HomeMy WebLinkAbout02-20-2018 Item 10 - Investment Oversight Committee Membership and Policies Annual Update
Meeting Date: 2/20/2018
FROM: Xenia Bradford, Finance Director
SUBJECT: ANNUAL REVIEW OF INVESTMENT POLICIES AND
RECOMMENDATIONS AND AMENDMENT TO INVESTMENT
OVERSIGHT COMMITTEE MEMBERSHIP
RECOMMENDATION
1. Approve changes to the investment manual in accordance with the annual Investment
Oversight Committee recommendations; and
2. Approve amendment to the Investment Oversight Committee membership.
DISCUSSION
The City Council delegated the power to manage the City’s investment portfolio to the City
Treasurer. City Council also approves the Investment Management Plan that guides the City
Treasurer through policies in administering investments. An Investment Oversight Committee
meets quarterly and advises the City Treasurer on compliance with investment policies. The
Investment Oversight Committee is also delegated responsibility to annually review investment
policies and make recommendations.
Proposed changes to investment policies.
The City contracts with Public Financial Management, Inc. (PFM) to manage the City’s
investment portfolio. PFM presents quarterly investment results for the Investment Oversight
Committee approval that the investment activities are in compliance with the City’s policy
requirements.
In accordance with the City’s investment policy, the Investment Oversight Committee met on
November 6, 2017 and reviewed the investment policies. Three changes were proposed to
increase flexibility of investment mechanisms. The proposed changes meet all government code
requirements outlined in the City’s Investment Management Manual.
The Investment Oversight Committee recommends three changes to the City’s investment
policies, as follows:
1. Medium Term Notes: Change this requirement such that all medium-term notes are rated
in a rating category of “A” or its equivalent or better by one or more Nationally
Recognized Statistical Rating Organizations (NRSRO). Currently the City policy requires
rating by two NRSROs. The Investment Oversight Committee reviewed the risk factors
versus estimated increase in earnings and voted unanimously to recommend this change.
2. Negotiable Certificates of Deposit: Change this credit rating requirement from “AA” to
“A” or “A-1” or its equivalent or better by one or more NRSROs. The Policy currently
requires negotiable CDs to be rated in a rating category of “AA” or its equivalent or
better by one or more NRSROs. The Investment Oversight Committee reviewed the risk
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factors versus estimated increase in earnings and voted unanimously to recommend this
change.
3. Asset Backed Securities: Recommend that the City consider authorizing a 15% allocation
to ABS. Currently the City’s policy does not allow investments in asset backed securities.
The Investment Oversight Committee reviewed the risk factors versus estimated
increases in earnings and voted unanimously to recommend this change.
Even though the precise impact to investment income is unknown, the recommended policy
changes will allow the portfolio manager to access a larger opportunity set of investments, which
is expected to positively impact the rate of return as described in Attachment-A.
Investment Oversight Committee Membership.
The Investment Oversight Committee is an oversight committee formed by Council that holds
public meetings quarterly and advises the City Treasurer. The purpose of the Inves tment
Oversight Committee is to review investment policies and practices, as well as portfolio
performance.
Currently the Investment Oversight Committee voting members consist of one Council member,
City Manager, Assistant City Manager, Finance Director, Accounting Manager/Controller and
one appointed member of the public.
Due to re-organization of the Finance Department, the recommendation is to replace the
Assistant City Manager member of the committee with the Budget Manager. The Accounting
Manager/Controller and the Budget Manager assist the Finance Director in Treasury
Management and provide cash analysis and quarterly earnings reports analysis.
The proposed change in membership increases finance oversight of the investments, while
maintaining diversity of oversight from Council, City Administration and the public.
CONCURRENCES
The Investment Oversight Committee concurs with the proposed changes to the City’s
investment policies.
City Administration concurs with proposed recommendation to amend the Investment Oversight
Committee membership.
ENVIRONMENTAL REVIEW
The California Environmental Quality Act does not apply to the recommended action in this
report, because the action does not constitute a “Project” under CEQA Guidelines Sec. 15278.
