1996 04 10 IABT0 0 (V
-ity 4 QamrA
78-495 CALLE TAMPICO - LA QUINTA, CALIFORNIA 92253 - (619) 777-7000
FAX (619) 777-7101
INVESTMENT ADVISORY BOARD
AGENDA
Study Session Room
78-495 Calle Tampico- La Quinta, CA 92253
April 10, 1996 - 5:30 P.M.
I CALL TO ORDER
a. Pledge of Allegiance
b. Roll Call
II CONFIRMATION OF AGENDA
III PUBLIC COMMENT -(This is the time set aside for public comment on any matter not scheduled on the agenda.)
IV CONSENT CALENDAR
A. Approval of Minutes of Special Meeting on March 28, 1996 for the
Investment Advisory Board.
V BUSINESS SESSION
A. City Council Request - Preferred Board Size
B. Transmittal of Treasury Report for February 29, 1996.
C. Consideration of approval of Investment Policy for the City of La Quinta.
VI BOARD MEMBER COMMENTS
VII INFORMATIONAL ITEMS
A. Information regarding Primary Dealers
B. Information regarding the Government Accounting Standards Board
(GASB).
VII ADJOURNMENT
MAILING ADDRESS - P.O. BOX 1504 - LA QUINTA, CALIFORNIA 92253
oz
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OF TNti
INVESTMENT ADVISORY BOARD MEETING: April 10, 1996
Business Item: A
ITEM TITLE
City Council Request -
Preferred Board Size
ISSUE AND DISCUSSION:
The City Council has directed Staff to ask each Board/Commission to evaluate
structural alternatives.
The attached staff report from Mark Weiss, Assistant City Manager outlines the City
Council direction in this matter as it relates to the Investment Advisory Board (IAB).
RECOMMENDATION
Provide the City Council a recommendation with the IAB thoughts on reducing the size
of the IAB from seven to five Board Members as outlined in the staff report.
roved for submission to the Investment Advisory Board:
n M. Falcone
ance Director
T 0 0
-itT 4 QK&M
MEMORANDUM
TO: Investment Advisory Board
FROM: Mark Weiss, Assistant City Managerm
DATE: April 3, 1996
RE: Preferred Board Size
The City Council has asked staff for background information on City of
La Quinta's Boards, Commissions and Committees. The Council,
subsequent to receiving this information, suggested that affected
Boards/Commissions be asked to comment on various possible
structural alternatives.
The Council has clearly indicated that the IAB's role in City affairs is
distinct and of critical importance. Thus, there is no thought of
proposing consolidation of the IAB with other Boards or otherwise
altering the IAB's basic function or role in City government. Having
said the above, however, the Council has indicated interest in generally
reducing Boards/Commissions size from seven (7) members to five (5).
The suggestion is that this reduction in size would be accomplished
over time through normal attrition (i.e., that no existing Board
member's position would be eliminated simply for the purpose of
reducing board size) .
Staff would be interested in the IAB's thoughts on this specific matter
and would report the Board's position on this issue, if one taken, to the
City Council in a full report during May.
MW:pjs
V rY
�OFTNti
INVESTMENT ADVISORY BOARD MEETING: April 10, 1996
BUSINESS SESSION: 8
ITEM TITLE
Transmittal of Treasury Report
for February 29, 1996
ISSUE AND DISCUSSION:
Attached please find the Treasury Report for February 29, 1996.
RECOMMENDATION:
Review, Receive and File the Treasury Report for February 29, 1996.
Approved for submission to the Investment Advisory Board:
Joh M. Falcone
Fin nce Director
4
MEMORANDUM
TO: La Quinta City Council
FROM: John Falconer, Finance Director/Treasurer
SUBJECT: Treasurer's Report for February 29, 1996
DATE: March 27, 1996
Attached is the Treasurer's Report for the month ending February 29, 1996. This report is submitted to
the City Council each month after a reconciliation of accounts is accomplished by the Finance
Department.
Cash and Investments:
Increase of $22,653. due to the net effect of revenues in excess of expenditures.
State Pool:
ICMA:
Decrease of $2,091,000. due to the net effect of debt service payments and transfers to
and from the cash and investment accounts.
No change.
Mutual Funds:
Increase of $62,608. due to interest earned.
Total decrease in cash balances $2,005,739.
I certify that this report accurately reflects all pooled investments and is in compliance with the California
Government Code; and is in conformity with the City Investment policy.
As Treasurer of the City of La Quinta, I hereby certify that sufficient investment liquidity and anticipated
revenues are available to meet the pools expenditure requirements for the next six months.
312-11�6
YFince
lconer Date
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CITY OF LA QUINTA
CITY
CITY ,
BALANCE SHEET 02/29/96
FIXED
LONG TERM
CITY ASSETS
DEBT RDA
ASSETS:
POOLED CASH
12,023,399.02
8,036,264.70
LQHP CASH
29,995.07
BOND REDEMPTION CASH
30,286.04
BOND RESERVE CASH
516,478.29
BOND PROJECT CASH
13,759,657.61
BOND ESCROW CASH
2,417.95
PETTY CASH
1,000.00
BANK OF THE DESERT M/M
ICMA DEFERRED COMPENSATION
332,304.17
CASH & INVESTMENT TOTAL
12,356,703.19
22,375,099.66
ACCOUNTS RECEIVABLE
146,700.15
63,000.00
LOAN/NOTES RECEIVABLE
67,120.00
DUE FROM OTHER AGENCIES
(57,244.84)
DUE FROM OTHER GOVERNMENTS
DUE FROM OTHER FUNDS
551,038.04
DUE FROM RDA
6,048,957.20
INTEREST ADVANCE -DUE FROM RDA
403,263.84
NSF CHECKS RECEIVABLE
21,354.92
ACCRUED REVENUE
TRAVEL ADVANCES
1,500.50
EMPLOYEE ADVANCES
PREPAID EXPENSES
RECEIVABLE TOTAL
6,564,531.77
681,158.04
WORKER COMPENSATION DEPOSIT
RENT DEPOSITS
RDA RDA FA
FIXED LONG TERM FINANCING LONG TERM GRAND
ASSETS DEBT AUTHORITY DEBT TOTAL
20,059,663.72
29,995.07
4,480.34 34,766.38
717,034.88 1,233,513.17
13,759,657.61
2,417.95
1,000.00
332,304.17
721,515.22 35,453,318.07
209,700.15
67,120.00
(57,244.84)
551,038.04
6,048,957.20
403,263.84
21,354.92
1,500.50
7,245,689.81
UTILITY DEPOSITS
75.00
75.00
MISC. DEPOSITS
2,000.00
2,000.00
DEPOSITS TOTAL
2,075.00
2,075.00
GENERAL FIXED ASSETS
16,150,822.00
5,879,910.05
22,030,732.05
AMOUNT AVAILABLE TO RETIRE L/T DEBT
2,340,653.00
2,340,653.00
AMOUNT TO BE PROVIDED FOR L!T DEBT
309,279.00 70,390,801.00
8,360,000.00 79,060,080.00
TOTAL OTHER ASSETS
16,150,822.00
309,279.00 5,879,910.05 72,731,454.00
8,360,000.00 103,431,465.05
TOTAL ASSETS
18 923,309.96 16 150,822.00
309,279.00 23,056,257.70 5,879,910.05 72,731,454.00
721,515.22 8,360,000.00 146,132,547.93
LIABILITY
ACCOUNTS PAYABLE
DUE TO OTHER AGENCIES
DUE TO OTHER FUNDS
INTEREST ADVANCE -DUE TO CITY
ACCRUED EXPENSES
12,272.60
PAYROLL LIABILITIES
(3,629.08)
STRONG MOTION INSTRUMENTS
2,422.31
FRINGE TOED LIZARD FEES
82,417.40
SUSPENSE
DUE TO THE CITY OF LA QUINTA
PAYABLES TOTAL
93,483.23
ENGINEERING TRUST DEPOSITS
58,545.91
SO. COAST AIR QUALITY DEPOSITS
ARTS IN PUBLIC PLACES DEPOSITS
198,053.10
DEVELOPER DEPOSITS
162,449.71
MISC. DEPOSITS
1,600.00
AGENCY FUND DEPOSITS
1,294,978.79
ICMA-DEFERRED COMP DEPOSITS
332,304.17
TOTAL DEPOSITS
2,047,931.68
DEFERRED REVENUE
OTHER LIABILITIES TOTAL
COMPENSATED ABSENCES PAYABLE
DUE TO THE CITY OF LA QUINTA
NOTE DUE TO MURPHY, DALES, LANE
DUE TO COUNTY OF RIVERSIDE
DUE TO C.V. UNIFIED SCHOOL DISTRICT
DUE TO DESERT SANDS SCHOOL DISTRIC
BONDS PAYABLE
TOTAL LONG TERM DEBT
TOTAL LIABILITY 2,141,414.91
EQUITY -FUND BALANCE
16,781,895.05 16,150, 822.00
551,038.04 551,038.04
12,272.60
(3,629.08)
2,422.31
82,417.40
551,038.04 644,521.27
58,545.91
198,053.10
162,449.71
1,600.00
1,294,978.79
332,304.17
2,047,931.68
309,279.00
309,279.00
6,452,222.25
6,452,222.25
11,572,687.00
11,572,687.00
12,271, 884.75
12,271,884.75
1,904,660.00
1,904,660.00
40,530,000.00 8,360,000.00
48,890,000.00
309,279.00 72,731,454.00 8,360,000.00
81,400,733.00
309,279.00 551,038.04 72,731,454.00 8,360,000.00
84,093,185.95
22,505,219.66 5,879,910.05 721,515.22
62,039,361.98
TOTAL LIABILITY & EQUITY 18,923,309.96 16,150,822.00 309,279.00 23,056,257.70 5,879,910.05 72,731,454.00 721,515.22 8,360,000.00 146,132,547.93
Lail- •c9
O2QUM&
v
OF TNt
INVESTMENT ADVISORY BOARD MEETING: April 10, 1996
BUSINESS SESSION: G
ITEM TITLE
Consideration of Approval
of Investment Policy for the
City of La Quinta
ISSUE AND DISCUSSION:
The following investment policies incorporate changes that have been made at the
March 13, 1996 and March 28, 1996 meetings by the Investment Advisory Board.
