HomeMy WebLinkAboutResolution No. 01-R16RESOLUTION NO. O1 -R1 •
A RESOLUTION OF THE BOARD OF DIRECTORS OF THE REDEVELOPMENT AGENCY OF THE CITY
OF AZUSA ADOPTING THE BUDGET AND APPROVING APPROPRIATIONS FOR THE
REDEVELOPMENT AGENCY FOR THE FISCAL YEAR COMMENCING JULY 1, 2001 AND ENDING JUNE
30, 2002
THE BOARD OF DIRECTORS OF THE REDEVELOPMENT AGENCY OF THE CITY OF AZUSA DOES
RESOLVE AS FOLLOWS:
SECTION 1. The budget for the Redevelopment Agency of the City of Azusa for the fiscal year
commencing July 1, 2001 and ending June 30, 2002, as prepared and submitted by the Executive
Director and as modified by the Redevelopment Agency, is hereby approved and adopted as the
budget of the Redevelopment Agency of the City of Azusa for said fiscal year in the amount of
$8,422,220. A copy of said budget is hereby ordered filed in the office of the Secretary and shall be
certified by the Secretary as having been adopted by this resolution.
SECTION 2. from the effective date of said budget, the several amounts stated therein as
proposed expenditures shall be and become appropriated to the respective objects and purposes
therein set forth for the Agency subject to expenditure pursuant to the provisions of all applicable
ordinances of the Agency and statutes of the State. Further, it is established that the Agency will not
exceed its budget.
SECTION 3. All appropriations in the 2000-2001 budget of the Agency not expended or
encumbered hereby expire and terminate, except for those appropriations expressly continued and
carried forward ("rebudgeted") into the budget for 2001-2002.
SECTION 4. The Redevelopment Agency of the City of Azusa does hereby direct that any
unappropriated balance in the various funds, as appropriate, as of June 30, 2001, shall be automatically
appropriated into the Contingency Fund therein.
SECTION 5. Pursuant to Government Code 37208, warrants drawn in payment certified or
approved by the Secretary as conforming to a budget approved by ordinance of the Agency need not
be audited by the Agency prior to payment. Budgeted demands paid by warrant prior to audit by the
Agency shall be presented to the Agency for ratification and approval at the first meeting after delivery
of the warrants.
SEC14ON 6), The Secretary shall certify to the adoption of this resolution.
APPROVED this 11 day of June 2001.
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1 HEREBY CERTIFY that the foregoing Resolution No. 1_g1 6 was duly adopted by the Board
of Directors of the Redevelopment Agency of the City of Azusa at a meeting thereof held on the I
day of June 2001, by the following vote of the Agency:
AYES DIRECTORS: Hardison, Stanford, Rocha, Chagnon
NOES DIRECTORS: None
ABSTAIN DIRECTORS None
ABSENT DIRECTORS: Madrid
SECRETARY
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City of Azusa, CA.
Redevelopment Agency
Investment Policy
1. POLICY STATEMENT
All funds of the City of Azusa shall be invested in accordance with principles of sound
treasury management and in accordance with the provisions of the California
Government Code Sections 53600 et seq., (the Municipal Code), and guidelines
established by the California Municipal Treasurer's Association, the California Society of
Municipal Finance Officers, and this Investment Policy ("Policy"). These funds are
defined and detailed in the City's Comprehensive Annual Financial Report (CAFR) and
includes any new funds created unless specifically excluded by the City Council.
Specifically excluded funds are:
Funds deposited with the State Public Employees' Retirement System and;
Bond proceeds that are subject to covenants and restrictions as defined in the
Bond's indenture or are administered under the direct control of the Bond Trustee.
2. INVESTMENT POLICY OBJECTIVES
A. Overall Risk Profile
The objectives of the City of Azusa's Investment Program are, in order of priority:
1. Safety of principal of invested funds;
2. Maintenance of sufficient liquidity to meet cash flow needs; and
3. Attainment of the maximum yield possible consistent with the first two
objectives.
To achieve these objectives, The City shall consider the following when making an
investment:
1. Safety of Principal of Invested Funds
The City shall mitigate the risk to the principal of invested funds by limiting
credit and interest rate risks. Credit Risk is the risk of loss due to the failure of
a security's issuer or backer. Interest Rate Risk is the risk that the market
value of the City's portfolio will fall due to an increase in general interest
rates.
a) Credit risk will be mitigated by:
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(i) Limiting investments to the safest types of securities;
(ii) By pre -qualifying the financial institutions with which it will do
business; and
(iii) By diversifying the investment portfolio so that the potential
failure of any one issue or backer will not place an undue financial
burden on the City.
b) Interest rate risk will be mitigated by:
(i) Structuring the City's portfolio so that securities mature to meet
the City's cash requirements for ongoing obligations, thereby
avoiding the possible need to sell securities on the open market at a
loss prior to their maturity to meet those requirements; and
(ii) Investing primarily in shorter term securities.
2. Liquidity
The City's investment portfolio shall be structured in a manner which
emphasizes that securities mature at the same time the cash is needed to
meet anticipated demands (Static Liquidity). Additionally, since all
possible cash demands cannot be anticipated, the portfolio should consist
of securities with active secondary markets (Dynamic Liquidity). The
maximum percentage of different investment instruments and maturities is
described in Section II of this Policy.
3. Yield
Yield on the City's investment portfolio is of secondary importance
compared to the safety and liquidity objectives described above.
Investments are limited to relatively low risk securities in anticipation of
earning a fair return relative to the risk being assumed. While it may
occasionally be necessary or strategically prudent for the City to sell a
security prior to maturity to either meet unanticipated cash needs or to
restructure the portfolio, this policy specifically prohibits trading securities
for the sole purpose of speculating on the future direction of interest rates.