FISCAL IMPACT
There are no budgetary impacts with the proposed changes. However, the proposed changes to
the City’s investment policies is expected to yield increases in investment income by providing
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the investments manager with more flexibility and variety of investment instruments
ALTERNATIVES
1. Council can elect not to approve the proposed changes the City’s investment policies or
approve any of the proposed three recommendations to investment policies independent of each
other. This is not recommended based on the consultant’s analysis of the City’s investment
policies and Investment Oversight Committee concurrence.
2. Council may also elect not to approve the change to Investment Oversight Committee
membership, in which case Interim Deputy City Manager will fill the Assistant City Manager
Position voting member seat on the committee at this time.
Attachments:
a - PFM Recommendations Memorandum
b - IOC DRAFT Meeting Minutes (11.06.17)
c- Investment Managment Plan
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December 19, 2017
Memorandum
To: Xenia Bradford, Director/Treasurer
Rico Pardo, Controller
City of San Luis Obispo
From: Monique Spyke, Managing Director
Izac Chyou, Senior Managing Consultant
Brandon Rake, Analyst
PFM Asset Management LLC
Re: Investment Management Plan and Investment Policy Review
We have completed our annual review of the City’s Investment Policy (the Policy). The Policy is in
compliance with all applicable California Government Code (“Code”) statutes regulating the
investment of public funds. We are recommending the following changes to the Policy: allow
purchases of all corporate notes rated “A” or better by one or more national recognized rating
agency (NRSRO), loosen the credit quality requirement of negotiable certificates of deposit
(“negotiable CDs”), and add asset-backed securities to the City’s list of Authorized Investments.
This memorandum explains our recommended revisions to the Policy. We have also attached a
marked-up version of the Policy illustrating these recommendations.
Recommendations
V. Investment Vehicles. (9) Medium Term Notes
The Policy currently requires medium term notes to be rated in a rating category of “A” or its
equivalent or better by two or more NRSROs and “AA” for financial issuers. We recommend the City
change this requirement such that all medium term notes are rated in a rating category of “A” or its
equivalent or better by one or more NRSROs. In doing so, we will increase the investable opportunity
set to allow for investments in split-rated issues from corporations such as Bank of America, Citi
Group, Goldman Sachs, Morgan Stanley, Coca-Cola, and AT&T which are rated in a rating category
of “A” or its equivalent or better by one NRSRO while another NRSRO rates the issues in the “BBB”
category or is not rated (see Exhibit A).
As of December 31, 2016, four of the top five most prolific issuers of debt in the 1-5 U.S. Corporate
Index were split rated issuers rated “A” or better by only one NRSRO. “A” rated financial issuers
make up 23% of the index, while only less than 10% are “AA” rated. In aggregate, “A” rated issuers
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make up ~44% of the entire universe. Accessing this market gives the portfolio manager access to
a market of more liquid issuers.
Furthermore, from 1970-2015, on average, 86.6% of “A” rated corporate issuers remained “A” rated,
2.6% were upgraded to “Aa”, 5.4% were downgraded to “Baa”, and 0.1% defaulted within a year
(see Exhibit B). PFM looks to invest in those split rated issuers who currently have strong or
improving credit fundamentals and a positive macroeconomic backdrop.
Exhibit A
A-Rated Representative Issuer List
Source: BofA Merrill Lynch 1-5 Year U.S. Corporate Index, as of 12/31/2016.
Exhibit B
Average One-Year Letter Rating Migration Rates, 1970-2015
Source: Moody’s Annual Default Study: Corporate Default and Recovery Rates, 1970-2015.
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(14) Negotiable Certificates of Deposit
The Policy currently requires negotiable CDs to be rated in a rating category of “AA” or its
equivalent or better by one or more NRSROs. We recommend the City change this credit rating
requirement from “AA” to “A” or “A-1” or its equivalent or better by one or more NRSROs. Major
rating agencies have reduced the credit ratings of major financial institutions (see exhibit A), which
are the primary issuers of negotiable CDs. This change was due to modifications in the ratings
criteria used by rating agencies rather than the financial health of negotiable CD issuers, which
has actually improved over the past few years. Therefore, there are almost no AAA-rated
corporate issuers remaining and there are very few AA-rated issuers. A-rated issuers make up
around 44% of the 1-5 year Corporate Index (see exhibit C). This rating requirement change in the
Policy would allow the portfolio manager to access a larger opportunity set, further diversify the
City’s portfolio, add incremental yield (40-50 basis points over 2-year U.S. Treasuries), and
potentially increase risk adjusted returns. Furthermore, “A” rated negotiable CDs are considered
safer than “A” rated corporate notes since negotiable CDs are higher on the capital spectrum. We
believe that PFM’s credit process allows the City to safely utilize “A” rated negotiable CDs.