proveA for submipion,4o the Investment Advisory Board:
JohP M. Falconer
FinAnce Director
CITY OF LA QUINTA
Investment Policies
Table of Contents
Section
Topic
Paae
Executive Summary
2
I
General Purpose
4
II
Investment Policy
4
III
Scope
4
IV
Objectives
5
► Safety
► Liquidity
► Yield
V
Prudence
6
VI
Delegation of Authority
6
VII
Conflict of Interest
7
VIII
Authorized Financial Dealers and Institutions
7
► Broker/Dealers
► Financial Institutions
IX
Authorized Investments and Diversification
9
X
Investment Pools
9
XI
Collateralization
9
X11
Safekeeping and Custody
10
Xlll
Interest Earning Distribution Policy
10
XIV
Maximum Maturities
10
XV
Internal Controls
10
XVI
Benchmark
12
XVII
Reporting Standards
12
XVIII
Investment of Bond Proceeds
13
XIX
Investment Advisory Board - City of La Quinta
13
XX
Investment Policy Adoption
13
Appendices Authorized Investments and Diversification 14
Municipal Code Ordinance 2.70 - Investment Advisory Board 15
Municipal Code Ordinance 3.08 Investment of Moneys and Funds 16
Listing of Approved Financial Institutions 18
Broker/Dealer Questionnaire and Certification 19
Investment Pool Questionnaire 23
Segregation of Major Investment Responsibilities 27
Glossary 28
1
City of La Quinta
Investment Policy
Executive Summary
The general purpose of this Investment Policy is to provide the rules and standards
users must follow in investing funds of the City of La Quinta.
It is the policy of the City of La Quinta to invest all public funds in a manner which will
provide a diversified portfolio with the highest investment return and the maximum
security while meeting daily- cash flow demands and in conformity to all state and local
statutes. This Policy applies to all cash and investments of the City of La Quinta, La
Quinta Redevelopment Agency and the La Quinta Financing Authority, hereafter
referred in this document as the "City".
The primary objectives, in order of priority, of the City of La Quinta's investment
activity shall be:
Safety of principal is the foremost objective of the investment program.
Investments of the City of La Quinta shall be undertaken in 'a manner that seeks
to ensure the preservation of capital in the overall portfolio
The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated.
The investment portfolio shall be designed with the objective of attaining a
market rate of return or yield throughout budgetary and economic cycles, taking
into account the investment risk constraints and liquidity needs.
Investments shall be made with judgment and care - under circumstances then
prevailing - which persons of prudence discretion, and intelligence exercise in the
management of their own affairs, not for speculation, but for investment, considering
the probable safety of their capital as well as the probable income to be derived.
Authority to manage the City of La Quinta's investment portfolio is derived from the
City Ordinance. Management responsibility for the investment program is delegated
to the City Treasurer, who shall establish and implement written procedures for the
operation of the City's investment program consistent with the Investment Policy. The
Treasurer shall establish and implement a system of internal controls to maintain the
safety of the portfolio. In addition, the internal control system will also insure the
timely preparation and accurate reporting of the portfolio financial information. The
adequacy of these controls will be reviewed and reported on annually by an
independent auditor.
0)
Investment responsibilities carry added duties of insuring that investments are made
without improper influence or the appearance to a reasonable person of questionable
or improper influence.
The City of La Quinta maintains a listing of financial institutions which are approved
for investment purposes. All Broker/Dealers and financial institutions selected by the
Treasurer to provide investment services will be approved by the City Manager subject
to City Council approval.
The Treasurer will be permitted to invest only in City approved investments up to the
maximum allowable percentages and, where applicable, through the bid process
requirements. Authorized investment vehicles and related maximum portfolio positions
are listed in Appendix A At least two bids will be required of investments in
aovernment securities.
Collateralization will be required for Certificates of Deposit. Collateral will always be
held by an independent third party with whom the City of La Quinta has a current
custodial agreement.. Evidence of ownership must be supplied to the City and retained
by the City Treasurer.
The City of La Quinta shall require that each individual investment have a maximum
maturity of two years unless specific approval is authorized by the City Council.
The'City of La Quinta will use the six month U.S. Treasury Bill as a benchmark when
measuring the performance of the investment portfolio.
The Investment Policies. shall be adopted by resolution of the La Quinta City Council
on an annual basis, The Investment Policies will be adopted before the end of June of
each year.
This Executive Summary is an overall review of the City of La Quinta Investment
Policies. Reading this summary does not constitute a complete review which can only
be accomplished by reviewing all the pages.
3
City of La Quinta
Statement of Investment Policy
July 1, 1996 through June 30, 1997
Adopted by the City Council on
GENERAL PURPOSE
The general purpose of this document is to provide the rules and standards users must
follow in administering the City of La Quinta cash investments.
II INVESTMENT POLICY
It is the policy of the City of La Quinta to invest public funds in a manner which will
provide a diversified portfolio with safety of principal and the highest investment return
while meeting daily cash flow demands. In addition, the Investment Policy will
conform to all State and local statutes governing the investment of public funds.
III SCOPE
This Investment Policy applies to all cash and investments of the City of La Quinta,
City of La Quinta Redevelopment Agency and the City of La Quinta Financing
Authority, hereafter referred in this document as the "City". These funds are reported
in the City of La Quinta Comprehensive Annual financial Report (CAFR) and include:
All funds within the following fund types:
► General
► Special Revenue
► Capital Project
► Debt Service
► Internal Service
► Trust and Agency
► Any new fund types and fund(s) that may be created.
4
IV OBJECTIVES
The primary objective, in order of priority, of the City of La Quinta's investment
activity shall be:
1. Safety
Safety of principal is the foremost objective of the investment program.
Investments of the City of La Quinta shall be undertaken in a manner that seeks
to ensure the preservation of capital in the overall portfolio in accordance with
the permitted investments. The objective will be to mitigate credit risk and
interest rate risk.
A. Credit Risk
Credit 'Risk - is the risk of loss due to the failure of the security issuer or
backer. Credit risk may be mitigated by:
► Limiting investments to the safest types of securities;
► Pre -qualifying the financial institutions, and broker/dealers, which
the City of La Quinta will do business; and
► Diversifying the investment portfolio so that potential losses on
individual securities will be minimized.
B. Interest Rate Risk
Interest Rate risk is the risk that the market value of securities in the
portfolio will fall due to changes in general interest rates. Interest rate
risk may be mitigated by:
► Structuring the investment portfolio so that securities mature to
meet cash requirements for ongoing operations, thereby avoiding
the need to sell securities on the open market prior to maturity;
and
► By investing operating funds primarily in shorter -term securities.
2. 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. Furthermore since all possible cash demands
cannot be anticipated the portfolio should consist of securities with active
secondary or resale markets.
5
3. Yield
The investment portfolio shall be designed with the objective of attaining a
market rate of return throughout budgetary and economic cycles, taking into
account the investment risk constraints and liquidity needs. Return on
investment is of least importance compared to the safety and liquidity objectives
described above. The core of investments are limited to relatively low risk
securities in anticipation of earning a fair return relative to the risk being
assumed. Securities shall not be sold prior to maturity with the following
exceptions:
► A declining credit security could be sold early to minimize loss of
principal;
► Liquidity needs of the portfolio require that the security be sold.
