08.b. Investment PolicyMEMORANDUM
TO: CITY COUNCIL
FROM: ANGELA KRAETSCH, DIRECTOR OF ADMINISTRATIVE SERVICE
SUBJECT: CONSIDERATION OF APPROVAL OF THE CITY OF ARROYO
GRANDE INVESTMENT POLICY
DATE: MAY 8,2012
RECOMMENDATION:
It is recommended the City Council approve the City of Arroyo Grande lnvestment
Policy.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
There is no funding impact to the City related to this policy. However, the City does
receive interest revenue based on the type of investments it pursues.
No or minimal future staff time is projected.
BACKGROUND:
Attached is the City's lnvestment Policy, which was reviewed by the City Council on
June 14, 201 1. In the past, California Government' Code Section 53646 required that
an lnvestment Policy be presented to the Council on an annual basis. Beginning
January 1, 2007, it was no longer required by statute that the treasurer or chief financial
officers of local government entities annually submit a statement of investment policy to
their governing body. However, it is highly recommended by both the Association of
Public Treasurers of the United States & Canada and the Government Finance Officers
Association (GFOA).
ANALYSIS OF ISSUES:
It is in the best interest of the City if staff continues to prepare the policy and present it
to the Council on an annual basis for review. The City's lnvestment Policy authorizes
only the more conservative investments, requires monthly investment reports to City
Council, and requires that the due diligence of a "prudent person" be followed in the
investment of City funds.
The purpose of the lnvestment Policy is to identify various policies and procedures that
enhance opportunities for a prudent and systematic investment process and to organize
and formalize investment-related activities. The ultimate goal is to enhance the
economic status of the City of Arroyo Grande while protecting its cash resources.
Agenda Item 8.b.
Page 1
CITY COUNCIL
APPROVAL OF 'THE CITY INVESTMENT POLICY
MAY 8,2012
PAGE 2
The investment policies and practices of the City of Arroyo Grande and the Arroyo
Grande Redevelopment Agency are based on State law and prudent money
management. All funds will be invested in accordance with the City's lnvestment Policy
and the authority governing investments for municipal governments as set forth in the
California Government Code.
ALTERNATIVES:
The following alternatives are provided for City Council consideration:
- Approve the lnvestment Policy;
- Do not approve the lnvestment Policy;
- Modify lnvestment Policy and approve;
- Provide direction to staff.
ADVANTAGES:
The lnvestment Policy provides staff with guidance when pursuing investment
opportunities. In addition, the policy establishes the specific investment goals of the
City which are safety, liquidity and yield.
DISADVANTAGES:
There are no identified disadvantages related to the approval of this policy. However,
there is some level of risk in any investment transaction. To minimize such risks,
diversification of the investment portfolio by institution and by investment instruments
when possible is recommended in the City's lnvestment Policy.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted in front of City Hall on Thursday, May 3, 2012. The Agenda
and report were posted on the City's website on Friday, May 4, 2012. No public
comments were received.
Attachment:
- City of Arroyo Grande lnvestment Policy
Agenda Item 8.b.
Page 2
CITY OF
ARROYO GRANDE
INVESTMENT POLICY
May 8,2012
Prepared by the Administrative Services Department
Agenda Item 8.b.
Page 3
TABLE OF CONTENTS
Investment Policy ....................................................................................................................... 1
.................................................................................................................. Investment Objective 1
Prudence Standard ..................................................................................................................... 2
Areas of Investment Policy:
. ................................................................................. I Authorities. Control. and Care 2
II . Portfolio Diversification
............................................................................ Eligible Financial Institutions 3
............................... Code Authorized Instruments and Portfolio Limitations 3
................................................................................... Safekeeping of Securities 4
..................................................................................... City Placement Practice 4
III . Cash Management and Maturities ........................................................................... 6
Investment Reporting, Policy Review and Effective Policy Term ............................................ 6
Agenda Item 8.b.
Page 4
CITY OF ARROYO GRANDE
STATEMENT OF INVESTMENT POLICY
Investment Policy
The purpose of this document is to identify various policies and procedures that enhance opportunities
for a prudent and systematic investment process and to organize and formalize investment-related
activities. The ultimate goal is to enhance the economic status of the City of Arroyo Grande while
protecting its cash resources.
The investment policies and practices of the City of Arroyo Grande and the Arroyo Grande
Redevelopment Agency are based on state law and prudent money management. All funds will be
invested in accordance with the City's Investment Policy and the authority governing investments for
municipal governments as set forth in the California Government Code.
Investment Obiective
The investment objective of the City of Arroyo Grande is to optimize the following goals:
Safety
Liquidity
Yield
Safety of principal is the foremost objective of the City. Investments shall be undertaken in a manner
that seeks to ensure the preservation of capital in the overall portfolio. Investment decisions should .
not incur unreasonable credit or market risks in order to obtain current investment income. Credit risk
is the risk of loss due to the failure of the security issuer or broker. Market risk is the risk that the
market value of securities in the portfolio will fall due to changes in general level of interest rates.
