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HomeMy WebLinkAbout02-15-2024 IOC Agenda PacketCity of San Luis Obispo, Agenda, Planning Commission Agenda INVESTMENT OVERSIGHT COMMITTEE Thursday, February 15, 2024 3:00 p.m. REGULAR MEETING Conference Room 6 990 Palm Street San Luis Obispo CALL TO ORDER: Chair Emily Jackson ROLL CALL: Committee Members Derek Johnson, Riley Kuhn, Debbie Malicoat, Jan Marx, Anni Wang, and Chair Emily Jackson OTHERS PRESENT: Monique S. Spkye, PFM Asset Management LLC, Sarah Walsh, PFM Asset Management LLC, and Michelle Karpovich, Recording Secretary PUBLIC COMMENT: At this time, people may address the Committee about items not on the agenda. Persons wishing to speak should come forward and state their name and address. Comments are limited to three minutes per person. Items raised at this time are generally referred to staff and, if action by the Committee is necessary, may be scheduled for a future meeting. CONSIDERATION OF MINUTES 1.Minutes of the Investment Oversight Committee of November 9, 2023. BUSINESS ITEMS 2.Presentation of the Quarterly Investment Report on Portfolio Performance & Economic Recommendation: Receive and confirm investment policy compliance. 3.Annual Review of City Investment Policy and Management Plan Recommendation: Review and reaffirm the City’s Investment Policy and Management Plan. 1 COMMENT AND DISCUSSION 4.Staff Updates and Agenda Forecast ADJOURNMENT The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, May 16, 2024, at 3:00 p.m., in the Council Hearing Room, 990 Palm Street, San Luis Obispo, California. The City of San Luis Obispo wishes to make all of its public meetings accessible to the public. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities. Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the Finance Department at (805) 781-7125 at least 48 hours before the meeting, if possible. Telecommunications Device for the Deaf (805) 781-7107. Meeting audio recordings can be found at the following web address: http://opengov.slocity.org/WebLink/1/fol/61037/Row1.aspx 2 Minutes - Draft Investment Oversight Committee Thursday, November 9, 2023 Regular Meeting of the Investment Oversight Committee CALL TO ORDER A Regular meeting of the Investment Oversight Committee was called to order on Thursday, November 9, 2023, at 3:06 p.m. in the Conference Room 6 at City Hall, 990 Palm Street, San Luis Obispo, by Chair Jackson. ROLL CALL Present: Committee Members Natalie Harnett, Derek Johnson, Erica A. Stewart, and Chair Emily Jackson. Absent: Committee Members Debbie Malicoat and Anni Wang Others Present: Sarah Walsh, and Monique Spyke, PFM Asset Management LLC. PUBLIC COMMENT ITEMS NOT ON THE AGENDA None --End of Public Comment-- APPROVAL OF MINUTES 1. Review of Minutes of the Investment Oversight Committee Meeting of August 10, 2023 PUBLIC COMMENT None --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON SECONDED BY COMMITTEE MEMBER STEWART CARRIED 4-0-2 (COMMITTEE MEMBERS MALICOAT AND WANG ABSENT), to approve the August 10, 2023, minutes, as presented. 3 City of San Luis Obispo, Title, Subtitle BUSINESS ITEMS 2.Presentation of the Quarterly Investment Report on Portfolio Performance & Economic Outlook Monique Spyke, and Sarah Walsh, for PFM Asset Management LLC, provided an update via PowerPoint presentation and responded to Committee inquiries. Public Comment None --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON, SECONDED BY COMMITTEE MEMBER HARNETT, 4-0-2 (WITH COMMITTEE MEMBERS MALICOAT AND WANG ABSENT), to approve the recommendation to accept the report. COMMENT AND DISCUSSION None ADJOURNMENT The meeting was adjourned at 3:41 p.m. The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, February 15, 2024 at 3:00 p.m. APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/XXXX 4 Quarterly Investment Report AS OF December 31, 2023 5 This report presents the City’s investment portfolio for the quarter ending December 31,2023.It has been prepared to comply with regulations contained in California Government Code Section 53646.The report includes all investments managed by the City on its own behalf as well as for other third-party agencies on a fiduciary basis such as the Whale Rock Commission. It also includes all City related investments held by trustees for bond debt service obligations.As required, the report provides information on the investment type, issuer,maturity date,cost,and current market value for each security. 6 Market Considerations U.S. economic conditions were characterized by: •Economic resilience but expectations for a slowdown •Cooling inflation that still remains above the Federal Reserve’s (“Fed”) target •The labor market coming into better balance •Consumers that continue to support growth through spending The Fed held rates steady at the December FOMC meeting as expected. The Fed’s most recent “dot plot” indicated 3 rate cuts in 2024, while markets are pricing a more aggressive 6 rate cuts by year end. Treasury yields ended the quarter materially lower. After peaking in October, yields reversed course on dovish Fed pivot. Credit spreads narrowed sharply on increased expectations for a soft landing. Source: Bloomberg as of December 31, 2023. 5.33% 4.25% 3.85%3.88%4.03% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Yi e l d Maturity U.S. Treasury Yield Curve December 31, 2023 September 30, 2023 3-Month 2-Year 5-Year 10-Year 30-Year 3.10%2.81% 2.47% 3.82% 4.13% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% U. S . T r e a s u r y Ag e n c y AB S Co r p A - A A A Co r p B B B 1-5 Year Indices Quarterly Returns 7 What we are watching… Real GDP expanded at an annualized pace of 4.9% in Q3 2023, after a 2.1% increase in Q2. The increase in Q3 reflected upticks in most segments, underscoring the resiliency of the U.S. economy. Estimates for 2024 indicate quarterly expectations on average of less than 1%, although positive, a confirmation of a slower pace of growth for the foreseeable future. The U.S. labor market remained strong, providing a continuing tailwind for the economy, although that strength has begun to moderate. Labor force participation dipped at year end, while the unemployment rate of 3.7% was a few tenths of a percent off the generational low reached early in 2023. Although slightly, U.S. inflation (as measured by CPI) continued to trend lower in Q4 as both headline and core inflation continued to decline from their peaks in mid-2022. Shelter costs—the average household’s biggest expense—accounted for nearly 70% of the total increase in core CPI over the past year as home prices remain elevated. Source: Federal Reserve, latest economic projections as of December 2023. 2.6% 1.4% 1.8%1.9%1.8% 0% 1% 2% 3% 4% 2023 2024 2025 2026 Longer Run Change in Real GDP September Projections December Projections 3.8%4.1%4.1%4.1%4.1% 0% 1% 2% 3% 4% 5% 6% 2023 2024 2025 2026 Longer Run Unemployment Rate September Projections December Projections 2.8% 2.4%2.1%2.0%2.0% 0% 1% 2% 3% 4% 5% 2023 2024 2025 2026 Longer Run PCE Inflation September Projections December Projections 5.4% 4.6% 3.6% 2.9%2.5% 0% 2% 4% 6% 8% 2023 2024 2025 2026 Longer Run Federal Funds Rate September Projections December Projections 8 Current Cash and Investment Summary The following is a summary of the City’s cash and investments based on market value, as of December 31, 2023, compared to the prior quarter. Investment Entity December 31, 2023 Percent of Total September 30, 2023 City Held Cash & Investments $34,429,115.80 5.8%$12,096,882.69 JPMorgan Money Market Account $50,000,000.00 24.0%$50,000,000.00 LAIF Held Investments $46,027,816.72 21.9%$45,616,465.55 PFMAM Managed Investments*$103,666,105.35 48.4%$100,906,981.38 TOTAL**$234,123,037.87 100%$208,620,329.62 *Figures shown exclude accrued interest. **Details may not add up to total due to rounding. 9 Current Cash and Investment Summary There are several factors which result in changes in cash and investment balances from month-to- month and quarter-to- quarter, dependent on the receipt of revenues or a large disbursement. •Some major City revenues are received on a periodic rather than a monthly basis. Property Tax is received in December, January, April, and May of each year. Transient Occupancy Tax is received monthly but varies considerably due to seasonality. •Payments for bonded indebtedness or large capital projects can reduce the portfolio substantially in the quarter in which they occur. •The City pays its CalPERS obligation in a lump sum at the beginning of the fiscal year to achieve interest savings. Factors 10 Securities Securities in the City’s portfolio are priced by Refinitiv, an independent pricing service, at the end of every month. In some cases, the City may have investments with a current market value that is greater or less than the recorded value. These changes in market value are due to fluctuations in the marketplace, having no effect on yield, as the City does not intend to sell securities prior to maturity. Nevertheless, these market changes can impact the total value of the portfolio. Security Type Market Value % of Portfolio % Change vs. 6/30/23 Permitted by Policy U.S. Treasury 61,892,645 59.4%10.3%100% Federal Agency 14,521,106 13.9%-17.5%100% Municipal Obligations 933,763 0.9%-45.3%30% Negotiable CDs 1,962,100 1.9%0.2%30% Corporate Notes 18,079,111 17.4%5.4%30% Asset-Backed Securities 6,008,161 5.8%45.0%15% Securities Sub-Total 103,396,886 4.8% Money Market Fund 269,220 0.3%-87.9%20% Accrued Interest 480,970 0.5% Securities Total 104,147,076 100.0%3.2% 11 PFMAM Managed 12/31/2023 9/30/2023 Average Maturity (Years)2.35 2.37 Effective Duration1 2.04 2.07 Average Market Yield 4.36%5.13% Total Return Total return is calculated based on interest and both realized and unrealized changes in market value; this is expressed as a rate of return over a specified period of time based on cost and is backward- looking. •Focused on long-term performance and growth •Affected by both yield and market value fluctuations •Reflects “true value” of the portfolio •Recommended approach by the Government Finance Officers Association Total Rate of Return 3 Months 1 Year 3 Years Since Inception City of SLO 2.79%4.75%0.04%1.42% 0-5 Treasury Index 2.72%4.49%-0.15%1.22% Variance +0.07%+0.26%+0.19%+0.20% 1Effective duration is the approximate percentage change in price for each 1% change in interest rates. 