V PRUDENCE
The City shall follow the Uniform Prudent Investor Act as adopted by the State of
California in Probate Code Sections 16045 through 16054..
Section 16053 sets forth the terms of a prudent person which are as follows:
Investments shall be made with judgment and care - under circumstances then
prevailing - which persons of prudence, discretion, and intelligence excerise in the
professional management of their own affairs, not for speculation, but for investment,
considering the probable safety of their capital as well as the probable income to be
derived.
VI DELEGATION OF AUTHORITY
Authority to manage the City of La Quinta's investment portfolio is derived from the
City Ordinance. Management responsibility for the investment program is delegated
to the City Treasurer, who shall establish written procedures for the operation of the
investment program consistent with the Investment Policy. Procedures should include
reference to safekeeping, wire transfer agreements, banking service contracts, and
collateral/depository agreements. Such procedures shall include explicit delegation of
authority to persons responsible for investment transactions. No person may engage
in an investment transaction except as provided under the terms of this Investment
Policy and the procedures established by the City Treasurer. The City Treasurer shall
be responsible for all transactions undertaken and shall establish a system of controls
to regulate the activities of subordinate officials. The City Manager or Assistant City
Manager shall approve in writing all purchases and sales of investments prior to their
execution by the City Treasurer.
0
VII CONFLICT OF INTEREST
Investment responsibilities carry added duties of insuring that investments are made
without improper influence or the appearance of improper influence.
Therefore, the City Manager, Assistant City Manager, and the City Treasurer shall
adhere to the State of California Code of Economic Interest and to the following:
► The City Manager, Assistant City Manager, and the City Treasurer shall not
personally or through a close relative maintain any accounts, interest, or private
dealings with any firm with the City places investments, with the exception of
regular savings, checking and money market accounts, or other similar
transactions that are offered on a non-negotiable basis to the general public.
Such accounts shall be disclosed annually to the City Clerk in conjunction with
annual disclosure statements of economic interest.
► All persons authorized to place or approve investments shall report to the City
Clerk kinship relations with principal employees of firms with which the City
places investments.
VIII AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The City of La Quinta maintains a listing of financial institutions which are approved
for investment purposes. In addition a list will also be maintained of approved
broker/dealers selected by credit worthiness, who maintain an office in the State of
California.
1. Broker/Dealers who desire to become bidders for investment transactions must
supply the City of La Quinta with the following:
► Current audited financial statements
► Proof of National Association of Security Dealers Certification
► Trading resolution
► Proof of California registration
► Resume of Financial broker
► Completion of the City of La Quinta Broker/Dealer questionnaire which
contains a certification of having read the City of La Quinta Investment
Policy
The City Treasurer shall evaluate. the documentation submitted by the
broker/dealer and independently verify existing reports on file for any firm and
individual conducting investment related business.
7
The City Treasurer will also contact the following agencies during the
verification process:
► National Association of Security Dealer's Public Disclosure Report File -
1-800-289-9999
► State of California Department of Corporations 1-916-445-3062
All Broker/Dealers selected by the City Treasurer to provide investment services
will be approved by the City Manager subject to City Council approval. The City
Attorney will perform a legal review of the trading resolution/investment
contract submitted by each Broker/Dealer.
Each securities dealer shall provide monthly and quarterly reports filed pursuant to U.S.
Treasury Department regulations. Each mutual fund shall provide a prospectus and
statement of additional information.
2. Financial Institutions will be required to meet the following criteria in order to
receive City funds for investment:
A. Insurance - Public Funds shall be deposited only in financial
institutions insured by the Federal Deposit Insurance Corporation
B. Collateral - The amount of City of La Quinta deposits or
investments not insured by agency of the federal government shall
be 100% collateralized by securities' or 150% mortgages' market
values of that amount of invested funds plus unpaid interest
earnings.
C. Size - The amount of City of La Quinta deposits or investments
must be collateralized or insured by an agency of the federal
government.
D. Disclosure - Each financial institution maintaining invested funds
in excess of $100,000 shall furnish corporate authorities a copy
of all statements of resources and liabilities which it is required to
furnish to the State banking or savings and loan commissioners as
required by the California Financial Code.
The City shall not invest in excess of $100,000 in banking
institutions which do not disclose to the city a current listing of
securities pledged for collateralization in public monies.
8
IX AUTHORIZED INVESTMENTS AND DIVERSIFICATION
The City Treasurer will be permitted to invest in the investments listed in the Appendix
entitled - Authorized Investments and Diversification.
X INVESTMENT POOLS
There are three (3) types of investment pools: 1) state -run pools, 2) pools that are
operated by a political subdivision where allowed by law and the political subdivision
is the trustee i.e. County Pool; and 3) pools that are operated for profit by third parties.
The City of La Quinta has an investment with the State of California's Treasurers
Office Local Agency Investment Fund commonly referred to as LAIF. LAIF was
organized in 1977 through State Legislation Section 16429.1, 2 and 3. Each LAIF
account is restricted to a maximum investable limit of $20 million and in addition LAIF
will provide quarterly market value information to the City of La Quinta.
On an annual basis the City Treasurer will submit the Investment Pool Questionnaire
to LAIF.
Also, prior to opening any new Investment Pool account, which would require City
Council approval, the City Treasurer will require the completion of the Investment Pool
Questionnaire.
The City does not have an investment with any other Investment Pool - County. Pools
or Third Party Pools.
XI COLLATERALIZATION
Collateralization will be required for Certificates of Deposits. The type of collateral is
limited to City authorized investments.
1. Certificates of Deposits under $100.000.
The City Treasurer may waive collateralization of a deposit that is federally
insured.
2. Certificates of Deposit over $100.000,
The amount not federally insured shall be 1 10% collateralized by securities or
150% mortgages market value of that amount of invested funds plus unpaid
interest earnings.
Collateral will always be held by an independent third party with whom the City of La
Quinta has a current custodial agreement. Evidence of ownership must be supplied
to the City of La Quinta and retained by the City Treasurer.
E
XII SAFEKEEPING AND CUSTODY
All security transactions of the City of La Quinta shall be conducted on a delivery -
versus - payment (DVP) basis. Securities will be held by a third party custodian
designated by the City Treasurer and evidenced by safekeeping receipts.
XIII INTEREST EARNING DISTRIBUTION POLICY
Interest earnings is generated from pooled investments and specific investments.
1. Pooled Investments - It is the general policy of the City to pool all available
operating cash of the City of La Quinta, La Quinta Redevelopment Agency and
La Quinta Financing Authority and allocate interest earnings, in the following
order, as follows:
A. Payment to the General Fund of an amount equal to the total annual bank
service charges as incurred by the general fund for all operating funds as
included in the annual operating budget.
B. Payment to the General Fund of a management fee equal to 5 % of the
annual pooled cash fund investment earnings.
C. Payment to each fund of an amount based on the average computerized
daily cash balance included in the common portfolio for the earning
period.
2. Specific Investments - Specific investments purchased by a fund shall incur all
earnings and expenses to that particular fund.
XIV MAXIMUM MATURITIES
The City of La Quinta shall require that each individual investment to have a maximum
maturity of two years unless specific approval is authorized by the City Council.
XV INTERNAL CONTROLS
The City Treasurer shall establish a system of internal controls to accomplish the
following objectives:
► Safeguard assets;
► The orderly and efficient conduct of its business, including adherence to
management policies;
► Prevention or detection of errors and fraud;
► The accuracy and completeness of accounting records; and,
► Timely preparation of reliable financial information.
10
While no internal control system, however elaborate, can guarantee absolute assurance
that the City's assets are safeguarded, it is the intent of the City's internal control to
provide a reasonable assurance that management of the investment function meets the
City's objectives.
The internal controls shall address the following:
a. Control of collusion. Collusion is a situation where two or more employees are
working in conjunction to defraud their employer.
b. Separation of 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.
C. 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.
d. Avoidance of 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.
e. Clear delegation of 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 as outlined in the Segregation of Major
Investment Responsibilities appendices.
f. Written confirmation or telephone transactions for investments and wire
transfers. 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 and the safekeeping institution
has a list of authorized signatures. Fax correspondence must be supported by
evidence of verbal or written follow-up.
g. Development of a wire transfer agreement with the City's bank and third party
custodian. This agreement should outline the various controls, security
provisions, and delineate responsibilities of each party making and receiving wire
transfers.
11
In addition to the System of Internal Controls developed by the City, the Internal
Controls shall be reviewed annually by the independent auditor.
