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HomeMy WebLinkAboutItem 5h - Update to the Investment Police and Management Plan Item 5h Department: Finance Cost Center: 2001 For Agenda of: 5/19/2026 Placement: Consent Estimated Time: N/A FROM: Emily Jackson, Finance Director SUBJECT: UPDATE TO THE CITY’S INVESTMENT POLICY AND MANAGEMENT PLAN RECOMMENDATION Approve a Draft Resolution entitled, “A Resolution of the City Council of the City of San Luis Obispo, California, Adopting the Updated Investment Policy and Management Plan” as recommended by the Investment Oversight Committee (IOC). (Attachment A) POLICY CONTEXT 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.” Government Code Section 53646 provides that the Treasurer or Chief Fiscal Officer and the Investment Oversight Committee (IOC) may review the Investment Policy & Management Plan annually. If changes to the Policy are recommended, the Council may 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 Cou ncil. DISCUSSION Background The City’s Investment Policy and Management Plan (Policy) was adopted by the City Council in June 2015 and substantive changes to the Policy were adopted in 2018 and 2020. In 2024, staff made non-substantive changes to the Policy to address language inconsistencies created by the 2018 and 2020 updates. The 2024 updates reflected changes previously approved by the City Council in 2018 and 2020 and as a result, the updates were not formally brought to the City Council for adoption. Page 93 of 415 Item 5h The City’s investment portfolio for longer-term investments is managed by the City’s investment advisor PFM Asset Management (PFMAM) and overseen by the City’s Investment Oversight Committee (IOC), which consists of the Mayor, City Manager, Finance Director/Treasurer, Deputy Director of Finance/Controller, Principal Budget Analyst, and a member of the public. The IOC 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. Prior Updates to Investment Policy and Management Plan A summary of prior changes to the Policy is included below: On February 20, 2018 the Policy was revised to increase flexibility of the City’s investment mechanisms by: • 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; • Changing the credit rating from “AA” to “A” or “A-1” or equivalent or better for negotiable certificates of deposit; • Allowing investments in asset backed securities. The 2018 update also updated IOC membership to replace the Assistant City Man ager 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 a focus on environmental issues, are socially engaged , and govern their business in a sustainable and conscientious manner. In February 2024, staff updated the Policy to address a discrepancy identified by the City’s independent auditor (Badawi and Associates) during the FY 2022 -23 audit. In the course of the FY 2022-23 audit, the independent auditor 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 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 as set backed securities, as noted above. Finance Department staff 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. The inconsistencies in the po licy updates were discussed with the IOC at its February 15, 2024 meeting, as part of the annual review of the Policy. As a part of Page 94 of 415 Item 5h that discussion, the IOC determined that the Policy did not need to return to Council for formal adoption and directed that the Finance Director send a memorandum to Council to highlight the administrative changes to address the inconsistencies. Recommended Changes The Policy requires that the IOC review the Investment Policy and Management Plan at least annually. The IOC reviewed recommended changes to the Policy at its regularly scheduled meeting on Thursday, October 30, 2025, and due to new legislation signed by the Governor in October 2025, the IOC had a second discussion on Thursday, November 20, 2025, to review and approve additional changes to the Policy in order to incorporate requirements related to the newly signed legislation in addition to the changes discussed in the October 2025 meeting. Following is a summary of the recommended changes by section. A redline copy of the Policy is attached as Attachment B – Exhibit A to the Draft Resolution. Additional information can be found in the memos from PFMAM in Attachments C and D. 1- Introduction Primary Investment Objective: Additions are recommended to clarify existing practices by: Identifying that maturities of investments will be selected based on liquidity requirements to minimize interest rate risk and maximize earnings; and clarifying that the City will not directly invest in securities maturing more than five years from the date of purchase, unless otherwise directed by the City Council, pursuant to Government Code 53601. 2- Investment Authority and Responsibilities Internal Controls: Additions are recommended to reflect the passage of SB 827, which expands fiscal and financial training requirements. Investment Management Resources: Additions are recommended to clarify that exceptions to custodial safekeeping (use of qualified third -party financial institutions to securely hold, settle and report on investment securities to ensure asset segregation, reduce risk, and comply with fiduciary duties) must be approved by the City Treasurer (Finance Director) in writing and included in quarterly reporting to the City Council. Responsibilities of an Investment Advisor: Additions to ensure compliance with Government Code 56301.8 which clarifies that State law limits the City to placing no more than 30% of its funds in certain privately assisted deposit programs through 2031, requires statewide data collection on local agency investments, and obligates the City to submit a report to the Legislature on any surplus fund deposits made under this program by January 1, 2030. 