Exhibit C
Source: BofA Merrill Lynch 1-5 Year U.S. Corporate Index by face value, as of 12/31/2016.
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It is important to note that our ratings criteria recommendation does not represent a change in our
stringent credit quality philosophy, rather it is a recognition of the realities of the marketplace and
will provide enhanced flexibility for the City, allowing the portfolio to be optimally diversified and to
capitalize on market opportunities without adding undue risk. Additionally, the issuer limits of 5%
help mitigate credit risk even further.
PFM’s credit process ensures that all issuers are thoroughly reviewed and evaluated before
purchase. Portfolio managers and traders are only permitted to purchase securities from companies
where PFM has exercised its due diligence and analysis. For a company to be added to a portfolio,
the company must be reviewed and vetted by PFM’s internal Credit Committee. PFM’s Credit
Committee is made up of our Chief Credit Officer, Chief Investment Officer, and senior portfolio
managers and traders. All corporate research is completed by investment personnel with direct
involvement in PFM’s investment process.
Furthermore, since business and economic conditions can change dramatically, corporate
exposure must be constantly monitored. An active approach to investing in corporate securities
and negotiable CDs is essential. PFM performs regular reviews to ensure each issuer continues
to meet our credit standards. In addition, we follow news about economic, industry and issuer
conditions. PFM has developed a process to detect changes in the financial condition or business
outlook of a company. PFM monitors the trading of securities related to a company, including
stock prices, credit spreads, and credit default swap levels. We have also developed the means
to monitor any changes in the credit rating of an issuer as they are announced. Company
quarterly and annual reports are reviewed and analyzed, as are industry trends. In addition, PFM
uses its own proprietary research, coupled with credit agency reports and research reports from
major Wall Street firms to gain other perspectives. If the outlook for a company deteriorates, PFM
may remove that issuer from investment. If the deterioration is significant enough, PFM may
recommend that the holdings of the company are sold.
V. Investment Vehicles. (12) Asset-Backed Securities
An asset-backed security (ABS) is a security in which its income payments and value is derived
from and collateralized or “backed” by a specified pool of underlying assets such as receivables.
Investors of these securities receive the principal and interest payments of the underlying loans
allowing diversification of their portfolios away from traditional government and corporate debt.
PFM currently finds value in AAA-rated ABS backed by high-quality auto loans, industrial
recievables and credit card receivables. These ABS maintain credit ratings that are higher than
those of bonds issued by the U.S. Treasury and federal agencies while providing higher yields.
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Utilizing high-quality asset-backed securities in a fixed-income portfolio can improve
diversification and offer potential return enhancement. Asset backed securities are a good
diversifier to corporate exposure. Accordingly, we recommend that the City consider authorizing a
15% allocation to ABS. This allocation to ABS is more conservative than the Code’s maximum
allocation limit of 20%. Furthermore, we recommend a maximum allocation per issuer of 2.5% as
an additional required level of diversification. The minimum credit requirements and maturity limit
will be consistent with Code. 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. As you can see from the table below, ABS have a lower effective duration than not only
corporates, but also treasuries and agencies of similar maturities. A lower duration means it has a
lower sensitivity to changes in interest rates. Lastly, the yield and total return for ABS have been
favorable.
1-5 Year Index Returns
Source: BofA Merrill Lynch 1-5 Year Indices. Returns greater than a year are annualized.
We also want to make the City aware of a statewide and national change impacting the
investment of public funds announced over the last 12 months; this is outlined below:
•SB 974, which took effect on January 1, 2017, modifies Code Sections 53601 et seq., to
clarify that the Code’s rating requirements specify the minimum credit rating category
required at purchase, without regard to +, - or 1,2,3 modifiers. This revision does not change
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the minimum rating allowed by Code, but simply makes explicit the common interpretation of
the Code’s rating requirements.