The independent auditors management letter comments pertaining to cash and
investments, if any, shall be directed to the City Manager who will direct the City
Treasurer to provide a written response to the independent auditors letter. This
response will also be directed to the City's Investment Advisory Board for their action.
XVI BENCHMARK
The investment portfolio shall be designed with the objective of obtaining a rate of
return throughout budgetary and economic cycles commensurate with the investment
risk constraints and the cash flow needs of the City. Return on investment is of least
importance compared to safety and liquidity objectives.
The City of La Quinta will use the six month U.S. Treasury Bill as a benchmark when
measuring the performance of the investment portfolio.
XVII REPORTING STANDARDS
SB564 section 3 requires a quarterly report to the Legislative Body of Investment
activities. The City of La Quinta has elected to report the investment activities to the
City Council on a monthly basis through the Treasurers Report.
The City Treasurer shall submit a monthly Treasurers Report to the City Council and
the Investment Advisory Board that includes all investments under the authority of the
Treasurer.
The Treasurers Report shall consist of a narrative of significant changes in cash
balances and the following:
► Changes in investments from the previous month;
► A certification statement from the City Treasurer;
► Purchases and sales of investments;
► Cost to market value comparisons of all investments by authorized investment
category, except for LAW which will be provided quarterly;
► Comparison of actual holdings to Investment Policy maximums;
► Twenty four (24) months history of cash and investments for trend analysis;
► Balance Sheet.
12
XVIII INVESTMENT OF BOND PROCEEDS
The City's investment policy shall govern bond proceeds and bond reserve fund
investments. California Code Section 5922 (d) governs the investment of bond
proceeds and reserve funds in accordance with bond indenture provisions which shall
be structured in accordance with the City's investment policy. .
Arbitrage Requirement
The US Tax Reform Act of 1986 requires the City to perform arbitrage calculations as
required and return excess earnings to the US Treasury from investments of proceeds
of bond issues sold after the effective date of this law. This arbitrage calculations may
be contracted with an outside source to provide the necessary technical assistance to
comply with this regulation. Investible funds subject to the 1986 Tax Reform Act will
be kept segregated from other funds and records will be kept in a fashion to facilitate
the calculations. The City's investment position relative to the new arbitrage
restrictions is to continue pursuing the maximum yield on applicable investments while
ensuring the safety of capital and liquidity. It is a fiscally sound position to continue
maximization of yield and to rebate excess earnings, if necessary.
XIX INVESTMENT ADVISORY BOARD - CITY OF LA QUINTA
The Investment Advisory Board (IAB) consists of seven members of the community
that have been appointed by and report to the City Council. The IAB meets on a
monthly basis to 1) review account statements and verifications to ensure accurate
reporting as they relate to an investment activity, 2) monitor compliance with existing
Investment Policy and Procedures and 3) review investment contracts and investment
consultants.
The appendices include City of La Quinta Ordinance 2.70 entitled Investment Advisory
Board Provisions.
XX INVESTMENT POLICY ADOPTION
On an annual basis, the Investment policies will be initially reviewed by the Investment
Advisory Board and the City Treasurer. The Investment Advisory Board will forward
the Investment policies, with any revisions, to the City Manager and City Attorney for
their review and comment. A joint meeting will be held with the Investment. Advisory
Board, City Manager, City Attorney, and City Treasurer to review the Investment
policies and comments, prior to submission to the City Council for their consideration.
The Investment Policies shall be adopted by resolution of the City of La Quinta City
Council on an annual basis. The Investment Policies will be adopted before the end
of June of each year.
13
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D
Chapter 2.70
INVESTMENT ADVISORY BOARD PROVISIONS
Sections:
2.70.010 General Rules Regarding Appointment and Terms.
2.70.020 Board meetings and compensation.
2.70.030 Board functions.
2.70.010 General rules regarding appointment and terms.
Except as set out below, see Chapter 2.06 for General Provisions.
The Investment Advisory Board (the "board") is a standing board composed of seven (7)
members from the public that are appointed by city council. La Quinta residency is preferred, but
not a requirement for board members. Recruitment for members may be advertised outside of the
city".
Background in the investment field and/or related experience is preferred. Background
information will be required and potential candidates must agree to a background check and
verification.
On an annual basis, in conjunction with the Political Reform Act disclosure statutes, or at any
time if a change in circumstances warrants, each board member will provide the City Council with
a disclosure statement which identifies any matters on the board. Such matters may include, but
are not limited to, changes in employment, changes in residence, or changes in clients.
The Board members will serve for two year staggered terms beginning on July 1 of every other
year, commencing July 1, 1993. Initially, two members will be appointed for two year terms and
three members will be appointed for one year terms. These initial appointments will start their
yearly calculations from July 1, 1993.
2.70.020 Board meetings and compensation.
Board members will be reimbursed for meeting and related expenses at an amount of fifty dollars
($50) per meeting.
Initially, the Board should meet once a month, but this schedule may be extended to quarterly
meetings upon the concurrence of the Board and the City Council. The specific meeting dates will
be determined by the Board members and meetings may be called for on an as needed basis.
2.70.030 Board functions.
The Board will annually elect a Chairperson and Vice -chairperson at the first meeting held after
each June 30.
The following are functions of the Board that are to be addressed at each meeting: (1) review
account statements and verifications to ensure accurate reporting as they relate to an investment
activity; (ii) monitor compliance with existing Investment policy and procedures; and (iii) review and
make investment contracts, and investment consultants.
The Board will report to City council after each meeting either in person or through
correspondence at a regular City Council meeting.
15
Chapter 3.08
INVESTMENT OF MONEYS AND FUNDS
Sections:
3.08.010 Investment of city moneys and deposit of securities.
3.08.020 Authorized investments.
3.08.030, Sales of securities.
3.08.040 City bonds.
3.08.050 Reports.
3.08.060 Deposits of securities.
3.08.070 Trust fund administration.
3.08.010 Investment of city moneys and deposit of securities.
Pursuant to, and in accordance with, and to the extent allowed by, Sections 53607 and
53608 of the Government Code, the authority to invest and reinvest moneys of the city, to
sell or exchange securities, and to deposit them and provide for their safekeeping, is delegated
to the city treasurer. (Ord. 2 § 1 (part), 1982)
3.08.020 Authorized investments.
Pursuant to the delegation of authority in Section 3.08.010, the city treasurer is authorized
to purchase, at their original sale or after they have been issued, securities which are
permissible investments under any provision of state law relating to the investing of general
city funds, including but not limited to Sections 53601 and 53635 of the Government Code,
as said sections now read or may hereafter be amended, from moneys in his custody which
are not required for the immediate necessities of the city and as he may deem wise and
expedient, and to sell or exchange for other eligible securities and reinvest the proceeds of the
securities so purchased. (Ord. 2 § 1 (part), 1982)
3.08.030 Sales of Securities.
From time to time the city treasurer shall sell the securities in which city moneys have been
invested pursuant to this chapter, so that the proceeds may, as appropriate, be applied to the
purchase for which the original purchase money may have been designated or placed in the
city treasury. (Ord. 2 § I (part),
3.08.040 City bonds.
Bonds issued by the city and purchased pursuant to this chapter may be canceled either
in satisfaction of sinking fund obligations or otherwise if proper and appropriate; provided,
however, that the bonds may be held uncancelled and while so held may be resold. (Ord. 2 §
1 (part), 1982)
3.08.050 Reports.
The city treasurer shall make a monthly report to the city council of all investments made
pursuant to the authority delegated in this chapter. (Ord. 2 § 1 (part), 1982)
16
3.08.060 Deposits of securities.
Pursuant to the delegation of authority in Section 3.08.010, the city treasurer is authorized
to deposit for safekeeping, the securities in which city moneys have been invested pursuant
to this chapter, in any institution or depository authorized by the terms of any state law,
including but not limited to Section 53608 of the Government Code as it now reads or may
hereafter be amended. In accordance with said section, the city treasurer shall take from the
institution or depository a receipt for the securities so deposited and shall not be responsible
for the securities delivered to and receipted for by the institution or depository until they are
withdrawn therefrom by the city treasurer. (Ord. 2 § 1 (part), 1982
3.08.070 Trust fund administration.
Any departmental trust fund established by the city council pursuant to Section 36523
of the Government Code shall be administered by the city treasurer in accordance with Section
36523 and 26524 of the Government code and any other applicable provisions of law. (Ord.