4- Eligible Financial Institution Certification and Reporting Requirements: Addition of language to clarify that the investment officer (Finance Director) shall submit a monthly report of Page 95 of 415 Item 5h investment transactions (if any) to the City Council, in accordance with Government Code 53607. 5- Investment Vehicles Suitable and Authorized Investment: Additions are recommended due to the passage of Senate Bill 595 and Senate Bill 858 in October 2025, which provided revisions to eligible investments for local agencies. These bills increase permissible commercial paper maturity from 270 days to 397 days. The legislation also provides that agencies with less than $100,000,000 in investment assets are permitted to invest no more than 40% of the portfolio until January 1, 20231. After January 1, 2031, local agencies with less than $100,000,000 in investment assets will be permitted to invest no more than 25% of investment assets in eligible commercial paper. City Policies: Addition of language to clarify that equity investments (purchase of stocks) are a prohibited investment vehicle. 7- Sustainability and ESG Investing: At its meeting on September 24, 2020, the IOC voted to add private prisons to the list of industries that the City should be excluded from investing in, under its Socially Responsible Investment Policy. Following the IOC’s action, the Policy was not amended to incorporate this change, but PFMAM has been excluding private prisons from the City’s investments, th rough an addendum to the Policy. At this time, the IOC is recommending that private prisons (corrections) be formally added to the list of excluded industry types also newly listed in the Policy. In addition to incorporating this previously directed modification into the Policy, the IOC is also recommending that the Sustainability and ESG section of the Policy be modified to include additional industry types that the City is excluded from investing in, including E-Cigarettes, Racetracks and Gambling/Casinos. 9- Evaluation of Investment Performance: Addition of language to confirm that the City intends to hold all investments to maturity to safeguard principal, while recognizing that market fluctuations may occasionally result in measured losses within a diversified portfolio. To responsibly enhance long-term returns within prudent risk limits, the City utilizes active portfolio management, strategic maturity planning, security swaps when beneficial to quality or liquidity, and credit reviews when securities are downgraded. Technical and Editorial Clean-Up: Numerous technical and editorial clean-ups are recommended throughout the document to correct typos from prior updates, increase consistency, address formatting issues and correct outdated references. Al l of these changes are non-substantive and have no material impact on the City’s investment strategy. Previous Council or Advisory Body Action Page 96 of 415 Item 5h The City Council approved the Investment Policy and Management Plan on June 23, 2015, and approved updates to the Policy on February 20, 2018, and August 18, 2020, as summarized in this report. The Investment Oversight Committee meets quarterly each year and reviewed and approved the recommended changes at the October 30, 2025 , and November 20, 2025, meetings. Public Engagement Investment Oversight Committee meetings are open to the public for attendance and/or public comment. No members of the public attended the meetings on October 30, 2025, or November 20, 2025, to provide comment. Public comment on this item can be provided to the City Council through written correspondence prior to the meeting and through public testimony at the meeting. CONCURRENCE The City’s Investment Oversight Committee reviewed recommended changes to the Investment Policy and Management Plan at its meetings on October 30, 2025, and November 20, 2025, and concurs with the recommended changes. ENVIRONMENTAL REVIEW The recommended actions are not considered a “Project” under California Environmental Quality Act (CEQA) Guidelines Section 15378. FISCAL IMPACT Budgeted: N/A Budget Year: 2025-26 Funding Identified: N/A Fiscal Analysis: Funding Sources Total Budget Available Current Funding Request Remaining Balance Annual Ongoing Cost General Fund $0 $0 $0 $0 State Federal Fees Other: Total $0 $0 $0 $0 The recommended changes to the Policy will not change the underlying goals of the City’s investment portfolio, nor its potential rate of return. The portfolio will be changed over time when securities mature, requiring new investment vehicles that will align with the adopted strategy and ESG investing goals. Page 97 of 415 Item 5h ALTERNATIVES 1. The City Council could direct staff to work with the Investment Oversight Committee to update the industry types that the City is excluded from investing in. If Council would like staff to revisit the industries that the City is excluded from investing in, Council would need to provide direction to staff on the types of industries to consider excluding and staff would work with the Investment Oversight Committee and investment advisors at PFM Asset Management to modify the Policy and bring it back to the City Council for adoption at a later date. 2. The City Council could direct staff to make other updates to the Investment Policy and Management Plan. If Council would like staff to make other updates to the Investment Policy and Management Plan, the Council would need to provide direction to staff on the desired updates and staff would work with the Investment Oversight Committee and investment advisors at PFM Asset Management to modify the Policy and bring it back to the City Council for adoption at a later date. ATTACHMENTS A - Draft Resolution adopting updates to the City’s Investment Policy and