12 Investment Objectives The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. The City follows the practice of pooling cash and investments for all funds under its direct control. Funds held by outside fiscal agents under provisions of bond indentures are maintained separately. Interest earned on pooled cash and investments is allocated quarterly to the various Quarterly Investment Report funds based on the respective fund’s average quarterly cash balance. Interest earned from cash and investments with fiscal agents is credited directly to the related accounts. It is common for governments to pool the cash and investments of various funds to improve investment performance. By pooling funds, the City can benefit from economies of scale, diversification, liquidity, and ease of administration. The City uses the services of an investment advisor, PFM Asset Management, to manage a portion of the City’s portfolio. The City’s strategy is to retain approximately 25% of the portfolio to manage its day-to-day cash flow needs, while PFM’s focus is on longer-term investment management. In addition, the City has retained direct control of several investments that had been acquired before the City began to use investment advisors. All investments are held by the City in a safekeeping account with Bank of New York Mellon, except for investments held by trustees related to bond financings, which are held by either US Bank or Bank of New York Mellon. 13 Environmental, Social, and Governance (ESG) Investment Objectives ESG investing is the process of incorporating the analysis of non-financial environmental, social, and governance factors into investment decisions alongside traditional financial criteria. As set forth in the City’s Investment Management Plan dated August 18, 2020, it is City’s objective to integrate environmental, social, and governance (“ESG”) factors into investment decisions for its investment portfolio to the extent practical and possible. In order to achieve this objective, the City will apply the ESG Investment Criteria to the following Investments: Asset-Backed Securities, Bankers’ Acceptances, Commercial Paper, Corporate, Medium-Term & Bank Notes, and Negotiable Bank Deposit Obligations. The ESG investment criteria is based on ESG Risk Ratings, industry and subindustry definitions, and subindustry rankings as provided by Sustainalytics. 14 Market Value includes accrued interest as of December 31, 2023. Average ESG Risk Rating is weighted by market value. Please s ee important disclosures at the end of this presentation. *U.S. Treasury and municipal obligations are not included in the analysis. ESG Risk Composition Overview The ESG Risk Rating measures economic value at risk based on ESG factors. A company’s ESG Risk Rating is comprised of a quantitative score and a risk category. The score indicates unmanaged ESG risk. Risk categories are absolute and comparable across industries. Lower scores represent less unmanaged risk. Ratings are scored on a scale of 1-100 and are assigned to one of the following ESG risk categories: •Negligible Risk (overall score of 0-9.99 points) •Low Risk (10-19.99 points) •Medium Risk (20-29.99 points) •High Risk (30-39.99 points) •Severe Risk (40 and higher points) 30/35 of portfolio issuers are rated with a total rated market value of $40.9 million (39%) Negligible Low Medium High Severe Portfolio Average ESG Risk Rating 20.4 Allocation by ESG Risk Rating Low 21% Medium 16% High <1% Not Rated 61% 15 Industry Diversification Portfolio holdings and Sustainalytics data as of December 31, 2023. Average ESG Risk Rating represents the market value -weighted average ESG risk rating for each industry. 28.9 20.7 19.3 25.3 22.0 17.6 17.2 19.0 15.4 0% 20% 40% 60% 80% 0 10 20 30 40 Po r t f o l i o W e i g h t ( % ) ES G R i s k R a t i n g Industry Exposure and Weighted Average Risk Score 16 S&P Credit Rating Distribution ESG Risk Rating Key Negligible Low Medium High Severe 0-9.99 10-19.99 20-29.99 30-39.99 40-100 Portfolio holdings and Sustainalytics data as of December 31, 2023. If a security is not rated by S&P, the equivalent Moody’s rating is used. NR stands for ‘no rating’ and implies that the issuer is not rated by S&P or Moody’s but is rated by Fitch. $0 $5 $10 $15 $20 NR A AA AAA Market Value Allocation (Millions $) Credit Rating Grouped by ESG Risk Rating Category 23.2 17.7 22.2 0.0 0.0 0.0 0 10 20 30 40 AAA AA A BBB A-1/A-1+NR Average ESG Risk Rating by S&P Credit Rating 17 Holdings as of December 31, 2023 Sorted By ESG Risk Rating Source: Sustainalytics. Holdings as of December 31, 2023. Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 12/31/2023 CarMax Inc.0.2%Automotive Retail 20 12.1 The Home Depot Inc 1.0%Home Improvement Retail 26 13.3 Coöperatieve Rabobank U.A.1.0%Diversified Banks 3 13.7 Federal National Mortgage Association 7.1%Thrifts and Mortgages 7 14.1 Adobe Systems Inc 0.6%Enterprise and Infrastructure Software 5 14.7 Microsoft Corp 1.5%Enterprise and Infrastructure Software 6 15.2 Novartis AG 1.5%Pharmaceuticals 1 15.8 Mastercard Incorporated 0.6%Data Processing 16 16.6 Fifth Third Bancorp 0.7%Regional Banks 11 17.7 Target Corp 0.7%Department Stores 29 18.5 Federal Home Loan Bank System 2.2%Consumer Finance 14 18.7 Pfizer Inc 1.1%Pharmaceuticals 3 18.7 The Toronto-Dominion Bank 1.0%Diversified Banks 17 19.0 Intel Corp 0.5%Semiconductor Design and Manufacturing 13 19.0 American Express Company 0.8%Consumer Finance 18 19.3 Deere & Co 0.8%Agricultural Machinery 30 20.0 Federal Home Loan Mortgage Corp 4.8%Thrifts and Mortgages 21 20.2 Kubota Corp 0.3%Agricultural Machinery 48 20.7 Bank of New York Mellon Corp 0.9%Asset Management and Custody Services 12 20.9 18 Holdings as of December 31, 2023 Sorted By ESG Risk Rating Source: Sustainalytics. Holdings as of December 31, 2023. (continued) Issuer % Weight Subindustry Subindustry Percentile ESG Risk Rating 12/31/2023 Bristol-Myers Squibb Company 0.3%Biotechnology 11 22.7 PACCAR Inc 0.8%Heavy Machinery and Trucks 26 24.4 Walmart Inc.1.3%Food Retail 55 25.3 The PNC Financial Services Group, Inc.0.7%Regional Banks 41 26.1 Citigroup, Inc.1.7%Diversified Banks 49 26.9 Bank of America Corporation 3.0%Diversified Banks 59 28.3 Hyundai Motor Company 0.3%Automobiles 69 28.3 Honda Motor Co Ltd 0.7%Automobiles 72 28.5 Toyota Motor Corp 1.0%Automobiles 81 29.4 JPMorgan Chase & Co.2.4%Diversified Banks 71 30.1 Amazon.com Inc 0.3%Online and Direct Marketing Retail 97 30.6 19 Socially Responsible Investment Policy In addition to the ESG criteria, the City’s Socially Responsible Investment (SRI) Policy restricts portfolio issuers who generate revenue from casinos, gambling, racetracks, brewery, wine/spirits, tobacco, electronic cigarette, or tobacco-related products, or who support the direct production or drilling of fossil fuels. The tables to the right show the Bloomberg Industry Classifications (“BICS”) for all the portfolio’s holdings. Issuer Sector (BICS) Adobe Inc Software & Services Amazon.com Inc Retail -Consumer Discretionary American Express Credit Account Credit Card ABS Bank of America Auto Trust Automobile ABS Bank of America Co Diversified Banks Bristol-Myers Squibb Co Pharmaceuticals Carmax Auto Owner Trust Automobile ABS Chase Issuance Trust Credit Card ABS Citibank Credit Card Issuance Trust Credit Card ABS Citigroup Inc Banks Cooperatieve Rabobank U.A.Banks Deere & Company Machinery Manufacturing FHLB Government Agencies FHLMC Government Agencies Fifth Third Auto Trust Automobile ABS FNMA Government Agencies Home Depot Inc Retail -Consumer Discretionary Honda Auto Receivables Automobile ABS Hyundai Auto Receivables Automobile ABS Issuer Sector (BICS) Intel Corporation Semiconductors JP Morgan Chase & Co Diversified Banks Kubota Credit Owner Trust Other ABS Los Angeles Community College District Education Mastercard Inc Consumer Finance Microsoft Corp Software & Services New Jersey Turnpike Authority Transportation Novartis Capital Corp Pharmaceuticals Paccar Financial Corp Transportation & Logistics Pfizer Inc Pharmaceuticals PNC Financial Services Group Banks State of Maryland General Government Target Corp Mass Merchants The Bank of New York Mellon Corporation Financial Services Toronto-Dominion Bank Banks Toyota Motor Corp Automobile ABS U.S. Treasury Sovereigns University of California Education Wal-Mart Stores Inc Mass Merchants Source: Bloomberg. BICs is an industry classification system developed and utilized by Bloomberg that classifies securities b ased on business, economic function, and other characteristics. 20 Distribution List City Council Erica A. Stewart Mayor Andy Pease Vice Mayor Jan Marx Council Member Emily Francis Council Member Michelle Shoresman Council Member Investment Oversight Committee Jan Marx Council Liaison Anni Wang Public Member Derek Johnson City Manager Emily Jackson Director of Finance Debbie Malicoat Deputy Director of Finance/City Controller Riley Kuhn Principal Financial Analyst—Budget Independent Auditor Badawi & Associates PFM Asset Management LLC Monique Spyke Managing Director 21 Appendix •Additional ESG Information •ESG Themes Information 22 0 5 10 15 20 25 30 35 40 Federal Agency & MBS Certificates of Deposit Corporate Notes ABS ESG Risk Rating ESG Risk Rating Range and Average by Sector Source: Sustainalytics. Data as of December 31, 2023. Bars represent the range of held issuers’ ESG risk rating that fall und er each sector, and lines indicate the sectors market value-weighted average ESG risk rating. Please see important disclosures at the en d of this presentation. Sector Analysis 25.3 22.0 16.4 16.9 23 ESG Themes Glossary ESG Theme Theme Description Key Indicators Environment Carbon Output & Energy Use Refers to a company’s management of risks related to its energy efficiency and greenhouse gas emissions in its operation as well as its products and services in the production phase and during the product use phase •Carbon intensity •Renewable energy use •Env. Mgt. System certification •GHG reporting / risk management •Hazardous products •Sustainable products & services Waste & Pollution Evaluates