'The City's investment portfolio will remain sufficiently liquid to enable the City to meet its cash flow
requirements. Liquidity of the investments guarantees the City's ability to meet operating expenditures.
The City's investment portfolio shall be designed with the objective of attaining a market rate of return
on its' investments consistent with the constraints imposed by its safety objective and cash flow
considerations. Yield is to be a consideration only after the basic requirements of safety and liquidity
have been met.
Optimization means striving to achieve a balance between all three objective goals. Should a demand
be perceived to prioritize the three goals, they are listed in preferred order.
Agenda Item 8.b.
Page 5
Prudence Standard
The standard of prudence to be used by the Treasurer and/or deputy shall be the "prudent person rule"
and shall be applied in the context of managing City investments. Persons acting in accordance with
written procedures and exercising due diligence shall be relieved of personal responsibility for an
individual investment loss, provided that deviations are reported in a timely fashion, and appropriate
action is taken to control adverse developments.
Areas of Investment Policy
Authorities, Control and Care:
1. The City Treasurer may appoint a Deputy with the responsibility for the individual placement
of monies in deposithnvestment transactions.
2. The Director of Administrative Services has been authorized, via Resolution #4005, to
establish deposit and investment agreements and undertake deposithnvestment transactions on
behalf of the City of Arroyo Grande.
3. The Administrative Services Department is responsible for implementing this policy, and
maintaining a system of internal control designed to prevent employee error or imprudent
actions, misrepresentation by parties to an investment agreement, fiaud, or unexpected
changes in the financial market place.
4. State of California Government Code Sections 53600 et seq. 53683 and 16429.1 regulate the
deposiVinvestment activities of general law cities (See Sec. 53635 and 16429.1). Based
upon the relatively small size of the City's portfolio, the City does not utilize a professional
investment manager. Rather, Arroyo Grande's investment program is simply a part of the
City's financial management activity.
5. The Treasurer and/or deputy shall use good judgement and m, as a "prudent person"
would, when entering contracts for deposits and investments, and when placing individual
investment transactions. Such care is that which would be exercised by a person concerning
hisfher own affairs; not for speculation, but for safe investment and earned interest.
Some level of risk is present in any investment transaction. Losses could be incurred due to
market price changes, technical cash flow complications such as the need to withdraw a non-
negotiable Time Certificate of Deposit early, or even the default of an issuer. To minimize
such risks, diversification of the investment portfolio by institution and by investment
instruments will be used as much as is practical and prudent.
Agenda Item 8.b.
Page 6
Portfolio Diversification:
1. Eligible Financial Institutions:
Government Code Section 53635 distinguishes between "deposits" and "investments". It
provides that "as far as possible" City monies shall be "deposited" in State or National
banks, or State or Federal savings and loan associations; may be "invested" in specified
instruments. Thus, eligible financial institutions would include:
A. Banks plus savings and loans, primarily for active demand deposits (checking accounts
and passbook savings) and inactive deposits (non-negotiable Time Certificates), also
for investment instruments. See Government Code Sec. 53638 for maximum deposit
limitations for banks and savings and loans, involving bank paid up capital and saving
and loan net worth.
B. Brokers and issuers, for various investment instruments listed below.
2. Code Authorized Instruments and Portfolio Limitations:
A. Instruments and Portfolio Limitations are authorized as provided in Government Code
Section 53635 and 16429.1, as follows:
1) Bonds issued by the City of Arroyo Grande. No limit.
2) U.S. Treasury Notes, bonds, bills, or other certificates of indebtedness. The
maximum maturity shall not exceed five years.
3) California State registered notes, bonds, or warrants. Maximum maturity of
five years.
4) Other local agencies within California, bonds, notes, warrants, or other
indebtedness. Five year maximum maturity.
5) Obligations issued by Federal agencies such as Federal Home Loan Bank
(FHLB), Federal Home Loan Mortgage Corporation (FHLMC), Federal Farm
Credit Bank (FFCB), etc. Limited to a five year maximum maturity.
6) Banker's acceptances (bills of exchange or time drafts) drawn on and accepted
by a commercial bank, and which are eligible for purchase by the Federal
Reserve System. These are limited to 40 percent of the City's surplus funds,
and limited to 180-day maximum maturities.
7) Commercial paper of "prime" quality, as rated by Moody's Investor Service or
Standard and Poor's Corporation. These are limited to 25 percent of the City's
Agenda Item 8.b.
Page 7
portfolio, and limited to 270-day maximum maturities, plus some other
qualifications.
8) FDIC insured or hlly collateralized time certificates of deposit in financial
institutions located in California, including United States branches of foreign
banks licensed to do business in California. The maximum maturity of a time
deposit shall not exceed five years.
9) Negotiable Certificates of Deposit, issued by either a National or State bank or
a state or federal savings and loan provided that the senior debt obligations of
the issuing institution are rated "AA" or better by Moody's or Standard &
Poor's. The maximum maturity of a negotiable certificate of deposit shall not
exceed five years. Purchase of negotiable certificates of deposit may not
exceed 20 percent of the book value of the City's portfolio.
