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1999 04 14 IAB MinutesINVESTMENT ADVISORY BOARD Meeting April 14, 1999 I CALL TO ORDER Regular meeting of the La Quinta Investment Advisory Board was called to order at the hour of 5:30 P.M. by Chairperson Irwin, followed by the Pledge of Allegiance. PRESENT: Board Members Brown, Bulgrin, Lewis, Mahfoud, Moulin, and Chairperson Irwin ABSENT: Board Member Osborne OTHERS PRESENT: John Falconer, Finance Director and Debbie DeRenard, Secretary II PUBLIC COMMENT - None III CONFIRMATION OF AGENDA - Confirmed IV CONSENT CALENDAR A. Approval of Minutes of Meeting of March 10, 1999 for the Investment Advisory Board. MOTION - It was moved by Board Members Lewis/Brown to approve the minutes. Motion carried unanimously. V BUSINESS SESSION A. Transmittal of Treasury Report for February 1999 MOTION - It was moved by Board Members Lewis/Brown to approve, receive and file the Treasurer's Report for February 28, 1999. Motion carried unanimously. B. Fiscal Year 1999/00 Investment Policy The Board reviewed the attached Investment Policy (Attachment No. 1) and changes/additions/deletions are shown in amended form. 1 Investment Advisory Board Minutes April 14, 1999 MOTION - It was moved by Board Members Lewis/Brown to continue the 1999/00 Investment Policy. Motion carried unanimously. VI CORRESPONDENCE AND WRITTEN MATERIAL A. Month End Cash Report - March 1999 Noted and Filed. B. Pooled Money Investment Board Reports - January 1999 Noted and Filed. VII BOARD MEMBER ITEMS Chairman Irwin advised that at this time he would like the Board to review the Ordinance that governs the Board and make any comments. In response to Board Member Lewis, Mr. Falconer clarified that the items in amended form have been changed since the last Investment Policy was approved. Board Member Lewis advised that the Board does not review the Investment Policy and Procedures on a monthly basis. They are reviewed on an annual basis. Chairman Irwin advised that during the last few months portions of the policy have been reviewed during each meeting. Board Member Moulin advised that he doesn't feel that the description in the Ordinance describes what the Board really does. He would like to recommend that the Board make the description more in line with the functions of the Board. In response to Chairman Irwin, Board Member Moulin advised that he reviewed the functions of the other Commissions and Boards advising that some have a fairly extensive description. He advised that with regards to Chapter 2.70, Section 2.70.030, Items 2 and 3 they could be worded differently and Item No. 1 is a misrepresentation of the functions of the Board and need to be changed. 2 Investment Advisory Board Minutes April 14, 1999 If the City Council really believes that the Board is completing the tasks indicated in Item 1 then they are misinformed. Board Member Lewis advised that he has been on the Board since its creation and the Board has never reviewed account statements for verifications. The Board has reviewed Treasurers Reports, policies, audit reports, etc., but the Board has never reviewed actual account statements. The Board monitors compliance with the Investment Policy and addresses the Investment Policy at each meeting, but the Board does not review the Investment Policy at each meeting. Board Member Bulgrin advised that he agrees with Board Member Lewis adding that the Board does not review account statements and verifications and this needs to be clarified. Board Member Mahfoud concurred. Board Member Brown questioned when the changes on the Ordinance went into effect. Board Member Lewis advised that he remembers that the City Council reviewed the Boards and Commissions Ordinances and changed them so that the wording was consistent with each Board and Commission. Chairman Irwin advised that there is some history behind the language in the Ordinance. The language "review account statements and verifications" are somewhat of a compromise that was developed by the Board. The original language had more emphasis on the attest function and the Board realized that they were not in a position to perform an attest function to the monthly or annual statements. If the Board decides that they do not want to perform item one of the Ordinance then the Board doesn't have any reason to be in existence. Council placed each Board Member for the purpose to providing the services listed in the Ordinance. One of the changes that was made several years ago was to limit the attest function to investment activities. Board Member Lewis advised that Chairman Irwin is describing what the Boards function is and he advised that he is interpreting account statements as the statements that are received from Wells Fargo, Smith Barney, etc. 3 Investment