the management of emissions and releases from a company’s own operations to air, water, and land, excluding greenhouse gas emissions •Emergency response program •Solid waste management •Effluent management •Radioactive waste management •Hazardous waste management •Non-GHG air emissions programs •Oil spill disclosure & performance •Recycled material use Resource Use & Biodiversity Analyzes how efficiently and effectively a company uses its raw material inputs and water in production. It also encompasses how a company manages the impact of its operations on land, ecosystems, and wildlife •Biodiversity programs •Deforestation programs / polices •Site closure & rehabilitation •Water intensity & risk management •Forest certifications •Supplier environmental programs / certifications •Sustainable agriculture programs Community Impact (Environmental) Evaluates the community impact from an environmental risk perspective based on an assessment of Community Relations, Products & Services, Occupational Health and Safety, and Product Governance •Env Impact –Community Relations •Env Impact –Products & Services •Env Impact –Occupational Health and Safety •Env Impact –Product Governance 24 ESG Theme Theme Description Key Indicators Social Human Capital Management Evaluates the management of risks related to human rights, labor rights, equality, talent development, employee retention, and labor health and safety •Discrimination policy •Diversity programs •Gender pay equality / disclosures •Employee development •Supply chain management / standards •Human rights policies & programs •Employee health & safety Product Governance Focuses on the management of risks related to product quality, safety, wellness, and nutrition, as well as customer data privacy & cybersecurity •Product & service safety programs / c certifications •Data privacy management •Media & advertising ethics policy •Organic products / GMO policy •Product health statement Community Impact (Social) Assesses how companies engage with local communities and their management of access to essential products or services to disadvantaged communities or groups •Equitable pricing and availability •Access to health care •Price transparency •Human rights / indigenous policy •Community involvement programs •Noise management ESG Financial Integration & Resilience Analyzes financial stability and issues that pose systemic risks and potential external costs to society in the financial services industry. Also measures ESG activities by financial institutions •Systemic risk management / reporting •Tier 1 capital •Leverage ratio •Responsible investment / asset management •Underwriting standards •Financial inclusion •Credit & loan standards •Green buildings investments ESG Themes Glossary 25 ESG Themes Glossary ESG Theme Theme Description Key Indicators Governance Corporate Governance Evaluates a company’s rules, policies, and practices with a focus on how a company's board of directors manages and oversees the operations of a company. Also assesses the management of general professional ethics and lobbying activities •Board / management quality & integrity •Board structure •Ownership & shareholder rights •Remuneration •Audit & financial reporting •Stakeholder governance •Bribery & corruption policies / programs •Money laundering policy •Whistleblower programs •Business ethics programs •Political involvement policy •Lobbying and political expenses 26 Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general informatio n purposes only and is not intended to provide specific advice or a specific recommendation.All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securit ies. There is no guarantee the investment objectives will be achieved as the investment portfolio will only include holdings consi stent with the applicable Environmental, Social, and Governance (ESG) guidelines. As a result, the universe of investments availab le will be more limited. ESG criteria risk is the risk that because the investment portfolio ESG criteria excludes securities o f certain issuers for nonfinancial reasons, the investment portfolio may forgo some market opportunities that would be available to investment portfolios that do not apply ESG criteria. PFM Asset Management LLC ("PFMAM") is an investment adviser registered with the U.S. Securities and Exchange Commission and a subsidiary of U.S. Bancorp Asset Management, Inc. ("USBAM"). USBAM is a subsidiary of U.S. Bank National Association ("U.S. Bank"). U.S. Bank is a separate entity and subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services or performance of PFMAM. The information contained is not an offer to purchase or sell any securities. Additional applicable regulatory information is available upon request. For more information regarding PFMAM's services or entities, please visit www.pfmam.com. 27 Agenda Report Investment Oversight Committee FROM: Emily Jackson, Finance Director DATE: 2/15/2024 SUBJECT: ANNUAL REVIEW OF CITY INVESTMENT POLICY AND MANAGEMENT PLAN RECOMMENDATION Review and reaffirm the City’s Investment Policy and Management Plan. POLICY CONTEXT As set forth in the Statement of Investment Policy, the City Treasurer is responsible for developing and monitoring the Investment Policy & Management Plan. As recommended by Government Code Section and 53646, the Investment Oversight Committee (IOC) will review the Investment Policy & Management Plan annually. The Council will review the Investment Policy & Management Plan at a public meeting when changes in strategies, practices or procedures are proposed by the Investment Oversight Committee. In the interim, the City Treasurer is responsible for keeping the Investment Policy & Management Plan up to date to reflect changes in legislation, organizational structure, and other policies and administrative procedures approved by the Council. DISCUSSION Background The City’s Investment Policy and Management Plan provides that the City “shall invest public funds in such a manner as to comply with state and local laws; ensure prudent money management; provide for daily cash flow requirements; and meet the objectives of the Investment Policy & Management Plan in priority order of Safety, Liquidity, and Return on Investment.” The City’s Investment Policy and Management Plan was developed in 2015 and was most recently updated in 2018 and 2020. A summary of the changes is as follows: •On February 20, 2018 the policy was revised to increase flexibility of investment mechanisms by: o Requiring that all medium-term notes are rated “A” or equivalent or better by one or more National Recognized Statistical Rating Organizations (NRSROs) rather than two NRSROs; o Changing the credit rating from “AA” to “A” or “A-1” or equivalent or better for negotiable certificates of deposit; o Allowing investments in asset backed securities. The 2018 update also updated IOC membership to replace the Assistant City Manager with the Budget Manager (now Principal Budget Analyst). •On August 18, 2020 the policy was revised to incorporate an Environmental, Social, Governance (ESG) investing approach which focuses on investing in companies that have 28 City of San Luis Obispo, Title, Subtitle a focus on environmental issues, are socially engaged and govern their business in a sustainable and conscientious manner. FY 2022-23 Audit and Identification of Policy Inconsistencies Related to 2020 Policy Update During the City’s FY 2022-23 audit, staff from the City’s independent auditor (Badawi and Associates) identified that the City was making investments in asset backed securities, despite the policy they had been provided not allowing for this type of investment. The Deputy Director of Finance immediately contacted PFM Asset Management Inc. (PFMAM), the City’s contracted investment manager, to determine why investments were being made in asset backed securities. PFMAM staff reviewed this issue and determined that when the 2020 policy updates were made to incorporate an ESG investing approach, the updates had been made to the 2015 version of the policy, rather than the 2018 policy which enabled investments in asset backed securities. Finance Department staff has since worked with PFMAM to update the policy consistent with the City Council’s intent, based upon approval of incremental changes to the policy, as outlined above. ATTACHMENTS A-Investment Policy and Management Plan (updated to incorporate changes made in 2018) 29 INVESTMENT POLICY & MANAGEMENT PLAN February 2024 30 INVESTMENT MANAGEMENT PLAN Table of Contents I.INTRODUCTION 1 •Policy Statement •Primary Investment Objective •Scope of Investment Management Plan •Use of State Guidelines •Preparation and Administration of the Plan •Ethics and Conflict of Interest II.INVESTMENT AUTHORITY AND RESPONSIBILITIES 5 •Authorized Investment Officers •Internal Controls •Investment Management Resources •Evaluation of Investment Officer Actions •Responsibilities of an Investment Advisor III.CAPITAL PRESERVATION AND RISK 9 •Overview •Portfolio Diversification Practices IV.ELIGIBLE FINANCIAL INSTITUTION 11 •Portfolio Diversification and Credit-Worthiness Standards •Certification and Reporting Requirements •Individual Placement of Investments •Individual Placement of Deposits V.INVESTMENT VEHICLES 12 •State of California Limitations •Suitable and Authorized Investments •Review of Investment Portfolio •City Policies •Authorized Investments Summary VI. INVESTMENT MATURITY 18 VII.ESG INVESTING 19 VIII.CASH MANAGEMENT PRACTICES 20 IX. EVALUATION OF INVESTMENT PERFORMANCE 21 X. INVESTMENT REPORTING 22 XI. INVESTMENT POLICY AND MANAGEMENT PLAN REVIEW 24 XII.GLOSSARY 25 31 INTRODUCTION POLICY STATEMENT The City of San Luis Obispo shall invest public funds in such a manner as to comply with state and local laws; ensure prudent money management; provide for daily cash flow requirements; and meet the objectives of the Investment Policy & Management Plan in priority order of Safety, Liquidity, and Return on Investment. The purpose of the investment management plan is to establish strategies, practices and procedures to be used in administering the City's portfolio in accordance with the City's Statement of Investment Policy. Included in the Appendix is a copy of the City’s most recently adopted Investment Policy. PRIMARY INVESTMENT OBJECTIVE The City's primary investment objective is to achieve a reasonable rate of return on public funds while minimizing the potential for capital losses arising from market changes or issuer default. Although the generation of revenues through interest earnings on investments is an appropriate City goal, the primary consideration in the investment of City funds is capital preservation in the overall portfolio. As such, the City's yield objective is to achieve a reasonable rate of return on City investments rather than the maximum generation of income, which could expose the City to unacceptable levels of risk. In determining individual investment placements, the following factors shall be considered in priority order: 1.Safety 2.Liquidity 3.Yield – (Return on Investment) Safety. Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the City will diversify its investments so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. The objective is to mitigate credit risk and interest rate risk summarized as follows: Credit Risk. Credit risk is the risk that a security or a portfolio will lose some or all its value due to a real or perceived change in the ability of the issuer to repay its debt. The City shall mitigate credit risk by adopting the following strategies: 1.Limiting investments to the safest types of securities. 2.Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisors with which the City will do business. If the City has an investment advisor, the investment advisor may use its own list of authorized broker/dealers to conduct transactions on behalf of the City. 3.It is the intent of the City to diversify the investments within the portfolio to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities. The asset allocation in the portfolio should, however, be flexible depending upon the outlook for the economy, the securities market, and the City’s anticipated cash flow needs. 32 INTRODUCTION 4.No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the United States Government, its agencies and instrumentalities, approved local agency investment pools, LAIF, money market funds, and the City’s main financial institution. 5.The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality, liquidity or yield of the portfolio in response to market conditions or the City’s risk preferences. 6.If securities owned by the City are downgraded by either Moody’s or S&P to a level below the quality required by this Investment Management Plan, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. a.If a security is downgraded below the level required by this policy, the City Treasurer will determine whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors. b.If a decision is made to retain a downgraded security in the portfolio, it will be monitored and reported monthly to the City Council. Interest Rate Risk. Interest rate risk is the risk that the portfolio will decline in value (or will not optimize its value) due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The City will mitigate interest rate risk by providing adequate liquidity for short-term cash needs, and by making some longer-term investments only with funds that are not needed for current cash flow purposes. The City further recognizes that certain types of securities, including variable rate securities, securities with principal pay downs prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to interest rate risk: 1.The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. 2.The City shall maintain a minimum of three months of budgeted operating expenditures in short term investments. The level of operating expenses shall be measured once per year and shall be based on the most recently adopted budget. 3.The duration of that part of the portfolio that is not needed for liquidity purposes shall typically be approximately equal to the duration of an index of US Treasury and Federal Agency Securities with maturities which meet the City’s needs for cash flow and level of risk tolerance (the Benchmark Index) plus or minus 10%. 33 INTRODUCTION Liquidity. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds. Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Yield: Return on Investments. The City’s investment portfolio shall be designed with the objective of attaining a market benchmark rate of return throughout budgetary and economic cycles, commensurate with the City’s investment risk constraints and the cash flow characteristics of the portfolio. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a reasonable return relative to the risk being assumed. SCOPE OF INVESTMENT MANAGEMENT PLAN Included in the scope of the City's Investment Policy & Management Plan are the following major guidelines and practices to be used in achieving the City's primary investment objective: 1. Investment authority and responsibilities 2.Capital preservation and risk 3.Eligible financial institutions 4.Allowable investment vehicles 5. Investment maturity 6.Cash management 7. Evaluation of investment performance 8. Investment reporting 9. Investment management plan review 10.Socially responsible investment guidelines These guidelines apply to all cash-related assets included within the City’s audited financial statements and held either directly by the City or held and invested by trustees or fiscal agents. The only exception is funds invested in the City's deferred compensation plan, which are controlled by federal law, specific provisions of the City's adopted plan and individual employee decisions. USE OF STATE GUIDELINES The California Government Code (including sections 16429.1, 16481.2, 53600-53609, 53630- 53634, 53635, 53635.2, 53635.3, 53635.8, 53637-53638 and 53684) regulates public agency investment and investment reporting practices. It is the policy of the City of San Luis Obispo to use the State's provisions for local government investments in developing and implementing the City's investment policies and practices. 34 INTRODUCTION PREPARATION AND ADMINISTRATION OF THE PLAN As set forth in the Statement of Investment Policy, the City Treasurer is responsible for developing and monitoring the Investment Policy & Management Plan. As recommended by Government Code Section and 53646, the Investment Oversight Committee will review the Investment Policy & Management Plan annually. The Council will review the Investment Policy & Management Plan at a public meeting when changes in strategies, practices or procedures are proposed by the Investment Oversight Committee. In the interim, the City Treasurer is responsible for keeping the Investment Policy & Management Plan up to date to reflect changes in legislation, organizational structure, and other policies and administrative procedures approved by the Council. ETHICS AND CONFLICT OF INTEREST Investment Officials shall refrain from personal business activity that could conflict with proper execution and management of the policy and the investment management plan, or which could impair their ability to make impartial decisions. Investment Officials must provide a public disclosure document by April 1st of each year or when material interest in financial institutions or personal investment positions require it. Furthermore, Investment Officials must refrain from undertaking personal investment transactions with the same individuals(s) employed by the financial institution with which business is conducted on behalf of the City. 35 INVESTMENT AUTHORITY AND RESPONSIBILITIES AUTHORIZED INVESTMENT OFFICERS Authority to manage the investment portfolio is granted to the Finance Director/City Treasurer pursuant to Resolution No. 8477. Responsibility for the day- to-day operation of the investment program may be delegated to the Deputy Director of Finance/Controller, who is responsible for carrying-out established written procedures and internal controls for the operation of the investment program consistent with this plan. These procedures should include references to safekeeping, delivery vs payment, investment accounting, repurchase agreements, wire transfer agreements, collateral/depository agreements and banking services contracts. Transactions Directed by City Staff. No person may engage in an investment transaction except as provided under the terms of this plan and the procedures established by the Finance Director/City Treasurer. Although the Finance Director/City Treasurer may delegate these duties to another official in the Department of Finance, every investment transaction must be reviewed and approved by the Finance Director/City Treasurer. Additionally, the Finance Director/City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. Transaction Directed by an Investment Advisor. The City may engage the services of an external investment adviser to assist in the management of the City’s investment portfolio in a manner consistent with the City’s objectives. The external investment adviser may be granted discretion to purchase and sell investment securities in accordance with the City’s Investment Policy and this Investment Management Plan. The investment adviser must be registered under the Investment Advisers Act of 1940. The investment advisor shall be required to provide a certification that it has read and understands the applicable sections of the California Government Code relating to municipal investments, this Investment Management Plan and the City’s Investment Policy. INTERNAL CONTROLS The Finance Director/City Treasurer is responsible for ensuring compliance with the City's Investment Policy as well as for establishing systems of internal control designed to prevent losses due to fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by City officers and employees. Additionally, the Finance Director/City Treasurer is responsible for the physical security of City investments and shall use custodial safekeeping for negotiable and bearer instruments whenever possible. INVESTMENT MANAGEMENT RESOURCES The concept of reasonable assurance recognizes that the: 1.Cost of a control procedure should not exceed the benefits likely to be derived. 2. Valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Finance Director/City Treasurer shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. 