B. Basic Investment Strategy
The City's investment portfolio shall be structured to provide that sufficient funds from
investments are available each month to meet the City's anticipated cash needs. Subject
to the objectives stated above, the choice in investment instruments and maturities shall
be based upon an analysis of future anticipated cash needs, existing and anticipated
revenues, interest rate trends and specific market opportunities. No investment may have
a maturity of more than five (5) years from its date of purchase without receiving prior
City Council approval. After approval by City Council, reserve funds associated with
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Investment Policy —Con't • •
bond issues may have a maturity of more than five (5) years, up to the earliest date the
bonds may be redeemed or mature.
3. INVESTMENTS
This section of the Investment Policy identifies the types of investments in which the City
will invest its idle or surplus funds.
A. Standard of Prudence
The City operates its investment portfolio under the Prudent Investor Standard
(California Government Code Section 53600.3) which states, in essence, that
"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 need of the City, that a prudent person 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 City".
This standard shall be applied in the context of managing the overall portfolio.
Investment officers, acting in accordance with written procedures and this
investment policy and exercising the above standard of diligence shall be relieved
of personal responsibility for an individual security's credit risk or market price
changes, provided deviations from expectations are reported in a timely fashion
and appropriate action is taken to control adverse developments.
B. Eligible Securities
The City is provided a broad spectrum of eligible investments under California
Government Code Section 53600 et seq. The City may choose to restrict its
permitted investments to a smaller list of securities that more closely fits the
City's cash flow needs and requirements for liquidity. If a type of investment is
added to California State Code 53600, it will not be added to the City's
Authorized Investment List until this policy is amended and approved by the City
Council. If a type of investment permitted by the City should be removed from
California State Code 53600, it will be deemed concurrently removed from the
City's Authorized Investment List.
The City's Authorized Investment List
• Insured Certificates of Deposit (CD's) of California banks
and/or savings and loan associations, and/or savings banks
which mature in five years or less, provided that the City's
investments shall not exceed One Hundred Thousand
($100,000) per institution. If the investment exceeds the
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Investment Poliov — Con't • •
insured $100,000, the funds are to be collateralized at 110% of
the deposit in government securities or 150% in mortgages.
• Local Agency Investment Fund (State Pool) Demand Deposits.
• Securities of the U.S. Government, and securities of which the
principal and interest is guaranteed by the full faith and credit
of the U.S. Government.
• Securities issued by agencies and instrumentalities of the U.S.
Government or issued by a government sponsored enterprise.
• Commercial Paper (limited to 30% of the portfolio) rated
Al/PI or the equivalent by 2 nationally recognized rating
agencies with maturities not to exceed 181 days.
• Medium —Term Corporate Notes (limited to 20% of the
portfolio) that are rated "AA" or better by two nationally
recognized rating agencies.
• Passbook Savings or Money Market Demand Deposits, subject
to the restrictions and limitations set forth in Government Code
Section 53638.
• Repurchase Agreements (limited to 30% of the portfolio) with
approved banks and broker-dealers who have completed and
signed a Master Repurchase Agreement with the City.
• Money Market Mutual Funds (with a stated objective of
maintaining a $1 net asset value) that has been rated AAAm by
Moody's or any two nationally recognized rating agencies.
Please see Exhibit A for a more detailed description of the
authorized investments listed above.
A thorough investigation of any pool or fund is required prior to investing and on
a continual basis. The investigation will, at a minimum, obtain the following
information:
A description of eligible investment securities, and a written
statement of investment policies and objectives.
A description of interest calculations and how it is distributed, and
how gains and losses are distributed.
A description of how securities are safeguarded (including the
settlement process) and how often the securities are marked to
market and how often an audit is conducted.
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A description of who may invest in the program, how often, what
size deposits and withdrawals are permitted.
A schedule for receiving statements and portfolio listings.
Does the pool/fund maintain a reserve or retain earnings or is all
income after expenses distributed to participants?
A fee schedule which also discloses when and how fees are
assessed.
Is the pool or fund eligible for bond proceeds and/or will it accept
such proceeds?
The purpose of this investigation is to determine the suitability of a pool or fund
and evaluate the risk of placing funds with that pool or fund.
One of the purposes of this Investment Policy is to define what investments
are permitted. If a type of security is not specifically authorized by this
policy, it is not a permitted investment.
C. Qualification of Brokers, Dealers and Financial Institutions
The City Treasurer or their designees will establish and maintain a list of the
financial institutions and broker/dealers authorized to provide investment and
depository services to the City, will perform an annual review of the financial
condition and registrations of the qualified bidders, and require annual audited
financial statements to be on file for each approved company. The City shall
annually send a copy of the their current Investment Policy to all financial
institutions and broker/dealers approved to do business with the City. Receipt of
the Policy and Enabling Resolution, including confirmation that it has been
received and reviewed by the person(s) handling the City's account, shall be
acknowledged in writing within thirty (30) days.
All broker-dealers and financial institutions that desire to become qualified
bidders for investment transactions must submit a "Broker -Dealer Application"
and related documents relative to eligibility. This includes a current audited
financial statement, proof of state registration, proof of NASD registration and a
certification they have received and reviewed the City's Investment Policy and
agree to comply with the provisions outlined in the Investment Policy. The City
Treasurer or their designees may establish any additional criteria they deem
appropriate to evaluate and approve any financial services provider. The selection
process for broker-dealers shall be open to both "primary dealers" and
"secondary/regional dealers" that qualify under Securities and Exchange
Commission Rule 156-1 (Uniform Net Capital Rule). The provider must have an
office in California and the provider's representative must be experienced in
institutional trading practices and familiar with the California Government Code
as it relates to investments by a City.
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D. Collateralization Requirements
Uninsured Time Deposits with banks and savings and loans shall be collateralized
in the manner prescribed by state law for depositories accepting municipal
investment funds.