Advisory Board Minutes April 14, 1999 Chairman Irwin advised that he is not referring to those statements and at the time the wording was changed on the Ordinance - account statements meant the treasurer's report and the year end annual report and it specifically did not include Wells Fargo or Bank of America Bank statements. At the time the language was changed the language was agreed upon by both the Board and Staff. Board Member Bulgrin advised that the problem exists in the financial community where the language currently used means something different from how it is interpreted. Chairman Irwin recommended changing the policy and leaving the Ordinance as it stands. Board Member Bulgrin questioned how you would place this in the policy. Mr. Falconer advised that a definition of an account statement could be added in the glossary. Board Member Moulin questioned why the Board should continue using the wording "account statement" if that is not what is really meant. He further advised that when he suggested the language "review the monthly report of the treasurer to determine it's compliance with the Investment Policy." This is something that the Board does review. He advised that the words "ensure accurate reporting" is defined in the dictionary as "guarantee" and the Board does not guarantee, the Board relies upon the Treasurer to give the Board an accurate report which shows compliance with the Investment Policy. Chairman Irwin advised that the Ordinance does not suggest an audit or attest. Board Member Bulgrin advised that in the financial community the wording in the Ordinance suggests that the Board performs an audit. Board Member Lewis advised that the Board is ensuring accurate reporting. Chairman Irwin advised that the Board is ensuring accurate reporting as it relates to an investment activity. Board Member Moulin advised that when he considered serving on the Investment Advisory Board he was furnished with a description of the Board Members responsibilities and his interpretation of the description was that the 2 Investment Advisory Board Minutes April 14, 1999 Board Members took turns going to the Finance Directors' office to review the financial statements and verifying the transactions to the account statements. Board Member Brown advised that the Board is the empowering authority and the Policy is developed based upon the Ordinance and it appears it is the Ordinance that needs to have clarification. Chairman Irwin advised that the Board is not in a position to come up with a single recommendation at this time. Board Member Lewis advised that the one problem with including the description in the glossary is that the policy derives its authority from the Ordinance. Chairman Irwin advised that during most Investment Advisory Board meetings the Board will review the Treasurers Report for 30 to 40 minutes. Board Member Moulin advised that reviewing the Treasurers Report is not reviewing accounts. Chairman Irwin advised that a Treasurers Report is an account statement within the meaning of the Ordinance. Board Member Moulin advised that he does not agree and feels that the Board should speak with the City Manager/City Council and find out if there are problems with changing of the wording. Board Member Bulgrin advised that the Board could make a recommendation to change the wording so that it's noted in the records and the clarification can be carried forward. Board Member Lewis advised that there could be a point in time where the entire Board is replaced at one time and new members would need clarification. Board Member Moulin advised that he feels the City Council would be open to any changes that are suggested. Chairman Irwin advised that he has concerns that if the Board tries to change the language in the Ordinance the Board is open to the possibility of the Council questioning why the City needs an Investment Advisory Board. Investment Advisory Board Minutes April 14, 1999 Board Member Brown advised that the Board is only asking for clarification. Board Member Lewis advised that there is nothing wrong with asking the City Council to change the wording of the Ordinance. Chairman Irwin advised that the Treasurers Report changes month to month and the title may change or the Board may decide to review other reports that, are generated. Board Member Lewis advised that it is not stated that the Board can only do what is described in the Ordinance. In response to Board Member Moulin, Chairman Irwin advised that he wished that the word "verification" was not in the Ordinance. Board Member Moulin advised that as Board Member Brown pointed out, the Council seems to make changes to the ordinance rather easily - so why not get it right. Discussion continued with Chairman Irwin requesting that each