2 § 1 (part), 1982)
17
LISTING OF APPROVED FINANCIAL INSTITUTIONS
1. Banking Services - First Interstate Bank
2. Custodian Services - First Interstate Bank Institutional Trust
Services
3. Deferred Compensation - International City/County Management
Association
Retirement Corporation
4. Broker/Dealer Services -
5. Government Pool - State of California Local Agency Investment
Fund
City of La Quinta Account
La Quinta Redevelopment .Agency
6. Bond Trustees - 1991 City Hall Revenue Bonds - First Trust
1991 RDA Project Area 1 - First Trust
1992 RDA Project Area 2 - First Interstate
Bank
1994 RDA Project Area 1 - First Trust
1995 RDA Project Area 1 & 2 - First
Interstate Bank
No Changes to this listing may be made without City Council approval.
18
BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION
1. Name of Firm:
2. Address:
3. Telephone: (
4. Broker's Representative to the City (attach resume):
Name:
Title:
Telephone: ( )
5. Manager/Partner-in-charge (attach resume):
Name:
Title:
Telephone:
6. List all personnel who will be trading with or quoting securities to City
employees (attach resume)
Name:
Title:
Telephone: ( ) ( )
7. Which of the above personnel have read the City's investment policy?
8. Which instruments are offered regularly by your local office? (Must equal
100%)
% U.S. Treasuries
% BA's
% Commercial Paper
% CD's
% Mutual Funds
% Agencies (specify):
19
% Repos
% Reverse Repos
% CMO's
% Derivatives
% Stocks/Equities
% Other (specify):
9. References -- Please identify your most directly comparable public sector
clients in our geographical area.
Entity Entity
Contact Contact
Telephone ( ) Telephone ( )
Client Since Client Since
10. Have any of your clients ever sustained a loss on a securities transaction
arising from a misunderstanding or misrepresentation of the risk
characteristics of the instrument? If so, explain.
11. Has your firm or your local office ever been subject to a regulatory or state/
federal agency investigation for alleged improper, fraudulent, disreputable or
unfair activities related to the sale of securities? Have any of your employees
been so investigated? If so,
explain.
12. Has a client ever claimed in writing that yQu were responsible for an
investment loss? Yes No If yes, please provide
action taken
Has a client ever claimed in writing that your firm was responsible for an
investment loss? Yes No If yes, please provide
action taken
Do you have any current, or pending complaints that are unreported to the
NASD?
Yes No If yes, please provide action taken
OR
Does your firm have any current, or pending complaints that are unreported
to the NASD? Yes No If yes, please provide action
taken
13. Explain your clearing and safekeeping procedures, custody and delivery
process.
Who audits these fiduciary responsibilities?
Latest Audit Report Date
14. How many and what percentage of your transactions failed.
Last month? % $
Last year? % $
15. Describe the method your firm would use to establish capital trading limits
for the City of La Quinta.
16. Is your firm a member in the S.I.P.C. insurance program. Yes No
If yes, explain primary and excess coverage and carriers.
17. What portfolio information, if any, do you require from your clients?
18. What reports and transaction confirmations or any other research
publications will the City receive?
19. Does your firm offer investment training to your clients? Yes No
21
20. Does your firm have professional liability insurance. Yes No
If yes, please provide the insurance carrier, limits and expiration date.
21.
22.
Please list your NASD Registration Number,
Do you have any relatives who work at the City of La Quinta?
Yes No If yes, Name and Department
23. Do you maintain an office in California. Yes No
24. Do you maintain an office in La Quinta or Riverside County? Yes No
25. Please enclose the following:
• Latest audited financial statements.
• Samples of reports, transaction confirmations and any other
research/publications the City will receive.
• Samples of research reports and/or publications that your firm regularly
provides to clients.
• Complete schedule of fees and charges for various transactions.
** CERTIFICATION***
I hereby certify that I have personally read the Statement of Investment Policy of
the City of La Quinta, and have implemented reasonable procedures and a system
of controls designed to preclude imprudent investment activities arising out of
transactions conducted between our firm and the City of La Quinta. All sales
personnel will be routinely informed of the City's investment objectives, horizons,
outlooks, strategies and risk constraints whenever we are so advised by the City.
We pledge to exercise due diligence in informing the City of La Quinta of all
foreseeable risks associated with financial transactions conducted with our firm.
By signing this document the City of La Quinta is authorized to conduct any and all
background checks. '
Under penalties of perjury, the responses to this questionnaire are true and accurate
to the best of my knowledge.
Broker Representative
Date
Title
Sales Manager and/or Managing Partner*
Date Title
22
INVESTMENT POOL QUESTIONNAIRE
Note: This Investment Pool Questionnaire was developed by the Government Finance
Officers Association (GFOA).
Prior to entering a pool, the following questions and issues should be considered.
SECURITIES
Government pools may invest in a broader range of securities than your entity invests
in. It is important that you are aware of, and are comfortable with, the securities the
pool buys.
1. Does the pool provide a written statement of investment policy and objectives?
2. Does the statement contain:
a. A description of eligible investment instruments?
b. The credit standards for investments?
c. The allowable maturity range of investments?
d. The maximum allowable dollar weighted average portfolio maturity?
e. The limits of portfolio concentration permitted for each type of security?
f. The policy on reverse repurchase agreements, options, short sales and futures?
3. Are changes in the policies communicated to the pool participants?
4. Does the pool contain only the types of securities that are permitted by your
investment policy?
INTEREST
Interest is not reported in a standard format, so it is important that you know how
interest is quoted, calculated and distributed so that you can make comparisons with
other investment alternatives.
Interest Calculations
1. Does the pool disclose the following about yield calculations:
a. The methodology used to calculate interest? (Simple maturity, yield to maturity,
etc.)
b. The frequency of interest payments?
c. How interest is paid? (Credited to principal at the end of the month, each
quarter; mailed?)
d. How are gains/losses reported? Factored monthly or only when realized?
23
REPORTING
1. Is the yield reported to participants of the pool monthly? (If not, how often?)
2. Are expenses of the pool deducted before quoting the yield?
3. Is the yield generally in line with the market yields for securities in which you
usually invest?
4. How often does the pool report, and does that report include the market value of
securities?
SECURITY
The following questions are designed to help you safeguard your funds from loss of
principal and loss of market value.
1. Does the pool disclose safekeeping practices?
2. Is the pool subject to audit by an independent auditor?
3. Is a copy of the audit report available to participants?
4. Who makes the portfolio decisions?
5. How does the manager monitor the credit risk of the securities in the pool?
6. Is the pool monitored by someone on the board of a separate neutral party external
to the investment function to ensure compliance with written policies?
7. Does the pool have specific policies with regards to the various investment
vehicles?
a. What are the different investment alternatives?
b. What are the policies for each type of investment?
8. Does the pool mark the portfolio to its market value?
9. Does the pool disclose the following about how portfolio securities are valued:
a. The frequency with which the portfolio securities are valued?
b. The method used to value the portfolio (cost, current value, or some other
method)?
24
OPERA TIONS
The answers to these questions will help you determine whether this pool meets your
operational requirements:
1. Does the pool limit eligible participants?
2. What entities are permitted to invest in the pool?
3. Does the pool allow multiple accounts and sub -accounts?
4. Is there a minimum or maximum account size?
5. Does the pool limit the number of transactions each month? What is the number
of transactions permitted each month?
6. Is there a limit on transaction amounts for withdrawals and deposits?
a. What is the minimum and maximum withdrawal amount permitted?
b. What is the minimum and maximum deposit amount permitted?
7. How much notice is required for withdrawals/deposits?
8. What is the cutoff time for deposits and withdrawals?
9. Can withdrawals be denied?
10. Are the funds 100% withdrawable at anytime?
11. What are the procedures for making deposits and withdrawals?
a. What is the paperwork required, if any?
b. What is the wiring process?
12. Can an account remain open with a zero balance?
13. Are confirmations sent following each transaction?
STA TEMENTS
It is important for you and the agency's trustee (when applicable), to receive
statements monthly so the pool's records of your activity and holding are reconciled
by .you and your trustee.
25
1. Are statements for each account sent to participants?
a. What are the fees?
b. How often are they passed?
c. How are they paid?
d. Are there additional fees for wiring funds (what is the fee)?
2. Are expenses deducted before quoting the yield?
QUESTIONS TO CONSIDER FOR BOND PROCEEDS
It is important to know (1) whether the pool accepts bond proceeds and (2) whether
the pool qualifies with the U.S. Department of the Treasury as an acceptable
commingled fund for arbitrage purposes.
1. Does the pool accept bond proceeds subject to arbitrage rebate?
2. Does the pool provide accounting and investment records suitable for proceeds of
bond issuance subject to arbitrage rebate?
3. Will the yield calculation reported by the pool be acceptable to the IRS or will it
have to be recalculated?