We would be happy to discuss any questions regarding our recommended changes to the Policy.
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Minutes
Investment Oversight Committee
Monday, November 6, 2017
Regular Meeting of the Investment Oversight Committee
CALL TO ORDER
A Regular meeting of the Investment Oversight Committee was called to order on Monday,
November 6, 2017, at 1:30 p.m. in the Council Hearing Room at 990 Palm Street, San Luis Obispo,
California, by Chair Johnson.
ROLL CALL
Present: Committee Members Steve Barasch, Derek Johnson, Rico Pardo, Chair Xenia
Bradford, and Greg Hermann
Absent: Committee Member Heidi Harmon
Others Present: Al Eschenbach, Independent Auditor and ex-officio member, Izac Chyou, PFM
Asset Management LLC (City’s Investment Advisor); Brandon Rake, Analyst
for PFM Asset Management LLC; Kelly Medina, Finance Administrative
Assistant & Recording Secretary
PUBLIC COMMENT ON ITEMS NOT ON THE AGENDA
Leslie Halls
---End of Public Comment---
1. OATH OF OFFICE OF NEW COMMITTEE MEMBER (HERMANN)
City Clerk Gallagher administered the Oath of Office to Committee member Hermann prior
to the Investment Oversight Committee meeting.
2. REVIEW OF INVESTMENT OVERSIGHT COMMITTEE MEETING MINUTES
OF AUGUST 17, 2017
ACTION: MOTION BY COMMITTEE MEMBER JOHNSON, SECOND BY
COMMITTEE MEMBER PARDO, CARRIED 5-0 (COMMITTEE MEMBER HARMON
ABSENT, COMMITTEE MEMBERS BARASCH & HERMANN ABSTAINED) to
approve the Investment Oversight Committee Meeting minutes of August 17, 2017. Per the
record, Committee Member Barasch requests Mayor Harmon be up to date on review of
meeting minutes from which she was absent.
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City of San Luis Obispo, Title, Subtitle
Minutes - Investment Oversight Committee Minutes of November 6, 2017 Page 2
Per City Charter: Section 505. Voting.
The ayes and noes shall be taken upon the passage of all ordinances and resolutions and entered upon
the journal of the proceedings of the Council. Upon the request of any member, the ayes and noes shall
be taken and recorded on any vote. All members, when present, must vote, except in the case of a
recusal due to a conflict of interest. Failure or refusal to vote shall be construed as an affirmative vote.
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City of San Luis Obispo, Title, Subtitle
Minutes - Investment Oversight Committee Minutes of November 6, 2017 Page 3
3. PRESENTATION OF THE QUARTERLY INVESTMENT REPORT ON
PORTFOLIO PERFORMANCE
City Investment Advisor Izac Chyou reviewed the contents of the report and summarized the
portfolio’s performance.
Public Comment:
None.
---End of Public Comment---
ACTION: MOTION BY COMMITTEE MEMBER JOHNSON, SECOND BY
COMMITTEE MEMBER BARASCH, CARRIED 5-0, (COMMITTEE MEMBER
HARMON ABSENT) to accept the Quarterly Investment Report for the period ending
September 30, 2017 is in compliance with the City’s Investment Policy.
4. REVIEW INVESTMENT POLICIES AND PRACTICES, FOLLOW-UP ITEM
FROM AUGUST 17, 2017
City Investment Advisory Izac Chyou presented.
Committee questions followed.
Public Comment:
None.
---End of Public Comment---
ACTION: MOTION BY COMMITTEE MEMBER JOHNSON, SECOND BY
COMMITTEE MEMBER HERMANN, CARRIED 5-0, (COMMITTEE MEMBER
HARMON ABSENT) to accept and present to the City Council the proposed investment
policy recommendations and make changes to recommended policies as presented by PFM.
5. ANNUAL REVIEW OF THE ALLOCATION OF CASH PORTFOLIO
City Investment Advisory Izac Chyou presented the Cash Flow Analysis.
Committee questioned followed.