interested Board Member to submit Board Member functions to Staff. Staff can take the submissions and submit them to the Board before the next meeting. In response to Mr. Falconer, Chairman Irwin advised that the deadline for submission of new language for Board Member functions is April 24th, 1999. VIII ADJOURNMENT MOTION - It was moved by Board Members Lewis/Bulgrin to adjourn the meeting at 7:50 P.M. Motion carried unanimously. Submitted by: Debbie DeRenard Finance Secretary C1 ATTACHMENT NO. 1 CITY OF LA QUINTA Investment Policy Table of Contents V Prudence VI Delegation of Authority VII Conflict of Interest Vill Authorized Financial Dealers and Institutions ► Broker/Dealers ► Financial Institutions IX Authorized Investments and Diversification L r r t910., X Investment Pools xi UHF Safekeeping and Custody }}} 41 Interest Earning Distribution Policy C1 Internal Controls ar +�' 1nt nil Auditor Benchmark V Reporting Standards XV1 ...................... ...................... ..................... Investment of Bond Proceeds ...................... I.I Investment Advisory Board -City of La Quinta xxW 1 Investment Policy Adoption 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 maximum security while meeting daily cash flow demands and the highest investment return 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. �t'�r tea c+n�tant of 'aafy� qu�ty ndedr t Otte w:ll edeaor ti. ranta�n a dirrfed porfolit by alloatn as+ats' betroen .efferent tpe 1n estmar to v �thtr po V- [ m t tons. 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 2 The City of La Quinta Investment Policy shall require that each individual investment have a maximum maturity of two years unless specific approval is authorized by the City Council. In addition, the City's investment in the State Local Agency Investment Fund (LAIF) is allowable as long as the average maturity does not exceed two years, unless specific approval is authorized by the City Council. The City's investment in Money Market Mutual funds is allowable as long as the average maturity does not exceed 60 days. The City of La Quinta Investment Policy 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 3 Policies. Reading this summary does not constitute a complete review which can only be accomplished by reviewing all the pages. City of La Quinta Statement of Investment Policy July 1, 1999 through June 30, 2000 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 as the primary objective. while meeting daily cash flow demands with the highest investment return. 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 Projects ► Debt Service ► Internal Service ► Trust and Agency ► Any new fund types and fund(s) that may be created. 5 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 sufficient liquid funds are available to meet anticipated demands. Furthermore since all possible cash demands cannot be anticipated the portfolio should ke dIverffied and ''consist of securities with active secondary or resale markets. A 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. d 4. Dir�ref+ ,- �'t� itMn t+� c►nrntaf saf iquidt end yi+[, tle City uuill etdec►r td rniin, a dfi+d`�►frtet ets aet+� dfeed#pes' a� inrwetmnsn prttitns. 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 7 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. 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 which 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 Investment Policy 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. 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 hav acurt insured by the Federal Deposit Insurance Corporation CF0I1,' B. Collateral - The amount of City of La Quinta deposits or investments not insured by the FdICof. the federal government shall be 1 10% collateralized by securities' or 150% mortgages' market values of that amount of invested funds plus unpaid interest earnings. must be collateralized - ed by an agency of the federal The City shall not invest in excess of the FDIC insured arctnt in banking institutions which do not disclose to the city a 9 current listing of securities pledged for collateral ization in public monies. IX AUTHORIZED NVESTMENTS AND DIVERSIMATleN AU H. REl The City Treasurer will be permitted to invest in the investments listed in the Appendix A. .............. I. STATE OF CALIFORNIA AND CITY OF LA QUINTA LIMITATIONS As provided in Sections 16429.1, 53601, 53601.1, and 53649 of the Government Code, the State of California limits the investment vehicles available to local agencies as summarized in the following paragraphs. Section 53601, as now amended, provides that unless Section 53601 specifies a limitation on an investment's maturity, no investments with maturities exceeding five years shall be made. The City of La Quinta