4. Will the pool accept transaction instructions from a trustee?
5. Are you allowed to have separate accounts for each bond issue so that you do not
commingle the interest earnings of funds subject to rebate with funds not subject
to regulations?
26
SEGREGATION OF MAJOR INVESTMENT RESPONSIBILITIES
Function
Responsibilities
Develop formal Investment Policy
City Treasurer
Recommend modifications to Investment Policy
Investment Advisory Board
Review formal Investment Policy and recommend
City Manager
City Council action
City Attorney
Adopt formal Investment Policy
City Council
Review Financial Institutions & Select Investments
City Treasurer
Approve investments
City Manager
Execute investment transactions
City Treasurer
Confirm wires, if applicable
City Manager or Accounting
Supervisor
Record investment transactions in City's
accounting records
Accounting Supervisor
Investment verification - match broker confirmation
to City investment records
Account Technician
Reconcile investment records
- to accounting records and bank statements
- to Treasurers Report
of investments
Account Technician
Security of investments at City
Vault
Security of investments Outside City
Third Party Custodian
Review internal control procedures
External Auditor
27
GLOSSARY
The purpose of this glossary is to provide the reader of the City of La Quinta
investment policies with a better understanding of financial terms used in municipal
investing.
AGENCIES: Federal agency securities
ASKED: The price at which securities are
offered.
BANKERS' ACCEPTANCE (BA): 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 drafts at its
maturity. An acceptance is a high-grade
negotiable instrument. Acceptances are
purchased in various denominations for 30,
60 or 90 days, but no longer than 270 days.
The interest is calculated on a 360=day
discount basis similar to treasury bills. Local
agencies may not invest more than 40% of
their surplus money in bankers acceptances.
BID: The price offered by a buyer of
securities. (When you are selling securities,
you ask for a bid.) See Offer.
BROKER: A broker brings buyers and sellers
together for a commission.
CERTIFICATE OF DEPOSIT (CD): Time
deposits of a bank or savings and loan. They
are purchased in various denominations with
maturities ranging from 30 to 360 days. The
interest is calculated on a 360-day, actual -
day month basis and is payable monthly.
28
COLLATERAL: Securities, evidence of
deposit or other property which a borrower
pledges to secure repayment of a loan. Also
refers to securities pledged by a bank to
secure deposits,of public monies.
COMMERCIAL PAPER: S h o r t- t e r m
unsecured promissory notes issued by a
corporation to raise working capital. These
negotiable instruments are purchased at a
discount to par value or at par value with
interest bearing. Commercial paper is issued
by corporations such as General Motors
Acceptance Corporation, IBM, Bank America,
etc.
COMPREHENSIVE ANNUAL FINANCIAL
REPORT' (CAFR): The official annual report
for the City of La Quinta. It includes five
combined statements for each individual fund
and account group prepared in conformity
with GAAP. It also includes supporting
schedules necessary to demonstrate
compliance with finance -related legal and
contractual provisions, extensive introductory
material, and a detailed Statistical Section.
COUPON: (a) The annual rate of interest that
a bond's issuer promises to pay the
bondholder on the bond's face value. (b) A
certificate attached to a bond evidencing
interest due on a payment date.
DEALER: A dealer, as opposed to a broker,
acts as a principal in all transactions, buying
and selling for his own account.
DEBENTURE: A bond secured only by the
general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are
two methods of delivery of securities:
delivery versus payment and delivery versus
receipt. Delivery versus payment is delivery
of securities with an exchange of money for
the securities. Delivery versus receipt is
delivery of securities with an exchange of a
signed receipt for the securities.
DERIVATIVES: (1) Financial instruments
whose return profile is linked to, or derived
from, the movement of one or more
underlying index or security, and may include
a leveraging factor, or (2) financial contracts
based upon notional amounts whose value is
derived from an underlying index or security
(interest rates, foreign exchange rates,
equities or commodities).
DISCOUNT: The difference between the cost
price of a security and its maturity when
quoted at lower than face value. A security
selling below original offering price shortly
after sale also is considered to be at a
discount
DIVERSIFICATION: Dividing investment
funds among a variety of securities offering
independent returns.
FEDERAL CREDIT AGENCIES: Agencies of
the Federal government set up to supply
credit to various classes of institutions and
individuals, e.g., S&L's, small business firms,
students, farmers, farm cooperatives, and
exporters. The following is a listing:
1. FNMAs (Federal National Mortgage
Association) - Used to assist the home
mortgage market by purchasing
mortgages insured by the Federal Housing
29
Administration and the Farmers Home
Administration, as well as those
guaranteed by the Veterans
Administration. They are issued in
various maturities and in minimum
denominations of $10,000. Principal and
Interest is paid monthly.
2. FHLBs (Federal Home Loan Bank Notes
and Bonds) - Issued by the Federal Home
Loan Bank System to help finance the
housing industry. The notes and bonds
provide liquidity and home mortgage
credit to savings and loan associations,
mutual savings banks, cooperative banks,
insurance companies, and mortgage -
lending institutions. They are issued
irregularly for various maturities. The
minimum denomination is $5,000. The
notes are issued with maturities of less
than one year and interest -is paid at
maturity. The bonds are issued with
various maturities and carry semi-annual
coupons. Interest is calculated on a 360-
day, 30-day month basis.
3. FLBs (Federal .Land Bank Bonds) - Long-
term mortgage credit provided to farmers
by Federal Land Banks. These bonds are
issued at irregular times for various
maturities ranging from a few months to
ten years. The minimum denomination is
$1,000. They carry semi-annual
coupons. Interest is calculated on a 360-
day, 30 day month basis.
4. FFCBs (Federal Farm Credit Bank) - Debt
instruments used to finance the short and
intermediate term needs of farmers and
the national agricultural industry. They
are issued monthly with three- and six-
month maturities. The FFCB issues larger
issues (one to ten year) on a periodic
basis. These issues are highly liquid.
5. FICBs (Federal Intermediate Credit bank
Debentures) - Loans to lending institutions
used to finance the short-term and
intermediate needs of farmers, such as
seasonal production. They are usually
issued monthly in minimum
denominations of $3,000 with a nine -
month maturity. Interest is payable at
maturity and is calculated on a 360-day,
30-day month basis.
6. FHLMCs (Federal Home Loan Mortgage
Corporation) - a government sponsored
entity established in 1970 to provide a
secondary market for conventional home
mortgages. Mortgages are purchased
solely from the Federal Home Loan Bank
System member lending institutions
whose deposits are insured by agencies
of the United States Government. They
are issued for various maturities and in
minimum denominations of $10,000.
Principal and Interest is paid monthly.
Other federal agency issues are Small
Business Administration notes (SBAs),
Government National Mortgage
Association notes (GNMAs), Tennessee
Valley Authority notes (TVAs), and
Student Loan Association notes (SALLIE-
MAEs).
FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to
$100,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest
at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve
through open -market operations.
30
FEDERAL HOME LOAN BANKS (FHLB):
Government sponsored wholesale banks
(currently 12 regional banks) which lend
funds and provide correspondent banking
services to member commercial banks, thrift
institutions, credit unions and insurance,
companies. The mission of the FHLBs is to
liquefy the housing related assets of its
members who must purchase stock in their
district Bank.
FEDERAL OPEN MARKET COMMITTEE
(FOMC): Consists of seven members of the
Federal Reserve Board and five of the twelve
Federal Reserve Bank Presidents. The
President of the New York Federal Reserve
Bank is a permanent member, while the other
Presidents serve on a rotating basis. The
Committee periodically meets to set Federal
Reserve guidelines regarding purchases and
sales of Government Securities in the open
market as a means of influencing the volume
of bank credit and money.
FEDERAL RESERVE SYSTEM: the central
bank of the United States created by
Congress and consisting of a seven member
Board of Governors in Washington, D.C., 12
regional banks and about 5,700 commercial
banks that are members of the system.
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank
credit guaranteed by GNMA and issued by
mortgage bankers, commercial banks,
savings and loan associations, and other
institutions. Security holder is protected by
full faith and credit of the U.S. Government.
Ginnie Mae securities are backed by the FHA,
VA or FMHM mortgages. The term
"passthroughs" is often used to describe
Ginnie Maes.
LAIF (Local Agency Investment Fund) - A
special fund in the State Treasury which local
agencies may use to deposit funds for
investment. There is no minimum
investment . period and the minimum
transaction is $ 5,000, in multiples of $1,000
above that, with a maximum balance of
$20,000,000 for any agency. The City is
restricted to a maximum of ten transactions
per month. It offers high liquidity because
deposits can be converted to cash in 24
hours and no interest is lost. All interest is
distributed to those agencies participating on
a proportionate share basis determined by
the amounts deposited and the length of time
they are deposited. Interest is paid quarterly.