Managemen t Plan B - Exhibit A to the Draft Resolution updating the Investment Policy and Management Plan May 2026- Redline C - PFMAM Memo- October 2025 D - PFMAM Memo- November 2025 Page 98 of 415 R _____ RESOLUTION NO. ____ (2026 SERIES) A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS OBISPO, CALIFORNIA, ADOPTING THE UPDATED INVESTMENT POLICY AND MANAGEMENT PLAN WHEREAS, the City of San Luis Obispo (“City”) is committed to the prudent stewardship of public funds and the maintenance of a comprehensive Investment Policy and Management Plan that safeguards assets, ensures liquidity, and provides a reasonable rate of return; and WHEREAS, California Government Code Sections 53600 et seq. establish the legal framework under which local agencies may invest public funds, and require periodic review an agency’s investment policy; and WHEREAS, the City’s Investment Policy and Investment Management Plan is reviewed at least annually to ensure compliance with state law, alignment with industry best practices, and consistency with the City’s financial objectives; and WHEREAS, City staff have completed a thorough evaluation of the existing Investment Policy and Investment Management Plan and are recommending updates to reflect current regulatory requirements, update the list of industries that the City is excluded from investing in, and enhance clarity of Policy requirements; and WHEREAS, the City’s Investment Oversight Committee reviewed the proposed updates at its meetings on October 30, 2025, and November 20, 2025, and recommends adoption of the updates by the City Council; and WHEREAS, the updated Investment Policy and Investment Management Plan support the City’s long-term financial sustainability, promotes transparency, and ensures accountable management of public funds. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo as follows: SECTION 1. The City Council hereby adopts the updated City of San Luis Obispo Investment Policy and Investment Management Plan, as presented by staff and attached hereto as Exhibit A. SECTION 2. The City Council affirms the City’s commitment to the principles of safety, liquidity, and yield, in that order of priority, in the investment of public funds. Page 99 of 415 Resolution No. _____ (2026 SERIES) Page 2 R _____ SECTION 3. The City Manager, Finance Director, and Investment Oversight Committee are hereby directed to implement the updated policy and plan, and ensure ongoing compliance with applicable local, state, and federal regulations. Upon motion of Council Member _____________, seconded by Council Member _____________, and on the following roll call vote: AYES: NOES: ABSENT: The foregoing resolution was adopted this _____ day of __________ 2026. _____________________ Mayor Erica A. Stewart ATTEST: _______________________ Teresa Purrington City Clerk APPROVED AS TO FORM: _______________________ J. Christine Dietrick City Attorney IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the City of San Luis Obispo, California, on ______________________. _______________________ Teresa Purrington City Clerk Page 100 of 415 INVESTMENT POLICY & MANAGEMENT PLAN February 2024May 2026 Page 101 of 415 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 10 • 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. SUSTAINABILITY & 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 Page 102 of 415 1 I. 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 Page 103 of 415 2 depending upon the outlook for the economy, the securities market, and the City’s anticipated cash flow needs. 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 Global 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. MarketInterest 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%. 4. Maximum Maturities: Maturities of investments will be selected based on liquidity requirements to minimize interest rate risk and maximize earnings. Current and expected yield curve analysis Page 104 of 415 3 will be monitored and the portfolio will be invested accordingly. 3.5.The City will not directly invest in securities maturing more than five years from the date of purchase. Per California Government Code Section 53601, the City may invest in maturities beyond five years after the City Council has granted express authority to make that investment either specifically or as part of an investment program approved by the City Council no less than three months prior to the investment. For purposes of compliance with this Policy, an investment’s term or remaining maturity shall be measured from the settlement date to final maturity. Page 105 of 415 4 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. Environmental, social, and governance (“ESG”) 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. Page 106 of 415 5 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. Page 107 of 415 6 II. 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 F i n an ce 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 theyit haves 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. Additionally, Section 53238.2 of the Code states: 1. Every local agency official who is in a local agency’s service as of January 1, 2026, and commenced that service prior to January 1, 2026, shall receive the fiscal and financial training required by this article before January 1, 2028, unless that official’s term ends before January 9,2028. 