Investment Policy has specified that no investment may exceed two years. U»S. +cur�r�eressuir eour�tie baed a to prnnd c�pal a intent b. tie fuii feit end cre+t f the . Government. +overmm�t itta Asition' ��MA is suchAa gercy. Th+ Cit�r a�f L Qu nta Ir uestr r� rat I 0c1 has. a lirriitatic�n of 76 e portfolio with 10 Bankers' Acceptances - As authorized in Government Code Section 53601 (f), 40% of the prt►lio may be invested in Bankers' Acceptances, although no more than 30% of the portfolio may be invested in Bankers' Acceptances with any one commercial bank. Additionally, the maturity period cannot exceed 270 days; however, Bankers' Acceptances are seldom marketed with maturities in excess of 180 days. The City of La Quinta Investment Policy does not allow investment in Bankers' Acceptances. 11 Negotiable Certificates of Deposit - As authorized in Government Code Section 53601(h), 30% maybe invested in negotiable certificates of deposit issued by commercial banks and savings and loan associations. The City of La Quinta Investment Policy does not allow investment in Negotiable Certificates of Deposit. Repurchase and Reverse Repurchase Agreements - As authorized in Government Code Section 53601(i), these investment vehicles are agreements between the local agency and seller for the purchase of government securities to be resold at a specific date and for a specific amount. Repurchase agreements are generally used for short term investments varying from one day to two weeks. There is no legal limitation on the amount of the repurchase agreement. However, the maturity period cannot exceed one year. The market value of securities underlying a repurchase agreement shall a at least 102% of the funds invested and shall be valued at least quarterly. The City of La Quinta Investment Policy does not allow investment in Repurchase Agreements. The term "reverse repurchase agreement" means the sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase such securities on or before a specific date and for a specific amount. As provided in Government Code Section 53635, reverse repurchase agreements require the prior approval of the City Council. The City of La Quinta Investment Policy does not allow investment in Reverse Repurchase Agreements. Corporate Notes - As authorized in Government Code Section 53601 (j), local agencies may invest in corporate notes for a maximum period of five years in an amount not to exceed 30% of the agency's portfolio. The notes must be issued by corporations organized and operating in the United States or by depository institutions licensed by the United States or any other state and operating in the United States. The City of La Quinta Investment Policy does not allow corporate notes. 12 illicnl�Iy raoie ren�tuth`�r rartra t� ayst n+t asua the U.. Treasury. The City of La tu�i limits the percentage ofory market mutual funds to 20% of the o tf l[+a. Thee "It rove tent in` Money l rl et Mutual funds is allowable as lungs t e rliatu`)ty of their portfolio sloes not exceed 60 days. Mortgage -Backed Securities - As authorized in Government code Section 53601(n), local agencies may invest in mortgage -backed securities such as mortgage pass -through securities and collateralized mortgage obligations for a maximum period of five years in an amount not to exceed 20% of the agency's portfolio. Securities eligible for investment shall have a "A" or higher rating. The City of La Quinta Investment Policy does not allow investment in Mortgage - Backed Securities. Financial Futures and Financial Option Contracts - As authorized in Government Code Section 53601.1, local agencies may invest in financial futures or option contracts in any of the above investment categories subject to the same overall portfolio limitations. The City of La Quinta Investment Policy does not allow investments in financial futures and financial option contracts. Certificates of Deposit - As authorized in Government Code Section 53649, Certificates of Deposit are fixed term investments which are required to be collateralized from 1 10% to 150% depending on the specific security pledged as collateral in accordance with Government Code Section 53652. There are no portfolio limits on the amount or maturity for this investment vehicle. *IMa Th+ety "Cesur- miry rei c)Istre[iatcp o depa�st that is 2. herutt riots ir[ e�+, cllatril s+ourils pr. 'l �+tgessrl�t �rslu of that 'amount of invested' fu pniIN ntt arrg The City of La Quinta Investment Policy limits the percentage of Certificates of Deposit to 60% of tl pprtfli. Sweep Accounts - As authorized by the City Council, a U.S. Treasury Money 13 Market Sweep Account with a $50,000 target balance may be maintained in conjunction with the checking account. T ityf ttairatusnewt Polk does not all 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 Investment Policy has arr eli 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 i2-@ $30 million. In addition, LAIF will provide quarterly market value information to the City of La Quinta Investment Policy. 