The State retains an amount for reasonable
costs of making the investments, not to
exceed one -quarter of one percent of the
earnings.
LIQUIDITY: A liquid asset is one that can be
converted easily and rapidly into cash
without a substantial loss of value. In the
money market, a security is said to be liquid
if the spread between bid and asked prices is
narrow and reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT POOL
(LGIP): The aggregate of all funds from
political subdivisions that are placed in the
custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE: The price at which a
security is trading and could presumably be
purchased or sold.
MASTER REPURCHASE AGREEMENT: A
written contract covering all future
transactions between the parties to
repurchase --reverse repurchase agreements
that establishes each party's rights in the
31
transactions. A master agreement will often
specify, among other things, the right of the
buyer -lender to liquidate the underlying
securities in the vent of default by the seller -
borrower.
MATURITY: The date upon which the
principal or stated value of an investment
becomes due and payable
MONEY MARKET: The market in which
short-term debt instruments (bills,
commercial paper, banders' acceptances,
etc.) are issued and traded.
OFFER: The price asked by a seller of
securities. (When you are buying securities,
you ask for an offer.) See Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and
sales of government and certain other
securities in the open market by the New
York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of
money and credit in the economy. Purchases
inject reserves into the bank system and
stimulate growth of money and credit; sales
have the opposite effect. Open market
operations are the Federal Reserve's most
important and most flexible monetary policy
tool.
PORTFOLIO: Collection of securities held by
an investor.
PRIMARY DEALER: A group of government
securities dealers who submit daily reports of
market activity an depositions and monthly
financial statements to the Federal Reserve
Bank of New York and are subject to its
informal oversight. Primary dealers include
Securities and Exchange Commission (SEC) -
registered securities broker -dealers, banks
and a few unregulated firms.
RATE OF RETURN: The yield obtainable on a
security based on its purchase price or its
current market price. This may be the
amortized yield to maturity on a bond the
current income return.
REPURCHASE AGREEMENT (RP OR REPO):
A repurchase agreement is a short-term
investment transaction. Banks buy
temporarily idle funds from a customer by
selling U.S. Government or other securities
with a contractual agreement to repurchase
the same securities on a future date.
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.
Some banks will execute repurchase
agreements for a minimum of $100,000 to
$500,000, but most banks have a minimum
of $1,000,000.
REVERSE REPURCHASE AGREEMENTS - A
reverse repurchase agreement is the opposite
of a repurchase agreement. The City loans a
security to a bank in exchange for cash. The
City agrees to pay off the loan with interest
on a future date.
SAFEKEEPING: A service to customers
rendered by banks for a fee whereby
securities and valuables of all types and
descriptions are held in the bank's vaults for
protection.
SECONDARY MARKET: A market made for
the purchase and sale of outstanding issues
following the initial distribution.
32
SECURITIES & EXCHANGE COMMISSION:
Agency created by Congress to protect
investors in securities transactions by
administering securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital
Rule.
STRUCTURED NOTES: Notes issued by
Government Sponsored Enterprises (FHLB,
FNMAS, SLMA, etc.) And Corporations
which have imbedded options (e.g., call
features, step-up coupons, floating rate
coupons, derivative -based returns) into their
debt structure, Their market performance is
impacted by the fluctuation of interest rates,
the volatility of the imbedded options and
shifts in the Shape of the yield curve.
TREASURY BILLS: Issued weekly with
maturity dates up to one year. They are
issued and traded on a discount basis with
interest figured on a 360-day basis, actual
number of days. They are issued in amounts
of $10,000 and up, in multiples of $5,000.
They are a highly liquid security.
TREASURY BONDS: Long-term coupon -
bearing U.S. Treasury securities issued as
direct obligations of the U.S. Government
and having initial maturities of more than 10
years.
TREASURY NOTES: Medium -term coupon -
bearing U.S. Treasury securities issued as
direct obligations of the U.S. Government
and having initial maturities from two to 10
years.
UNIFORM NET CAPITAL RULE: Securities
and Exchange Commission requirement that
member firms as well as nonmember broker
dealers in securities maintain a maximum
ratio of indebtedness to liquid capital of 15
to 1; also called net capital rule and net
capital ratio.
Indebtedness covers all money owed to a
firm, including margin loans and
commitments to purchase securities, one
reason new public issues are spread among
members of underwriting syndicates. Liquid
capital includes cash and assets easily
converted into cash.
UNIFORM PRUDENT INVESTOR ACT: The
State of California has adopted this Act. The
Act contains the following sections: duty of
care, diversification, review of assets, costs,
compliance determinations, delegation of
investments, terms of prudent investor rule,
and application.
YIELD: The rate of annual income return on
an investment, expressed as a percentage.
(a) INCOME YIELD is obtained by dividing the
current dollar income by the current market
price for the security. (b) NET YIELD or
YIELD TO MATURITY is the current income
yield minus any premium above par of plus
any discount from par in purchase price, with
the adjustment spread over the period from
the date of purchase to the date of maturity
of the bond.
33
U �
`y OF TNti
INVESTMENT ADVISORY BOARD MEETING: April 10, 1996
Informational Item: A
ITEM TITLE
Information regarding
Primary Dealers
ISSUE AND DISCUSSION:
The following item was discussed at the last meeting. The information on primary
dealers was taken from the Federal Reserve Bank of New York web -site. The actual
list of primary dealers was unavailable at the time of mailing and will be distributed at
the meeting.
Approved for submission to the Investment Advisory Board:
>hn M. Falcone
nance Director
FRBNY Fedpoints 2: Primary Dealers Page 1
G. p;
tt
r
r, x
a:
Fedpoint 2: Primary Dealers
• Primary dealers are banks and securities brokerages that trade in U.S. Government securities with the Federal Reserve
System.
. As of December 1995, there were 37 primary dealers.
• Primary dealers' trading volumes in U.S. Government securities averaged about $200 billion per day as of December 1995.
Primary dealers are banks and securities broker -dealers that trade in U.S. Government securities with the Federal Reserve. Bank of
New York. The New York Fed's open market desk, on behalf of the Federal Reserve System, engages in the trades in order to
implement monetary policy.. The purchase of Government securities in the secondary market by the Open Market Desk adds
reserves to the banking system; the sale of securities drains reserves.
The primary dealer system was established by the New York Fed in 1960 and began with 18 primary dealers. By 1988, the
number of dealers had grown to a peak of 46. In 1992, the number of dealers declined to 38, where it stood until it dropped to 37
in mid-1995. One explanation for the decreasing number of dealers is consolidation, as Government securities trading firms have
merged or refocused their core lines of business.
Amended Procedures for Primary Dealers
In January 1992, in order to address certain shortcomings that had arisen in the primary dealer arrangements, the Federal Reserve
amended its procedures for selecting primary dealers. One problem was the widespread misconception that the Fed regulated the
primary dealer firms. Also, the primary dealer designation by the Fed had come to be viewed as giving special status to the firms.
Responding to these issues, the New York Fed changed its criteria for administering its counterparty (primary dealer)
relationships. One change eliminated a standard for trading volume with customers. Another disbanded the Bank's dealer
surveillance unit and shifted its focus to market surveillance, reflecting more accurately the nature of its work. This change
reiterated the point that the Bank does not have -- nor did it ever have -- formal regulatory authority over the primary dealers. At
the same time, the Bank strengthened its market -monitoring capability.
The market surveillance unit communicates market developments to an interagency working group consisting of the New York
Fed, the Federal Reserve Board of Governors, the Securities and Exchange Commission, the U.S. Treasury, and the U.S.
Commodity Futures Trading Commission.
The Bank also accelerated its efforts to automate Treasury auctions and open market operations with a view toward increasing the
efficiency of these activities. An automated Treasury auction system was begun in April 1993 and automated open market
operations in 1994.
Becoming a Primary Dealer
A firm wishing to become a primary dealer must notify the New York Fed in writing. The Bank then consults with the applicant's
principal regulator to verify that the firm complies with relevant capital standards. Applicants must be commercial banking
organizations that are subject to official supervision by U.S.'Federal bank supervisors or broker -dealers registered with the
Securities and Exchange Commission. They may be foreign -owned.