Public Comment:
Leslie Halls
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City of San Luis Obispo, Title, Subtitle
Minutes - Investment Oversight Committee Minutes of November 6, 2017 Page 4
---End of Public Comment---
ACTION: MOTION BY CHAIR BRADFORD, SECOND BY COMMITTEE MEMBER
JOHNSON, CARRIED 5-0 (COMMITTEE MEMBER HARMON ABSENT AND
COMMITTEE MEMBER BARASCH ABSTAINED), to make a recommendation to
increase the portfolio managed by PFM from current City managed portfolio of 31% to 25%
of total.
6. ITEMS TO BE ADDRESSED AT A FUTURE MEETING
Continue Cash Flow Analysis Discussion
7. DISCUSSION OF INVESTMENT OVERSIGHT COMMITTEE CALENDAR
The next committee meeting is scheduled for February 15, 2018.
ADJOURNMENT
The meeting was adjourned at 2:36 pm.
APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/2017
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INVESTMENT MANAGEMENT PLAN
June 2015
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INVESTMENT MANAGEMENT PLAN
Katie Lichtig, City Manager
Prepared by the Department of Finance & Information Technology
Wayne Padilla, Finance Director/City Treasurer
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INVESTMENT MANAGEMENT PLAN
Table of Contents Introduction
Purpose .................................................................................................................................................... 1
Primary Investment Objective ................................................................................................................ 1
Scope of Investment Management Plan ................................................................................................. 3
Use of State Guidelines .......................................................................................................................... 3
Preparation and Administration of the Plan ........................................................................................... 4
Investment Authority and Responsibilities
Authorized Investment Officers ............................................................................................................. 5
Internal Controls ..................................................................................................................................... 5
Investment Management Resources ....................................................................................................... 5
Evaluation of Investment Officer Actions .............................................................................................. 6
Responsibilities of an Investment Advisor ............................................................................................. 7
Capital Preservation and Risk
Overview ................................................................................................................................................. 9
Portfolio Diversification Practices .......................................................................................................... 9
Eligible Financial Institutions
Portfolio Diversification and Credit-Worthiness Standards ................................................................. 10
Certification and Reporting Requirements ........................................................................................... 10
Individual Placement of Investments ................................................................................................... 10
Individual Placement of Deposits ......................................................................................................... 11
Investment Vehicles
State of California Limitations ............................................................................................................. 12
Suitable and Authorized Investments………………………………………………………………12
City Policies .......................................................................................................................................... 15
Authorized Investment Summary ......................................................................................................... 16
Investment Maturity ........................................................................................................................................ 17
Socially Responsible Investing ........................................................................................................................ 18
Cash Management Practices ........................................................................................................................... 19
Evaluation of Investment Performance ......................................................................................................... 20
Investment Reporting ...................................................................................................................................... 21
Investment Management Plan Review ........................................................................................................... 23
Appendix
Investment Policy ................................................................................................................................. 25
Glossary ................................................................................................................................................ 27
Resolution No. 8477 Appointing the Director of Finance as City Treasurer ...........................................
Resolution No. 8523 Approving the Investment Management Plan .......................................................
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I. INTRODUCTION
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PURPOSE
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.
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 of 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.
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I. INTRODUCTION
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4. 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.
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
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 Authority’s needs for cash flow and level
of risk tolerance (the Benchmark Index) plus or minus 10%.
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I. INTRODUCTION
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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 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 scope of 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.
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I. INTRODUCTION
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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 Management Plan.
As recommended by Government Code Section and 53646, the Council will review the Investment
Policy annually. The Council will review the Investment Management Plan at a public meeting
when changes in strategies, practices or procedures are proposed. In the interim, the City Treasurer
is responsible for keeping the Investment Management Plan up-to-date to reflect changes in
legislation, organizational structure, and other policies and administrative procedures approved by
the Council.
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II. INVESTMENT AUTHORITY AND RESPONSIBILITIES
5
AUTHORIZED INVESTMENT OFFICERS
Authority to manage the investment portfolio is granted to the Director of Finance & Information
Technology (Director/City Treasurer) pursuant to Resolution No. 8477. Responsibility for the day-
to-day operation of the investment program may be delegated to the Finance Operations Manager,
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 Director/City
Treasurer. Although the Director/City Treasurer may delegate these duties to another official in the
Department of Finance & Information Technology, every investment transaction must be reviewed
and approved by the Director/City Treasurer. Additionally, the 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 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 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 Director/City Treasurer shall establish a process for annual independent review by an
external auditor to assure compliance with policies and procedures.