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 investments with any other Investment Pool - County Pools or Third Party Pools. .. .. ... - - - - • I • • • . - - - - - - • . • •1•J 1 l•7 l 1�7 � � l� l+1 � �1 1�1� 1 �l �l 1 l�i� � ti � � l ��7 l �'t� 1 � l� � lei S� 11 � l�i� �!1't� � l�i�J l �•� 14 X-H SAFEKEEPING AND CUSTODY All security transactions of the City of La Quinta Investment Policy 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. Deposits and withdrawals of money market mutual funds and LAIF shall be made directly to the entity and not to an investment advisor..,..,,r►1er' car tales. Money market mutual funds and LAIF shall also operate on a DVP basis to be considered for investment. 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. 11M MATURITIES - - - A : .. - . .: ..... INTERNAL C NTR LSIgr AN. 15 The City Treasurer shall establish a system of internal controls to accomplish the following objectives: No. 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. 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 deleaation 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 shall be supported by written communications and approved by the appropriate person. Written 16 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. In addition to The System of Internal Controls developed by the City, the eontro's sha" be reviewed annually by the independent . shad b+ rei�wd "`! 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 Investment Policy will use the six month U.S. Treasury Bill as a benchmark when measuring the performance of the investment portfolio. REPORTING STANDARDS SB564 section 3 requires a quarterly report to the Legislative Body of Investment activities. The City of La Quinta Investment Policy 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. 17 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 LAIF 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. ` VMS 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. Investable 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 the City's position to continue maximization of yield and to rebate excess earnings, if necessary. )MI1. E INVESTMENT ADVISORY BOARD - CITY OF LA QUINTA The appendices include City of La Quinta Ordinance 2.70 entitled Investment Advisory Board Provisions. ' X 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. im N z O Q H J G Z Q H z LU N W Z G LU N 2 O F- Q D E m E m L.. O a 7 N c d U) CD O N a c w a E m 7 w � N N U)N c ° 0_ 0 '0 -0-0 c m = U 3 � d n � E N O () m F- rn •� C U C O N >. O) 5 E `p O "' N O -0 N MN C N U) o (L m w°U C� c c Li o _U U 0 Q C = O N W N U U O LL � LL v m a) > U c aci 0) ° c Ca Ca 7 E am) %+ mg 22 a1°i N (m) T N of )i N am) T N v o Cl) T N o (O O \° � L (! 4 U c� U m QU m a) U C x N a) H . N C y O 7 a) ~O ) C ` a O N L N O N LL 7 and O a)a CL °-� 'C H U d 00 4) O'C O X mp_ C) N> ca N O °m 0ncw E o o� c m m a� C O (ca o O C 0 � cw O O O O M m .�,+->- O m O C 3 U O O `° m �2 c O O O O O OCS LL p O O O O O w a a a a a° d a° LL m 7 U U O O yyO-- L O rE O O N O m 7 O r N L\ 3 O yyO-- 16 N L\ 7 O E X O a O a O a O a O O y a'M 7 O a O O N aN 7 Q z ° R co 0 (O 0 � 0 r o C M h o M o C �. 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N >' O m• M c C 7 N C -° 7 '° C w 'C m Zc O a? a m _> a) m ° N O 7 m Lc > umi•� m 0 ° U � w a) w-Eo 3C m U N m m v •C •� 3� -° m a)(D0 �'m �o o °W mm m O) O Nm_ L N7 U °y a) a)U Y O. U fo_d N - 7 ° m-0 o C E-'O L oa N m l a) ink_ a y m m C m E m w N 'O) 7 m N 7 U Vi U O y E-0 O N v1 (0 7 N p v1 (>a 7 U C C Z .O +_ a) C m a- w> 'NO a > C 7 m E L O O ° a) 7 0 - w a s o m V5 O. °- a ((((ppppc3�n 3o p mE .om w p a) C_ N C a j m E N° a U o m cn �•E m Mn QJ E U c m �H O m E H N Q N U 2 IL N M '7 LO (O m N av )(D nvc10 Ca N m 76 pOCE CD 0 � L w U) ul O a) N�°aa)) >C(aL) C 2 N C OCR N O m a)._ o c-0._ o cw (D -01EQ) nU)0_E0 p U L o > .- omom a) a> --0 +LPL 7 c C N aLC`U) 7 7 CDQ)+- N�Nm 70 c .0 U aNL a—N) >, o m Mc)'m ao ECDU) 7 > > 7 X� 7ac M N m m�(n N E L ° C c m N 1E ° 7 U N m N- Eco U) O o- m a) E ->c� Lc�c m N .- m U ° N N N N m m>ECU H.�»�c 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. .. OW .. �04 2.70.020 Board meetings and compensation. Board Members vv*" be re8rnbursed for meeting and related expenses at an arnount 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 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, ( r'r) monitor compliance with existing Investment Policy and procedures; and (3-iir) review and make recommendations concerning Investment Policy and procedures, 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. 