According to the New York Fed's current criteria, bank -related primary dealers must be in compliance with Tier I and Tier II
capital standards under the Basle Capital Accord, with at least $100 million of Tier I capital. The Tier I component of a bank's
qualifying capital must represent at least 50% of qualifying total capital and may consist of the following items that are defined as
core capital elements: common stockholders' equity, qualifying noncumulative perpetual preferred stock, and minority interest in
the equity accounts of consolidated subsidiaries. Thus, Tier I capital is normally defined as the sum of core capital elements, less
goodwill and other intangible assets. The Tier II component of a bank's qualifying total capital may consist of the following items
that are defined as supplementary capital elements: allowance for loan and lease losses, perpetual preferred stock and related
surplus, hybrid capital instruments and mandatory convertible debt securities, and term subordinated debt and intermediate term
preferred stock. Registered broker -dealers must have at least $50 million in Tier II capital and total capital in excess of the
regulatory "warning levels" set by the Securities and Exchange Commission and the Treasury, the two regulatory bodies that
oversee non -bank securities trading organizations. These specified minimum levels of capital are designed to help insure that
primary dealers are able to enter into transactions with the Fed in sufficient size to maintain the efficiency of trading desk
operations.
The Fed requires primary dealers to make reasonably good markets in their trading relationships with the Fed's trading desk, to
participate meaningfully in Treasury auctions, and to offer market information and analysis to the Fed's trading desk that are
helpful in the formulation and implementation of monetary policy.
Dealers report weekly on their trading activities, as well as on cash, futures, and financing market positions in Treasury and other
FRBNY Fedpoints 2: Primary Dealers Page 2
securities. Such reports supply additional information important to surveillance efforts. Primary dealers' trading volume averaged
about $200 billion per day as of December 1995.
Open market transactions occur through a competitive bidding process in which the Open Market Desk invites all primary dealers
to submit propositions in response to its announced operation (i.e. purchases, sales, repurchase agreements, or matched -sale
purchase transactions). Dealers submit propositions and receive results electronically. The open market desk uses software
programs to facilitate the selection process.
Review Procedures
The New York Fed continuously reviews the designation of each primary dealer and evaluates its role as a trading partner with the
Bank. Each dealer is expected to be a meaningful business counterparty over time, both in size and in competitiveness of its
propositions. Failure to meet performance standards, for example, failing to effectively communicate market information to the
Fed, will over time, result in the Fed's withdrawal of the primary dealer designation. In addition, if a primary dealer fails to meet
required capital standards, the Fed may suspend its trading relationship until the fmn's capital position is restored to the
appropriate level. Any decision by the Fed will carry no implication as to the creditworthiness, financial strength, or managerial
competence of the firm.
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INVESTMENT ADVISORY BOARD MEETING: April 10, 1996
Informational Item: B
ITEM TITLE
Information regarding the
Government Accounting Standards
Board (GASB).
ISSUE AND DISCUSSION:
The following article was in the March 1996 Journal of Accountancy. The information is
provided for information only.
Approyed for submission to the Investment Advisory Board:
hn M. Falcone
lance Director
GOVERNMENT ACCOUNTING
GASB Will Address
Investment Valuation
The Governmental Accounting
Standards Board has tentatively de-
cided that state and local governments
should report many of their invest-
ments at fair value in their annual fi-
nancial reports. Fair value is the
amount at which a financial instru-
ment could be exchanged in a current
transaction between willing parties,
other than in a forced or liquidation
sale. The proposed statement, Account-
ing and Financial Reporting for Certain
Investments and for External Investment
Pools, was issued in February.
The GASB said the reporting re-
quirement also would apply to gov-
ernment investment pools unless they
operated similarly to money mutual
funds, 'in which case they could retain
cost -based accounting.
The proposed statement would es-
tablish standards for most government
entities for investments in
■ Interest -earning investment con-
tracts.
■ External investment pools and
open-end mutual funds.
■ Debt securities.
■ Equity securities, option con-
tracts, stock warrants and stock rights
that have readily determinable fair
values.
"All investment income, including
changes in the fair value of invest-
ments, would be reported in the oper-
ating statement or other statement of
activities, subject to the measurement
focus and basis of accounting of the
fund in which the income is report-
ed," said the GASB. The proposed
statement also would establish mini-
mum standards for the financial state-
ments and disclosures that would be
inade in the sponsor's report concern-
ing those pools, including expanded
disclosure requirements if pool finan-
cial reports were not issued.
Provisions of the proposed state-
iiient would be effective for financial
statements for periods beginning after
June 15, 1997, with earlier application
encouraged. Comments are due by
June 14, 1996. Copies of the state-
ment can be obtained by calling the
GASB at (203) 847-0700, ext. 555.
INVESTMENT ADVISORY BOARD MEETING:
ITEM TITLE
Consideration of Selection of Broker/Dealer
for City of La Quinta Listing of Financial
Institutions - Staff Report to City Council
ISSUE AND DISCUSSION:
April 10, 1996
Information Item
Attached please find the Staff Report that will be presented to the City Council at its April
16, 1996 meeting. The report was originally submitted April 2, 1996. The Council asked
for additional information before it considered Staffs recommendation. The information that
is underlined is the additional information that Staff has provided.
Approved for submission to the Investment Advisory Board:
in M. Falcone
ance Director
April 16, 1996
Consideration of Selection of Broker/Dealer
for City of La Quinta Listing of Financial
Institutions
RECOMMENDATION:
Approve Mr. Ernest Marchowsky of Dean Witter, Newport Beach (Attachment No. 1)
and Mr. Ron Meraz and Mr. Alfredo Sandoval of Merrill Lynch Pierce Fenner & Smith,
Inc. of Indian Wells (Attachment No. 2) be placed as broker/dealers on the Listing of
Financial Institutions for the City of La Quinta.
FISCAL IMPLICATIONS:
The broker/dealer fees are determined on a per -transaction basis and are included in
the cost of the security that is bought and sold. Typically, fees for one (1) year
Treasury securities would average 15 cents per $1,000 dollars, or $1 50 per
$1,000,000 dollars. The total estimated cost per fiscal year should not exceed
$4,000.00.
ISSUE AND DISCUSSION:
The City of La Quinta does not have broker/dealers who may purchase or sell
investments at the direction of the City Treasurer. As a result, the City is unable to
diversify its portfolio.
The City would establish cash accounts with the broker/dealers who would execute
trades on a delivery versus payment with the City's custodian - First Interstate Trust
All purchases or sells would be on a competitive basis.
The following discussion sets forth the steps staff took in order to make its
recommendation:
The attached Broker/Dealer Questionnaire (Attachment No. 3) was sent out to the
firms listed below based upon the following criteria 1) firms that submitted requests
to the City, 2) Investment Advisory Board recommendations and 3) staff
recommendations.
Broker/Dealer Questionnaires Mailed or Delivered:
Bank of California, Los Angeles
Dean Witter, Newport Beach
International Securities, Group, San Diego
Merrill Lynch, Indian Wells
Paine Webber, Indian Wells
Prudential Securities, Indian Wells
Smith Barney, Palm Desert
Wells Fargo Bank, Indian Wells
In addition to reviewing the completed questionnaires, staff also contacted the
National Association of Security Dealers (NASD) and State of California Corporations
Department to disclose disciplinary actions that may have been taken, and reviewed
financial statement information. Staff has also personally met with each of the
broker/dealers being recommended.
The results can be summarized as follows:
► Met requirements
► Did not meet requirements
► Declined to respond
The results are as follows:
Bank of California
Dean Witter
International Securities Group
Merrill Lynch
Paine Webber
Prudential Securities
Smith Barney
Wells Fargo Bank
- Did not meet requirements
- Met requirements
- Did not meet requirements
- Met requirements
- Declined to respond
- Declined to respond
- Declined to respond
- Declined to respond
The goal of staff was to have three broker/dealers to obtain quotes from when trading
investments, however only two have met the requirements set forth in the
broker/dealer questionnaire. Staff will continue to seek a third broker/dealer in the
future. However, we do not want to delay the diversification of the investment
portfolio and are not in a position to recommend a third broker/dealer at this time.
The Investment Policy only requires two bids. Staff believes that the additional time
needed to select another broker/dealer would not result in significant savings based
upon the types of investments that will be purchased (e.g., Treasury Bills).
The Corporate Resolutions and Investor Agreement have been reviewed by the City
Attorney and are attached (Attachments No. 1 & 2). In addition to staff's
recommendation, the Investment Advisory Board took action at their March 13, 1996
meeting to recommend these broker/dealers.
FINDINGS AND ALTERNATIVES:
The alternatives available are:
1 . Approve the selection of broker/dealers as recommended by the Investment
Advisory Board;
2. Deny the approval of the broker/dealer.
bhn M. Falcon6r
inance Director
Attachments:
1. Ernest Marchowski of Dean Witter, Newport Beach - Corporate Trading
Authorization Agreement.
2. Mr. Ron Meraz and Mr. Alfredo Sandoval of Merrill Lynch Pierce Fenner & Smith,
Inc. Indian Wells, Corporate Trading Authorization Agreement.
3. Broker/Dealer Questionnaire.