1.2.Every local agency official who commences service with a local agency on or after January 1, 2026, shall receive the fiscal and financial training required by this article no later than six months from the first day of service with the local agency. Thereafter, the local agency official shall receive the training at least once every two years. Page 108 of 415 7 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. Page 109 of 415 8 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. All exceptions to this safekeeping policy must be approved by the City Treasurer in written form and included in quarterly reporting to the City Council. GASB Statement No. 3 establishes numerical categories of risk relating to the custody and safekeeping of deposits and investments held by third part custodians. Under this Investment Policy, the City’s requirements for the safekeeping of deposits and investments fall into Category 1, the safest category. However, it is possible that if the City Treasurer approves an exception to this safekeeping policy, the City’s safekeeping policy would no longer quality as Category 1. 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 Page 110 of 415 9 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. Page 111 of 415 10 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 in a n c e D i r e c t o r /C it y 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: I. 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. II. 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. III. 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. III.IV. Section 53601.8 of the Code states that, local agencies are permitted to place no more than 30% of funds as deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of deposit, subject to certain conditions until January 1, 2031. Existing law until January 1, 2026, prohibits deposits placed pursuant to the provisions from exceeding 50% of the agency’s funds. Additionally, under amendments to section 53601.8, in effort to identify ways to reduce the costs and improved credit ratings of state and local issues, the California Debt and Investment Advisory Commission is commissioning studies that require collecting, maintaining, and providing information on local agency investments of public funds for local agency investments. The City will be required to Page 112 of 415 11 submit a prescribed report ot the appropriate policy committees of the legislature on the deposit of surplus funds on or before January 1, 2030, pursuant to existing law by local agencies. IV.V. V.VI. 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. VI.VII. 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. Page 113 of 415 12 VII.VIII. 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. VIII.IX. Investment Advisor shall be entitled to rely upon City's written advice with respect to anticipated drawdowns of managed assets. IX.X. 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. Page 114 of 415 13 III. 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. Page 115 of 415 14 IV. ELIGIBLE FINANCIAL INSTITUTION 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. 3.4. In accordance with California Government Code 53607, the investment officer shall submit a monthly report of investment transactions, if any, to the legislative body. 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). Page 116 of 415 15 All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate: 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. Page 117 of 415 16 V. INVESTMENT 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. Additionally, the City is authorized to invest in United States government securities that could result in zero-interest accrual if held to maturity, with a repeal date of January 1, 2031, at which time, securities that could result in zero-interest accrual will no longer be permitted. 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 Page 118 of 415 17 (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 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. Eligible commercial paper will have a maximum maturity of 397 days or less. California Code 53601 authorized local agencies that have less than $100,000,000 of investments under management to invest no more than 40% of their moneys in eligible commercial paper with a sunset clause of January 1, 2031. After this date, the limit for local agencies with less than $100,000,000 of investment assets under management to invest no more than 25% in eligible commercial paper. 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 execu ted 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, Page 119 of 415 18 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 by an NRSRO unless issued or guaranteed by federal agencies and GSEs. 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. 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 terms 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: Page 120 of 415 19 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 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 Page 121 of 415 20 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), equity investments, unregulated and/or unrated investment pools or trusts, collateralized mortgage 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. Page 122 of 415 21 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 Page 123 of 415 22 VI. 