10) Repurchase agreements or reverse repurchase agreements, whereby the seller
of securities will repurchase them on a specified date and for a specified
amount. The maximum maturity of a time deposit shall not exceed one year.
1 1) Local Agency Investment Fund, State of California, per Government Code Sec.
16429.1. Pooled monies of various agencies within California. Account size is
limited to a minimum of $5,000 (unless bond proceeds) and a maximum limit
of $50 million.
Safekeeping of Securities:
To protect against fiaud or embezzlement or losses caused by collapse of an individual securities
dealer, all securities owned by the City shall be held in safekeeping by a third party bank trust
department. Designated third party shall act as agents for the City under the terms of a custody
agreement. All trades executed by a dealer will settle delivery vs. payment @VP) through the City's
safekeeping agent. Investment officials shall be bonded to protect the public against possible
embezzlement or malice.
Securities held in custody for the City shall be independently audited on an annual basis to verify
investment holdings.
City Placement Practice:
1. The following financial institutions will be used by the City of Arroyo Grande, for non-
negotiable Time Certificates of Deposit:
a) Commercial banks having offices in the State of California.
b) Savings and loans maintaining ofices in the State of California.
4 Agenda Item 8.b.
Page 8
2. The State of Califomia Local Agency Investment Fund (L.A.I.F.) will be utilized, to pool
current surplus City monies for demand deposit earnings.
3. For other investment instruments, three institutions may be selected from a list of qualified
primary or regional brokerldealers qualifjmg under SEC rule 15c3-1 (uniform net capital
rule). Brokerldealers must be licensed in the State of Califomia and be headquartered or
maintain a branch office in the State of Califomia.
All brokersldealers shall carry Errors and Omissions insurance with a limit of not less than
$1,000,000 per occurrence. Proof of existence of said insurance shall be provided to the
City at its request and the City shall be notified if the policy is cancelled or coverage is
reduced below $1,000,000.
4. Prior to establishing a contract for deposit of monies per Sec. 53649, or placing an
individual investment, the credit-worthiness of each financial institution will be
determined. As a minimum, the ratio of net worth (equity) to total assets shall be 3.0% or
more.
5. No more than 30% of the City's available surplus shall be placed with any one financial
institution (excluding the State L.A.I.F. and government agency issues).
6. No more than 50% of the City's available surplus shall be placed with savings and loan
institutions.
7. The City, as authorized in Government Code Sections 53635 and 16429.1, may use all
deposit and investment instruments; except repurchase and reverse repurchase agreements
shall not be used. However, non-negotiable time certificates with commercial banks and
savings and loans, plus deposits in the State Local Agency Investment Fund, will be the
primary instruments used by the City, along with possible U.S. Treasury bills and bankers
acceptances.
8. Collateral security on Certificates of Deposit will be provided in accordance to
Government Code Sections 53651and 53653 by the commercial banks and savings and
loans, at 1 10% when government securities are used, or at 150% when promissory notes
secured by 1st mortgages or 1st trust deeds on improved residential real property located in
Califomia are used.
9. Individual placements of deposits and investments will be made based upon highest rate
quotes, in most instances.
10. Within the context of any portfolio limitations and quoted rates, deposits shall be
distributed between institutions as evenly as practical or possible.
Agenda Item 8.b.
Page 9
Cash Management and Maturities:
1. A maximum investment of all City monies, not needed to meet current cash flow needs,
will be maintained as closely as practical. A sufficient compensating balance will also be
provided, regarding the City's banking service agreement.
2. All monetary resources will be pooled for investment purposes, to maximize interest
earnings, which will be periodically allocated to the various funds of the City based upon
average cash balances at month ends. No interest will be credited to individual accounts
within the various funds.
3. Time deposits and investments will be held to maturity, unless it is absolutely necessary to
sell an investment early due to an unexpected liability.
4. Maturities of deposits and investments will be scheduled in such a manner as to provide a
steady stream of available cash to meet cash flow needs. The California State Local
Agency Investment Fund deposits of the City of Arroyo Grande are available on a same-
daylnext-day telephone call basis.
Investment Reporting, Policy Review and
Effective Policy Term
An Investment Policy is no longer required by statute. However, it is highly recommended by both the
Association of Public Treasurers of the United States & Canada and the Government Finance Officers
Association (GFOA). It is in the best interest of the City to prepare, present and discuss the Investment
Policy with the City Council on an annual basis. In addition, a monthly report is submitted to the City
Council, providing the following information:
1. Type of investment.
2. Financial institution (bank, savings and loan, broker, etc).
3. Date of maturity.
4. Principal amount.
5. Rate of interest.
6. Current market value for all securities having a maturity of more than 12 months.
7. Relationship of the monthly report to the annual statement of investment policy.
The City's independent certified public accountant shall review and make recommendations, when
appropriate, regarding the City of Arroyo Grande's investment policy.
Agenda Item 8.b.
Page 10