21 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) 22 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) 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) 23 LISTING OF APPROVED FINANCIAL INSTITUTIONS 1. Banking Services - Wells Fargo Bank, Goer amen, Service is .ntr[o, aifr�ia 2. Custodian Services - Bank of New York{ Las Angeles, California 3. Deferred Compensation - International City/County Management Association Retirement Corporation 4. Broker/Dealer Services - Merrill Lynch, Indian Wells, CA ltorgart Sanla Dean Witter, Newport Say F nee o, + aii ornia, Si.iI.rr or (Smith Barney, Newport Beach, CA 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 - US Bank 1991 RDA Project Area 1 - US Bank 1992 RDA Project Area 2 - US Bank 1994 RDA Project Area 1 - US Bank 1995 RDA Project Area 1 & 2 - US Bank Assessment Districts - US Bank No Changes to this listing may be made without City Council approval. m BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION 1. Name of Firm: 2. Address: 3. 3 5. Telephone: ( ) ( ) Broker's Representative to the City (attach resume): Name: Title: Telephone: ( ) 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 % Repos % BA's % Reverse Repos % Commercial Paper % CMO's % CD's % Derivatives % Mutual Funds % Stocks/Equities % Agencies (specify): % Other (specify): 25 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 26 Do you have any current, or pending complaints that are unreported to the NASD? Yes No If yes, please provide action taken 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. M[:0 Is your firm a member in the S.I.P.C. insurance program. Yes If yes, explain primary and excess coverage and carriers. IM 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? 27 19. Does your firm offer investment training to your clients? Yes No 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' 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 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? W 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)? 30 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. 31 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? KK 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 and City Council action City Attorney Adopt formal Investment Policy City Council Review Financial Institutions & Select Investments City Treasurer Approve investments City Manager or Assistant City Manager Execute investment transactions City Treasurer Confirm wires, if applicable City Manager or Accounting Manager Record investment transactions in City's accounting records Accounting Manager 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 33 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 ardor ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft o "e acct irttt r 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): A time deposits with a speifi m tu7.fty 66� by crt�f�bat+a. Lareµdnaxninatio CC` are p►) A.: 10-�g atia la.a bank 34 Id - . : : LIS Pm .: :. i 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 IISOUT S BITI'S: I+�rtes bear)r� goy rrarlet )ntru�er"ats that ire 1ss� d dis c ter d r8de ed et rnatu ity firf dace ulueeg. j U.S. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. 35 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- +—FNMAs (Federal National Mortgage Association) - Used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those guaranteed by the Veterans Administration. 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- 36 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. 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 $30,000,000 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 37 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 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 all cash and securities under the direction of the City Treasurer, including Bond Proceeds. 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. the w f t Is tet , V. (h e'a a eO at+ �dM. 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. KT:3 REVERSE REPURCHASE AGREEMENTS (RPor FePQ) - A hlcer f seourt)ee(( these date. Tie security "buyer" in ffeet le ids the "seli+,r" Mey fcr teerid of the 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. 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. SURPLUS FUNDS: Section 53601 of the California Government Code defines surplus funds as any money not required for immediate necessities of the local agency. The City has defined immediate necessities to be payment due within one week. TREASURY BILLS: 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 39 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. Investment -Policy Last Revised ,N