Repurchase Agreements shall be collateralized in accordance with terms specified
in the Master Repurchase Agreement. The valuation of collateral securing a
Repurchase Agreement will be verified weekly to ensure a minimum of 102% of
the value of the transaction is held by the City's depository agent.
E. Diversification
The City will diversify its investments by security type and investment. With the
exception of bond reserve funds, bond escrow funds, and any other specific funds
approved by the Treasury Committee or the Board of Directors, the City
Treasurer or their designee and the City's Investment Committee will adopt a
strategy that combines current market conditions with the City's cash needs to
maintain the maximum degree of safety of principal and liquidity throughout
market and budgetary cycles. This strategy will include diversification by
investment type and maturity allocations and will be included in the regular
quarterly reports to Council. This strategy will be reviewed quarterly and can be
changed accordingly.
F. Confirmations
Receipts for confirmation of purchases or sales of authorized securities shall
include at a minimum the following information: trade date, settlement date,
description of the security, par value, interest rate, price, yield to maturity, City's
name, net amount due and third party custodial information.
G. GASB 3
The Governmental Accounting Standards Board (GASB) issued GASB #3 in
April 1986, and the local entity's investments must be categorized into one of
three levels of credit risk as follows:
a) Securities that are insured or registered, or for which the securities are
held by public units or its agent in the units;
b) Securities that are uninsured and unregistered and are held by the broker
or dealer or by its trust department or agent in the unit's name;
C) Securities that are uninsured and unregistered and are held by the broker
or dealer or by its trust department or agent, but not in the unit's name.
The carrying amount and market value of all types of investments must be
disclosed in total and for each type of investment. Government Accounting
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Investment Policy —Con't • •
Standards Board #3 exempts mutual funds and LAIF investments from the
mandatory risk categorization.
4. SAFEKEEPING OF SECURITIES
A. Safekeeping Agreement
The City shall contract with a bank or banks for the safekeeping of securities that
are owned by the City as a part of its investment portfolio or transferred to the
City under the terms of a Repurchase Agreement.
All securities owned by the City shall be held in safekeeping by a third party bank
trust department acting as agent for the City under the terms of a custody
agreement executed by the bank and the City. All securities will be received and
delivered using standard delivery versus payment (DVP) procedures. The
third party bank trustee agreement must comply with Section 53608 of the
California Government Code. No outside broker/dealer or advisor may have
access to City funds, accounts or investments and any transfer of funds must be
approved by the City Treasurer.
B. Security Transfers
The authorization to release the City's securities or funds will be telephoned to
the appropriate bank representative by a finance department member other than
the person who initiated the transaction. A written confirmation outlining details
for the transaction and confirming the telephoned instructions will be sent to the
bank within five (5) working days.
C. Verification of Securities
Securities transferred to the City as collateral securing time deposits or repurchase
agreements which are being held in safekeeping on behalf of the City will be
verified in writing and examined on a surprise basis during the year by the City's
independent auditors as a part of the City's annual independent audit process.
5. STRUCTURE AND RESPONSIBILITIES
This section of the policy defines the overall structure and areas of responsibility within
the investment management program.
A. Responsibilities of the Citv Treasurer
The City Treasurer is charged with responsibility for maintaining custody of all
public funds and securities belonging to or under the control of the City, and for
the deposit and investment of those funds in accordance with principles of sound
treasury management applicable laws, ordinances and this Investment Policy.
This includes establishing written procedures for the operation of the investment
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program consistent with this policy. The procedures should include reference to
safekeeping, master repurchase agreements, wire transfer agreements, banking
services contracts and depository agreements. Such procedures shall also include
explicit delegation of authority to persons responsible for investment transactions.
No person may engage in an investment transaction except as provided under the
terms of this policy and the procedures established by the Treasurer and approved
by the Investment Committee. Investment decisions that involve borrowing in the
amount of $100,000 or more must be included as a separate discussion item on
the City Council's agenda. Such items can no longer be included on the City
Council's consent calendar. (California Government Code 53635.7)
B. Responsibilities of the Director of Finance
The Director of Finance is responsible for keeping the City Council fully advised
as to the financial condition of the City.
C. Responsibilities of the City Council
The City Council shall consider and adopt a written Investment Policy. As
provided in that policy, the Council shall receive, review and accept monthly
investment reports.
D. Responsibilities of the Investment Committee
There shall be an Investment Committee consisting of the Director of Finance, the
City Manager, the City Treasurer and their designees. The Committee shall meet
quarterly to discuss cash flow requirements, the monthly investment reports,
investment strategies, investment and banking procedures and significant
investment related work projects being undertaken in each department that will
affect the cash flow management of the City Treasurer. This will require timely
reports from the department heads to the City Treasurer concerning significant
future cash flow requirements. The Committee's meetings will be summarized in
minutes that are distributed to the City Council. The Investment Committee, with
the approval of the City Council, may retain an external investment manager on
behalf of the City. The investment manager will be required to act in accordance
with this investment policy.
E. Ethics and Conflicts of Interest
All City officers and employees involved in the investment process shall refrain
from personal business activity that could conflict with the proper execution of
the investment program, or that could impair their ability to make impartial
investment decisions. Those employees and investment officials shall disclose to
the appropriate City executive (City Manager, City Attorney, or the Director of
Finance) any material financial interests in financial institutions that conduct
business within the City, and they shall further disclose any large personal
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financial/investment positions that could be related to the performance of the
City's investments.
6. REPORTING
The City Treasurer shall prepare a monthly investment report, including a succinct
management summary that provides a clear picture of the status of the current investment
portfolio and transactions made over the past month. This management summary shall be
prepared in a manner that will allow the Director of Finance and the City Council to
ascertain whether investment activities during the reporting period have deviated from
the City's Investment Policy.
The monthly report shall include the following:
A. A list of individual securities held at the end of the reporting month.
B. Unrealized gains or losses resulting from amortization or accretion of
principal versus market value changes by listing the cost and market value
of securities owned by the City.