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II. INVESTMENT AUTHORITY AND RESPONSIBILITIES
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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 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.
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Investment officers acting in accordance with written procedures and this Investment 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 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.
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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.
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III. CAPITAL PRESERVATION AND RISK
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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.
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PORTFOLIO DIVERSIFICATION AND CREDIT-WORTHINESS STANDARDS
The following general criteria relating to portfolio diversification and credit-worthiness will be used
in selecting depositories and broker/dealers (financial institutions) in the placement of City
investments:
1. The financial capacity and credit-worthiness 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 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:
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IV. ELIGIBLE FINANCIAL INSTITUTIONS
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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 amount 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.
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STATE OF CALIFORNIA LIMITATIONS
As provided in the applicable sections of the Government Code, the State of California limits the
investment vehicles available to local agencies.
SUITABLE AND AUTHORIZED INVESTMENTS
City funds may be invested in the following 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 “A” or higher by at least one nationally recognized statistical rating
organization. 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 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 “A”
or higher by a NRSRO.
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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 “A-1” or higher, or the
equivalent, by a NRSRO.
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 the “A” category or better by two or more nationally
recognized statistical-rating organizations (NRSRO). If the notes are issued by a financial
institution they must be rated in the “AA” category 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. 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.
13. 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
at least “AA” or “A-1” 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.
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14. 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.
15. 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.
16. 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).
17. 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
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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.
CITY POLICIES
Debt Funds. Reserve funds from the proceeds of debt issues shall be invested by the 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. Further, 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 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.
7. The City is allowed to invest in mortgage pass-through and asset-backed securities, provided
that such securities have a maximum stated final maturity of five years and are rated AA by
Standard & Poor’s or Aa by Moody’s; and that purchase of such securities does not exceed
20% of the portfolio. However, given the “melt-down” in these types of securities in 2007 –
even when rated “AAA/Aaa” by NRSRO’s – the City will not invest in these securities.
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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 Yearsa
None
None
2. GSE Securities 5 Years
None
None
5 Yearsa
None
None
3. Municipal Securitiesb 5 years
None
None
5 yearsa
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” or better
“AA” or better for financial
issuers
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. LAIF N/A
None
None
N/A
Limit per Gov’t Code
None
9. Negotiable CDs 5 Years
30% per type; none per issuer
None
5 Years
30% per type; 5% per issuer
“AA” or “A-1”
10. Collateralized Bank Deposits 5 Years
None
None
5 Years
Non per type; 25% per institution
None
11. 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
12. 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
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In addition to the risks associated with the credit-worthiness 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 5 years is required at least
three months prior to the initial investment.
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VII. SOCIALLY RESPONSIBLE INVESTING
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City funds should be guided by the following provisions when investing in securities of non-
governmental entities:
1. Priority shall be given to investments in entities that support community well-being through safe
and environmentally sound practices and fair labor practices.
2. Priority shall be given to investments in entities that promote equality of rights regardless of
race, religion, color, ancestry, age, national origin, gender, marital status, sexual orientation,
disability or place of birth.
3. Priority shall be given to investments in entities that promote community economic
development.
In addition, the direct investment of City funds is restricted as follows:
1. No investments are to be made in tobacco, electronic cigarette, or tobacco-related products.
2. No investments are to be made to support the direct production or drilling of fossil fuels.
The City Treasurer shall periodically verify compliance with the guidelines either through direct
contact with the company or with its Investors Responsibility Center.
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VIII. CASH MANAGEMENT PRACTICES
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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.
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IX. EVALUATION OF INVESTMENT PERFORMANCE
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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 BofA Merrill Lynch 0-to-5 year U.S. Treasury Bond
Index.
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X. INVESTMENT REPORTING
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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.
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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.
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XI. INVESTMENT MANAGEMENT PLAN REVIEW
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The Director/City Treasurer shall review the City's Statement of Investment Policy and Investment
Management Plan on an ongoing basis to ensure its continued value in administering the City's
portfolio. Additionally, the City shall maintain an Investment Oversight Committee whose
membership shall consist of the City Administrative Officer, Assistant City Administrative Officer,
Director/City Treasurer, Finance Operations Manager, the City's Independent Certified Public
Accountant 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
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 Director/City Treasurer in managing the City's investment portfolio in accordance with this
plan.