36 INVESTMENT AUTHORITY AND RESPONSIBILITIES Internal controls shall address the following points: 1.Separating transaction authority from accounting and record keeping. By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 2.Custodial safekeeping. Securities purchased from any bank or dealer including appropriate collateral (as defined by State Law) shall be placed with an independent third party for custodial safekeeping as evidenced by safekeeping receipts in the City of San Luis Obispo’s name. 3.Avoiding physical delivery securities. Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. 4.Delivery versus payment. All trades where applicable will be executed by delivery vs payment (DVP). This ensures that securities are deposited in the eligible financial institution before the release of funds. Securities will be held by a third-party custodian as evidenced by safekeeping receipts. 5.Clearly delegating authority to subordinate staff members. Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6.Confirming telephone transactions for investments and wire transfers in writing. Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead or e-mail and the safekeeping institution has a list of authorized signatures. 7.Developing wire transfer agreements with the lead bank or third-party custodian. This agreement should outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. EVALUATION OF INVESTMENT OFFICER ACTIONS The standard of prudence to be applied by the Finance Director of Finance/City Treasurer shall be the "prudent investor" standard, as defined under Government Code Section 53600.3 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. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law. 37 INVESTMENT AUTHORITY AND RESPONSIBILITIES Investment officers acting in accordance with written procedures and this Investment Policy & Management Plan, and exercising due 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 the liquidity and the sale of securities are carried out in accordance with the terms of this plan. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. In accordance with Government Code Section 53607, the Finance Director/City Treasurer shall prepare a report of monthly investment transactions for the City Council’s review. In addition, the City Council shall determine each year whether the delegation of investment authority to the Treasurer shall be renewed. RESPONSIBILITIES OF AN INVESTMENT ADVISOR When the services of an investment advisor are contracted for by the City, the responsibilities and obligations of the investment advisor shall be identified within the terms of the contract and shall, at a minimum, include the following: 1. Investment Advisor will provide investment research and supervision of the managed assets and conduct a continuous program of investment, evaluation and, when appropriate, sale and reinvestment of the managed assets. 2. Investment Advisor shall continuously monitor investment opportunities and evaluate investments of the managed assets. Investment Advisor shall furnish City with statistical information and reports with respect to investments of the managed assets. 3. Investment Advisor shall place all orders for the purchase, sale, or exchange of portfolio securities for City's account with brokers or dealers recommended by Investment Advisor and/or City, and to that end Investment Advisor is authorized as agent of City to give instructions to the custodian designated by City (the “Custodian”) as to deliveries of securities and payments of cash for the account of City. 4.In connection with the selection of such brokers and dealers and the placing of such orders, Investment Advisor is directed to seek for City the most favorable execution and price, the determination of which may take into account, subject to any applicable laws, rules and regulations, whether statistical, research and other information or services have been or will be furnished to Investment Advisor by such brokers and dealers. 5. Investment Advisor shall not take possession of or act as custodian for the cash, securities or other assets of City and shall have no responsibility in connection therewith. 38 INVESTMENT AUTHORITY AND RESPONSIBILITIES 6.Authorized investments shall include only those investments which are currently authorized by the state investment statutes, and City’s investment policy, and as supplemented by such other written instructions as may from time to time be provided by City to Investment Advisor. 7. Investment Advisor shall be entitled to rely upon City's written advice with respect to anticipated drawdowns of managed assets. 8. Investment Advisor will observe the instructions of City with respect to broker/dealers who are approved to execute transactions involving the managed assets and in the absence of such instructions will engage broker/dealers who Investment Advisor reasonably believes to be reputable, qualified and financially sound. 39 CAPITAL PRESERVATION AND RISK OVERVIEW Some level of risk is inherent in any investment transaction. Losses may be incurred due to issuer default, market price changes or technical cash flow complications such as investments in non- marketable certificates of deposit. Diversification of the City's portfolio by institution, investment vehicle and maturity term is the primary tool available to the City in minimizing investment risk and capital losses by safeguarding the overall portfolio from any individual loss. PORTFOLIO DIVERSIFICATION PRACTICES The following sections summarize the City's major portfolio diversification practices and guidelines in determining: 1.Eligible financial institutions 2.Investment vehicles 3.Investment maturity Portfolio limitations included in these guidelines are to be based on the portfolio composition and Investment Management Plan policies in effect at the time of placement; the actual composition of the City's investments may vary over time from plan limitations due to overall portfolio changes from when the individual placement was made as well as changes in the City's Investment Management Plan. Credit criteria listed in these guidelines refer to the credit rating at the time the security is purchased. If an investment’s credit rating falls below the minimum rating required at the time of purchase, the Finance Director/City Treasurer will consult with the Investment Advisor and perform a timely review to decide whether to sell or hold the investment. 40 ELIGIBLE FINANCIAL INTITUTION PORTFOLIO DIVERSIFICATION AND CREDIT-WORTHINESS STANDARDS The following general criteria relating to portfolio diversification and creditworthiness will be used in selecting depositories and broker/dealers (financial institutions) in the placement of City investments: 1.The financial capacity and creditworthiness of the financial institution shall be considered before the placement of City investments. 2.Current financial statements shall be maintained for each institution in which or through which cash is invested. 3.No more than 5% of the City's portfolio (exclusive of the US Government, its agencies and instrumentalities, approved local agency investment pools and money market funds government agency issues, or LAIF and money market funds, and the City’s main financial institution) shall be placed with any financial institution. 4.No more than 25% of the City's portfolio shall be invested in collateralized certificates of deposit issued by savings and loan institutions. 5.Certificates of deposit placed by the City shall not constitute more than 15% of the total assets of the institution; and the institution must have total assets in excess of $200 million. CERTIFICATION AND REPORTING REQUIREMENTS Unless the City has engaged an investment advisor, the City shall establish a list of qualified securities dealers based on a certification submitted by all financial institutions with which the City has an investment relationship. The certification shall state that the institution has reviewed the City's Investment Policy & Management Plan and that it will: 1.Exercise due diligence in monitoring the activities of its officers and employees engaged in transactions with the City. 2. Ensure that all of its officers and employees offering investments to the City are trained in the precautions appropriate to public sector investments. 3.Submit audited financial statements prepared by an independent certified public accountant to the City on an annual basis within 180 days after the end of the institution's fiscal year. INDIVIDUAL PLACEMENT OF INVESTMENTS A list will be maintained of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least five years of operation). These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule). All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: 41 ELIGIBLE FINANCIAL INTITUTION 1.Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines 2.Proof of National Association of Securities Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties) 3.Proof of state registration 4.Certification of having read and understood and agreeing to comply with the applicable sections of the California Government Code and the City’s Investment Policy and that all securities recommended shall be suitable for the City of San Luis Obispo. The investment advisor (or City staff if applicable) will strive to obtain competitive bids from at least three brokers or financial institutions on all purchases and sales of investment instruments whenever possible. INDIVIDUAL PLACEMENT OF DEPOSITS Individual placement of collateralized certificates of deposit with eligible financial institutions shall be based on the following practices and procedures: 1. Deposits shall only be placed with financial institutions maintaining offices within the City of San Luis Obispo. 2.Unless collateralized by eligible securities as provided in Sections 53651 and 53652 of the Government Code, the maximum number of Certificates of Deposit to be placed with any single institution is the amount up to the Federal Deposit Insurance Corporation (FDIC) limit. 