C. A description of the current investment strategy and the assumptions upon
which it is based.
D. Dollar weighted yield to maturity of the City's investments.
E. Maturity schedule by type, of each of the City's investments.
F. Statement of compliance of the City's Investment Policy with California
Government Code Section 53601 et seq.
G. Statement as to ability to meet all scheduled expenditure requirements for
the next six months.
H. Market value, book value, par value and cost basis of all investments.
Investments "under the management of contracted parties, including
lending programs" (i.e. investments held by deferred compensation
administrators).
7. PERFORMANCE STANDARDS
The investment portfolio will be managed in accordance with the standards established
within this Investment Policy and should obtain a market rate of return throughout
budgetary and economic cycles. The Investment Committee will establish and
periodically review the City's portfolio benchmarks and performance. A benchmark will
be selected that compares with the portfolio composition, structure and investment
strategy at that time.
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8. REVIEW OF INVESTMENT POLICY
A. Policy Review
This Investment Policy shall be reviewed annually by the City Council in
accordance with State law to ensure its consistency with respect to the overall
objectives of safety, liquidity and yield. Proposed amendments to the policy shall
be prepared by the Treasurer and reviewed by the Investment Committee and City
Attorney and then be forwarded to the City Council for consideration. The
Investment Committee shall annually review the Investment Policy and any
proposed amendments and forward to the City Council for its consideration and
adoption at a public meeting.
B. Internal Control and Review
The external auditors shall annually review the investments and general activities
associated with the investment program to ensure compliance with this
Investment Policy. This review will provide internal control by assuring
compliance with policies and procedures for the activities that are selected for
testing.
9. ADOPTION OF POLICY
This Policy was duly adopted by the City Council of the City of Azusa on July 16,
2001.
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EXHIBIT A
DESCRIPTION OF INVESTMENTS
The City of Azusa's investments may be placed in those securities as outlined below; the
allocation between the various investment instruments may change in order to give the
City the best combination of safety, liquidity and higher yield. Surplus funds of local
agencies may only be invested in certain eligible securities. The City limits its
investments to allowable securities under the State of California statutes (Government
Code Section 53601, et seq., Section 53356, et seq., and Section 53595, et seq.) and is
further limited to those listed below.
Certificates of Deposit
Certificates of deposit allow the City to select the exact amount and day of maturity as
well as the exact depository. Certificates of deposit are issued in any amount for periods
of time as short as fourteen days and as long as several years. At any given time, the City
may have certificates of deposit in numerous financial institutions in the future.
The Treasurer may at his discretion waive security for that portion of a deposit, which is
insured pursuant to federal law. Currently, the first $100,000 of a deposit is federally
insured by FSLIC or FDIC. It may be to the City's advantage to waive this collateral
requirement for the first $100,000 because the City may receive a higher interest rate. If
funds are to be collateralized, the collateral will be 110% of the deposit in government
securities or mortgages of 150°/x. At purchase, institutions must not show an operating
loss. Banks must have an equity to asset ratio of at least 6%. Savings and loan
associations and savings banks must have an equity to asset ratio of at least 3%.
Local Agency Investment Fund
The Local Agency Investment Fund (LAIF) of the State of California offers high
liquidity because deposits can be wired to the City checking account within twenty-four
hours. Interest is computed on a daily basis.
This is a special fund in the State Treasury, which local agencies may use to deposit
funds for investment. There is no minimum investment period and the minimum
transaction is $5,000 in multiples of $1,000 above that, with a maximum of $20,000,000
for any City. It offers high liquidity because deposits can be converted to cash within
twenty-four hours and no interest is lost. All interest is distributed to those agencies
participating on a proportionate share determined by the amounts deposited and the
length of time they are deposited. Interest is paid quarterly by adding it to the principal.
The State charges participants a small fee to cover reasonable costs associated with
operating the investment pool, not to exceed one-quarter of one percent of the earnings.
The interest rates received are fairly stable because of the pooling of the State's surplus
cash with the surplus cash deposited by local governments. This creates a well -
diversified multi -billion dollar money pool.
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U.S. Treasury Securities
U.S. Treasury securities are highly liquid and considered the safest of all investments
because they are back by the full faith and credit of the United States Government.
U.S. Treasury Bills are direct obligations of the United States Government.
They are issued weekly with maturity dates up to six months. They are issued and
traded on a discount basis and the interest is figured on a 360 -day basis using the
actual number of days to maturity. They are issued in the minimum amount of
$10,000 and in multiples of $5,000 thereafter.
U.S. Treasury Notes are direct obligations of the United States Government.
They are issued throughout the year with maturities from 2 up to 30 years. Notes
are coupon securities paying a fixed amount every six months. The City will not
invest in notes having maturities longer then five years.
Federal Agency Securities
Federal Agency securities are highly liquid and considered to be virtually without credit
risk. Federal Agency issues are guaranteed indirectly by the United States Government.
All Agency obligations that are fixed-rate and meet the maturity restrictions of the State
Code and this policy qualify as legal investments and are acceptable as security for public
deposits. They usually provide higher yields than regular Treasury issues with all of the
same advantages. Examples are:
FNMA's (Federal National Mortgage Association) are used to assist the home
mortgage market by purchasing mortgages insured by the Federal Housing
Administration and the Farmers Home Administration, as well as those
guaranteed by the Veterans Administration.
FHLB's (Federal Home Loan Bank Notes and Bonds) are issued by the Federal
Home Loan Bank System to help finance the housing industry. The notes and
bonds provide liquidity and home mortgage credit to savings and loan
associations, mutual savings banks, cooperative banks, insurance companies and
mortgage -lending institutions.