This distinction between management and oversight is especially important to make as it applies to
the role of the City's independent auditors on this committee. 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.
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INVESTMENT POLICY
A. Responsibility. Investments and cash
management is the responsibility of the City
Treasurer or designee. It is the City’s policy
to appoint the Director of Finance &
Information Technology as the City’s
Treasurer.
B. Investment Objective. The City's primary
investment objective is to achieve a
reasonable rate of return while minimizing
the potential for capital losses arising from
market changes or issuer default.
Accordingly, the following factors will be
considered in priority order in determining
individual investment placements:
1. Safety
2. Liquidity
3. Yield
C. Tax and Revenue Anticipation Notes: Not
for Investment Purposes. There is an
appropriate role for tax and revenue
anticipation notes (TRANS) in meeting
legitimate short-term cash needs within the
fiscal year. However, many agencies issue
TRANS as a routine business practice, not
solely for cash flow purposes, but to
capitalize on the favorable difference
between the interest cost of issuing TRANS
as a tax-preferred security and the interest
yields on them if re-invested at full market
rates.
As part of its cash flow management and
investment strategy, the City will only issue
TRANS or other forms of short-term debt if
necessary to meet demonstrated cash flow
needs; TRANS or any other form of short-
term debt financing will not be issued for
investment purposes. As long as the City
maintains its current policy of maintaining
fund/working capital balances that are 25%
of operating expenditures as reflected in the
most recently adopted budget, it is unlikely
that the City would need to issue TRANS
for cash flow purposes except in very
unusual circumstances.
D. Selecting Maturity Dates. The City will
strive to keep all idle cash balances fully
invested through daily projections of cash
flow requirements. To avoid forced
liquidations and losses of investment
earnings, cash flow and future requirements
will be the primary consideration when
selecting maturities.
E. Diversification. As the market and the
City's investment portfolio change, care will
be taken to maintain a healthy balance of
investment types and maturities.
F. Authorized Investments. The City will
invest only in those instruments authorized
by the California Government Code.
The City will not invest in stock, will not
speculate and will not deal in futures or
options. The investment market is highly
volatile and continually offers new and
creative opportunities for enhancing interest
earnings. Accordingly, the City will
thoroughly investigate any new investment
vehicles before committing City funds to
them.
G. Authorized Institutions. Current financial
statements will be maintained for each
institution in which cash is invested.
Investments will be limited to 20% of the
total net worth of any institution and may be
reduced further or refused altogether if an
institution's financial situation becomes
unhealthy.
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H. Consolidated Portfolio. In order to
maximize yields from its overall portfolio,
the City will consolidate cash balances from
all funds for investment purposes, and will
allocate investment earnings to each fund in
accordance with generally accepted
accounting principles.
I. Safekeeping. Ownership of the City's
investment securities will be protected
through third-party custodial safekeeping.
J. Investment Management Plan. The City
Treasurer will develop and maintain an
Investment Management Plan that addresses
the City's administration of its portfolio,
including investment strategies, practices
and procedures.
K. Investment Oversight Committee. As set
forth in the Investment Management Plan,
this committee is responsible for reviewing
the City’s portfolio on an ongoing basis to
determine compliance with the City’s
investment policies and for making
recommendations regarding investment
management practices.
Members include the City Administrative
Officer, Assistant CAO, Director of
Finance/City Treasurer, Revenue Manager
and the City’s independent auditor.
L. Reporting. The City Treasurer will develop
and maintain a comprehensive, well-
documented investment reporting system,
which will comply with Government Code
Section 53646. This reporting system will
provide the Council and the Investment
Oversight Committee with appropriate
investment performance information.
M. 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.
N. Socially Responsible Investing. The City
should prioritize investments that support
community well-being and equal rights. The
City will not invest in entities involved to
the tobacco industry, nor in direct producers
and drillers of fossil fuels.
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Glossary
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
1. 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.
2. 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.
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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.
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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 ten 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
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