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. Page 124 of 415 23 VII. SUSTAINABILITY & 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 and other sustainability 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 additional screening investment criteria to authorized corporate obligations—, including asset-backed securities, bankers’ acceptances, commercial paper, corporate/medium-term notes, bank notes, and negotiable certificates of deposit —for purposes of determining investment eligibility. The Sustainability & ESG iInvestment cCriteria will be based on the ESG risk ratings, industry and sub-industry definitions, and sub-industry rankingsrules detailed below, which are provided by Morningstar Sustainalytics, Bloomberg, or another Sustainalyticsa reputable ranking rating agency. The ESG investment criteria may include industry exclusions, ESG risk rating limitations, and eligibility exceptions for issuers that are top performers within their subindustry. Thise cESG criteria will be reviewed annually by City’s Investment Oversight Committee. Sustainability & ESG Investment Criteria* Criteria #1: Industry/ Subindustry Exclusions based on Bloomberg BB Sector classifications Industry/subindustry exclusions: (1) Coal (2) Oil & Gas (3) Oil & Gas Services (4) Pipelines (5) Aerospace/Defense (6) Aerospace/Defense-Equip (7) Electronic-Military (8) Forest Products & Paper (9) Tobacco (10) Private Corrections (11) Casino Services (12) Gambling (Non-Hotel) (13) Internet Gambling (14) Lottery Services (15) Racetracks Criteria #2: ESG Risk Rating Limit based on data from Morningstar Sustainalytics An eligible issuer’s ESG Risk Rating must be medium or lower (i.e., < 30 on a scale of 0-100, where lower scores indicate less ESG-related risk) Criteria #3: ESG Risk Rating Limit Exception | Top ESG Performers Within Peer Group based on data from Morningstar Sustainalytics If Criteria #1 is satisfied, but #2 is not met, an issuer may still be eligible if its ESG Risk Rating is in the high category (i.e., 30-39.99) and its subindustry ranking is within the top 25th percentile Acceptable Investments Subject to the Sustainability & ESG Investment Criteria Asset-Backed Securities Bankers’ Acceptances Commercial Paper Corporate, Medium-Term & Bank Notes Negotiable Bank Deposit Obligations *The criteria outlined above will be based on issuer/parent corporation-level data as of the most recent prior-month-end date. The Sustainability & ESG Investment Parameters are in effect at time of purchase of the investment. Page 125 of 415 24 If a previously purchased investment no longer satisfies the City’s Sustainability & ESG iInvestment cCriteria, the City will continue to hold that investment to maturity unless the City directs its investment advisor to sell the investment. Page 126 of 415 25 VIII. 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. Page 127 of 415 26 IX. 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 returns of a Treasury Index of similar duration.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. It is the City’s full intent, at the time of purchase, to hold all investments until maturity to ensure the return of all invested principal dollars. However, it is realized that market prices of securities will vary depending on economic and interest rate conditions at any point in time. It is further recognized that in a well-diversified investment portfolio, occasional measured losses are inevitable due to economic, bond market, or individual security credit analysis. These occasional losses must be considered within the context of the overall investment program objective and the resultant long-term rate of return. The investment program shall seek to augment returns consistent with the intent of this policy, identified risk limitations and prudent investment principles. These objectives will be achieved by use of the following strategies: Active Portfolio Management: Through active fund and cash flow management, taking advantage of current economic and interest rate trends, the portfolio yield may be enhanced with limited and measurable increases in risk by extending the weighted maturity of the total portfolio. Portfolio Maturity Management: When structuring the maturity composition of the portfolio, the City shall evaluate the current cash flow trends, expected interest rate yields, and necessary cash flow requirements. It is recognized that in optimal market condition, longer maturities pro duce higher yields. Securities Swaps: The City may take advantage of a security swap opportunity in order to improve the quality, yield, or target duration in the portfolio; address a liquidity need of the portfolio; or to remove a security with a declining credit to minimize loss of principal. A swap may be selected even if the transactions will result in an accounting loss. Documentation for swaps will be included in the City's permanent investment file documents. Security Downgrade: If securities owned by the City are downgraded to a level below the quality required by this Investment Policy, 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. Page 128 of 415 27 X. 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. Page 129 of 415 28 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. Page 130 of 415 29 XI. 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. Page 131 of 415 30 XII. 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 (BAs) 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 (CDs) • 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. Page 132 of 415 31 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 the Federal National Mortgage Association (“Fannie Mae” or (“FNMA”), the Federal Home Loan Mortgage Corporation (“Freddie Mac” or (“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. Page 133 of 415 32 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 Global, 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 them 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 Repurchase Agreemento. 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 U.S. 