Other Federal Agency issues are Federal Home Loan Mortgage Corporation
(FHLMC), Federal Farm Credit Bank (FFCB), Small Business
Administration Notes (SBA's), Government National Mortgage Association
(GNMA's), Tennessee Valley Authority (TVA's) and the Student Loan
Marketing Association (SLMA's).
Negotiable Certificate of Deposit
Negotiable certificates of deposit are high-grade instruments, paying a higher interest rate
than regular certificates of deposit. They are liquid because they can be traded in the
secondary market.
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Negotiable Certificates of Deposit (NCD's) are unsecured obligations of the issuing
financial institution, bank or savings and loan, bought at face value with a promise to pay
face value plus accrued interest at maturity. The primary market issuance is in multiples
of $1 million. The secondary market usually trades in denominations of $500,000,
although smaller denominations are occasionally available. Local agencies may not
invest more than 30% of their surplus money in negotiable certificates of deposit. NCD's
will only be placed with the largest and most financially sound institutions.
Commercial Paper
Commercial paper allows the investment of large amounts of money on a short-term
basis at rates higher than passbook savings accounts. Commercial paper is a short-term
unsecured promissory note issued by a corporation to raise working capital. These
negotiable instruments are purchased at a discount to par value. As an example,
corporations such as American Express, International Business Machines (IBM) and
General Electric issue commercial paper.
Local agencies are permitted by state law to invest in commercial paper of "prime"
quality of the highest ranking or of the highest letter and numerical rating as provided by
Moody's Investor's Service, Inc. or Standard and Poor's Corporation (Allpl or A1+/p]).
Purchases of eligible commercial paper may not exceed 180 days maturity nor exceed
30% of the City's surplus funds.
Medium -Term Corporate Notes
A City may invest in medium term corporate notes with a maximum maturity of five
years issued by a corporation organized and operating within the United States, a
depository institution licensed by the United States government or any state government
and operating within the United States. The California State Code (53601 et seq.) permits
cities to invest in corporations with a rating category of "A" or better, but the City will
limit its investments in corporate medium term notes to those issued by corporations that
have been rated "AA" or its equivalent by two nationally recognized ratings agencies.
Passbook Savings or Money Market Account
Passbook savings account allows us to transfer money from checking to savings and earn
interest on smaller amounts of money, which are not available for a longer-term
investment
The passbook savings account is similar to a CD, except not for a fixed term. The
interest rate is much lower than CD's, but the savings account provides daily liquidity and
funds can be deposited and withdrawn according to our daily needs.
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Mutual Funds
Mutual funds allow the City to maintain liquidity and receive money market rates.
Mutual Funds are referred to in the Government Code, Section 536011, as "shares of
beneficial interests issued by diversified management companies". The Mutual Fund
must be restricted by its prospectus to be a "Money market" mutual fund and be limited
to the same approved investments as LAIF. These investments include U.S. Treasury and
Agency issues, Bankers Acceptances, Commercial Paper, Repurchase Agreements,
Certificates of Deposit, and Negotiable Certificates of Deposit. The quality rating and
percentage restrictions in each investment category applicable to LAIF also apply to any
Mutual Fund.
One of the stated objectives of the Mutual Fund must be to attempt to maintain a $1.00
Net Asset Value (NAV). A further restriction is that the purchase price of shares of any
mutual fund shall not include any sales commission. Investments in mutual funds shall
not exceed 15% of the City's surplus money.
Repurchase Agreements
Repurchase agreements are purchases of securities by the City under an agreement with a
term of one (1) year or less whereby the seller will "repurchase" the same securities on or
before a specified date or on demand of either party and for a specified amount. The
underlying securities must be delivered to the City's custodial account by book entry,
physical delivery or a third -party custodial agreement.
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GLOSSARY
ACCRETION: Process of making incremental, periodic increases in the book or
carrying value of an asset. For example, when a bond is purchased at a price below 100,
the difference between the purchase price and the par value, the discount, is accreted,
Discounts are usually accreted in roughly equal amounts that completely eliminate them
by the time the bond matures or by the call date, if applicable.
ACCRUED INTEREST: The interest accumulated on a security from its issue date or
since the last payment of interest up to but not including settlement date. The purchaser of
the security pays to the seller the market price plus accrued interest.
AGENCIES: Divisions of the government whose securities are backed by the full faith
and credit of the United States. The Government National Mortgage Association is a
government agency.
AMORTIZATION: The process of making regular, periodic decreases in the book or
carrying value of an asset. For example, when a bond is purchased at a price above 100,
the difference between the purchase price and the par value, the premium, is amortized.
Premiums are usually amortized in roughly equal amounts that completely eliminate them
by the time the bond matures or by the call date, if applicable.
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): An unconditional obligation of the accepting bank.
Banker's acceptances, or BA's, arise from transactions involving the import, export
transit, or storage of goods -- this includes domestic as well as international transit. The
underlying transaction that gives rise to a BA is almost completely irrelevant to the credit
quality or the liquidity of the instrument. The actual BA is created at a late stage in the
underlying transaction when a bank accepts its obligation to pay the holder of the
accepted draft. From an investor's point of view, a BA is a bank obligation that has at
least the same credit strength as any CD issued by the same bank. In fact, BA's are
typically stronger than CD's because in addition to the credit strength of the accepting
bank they are backed by the credit strength of a drawer, an endorsing bank, if one is
involved in the transaction, and usually by the pledge of documents representing
ownership of the trade goods and insurance on the goods.
BASIS POINT: One one -hundredths (1/100) of one percent; 0.0001 in decimal form.
BEAR MARKET: A period of rising interest rates and falling bond prices.
BENCHMARK: A comparative base for performance evaluation. A benchmark can be a
broad-based bond index, a customized bond index, or a specific objective.
W
BID: The price offered for securities.