3.Reasonable efforts will be made to place deposits of less than the FDIC limit with each eligible institution. Any deposits in excess of this amount shall be awarded based on competitive bids. Documentation relating to rate quotes shall be maintained by Finance for six months. 4.Within the context of the City's policies regarding competitive bidding and portfolio limitations, deposits shall be distributed as evenly as possible between financial institutions. 42 V. INVESTMENT VEHICLESINVESTMENT VEHICLES STATE OF CALIFORNIA LIMITATIONS As provided in the applicable sections of the Government Code (53601 + 53601.6), the State of California limits the investment vehicles available to local agencies. SUITABLE AND AUTHORIZED INVESTMENTS City funds may be invested to diversify the investments by security type and institutions subject to the following restrictions: 1.No more than 5% of the total portfolio may be invested in securities of any single issuer, other than the US Government, its agencies and instrumentalities, approved local agency investment pools, LAIF, money market funds, and the City’s main financial institution. 2.The maximum stated final maturity of individual securities in the portfolio shall be five years, except that up to 10% of the portfolio can be invested in Treasury, municipal, and GSE securities maturing over 5 years. 3.The City shall maintain a minimum of three months of budgeted operating expenditures in short term investments. The level of operating expenses shall be measured once per year and shall be based on the most recently adopted budget. 4.The duration of that part of the portfolio that is not needed for liquidity purposes shall typically be approximately equal to the duration of an index of US Treasury and Federal Agency Securities with maturities which meet the Authority’s needs for cash flow and level of risk tolerance (the Benchmark Index) plus or minus 10%. 5.Treasury Obligations: Treasury bills, Treasury notes, Treasury bonds and Treasury STRIPS with maturities not exceeding five years from the date of purchase. 6.Federal Agency or Government Sponsored Enterprise (GSE) Securities: Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises with maturities not exceeding five years from the date of purchase. 7.Municipal Securities: include obligations of the City, the State of California, any of the other 49 states, and any local agency within the State of California, provided that the securities are rated in a rating category of “A” or its equivalent or higher by at least one nationally recognized statistical rating organization (NSRO). No more than 30% of the portfolio may be invested in these securities and no more than 5% of the portfolio may be invested in any issuer. 8.Commercial Paper: With “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organizations (NRSRO). The entity that issues the commercial paper must meet all of the following conditions in either paragraph a or paragraph b: a.The entity meets the following criteria: (i) is organized and operating in the United States as a general corporation, (ii) has total assets in excess of five hundred 43 V. INVESTMENT VEHICLESINVESTMENT VEHICLES million dollars ($500,000,000), and (iii) has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or higher by a NRSRO. b.The entity meets the following criteria: (i) is organized within the United States as a special purpose corporation, trust, or limited liability company, (ii) has program- wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond, and (iii) has commercial paper that is rated in a rating category of “A-1” or higher, or the equivalent, by a NRSRO. c.Eligible commercial paper will have a maximum maturity of 270 days or less. No more than 40% of the City’s portfolio may be invested in commercial paper. The City may purchase no more than 10% of the outstanding commercial paper of any single issuer. 9.Medium Term Notes: Issued by corporations organized and operating in the U.S. or by depository institutions licensed by the U.S. or any state and operating within the U.S., except financial institutions shall not be considered. At the time of purchase, the notes must mature within five years and must be rated in a rating category of “A” or its equivalent or better by one or more NRSRO. At the time of purchase, no more than 30% of the City’s portfolio may be invested in medium term notes and no more than 5% of the City’s portfolio may be invested in any one issuer. 10.Bankers’ Acceptances: Not exceeding 180 days to maturity. At the time of purchase, no more than 40% of the City’s surplus funds may be invested in bankers’ acceptances and no more than 5% of the City’s surplus funds may be invested in bankers’ acceptances from any one bank. 11.Repurchase Agreements: With a term of the agreement not exceeding one year, collateralized by U.S. Treasury and agency securities listed in items 1 and 2 above. The value of the collateral underlying the agreement shall be 102%. The market value of the collateral shall be marked-to- the-market at least weekly based on the bid price and adjustments made when the value falls below 102%. Collateral shall be held in the City’s custodial bank as safekeeping agent. Repurchase Agreements shall be entered into only with dealers who have executed a Master Repurchase Agreement with the City and who are recognized as Primary Dealers with the Market Reports Division of the Federal Reserve Bank of New York. There are no limitations on the amount that can be invested in repurchase agreements. No more than 25% of the portfolio can be invested with any one financial institution. 12.Asset-Backed Securities (ABS). A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond. At the time of purchase, asset-backed securities must be issued by an issuer rated in a rating category of “A” or its equivalent or better for the issuer’s debt as provided by an NRSRO and rated in a rating category of “AAA” or its equivalent or better by an NRSRO. At the time of purchase, no more than 15% of the City’s portfolio may be invested in asset-backed securities and no more than 2.5% of the City’s portfolio may be invested in any one issuer. 13.Local Agency Investment Fund (LAIF): A local government investment pool established by the State Treasurer of California for the benefit of California local agencies. City funds can be invested in LAIF up to the maximum permitted by State Law. 44 V. INVESTMENT VEHICLESINVESTMENT VEHICLES 14.Negotiable Certificates of Deposit: Issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally or state-licensed branch of a foreign bank. At the time of purchase, the maturity of the certificate may not exceed five years, must be rated in a rating category of “A” or “A-1” or its equivalent or better by one or more NRSRO, no more than 30% of the City’s surplus funds may be invested in certificates of deposit and no more than 5% of the City’s surplus funds may be invested in certificates from any one bank. 15.Collateralized Bank Deposits: Shall be evaluated in term of Federal Deposit Insurance Corporation (FDIC) coverage. For deposits in excess of the FDIC insured limit, approved collateral at the percentage above market value as specified by California Government Code, Sections 53651 et seq. and Sections 53652 et seq. shall be required. No more than 25% of the portfolio can be placed with any one financial institution. This limit may be exceeded if necessary, to allow the City to meet its short-term operational needs. 16.Money Market Mutual Funds: Shall be registered under the Investment Company Act of 1940. To be eligible for investment pursuant to this subdivision, these companies will either: i. attain the highest-ranking letter or numerical rating provided by at least two NRSROs or ii.have retained an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years of experience managing money market mutual funds and with assets under management in excess of $500,000,000. At the time of purchase, no more than 20% of the City’s surplus funds may be invested in money market mutual funds and no more than 10% of the City’s surplus funds may be invested in any one fund. 17.Local Government Investment Pools: Shares of beneficial interest issued by a joint powers authority (Local Government Investment Pools) organized pursuant to Government Code Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (o) of California Government Code Section 53601, inclusive. Each share will represent an equal proportional interest in the underlying pool of securities owned by the joint powers’ authority. The Pool will be rated in a rating category “AAA” or its equivalent by a NRSRO. To be eligible under this section, the shares will maintain a stable net asset value (NAV) and the joint powers authority issuing the shares will have retained an investment adviser that meets all of the following criteria: a.The adviser is registered or exempt from registration with the Securities and Exchange Commission. b. The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (o) Government Code Section 53601, inclusive. c.The adviser has assets under management in excess of five hundred million dollars ($500,000,000). 