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 Page 134 of 415 1 of 1 September 5, 2025 Memorandum To: Emily Jackson, Finance Director City of San Luis Obispo From: Monique Spyke, Managing Director Justin Resuello, Institutional Sales and Relationship Manager PFM Asset Management a division of U.S. Bancorp Asset Management, Inc. RE: 2025 Investment Policy Review PFM Asset Management, a division of U.S. Bancorp Asset Management, Inc. has completed its review of the Investment Policy (the “Policy”) for the City of San Luis Obispo (the “City”). This year, we are recommending changes to (1) provide futher clarity on policy and (2) include Sustainability and ESG Criteria within the Policy itself. All changes have been tracked within the shared file. Specifically, with regard to policy clarity, we recommend removing the contrarian mention of “collateralized mortgage obligations” in the Prohibited Investment Vehicles and Practies section of the Policy. In January 2024, Senate Bill 882 made several changes to Code, including one change to Code Section 53601(o). The bill clarified that mortgage-backed securities issued by federal agencies are exempt from the Code’s requirements described in Section 53601(o) for privately issued asset- and mortgage- backed securities. The Code update codifies the common understanding of how agency mortgage-backed securities are treated under Code. We are recommending including the following language: “For investments that are not issued or guaranteed by federal agencies and GSEs …” Separately, we also recommend updating the name for “S&P” to “S&P Global” to align with formal credit rating agency recognition. In accordance with the City’s request, we have also integrated the ESG parameters into the main Policy document rather than maintaining a separate Addendum. All pertinent updates can be found in Section VII: Sustainability & ESG Investing. Most notably, we changed the title from “ESG” to “Sustainability & ESG” to be more inclusive and align better with current industry terminology. References to Morningstar’s Sustainalytics were expanded to “Morningstar, Bloomberg, or another reputable rating agency.” Additionally, the company-specific exclusions for private prisons were replaced with the exclusion of the specific industry name (“Private Corrections” under Criteria #1); the reason for this change is that this industry-level exclusion was not available for Bloomberg coding when the Addendum was first adopted in 2020, but it can now be included. Lastly, it was clarified that the rules apply only at the time of purchase, which had been implied but not clearly stated before. Please let me know if you’d like to schedule a call to discuss our recommendations or to answer any questions you may have. Thank you. Page 135 of 415 Page 136 of 415 1 of 2 November 13, 2025 Memorandum To: Emily Jackson, Finance Director City of San Luis Obispo From: Monique Spyke, Managing Director Justin Resuello, Institutional Sales and Relationship Manager PFM Asset Management a division of U.S. Bancorp Asset Management, Inc. RE: 2025 Investment Policy Review PFM Asset Management, a division of U.S. Bancorp Asset Management, Inc. has completed its review of the Investment Policy (the “Policy”) for the City of San Luis Obispo (the “City”). This year we are recommending changes to provide futher clarity on policy and have attached a marked-up version of the Policy to illustrate our recommendations. Under section five, “Investment Vehicles”, we suggest addressing the amendments to Senate Bill 595 and Senate Bill 858 provided revisions applicable to eligible investments for local agencies: The maximum maturity period for prime quality commercial paper increased from 270 days to 397 days. Agencies with less than $100,000,000 in investment assets are permitted to invest no more than 40% of the portfolio until January 1, 2031. After January 1, 2031, local agencies with less than $100,000,000 in investment assets will be permitted to invest no more than 25% of investment assets in eligible commercial paper. Additionally, local agencies are authorized to invest in United States government securities that could result in zero-interest accrual if held to maturity, with a repeal date of January 1, 2031, at which time, securities that could result in zero-interest accrual will no longer be permitted. Addressed in section two, “Inventment Authority and Responsibilities”, Senate Bill 827 expands fiscal and financial training requirements. Section 53238.2 states: (a) Every local agency official who is in a local agency’s service as of January 1, 2026, and commenced that service prior to January 1, 2026, shall receive the fiscal and financial training required by this article before January 1, 2028, unless that official’s term of office ends before January 9, 2028. (b) Every local agency official who commences service with a local agency on or after January 1, 2026, shall receive the fiscal and financial training required by this article no later than six months from the first day of service with the local agency. Thereafter, the local agency official shall receive the training at least once every two years. In the “Responsibilities of an Investment Advisor”, we suggest addressing the amendment to section 53601.8 of the Code, which states, local agencies are permitted to place no more than 30% of funds as deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of deposit, subject to certain conditions until January 1, 2031. Existing law until Page 137 of 415 2 of 2 January 1, 2026, prohibits deposits placed pursuant to the provisions from exceeding 50% of the agency’s funds. Additionally, under amendments to section 53601.8, in effort to identify ways to reduce the costs and improve credit ratings of state and local issues, the California Debt and Investment Advisory Commission is commissioning studies that require collecting, maintaining, and providing information on local agency investments of public funds for local agency investments. The City will be required to submit a prescribed report to the appropriate policy committees of the legislature on the deposit of surplus fun ds on or before January 1, 2030, pursuant to existing law by local agencies. Please feel free to contact me at your convenience should you have any questions or if you would like to discuss the review further. Page 138 of 415