BOND EQUIVALENT YIELD: An annual yield, expressed as a percentage, describing
the return provided to bond holders. A bond equivalent yield is double the simple interest,
semiannual yield. Since Treasury and agency notes and bonds, as well as most corporate
and municipal bonds, pay interest semiannually, the bond equivalent yield is a way to
compare yields available from discount securities such as Treasury bills and Commercial
Paper with yields available from coupon securities. From that usage, this yield measure is
also known as the coupon yield equivalent or the equivalent bond yield. For securities
that pay daily, monthly, or quarterly interest, the bond equivalent yield understates the
benefits obtained from the compounding of income from those investments.
BOOK ENTRY: A system of custody and transfer of government securities through the
electronic settlement and delivery of transactions.
BOOK VALUE: The original acquisition cost of an investment plus or minus the
accrued amortization or accretion.
BROKER: A party who brings buyers and sellers together. Brokers do not take
ownership of the property being traded. They are compensated by commissions. They are
not the same as dealers; however, the same firms that act as brokers in some transactions
may act as dealers in other transactions.
BULL MARKET: A period of falling interest rates and rising bond prices.
CALLABLE BOND: A bond that the issuer has the right to redeem prior to maturity.
Some callable bonds may be redeemed on one call date while others may have multiple
call dates. Some callable bonds may be redeemed at par while others can be redeemed
only at a premium.
CALL DATE: The date or dates on which a security may be called for redemption by the
issuer.
CERTIFICATE OF DEPOSIT (CD): A negotiable receipt from a bank for deposit of
funds for a specified period of time at a specified rate of interest.
COLLATERAL: Securities, evidence of deposit or other property that a borrower
pledges to secure repayment of a loan. Also refers to securities pledged by a bank to
secure deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATION (CMO): A type of
mortgage-backed security created by dividing the rights to receive the principal and
interest cash flows from an underlying pool of mortgages in separate classes or tiers. A
multiclass bond backed or collateralized by mortgage loans or mortgage pass-through
securities. A given class is typically not redeemed until all bonds with earlier priority
have been redeemed.
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Investment Policy — Glossary — 0 •
COMMERCIAL PAPER: Short-term negotiable unsecured promissory notes of
corporations. It is used primarily by corporations for short-term financing needs at a rate,
which is generally lower than the prime rate.
CONFIRMATION: The document used to state in writing the terms of the trade, which
had previously been agreed to verbally.
CONVEXITY: A measure of the sensitivity of duration to changes in yield levels.
Convexity can be viewed as the margin of error in the interest rate sensitivity measured
by duration. Convexity is a measure of the stability or instability of the measured
duration. If convexity is low, that is, if the price/yield relationship is close to a straight
line, duration is stable. If convexity is high, duration is unstable. The greater an
instrument's convexity, the less accurate duration will be.
COUPON: A periodic interest amount paid to the bondholder by the issuer of the bond.
CREDIT RISK: "Me risk that (1) the issuer is downgraded to a lower quality category
and/or (2) the issuer fails to make timely payments of interest or principal.
CUSIP NUMBER: A nine -digit number established by the Committee on Uniform
Securities Identification Procedures that is used to identify publicly traded securities.
Each publicly traded security receives a unique CUSIP number when the security is
issued.
DEALER: A firm who buys and sells for its own account. Dealers have ownership, even
if only for an instant, between a purchase from one party and a sale to another party. They
are compensated by the spread between the price they pay and the price they receive.
Dealers are not the same as brokers; however, the same firms who act as dealers in some
transactions may act as brokers in other transactions.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT (DVP): The safest method of settling a trade
involving a book entry security. In a DVP settlement the funds are wired from the buyer's
account and the security is delivered from the seller's account in simultaneous,
interdependent wires.
DEPOSITORY TRUST COMPANY (DTC): An organization that holds physical
certificates for stocks and bonds and issues receipts to owners. Securities held by DTC
are immobilized so that they can be traded on a book entry basis.
DERIVATIVES: Financial instruments whose value depends on the values of
underlying assets or indexes.
DISCOUNT: The amount by which the price for a security is less than par.
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Investment policy - Glossary At is
DISCOUNT RATE: The percentage rate applied to reduce the redemption value of a
security in cases where the difference between such a reduced value and the redemption
value is the investor's compensation for owning the security.
DISCOUNT SECURITIES: Securities that do not pay periodic interest. Investors earn
the difference between the discount issue price and the full face value paid at maturity.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
DURATION: A sophisticated measure of the weighted average maturity of a bond's cash
flow stream, where the present values of the cash flows serve as the weights.
ECONOMIC CYCLE (BUSINESS CYCLE): As the economy moves through the
business cycle, interest rates tend to follow the levels of production, output, and
consumption -rising as the economy expands and moves out of recession and declining
after the economy peaks, contracts, and heads once again into recession.
EFFECTIVE MATURITY: The average maturity of a bond, given the potential for
early call. For a non -callable bond, the final maturity date serves as the effective maturity.
For a callable bond, the effective maturity is bounded by the first call date and the final
maturity date; the position within this continuum is a function of the call price, the current
market price, and the yield volatility (reinvestment rate) assumed.
ELIGIBLE BANKER'S ACCEPTANCES: BA's that meet Federal Reserve
requirements can serve as collateral for bank borrowings from he Federal Reserve. Such
BA's are called eligible banker's acceptances. The accepting bank can sell eligible BA's
without incurring reserve requirements.
FACE VALUE: Par Value -the principal amount due and payable to a bondholder at
maturity.
FEDERAL FARM CREDIT BANKS: A government-sponsored corporation that was
created in 1916 and is a nationwide system of banks and associations providing mortgage
loans, credit, and related services to farmers, rural homeowners, and agricultural and rural
cooperatives. The banks and associations are cooperatively owned, directly or indirectly,
by their respective borrowers.. The Federal Farm Credit System is supervised by the
Farm Credit Administration, an independent agency of the U.S. government. The Farm
Credit Administration chartered the Financial Assistance Corporation to provide capital,
as directed by the Assistance Board, to institutions in the Federal Farm Credit System that
are experiencing financial difficulty.