18.Investments in Community Banks: Provided that the requirements of these guidelines and 45 V. INVESTMENT VEHICLESINVESTMENT VEHICLES California Code sections 53630-53653 are adhered to, funds may be invested in community banks within the San Luis Obispo County service area under the following criteria: a.The bank must be based and have its headquarters in San Luis Obispo County, with at least one branch within the City of San Luis Obispo. b.As indicated by Government Code Section 53635.2, the bank must receive an overall rating of not less than “satisfactory” from the appropriate federal supervisory agency for meeting the criteria specified in Section 2906 of Title 12 of the U.S. Code (Community Reinvestment Act of 1977). c.The bank must provide certification and supporting information that indicates at least 25% in loans is invested within the City of San Luis Obispo. d.To ensure the City obtains a competitive rate for investments in the program, any potential investment or proposal must enjoy a rate of return equal to or greater than the Local Agency Investment Fund (LAIF) average quarterly rate existing at the time of the investment; e.Participating banks shall make a presentation to the City of San Luis Obispo Investment Oversight Committee about their community involvement at least once per year. f.Upon the Investment Oversight Committee’s review of community involvement, the existing investment will be evaluated for renewal by City finance staff. REVIEW OF INVESTMENT PORTFOLIO The securities held by the City must be in compliance as outlined under “Suitable and Authorized Investments” at the time of purchase. Because some securities may not comply with said section subsequent to the date of purchase, the Finance Director/City Treasurer shall at least annually review the portfolio to identify those securities that doe no longer comply. The Finance Director/City Treasurer shall establish procedures to report to the Investment Oversight Committee any major and/or critical incidences of noncompliance identified through the review of the portfolio. CITY POLICIES Debt Funds. Reserve funds from the proceeds of debt issues shall be invested by the Finance Director/City Treasurer in accordance with bond covenants. Deferred Compensation. These policies do not apply to deferred compensation plans. Individual investment policies are adopted by each deferred compensation plan and approved independently by Council. Furthermore, individual investments are directed solely by the employee. Prohibited Investment Vehicles and Practices 1.State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to, mutual funds (other than money market funds as described above in No. 10), unregulated and/or unrated investment pools or trusts, collateralized mortgage 46 V. INVESTMENT VEHICLESINVESTMENT VEHICLES obligations and futures and options. 2.In accordance with Government Code Section 53601.6, investment in inverse floaters, range notes or mortgage derived interest-only strips is prohibited. 3.Investment in any security that could result in a zero-interest accrual if held to maturity is prohibited. 4.Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. 5. Purchasing or selling securities on margin is prohibited. 6.The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited without Council approval. 47 V. INVESTMENT VEHICLESINVESTMENT VEHICLES AUTHORIZED INVESTMENTS SUMMARY Investment Type Government Code Maximum Maturity Maximum % of Portfolio Quality Requirements San Luis Obispo Maximum Maturity Maximum % of Portfolio Quality Requirements 1.Treasury Obligations 5 Years None None 5 Years a None None 2.GSE Securities 5 Years None None 5 Years a None None 3.Municipal Securitiesb 5 years None None 5 years a 30% per type; 5% per issuer “A” or better 4.Commercial Paper 270 Days 25% per type; none per issuer A-1/P-1/F-1; Long-term “A” 270 Days 25% per type; 10% per issuer A- 1/P-1/F-1; Long-term “A” 5.Medium Term Notes 5 Years 30% per type; none per issuer “A” 5 Years 30% per type; 5% per issuer “A” 6.Bankers’ Acceptances 180 Days 40% per type; 30% per issuer None 180 Days 40% per type; 5% per issuer None 7.Repurchase Agreement 1 Year None None 1 Year None per type; 5% per counterparty Primary Dealers/ Collateralization requirements 8. Asset Backed Securities 5 Years 20 % per type; none per issuer “A” for issuer’s debt; “AA” for issue” 5 Years 15% per type; 2.5% per issuer “A” for issuer’s debt; “AAA” for issue 9.LAIF N/A None None N/A Limit per Gov’t Code None 10.Negotiable CDs 5 Years 30% per type; none per issuer None 5 Years 30% per type; 5% per issuer “AA” or “A-1” 11.Collateralized Bank Deposits 5 Years None None 5 Years None per type; 25% per institution None 12.Money Market Mutual Funds N/A 20% per type; 10% per issuer Highest rating of at least two NRSRO N/A 20% per type; 10% per issuer Highest rating of at least two NRSRO 13.Local Government Investment Pools (LGIPs) N/A N/A Advisor requirements N/A N/A Advisor requirements/“AAA” a.Up to 10% of the portfolio can be invested in Treasury and GSE securities maturing over 5 years. This includes municipal obligations. b.Includes State Obligations, City of San Luis Obispo obligations and California Local Agency obligations 48 INVESTMENT MATURITY In addition to the risks associated with the creditworthiness of the financial institution and the security of the investment vehicle, the maturity period of investments is also a significant consideration in the management of the City's portfolio. In order to minimize the impact of market risk, it is intended that all investments will be held until maturity. In implementing this policy, the following guidelines will be used: 1.Projected cash flow requirements are the primary factor to be used in determining investment maturity terms. 2.After cash flow needs have been met, investments may be structured in longer-term securities within a disciplined investment program and process that is based on long-term expectations and is not speculative. 3.Investments may be sold before maturity for cash flow purposes or to rebalance the risk profile of the portfolio. 4.Council approval to make investments with terms in excess of five years is required at least three months prior to the initial investment. 49 ESG INVESTING Environmental, social, and governance (“ESG”) investing is the process of incorporating the analysis of non-financial environmental, social, and governance factors into investment decisions alongside more traditional financial criteria. It is the City’s objective to integrate ESG factors into investment decisions for its investment portfolio to the extent practical and possible. In order to achieve this objective, the City will develop and apply ESG investment criteria to authorized corporate obligations, including bankers’ acceptances, commercial paper, medium-term notes, and negotiable certificates of deposit for purposes of determining investment eligibility. The ESG investment criteria will be based on the ESG risk ratings, industry and sub-industry definitions, and subindustry rankings provided by Sustainalytics. The ESG investment criteria may include industry exclusions, ESG risk rating limitations, and eligibility exceptions for issuers that are top performers within their subindustry. The ESG criteria will be reviewed annually by City’s Investment Oversight Committee. If a previously purchased investment no longer satisfies the City’s ESG investment criteria, the City will continue to hold that investment to maturity unless the City directs its investment advisor to sell the investment. 50 CASH MANAGEMENT PRACTICES To achieve a reasonable return on public funds, the following cash management practices will be followed: 1.Maintain maximum investment of all City funds not required to meet immediate cash flow needs while maintaining adequate compensating balances as required under the City’s banking services agreement. 2.Pool resources available for investment from all City-administered funds, with interest earnings allocated to each of the funds in accordance with generally accepted accounting principles. 3.Maximize the City’s cash flow through the immediate deposit of all cash receipts, use of direct deposits and wire transfers when available, and appropriate timing of payments to vendors. 4.Maximize the cash flow information available by using only one operating bank account. 51 EVALUATION OF INVESTMENT PERFORMANCE As indicated in the Introduction section of this document, it is the City’s primary investment objective to achieve a reasonable rate of return on public funds while minimizing risks and preserving capital. In evaluating the performance of the City’s overall portfolio in achieving this objective, it is expected that yields on City investments will regularly meet or exceed the average return on three-month U. S. Treasury Bills. It is also expected that the portfolio managed by the investment advisor will meet or exceed the Bank of America Merrill Lynch 0-to-5-year U.S. Treasury Bond Index. 52 INVESTMENT REPORTING Consistent with the guidance provided by California Government Code Section 53646 and the City’s practice of reviewing the Financial Policies each year, the Finance Director/City Treasurer may submit the Investment Policy to the Council for consideration at a public meeting. This statement will generally be reviewed by the Council in conjunction with the Financial Plan review and approval process. In accordance with this Statement of Investment Policy, the City Treasurer is responsible for developing and maintaining this Investment Management Plan. Though optional, pursuant to California Government Code Section 53646 (b)(1), the Finance Director/City Treasurer will provide the Council and Investment Oversight Committee with a quarterly investment report providing the following information for each investment or security: 1.Issuer (financial institution) 2.Type of investment 3.Amount paid for the investment 4.The par amount of the investment, if applicable 5.Certificate or other reference number if applicable 6.Percentage yield on an annualized basis 7.Purchase date 8.Maturity date for each investment and the weighted average maturity of all the investments within the portfolio 9.Current book value 10.Current market value 11.Total cost and market value, including source of this valuation, of the City's portfolio 12.A description of the compliance with the Statement of Investment Policy 13.Information demonstrating that the City's expenditure requirements can be met in the following six months 14.Other information regarding the City's portfolio as appropriate The Investment Report shall include all investments as of the end of the quarter from all funds held in the City's portfolio, including funds held and invested by trustees exclusive of deferred compensation plan funds; and shall be issued within 30 days after the end of the quarterly reporting period. 53 INVESTMENT REPORTING 1.Within 60 days from the start of each fiscal year, the City Treasurer shall provide the Investment Oversight Committee (IOC) with the value that represents the City’s minimum liquidity requirement which is equal to 3 months of operating costs based on the most recently adopted annual budget. Any adjustments to this amount which the Treasurer feels are required to meet cash demands from time to time shall be identified by the Treasurer at each meeting of the IOC as these amounts become known. 2.At the regularly scheduled IOC meeting which next follows the end of a fiscal year, the Treasurer shall file a report which identifies how the invested balances were adjusted to accommodate the City’s liquidity requirement and the extent to which investment maturity limits were adjusted to follow the City’s benchmark duration value. 54 XII. GLOSSARY INVESTMENT POLICY AND MANAGEMENT PLAN REVIEW The Finance Director/City Treasurer shall review the City's Investment Policy & Management Plan on an ongoing basis to ensure its continued effectiveness and value in administering the City's portfolio. Additionally, the City shall maintain an Investment Oversight Committee whose membership shall consist of the Mayor, the City Manager, the Finance Director/City Treasurer, the Deputy Director of Finance/Controller, the Principal Budget Analyst, and a member of the public at large. The Investment Oversight Committee is responsible for: 1.Reviewing the City's portfolio at least quarterly to determine compliance with the Investment Policy & Management Plan; and 2.Reviewing and making recommendations as appropriate regarding the City's investment policies and practices at least annually. It is important to note the distinction between the committee's oversight responsibility in ensuring compliance with the policies and overall framework established in this plan, and the responsibility of the Finance Director/City Treasurer in managing the City's investment portfolio in accordance with this plan. This distinction between management and oversight is especially important as it applies to the role of the City's independent auditors. The committee's oversight function is consistent with the scope of the auditor's engagement duties, which includes reviewing for compliance with City financial policies and procedures, and for making recommendations for improvements in the City's fiscal operations. However, in this oversight context, the auditors retain their independence from responsibility for managing any aspects of the City's operations; this responsibility lies solely with the City's elected leadership and staff. 55 GLOSSARY Asset Backed Security is a security in which its income payments and value is derived from and collateralized of “backed” by a specified pool of underlying assets, such as receivables. Bankers’ Acceptances are short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at maturity. An acceptance is a high-grade negotiable instrument. Benchmark is a market index used as a comparative basis for measuring the performance of an investment portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance and duration of the actual portfolio's investments. Bond is a financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a specified stream of future cash flows, including periodic interest payments and a principal repayment. Broker-Dealer is a person or a firm who can act as a broker or a dealer depending on the transaction. A broker brings buyers and sellers together for a commission. They do not take a position. A dealer acts as a principal in all transactions, buying and selling for his own account. Certificates of Deposit •Negotiable Certificates of Deposit are large-denomination CDs. They are issued at face value and typically pay interest at maturity, if maturing in less than 12 months. CDs that mature beyond this range pay interest semi-annually. Negotiable CDs are issued by U.S. banks (domestic CDs), U.S. branches of foreign banks (Yankee CDs), and thrifts. There is an active secondary market for negotiable domestic and Yankee CDs. However, the negotiable thrift CD secondary market is limited. Yields on CDs exceed those on U.S. treasuries and agencies of similar maturities. This higher yield compensates the investor for accepting the risk of reduced liquidity and the risk that the issuing bank might fail. State law does not require the collateralization of negotiable CDs. •Non-negotiable Certificates of Deposit are time deposits with financial institutions that earn interest at a specified rate for a specified term. Liquidation of the CD prior to maturity incurs a penalty. There is no secondary market for those instruments, therefore, they are not liquid. They are classified as public deposits and financial institutions are required to collateralize them. Collateral may be waived for the portion of the deposits that are covered by FDIC insurance. Collateral refers to securities, evidence of deposits, or other property that a borrower pledges to secure repayment of a loan. It also refers to securities pledged by a bank to secure deposits. In California, repurchase agreements, reverse repurchase agreements, and public deposits must be collateralized. Commercial Paper is a short-term, unsecured, promissory note issued by a corporation to raise working capital. 56 GLOSSARY Corporate Note is a debt instrument issued by a corporation with a maturity of greater than one year and less than ten years. Delivery Versus Payment (“DVP”) is a settlement procedure in which securities are delivered versus payment of cash, but only after cash has been received. Most security transactions, including those through the Fed Securities Wire system and Depository Trust Company (“DTC”), are done DVP as a protection for both the buyer and seller of securities. Depository Trust Company (“DTC”) is a firm through which members can use a computer to arrange for securities to be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and credit entries. Most corporate securities, commercial paper, CDs, and BAs clear through DTC. Federal Agency Obligations are issued by U.S. Government Agencies or Government Sponsored Enterprises (“GSE”). Although they were created or sponsored by the U.S. Government, most Agencies and GSEs are not guaranteed by the United States Government. Examples of these securities are notes, bonds, bills and discount notes issued by Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”), the Federal Home Loan Bank system (“FHLB”), and Federal Farm Credit Bank (“FFCB”). The Agency market is a very large and liquid market, with billions traded every day. Investment Advisor is a company that provides professional advice managing portfolios, investment recommendations and/or research in exchange for a management fee. Issuer means any corporation, governmental unit, or financial institution that borrows money through the sale of securities. Liquidity refers to the ease and speed with which an asset can be converted into cash without loss of value. In the money market, a security is said to be liquid if the difference between the bid and asked prices is narrow and reasonably sized trades can be done at those quotes. Local Agency Investment Fund (“LAIF”) is a special fund in the State Treasury that 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 $50 million for any California public Agency. It offers high liquidity because deposits can be converted to cash in 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 via direct deposit to the Agency’s LAIF account. The State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter of one percent of the earnings. Market Value is the price at which a security is trading and could presumably be purchased or sold. Maturity is the date upon which the principal or stated value of an investment becomes due and payable. 57 GLOSSARY Medium-Term Notes are debt obligations issued by corporations and banks, usually in the form of unsecured promissory notes. These are negotiable instruments that can be bought and sold in a large and active secondary market. For the purposes of California Government Code, the phrase “Medium-Term” refers to a maximum remaining maturity of five years or less. They can be issued with fixed or floating-rate coupons, and with or without early call features, although the vast majority are fixed-rate and non-callable. Corporate notes have greater risk than Treasuries or Agencies because they rely on the ability of the issuer to make payment of principal and interest. Money Market Fund is a type of safe investment comprising a variety of short-term securities with high quality and high liquidity. The fund provides interest to shareholders and must strive to maintain a stable net asset value (“NAV”) of $1 per share. NRSRO is a “Nationally Recognized Statistical Rating Organization.” A designated rating organization that the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody’s, S&P, Fitch, and Duff & Phelps among others. Principal describes the original cost of a security. It represents the amount of capital or money that the investor pays for the investment. Repurchase Agreements are short-term investment transactions. Banks buy temporarily idle funds from a customer by selling him U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date at an agreed upon interest rate. Repurchase Agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal Funds and the maturity of the Repo. Repurchase Agreements must be collateralized. Supranational entities are formed by two or more central governments with the purpose of promoting economic development for the member countries. Supranational institutions finance their activities by issuing debt, such as supranational bonds. Examples of supranational institutions include the European Investment Bank and the World Bank. Similarly, to the government bonds, the bonds issued by these institutions are considered direct obligations of the issuing nations and have a high credit rating. U.S. Treasury Issues are direct obligations of the United States Government. They are highly liquid and are considered the safest investment security. U.S. Treasury issues include: 1.Treasury Bills which are non-interest-bearing discount securities issued by the U.S. Treasury to finance the national debt. Bills are currently issued in one, three, six, and twelve-month maturities. 2.Treasury Notes that have original maturities of one to 10 years. 3.Treasury Bonds that have original maturities of greater than 10 years. Yield to Maturity is the rate of income return on an investment, minus any premium above par or plus any discount with the adjustment spread over the period from the date of the purchase to the date of maturity of the bond 58