FEDERAL FUNDS: Monies within the Federal Reserve System representing a member
bank's surplus reserve funds. Banks with excess funds may sell their surplus to other
banks whose funds are below required reserve levels. Normally, Federal funds are
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Investment Policy — Glossary —0 •
employed in settling all government securities transactions. The Federal Funds Rate is the
rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal
Reserve through open market operations.
FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to
savings and loan associations. The Federal Home Loan Banks play a role analogous to
that played by the Federal Reserve Banks to its' member commercial banks.
FEDERAL HOME LOAN MORTGAGE CORPORATION FHLMC or "Freddie
Mac"): A government-sponsored corporation that was created in July 1970, by the
enactment of Title III of the Emergency Home Finance Act of 1970. Freddie Mac was
established to help maintain the availability of mortgage credit for residential housing,
primarily through developing and maintaining an active, nationwide secondary market in
conventional residential mortgages. Freddie Mac currently raises funds for its mortgage
purchases principally through the issuance of mortgage pass-through securities called
Freddie Mac Mortgage Participation Certificates (PCs), Collateralized Mortgage
Obligations (CMO's), and Real Estate Mortgage Investment Conduits (REMIC's), which
are debt obligations secured by conventional residential mortgages.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae):
FNMA, like GNMA was chartered under the Federal National Mortgage Association Act
in 1938. FNMA is a federal corporation working under the auspices of the Department of
Housing and Urban Development (HUD). It is the largest single provider of residential
mortgage funds in the United States. Fannie Mae is a private stockholder -owned
corporation. The corporation's purchases include a variety of adjustable mortgages and
second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly
liquid and are widely accepted. FNMA assumes and guarantees that all security holders
will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMQ): Consists of seven members of
the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The
President of the New York Federal Reserve Bank is a permanent member while the other
Presidents serve on a rotating basis. The Committee periodically meets to set Federal
Reserve guidelines regarding purchases and sales of government securities in the open
market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central batik of the United States created by
Congress and consisting of a seven member Board of Governors in Washington, D.C., 12
Regional Banks and about 5,700 commercial banks that are members of the system.
FED -INCOME SECURITY: A financial instrument promising a fixed amount of
periodic income over a specified future time span.
GEOMETRIC MEAN RETURN: The compounded total return of an investment over a
multi -period time frame; an internal rate of return that connects the initial value of an
investment to its end -of -measurement -period value. The geometric mean return is a better
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— Glossary—0't •
measure of the true return garnered by an investor than the arithmetic mean return, since
it smoothes out periodic fluctuations. In return by focusing solely on the beginning and
ending investment values.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie
Mae): Securities guaranteed by GNMA and issued by mortgage bankers, commercial
banks, savings and loan associations and other institutions. Security holder is protected by
full faith and credit of the U.S. Government Ginnie Mae securities are backed by FHA,
VA or FHMA mortgages. The term " pass-through" is often used to describe Ginnie
Mae's.
GOVERNMENTS: Designation for all the various marketable securities issued by the
United States government.
GOVERNMENT-SPONSORED ENTERPRISE'S (GSE's): Payment of principal and
interest on securities issued by these corporations is not guaranteed explicitly by the U.S.
government; however, most investors consider these securities to carry an implicit U.S.
government guarantee. The debt is fully guaranteed by the issuing corporations. GSE's
include: Farm Credit System, Federal Home Loan Bank System, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, Student Loan Marketing
Association, and the Tennessee Valley Authority.
INSTRUMENTALITIES: See Government -Sponsored Enterprises
INTEREST RATE RISK: The risk that the general level of interest rates will change,
causing unexpected price appreciations or depreciations.
LADDERED MATURITY STRATEGY: A portfolio structured with approximately
equal maturities in every year. Maturities are reinvested at the long end of the ladder to
replace the bonds that have shortened in maturity. Given a normal yield curve with a
positive slope this passive strategy provides the benefit of being able to take advantage of
the higher, long-term yields without sacrificing safety or liquidity.
LIQUIDITY: An entity's capacity to meet future monetary outflows (whether they are
required or optional) from available resources. Liquidity is often obtained from reductions
of cash or by converting assets into cash. (Assets readily convertible to cash are often
called liquid assets.)
LIQUIDITY RISK: The risk that an investment will be difficult to sell at a fair market
price in a timely fashion.
MARKET VALUE: The current face or par value of an investment multiplied by the net
selling price of the security as quoted by a recognized market pricing source quoted on
the valuation date.
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Investment Policy — Glossary —0l •
MASTER REPURCHASE AGREEMENT: A written contract covering all future
transactions between the parties to repurchase and reverse repurchase agreements that
establishes each party's rights in the transactions. A master agreement will often specify,
among other things, the right of the buyer to liquidate the underlying securities in the
event of default by the seller.
MATURITY DATE: The date upon which the principal or face value of an investment
becomes due and payable.
MODIFIED DURATION: Macaulay's duration adjusted for non -continuous
compounding of interest. Higher yield levels and longer duration instruments lead to
more sizable differences between the two formulations. Modified duration can be used as
a multiplier to determine the percent change, in the price of a bond or bond portfolio, for
every 100 basis point (i.e. 1 %) change in yield.
MONEY MARKET: 'Me market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and traded.
MONEY MARKET INSTRUMENT: Generally, a short-term debt instrument that is
purchased from a broker, dealer, or bank. Sometimes the term " money market' with "
short-term,"' defines an instrument with no more than 12 months remaining from the
purchase date until the maturity date. Sometimes the term" money market' is used more
restrictively to mean only those instruments that have active secondary markets.
MORTGAGE-BACKED SECURITIES (MBS): Securities composed of, or
collateralized by, loans that are themselves collateralized by liens on real property.
NOMINAL RETURN: The absolute or stated return.
OFFER: The price asked by a seller of securities. (When you are buying securities, you
ask for an offer.) See Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other
securities in the open market by the New York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of money and credit in the economy. Purchases
inject reserves into the bank system and stimulate growth of money and credit; sales have
the opposite effect. Open market operations are the Federal Reserve's most important and
most flexible monetary policy tool.
OPTION -ADJUSTED SPREAD (OAS): Measures of the return provided to an investor
from a financial instrument that is either an option or includes an option. The
option -adjusted spread calculations break a security into separate cash flows. Each of
those cash flows is discounted at a unique discount rate appropriate for its maturity. The
discount rates are obtained from a benchmark yield curve. The benchmark yield curve
consists of the currently available yields for risk-free investments of various maturities.
Since U.S. Treasury obligations are not considered to have any credit risk, Treasury rates
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— Glossary — at •
are used. OAS is not quoted as a yield. Instead, it is quoted as a difference, or spread, in
basis points.
PAR: 100% of face value of a security.
POOLED FUND GROUP: An internally created fund of an investing entity in which
one or more institutional accounts of the investing entity are invested (as defined by the
Public Funds Investment Act). The City's various 46 pools" would each be considered a "
pooled fund group".
PORTFOLIO: Collection of securities held by an investor.
PREMIUM: The amount by which the price for a security is greater than its par amount.
PRIMARY DEALER: A group of government securities dealers that submit daily
reports of market activity and positions and monthly financial statements to the Federal
Reserve Bank of New York and are subject to its informal oversight. Primary dealers
include Securities and Exchange Commission (SEC) registered securities broker-dealers,
banks, and a few unregulated firms.
PRINCIPAL: The face or par value of an instrument, exclusive of accrued interest
PRUDENT PERSON RULE: An investment standard. In some states the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected by
the state. In other states the trustee may invest in a security if it is one that would be
bought by a prudent person of discretion and intelligence who is seeking a reasonable
income and preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes under
the laws of this state, which has segregated for the benefit of the commission eligible
collateral having a value of not less than its maximum liability and which has been
approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity on a bond or the
current income return.
REAL RETURN: The total return in excess of the inflation rate.
REINVESTMENT RATE: The interest earned on the reinvestment of coupon
payments.
REINVESTMENT RATE RISK: The risk that the actual reinvestment rate falls short
of the expected or assumed reinvestment rate.
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i
REPURCHASE AGREEMENT (REPO): An agreement of one party to sell securities
at a specified price to a second party and a simultaneous agreement of the first party to
repurchase the securities at a specified price on demand or at a specified later date, The
difference between the selling price and the repurchase price provides the interest income
to the party that provided the funds. Every transaction where a security is sold under an
agreement to be repurchased is a REPO from the selleriborrowers point of view and a
reverse from the buyer/lender's point of view.
SAFEKEEPING: A service to customers rendered by banks, for a fee, whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection.
SCIENTIFIC AMORTIZATION: The natural tendency of a bond's price to approach
par value. The bond's premium or discount is amortized as time passes. The initial price
and yield determine the rate at which the premium or discount amortization occurs.
Holding yield level constant, the amount of amortization for a given period is the change
in price that naturally occurs.
SECONDARY MARKET: A market made for the purchase and sale of outstanding
issues following the initial distribution.
SECURITIES AND EXCHANGE COMMISSION: Agency Created by Congress to
protect investors in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule,
SECURITIES LENDING AGREEMENT: A securities loan is a transaction in which
the owner of a security (the City) agrees to lend a security to a borrower (dealer bank)
under terms negotiated at the time of the loan. During the period that a security is out on
loan the lender continues to have all the benefits of ownership. All interest or dividend
income belongs to the leader. During the term of the loan a fee is paid by the borrower to
the lender and the borrower must put up collateral in the form of U.S. Government or
agency securities whose value is equal to at least 102% of the value of the loaned
securities.
SEPARATELY INVESTED ASSET: An account or fund of a state agency or local
government that is not invested in a pooled fund group (as defined by the Public Funds
Investment Act).
SPREAD: Most commonly used when referring to the difference between the bid and
asked prices in a quote.
STRIPS: Separation of the principal and interest cash flows due from any
interest-bearing securities into different financial instruments. Each coupon payment is
separated from the underlying investment to create a separate security. Each individual
23
— Glossary —0 •
cash flow is sold at a discount. The amount of the discount and the time until the cash
flow is paid determine the investor's return.
TOTAL RETURN. The change in the total value of a fixed-income investment taking
into account the price return, coupon return and reinvestment return over a specified
period.
TREASURY BILLS: A non-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three months, six
months, or one year.
TREASURY BONDS: Long-term coupon -bearing U.S. Treasury securities having initial
maturities of more than ten years.
TREASURY NOTES: Intermediate-term coupon -bearing U.S. Treasury securities
having initial maturities of from one to ten years.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement
that member firms as well as nonmember broker-dealers in securities maintain a
maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and
net capital ratio. Indebtedness covers all money owed to a firm, including margin loans
and commitments to purchase securities, one reason new public issues are spread among
members of underwriting syndicates. Liquid capital includes cash and assets easily
converted into cash.
WHEN -ISSUED: New issues trade on a "when -issued" basis. The when -issued trading
period is normally from 3-10 days. However, interest does not accrue during the
when -issued period, and payment is not required until the settlement date. The
abbreviation "W.I." is used to denote a security trading on a "when -issued" basis.
YIELD TO CALL (YTC): The discount rate that equates the present value of a bond's
future cash flows received through the call date to the bond's current price.
YIELD TO MATURITY (YTM): The discount rate that equates the present value of a
bond's future cash flows received through the maturity date to the bond's current market
price.
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