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HomeMy WebLinkAboutPR 14977: INVESTMENT POLICIES FOR 2008-2009 FISCAL YEARMemo>"andum City of Port Arth ur, Texas Finance Departfnent To: Steve Fitzgibbons, City Mana From: Rebecca Underhill, Asst. City a er -1Ydministration Date: November 4, 2008 ~~ Subject: Proposed Resolution 14977 I recommend that the City Council approve PR 14977 affirming the,investment policies of the City of Port Arthur for the 2008-2009 fiscal year. P. R. NO. 14977 jja/ 11/4/08 RESOLUTION NO. A RESOLUTION AFFIRMING THE INVESTMENT POLICIES OF THE CITY OF PORT ARTHUR FOR THE 200$-2009 FISCAL YEAR WHEREAS, Chapter 2256 of the Government Code, V.T.C.A., commonly known as "The Public Funds Investment Act", requires that the City adopt an investment policy by rule, order, ordinance or resolution; and WHEREAS, The Public Funds Investment Act requires the chief financial officer and the investment officer of the City to attend investment training; and WHEREAS, the City of Port Arthur approves of the investment training courses sponsored by the independent sources listed in the Investment Policy; and WHEREAS, the Asst. City Manager- Administration (chief financial officer) and the Assistant Finance Director (investment officer) of the City have attended an investment training course sponsored by an independent source within the last two years as required by the Public Funds Investment Act; and WHEREAS, the attached investment policy complies with the Public Funds Investment Act; as amended, and authorizes the investment of City funds in safe and prudent investments. NOW THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PORT ARTHUR: THAT, the City of Port Arthur has complied with the requirements of the Public Funds Investment Act, and the Investment Policy, as amended, attached hereto as "Exhibit A" is hereby adopted as the investment policy of the City effective this date. THAT, a copy of the caption of this Resolution shall be spread upon the Minutes of the City Council. READ, ADOPTED, AND APPROVED, this- day of November, 2008, AD, at a Regular Meeting of the City Council of the City of Port Arthur, Texas by the following vote: AYES: Mayor: NOES: Mayor ATTEST: Terri Hanks, Acting City Secretary APPROVED AS TO FORM: Mark Sokolow, City Attorney APPROVED FOR ADMINISTRATION: ve Fitzgibbons~Citny Manage/r (~~~-C Rebecca Underhill, Finance Director Z:\FinanceViesolutionsUnvesfinen[POlicy.doc Exhibit "A" INVESTMENT POLICY I. POLICY It is the policy of the City of Port Arthur that after allowing for the anticipated cash flow requirements of the City and giving due consideration to the safety and risk of investment, all available funds shall be invested in conformance with these legal and administrative guidelines, seeking to optimize interest earnings to the maximum extent possible. Effective cash management is recognized as essential to good fiscal management. Investment interest is a' source of revenue to City funds. The City's investment portfolio shall be designed and managed in a manner designed to maximize this revenue source, to be responsive to public trust, and to be in compliance with legal requirements and limitations. Investments shall be made with the primary objectives of: < Safety and preservation of principal , Maintenance of sufficient liquidity to meet operating needs Public trust from prudent investment activities Optimization of interest earnings on the portfolio II. PURPOSE The purpose of this investment policy is to comply with Chapter 2256 of the Government Code ("Public Funds Investment Act"), which requires each City to adopt a written investment policy regarding the investment of its funds and funds under its control. The Investment Policy addresses the methods, procedures and practices that must be exercised to ensure effective and judicious fiscal management of the City's funds and the funds of the Port Arthur Section 4A Economic Development Council (PAEDC). III. SCOPE. This investment Policy shall govern the investment of all financial assets of the City. These funds are accounted for in the City's Comprehensive Annual Financial Report (CAFR) and include: • General Fund • Special Revenue Funds • Capital Projects Funds • Enterprise Funds • Internal Service Funds • Economic Development Corporation • Trust and Agency Funds, to the extent not required by law or existing contract to be kept segregated and managed separately • Debt Service Funds, including reserves and sinking. funds, to the extent not required. by law or -existing contract to be kept segregated and managed sepaaately • Any new fund created by the City, unless specifically exempted from this Policy by the City Council (Council) or by law. The City will consolidate cash balances from all funds and the Port Arthur Section 4A Economic Development Corporation to maximize investment earnings. Investment income will b'e allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. This Investment Policy shall apply to all transactions involving the financial assets and related activity for all the foregoing funds. However, tfiis,policy does not apply to the assets administered for the benefit of the city employees by outside agencies under deferred compensation programs. IV. INVESTMENT STRATEGY The City of Port Arthur maintains portfolios that utilize two specific investment strategy considerations designed to address the unique characteristics of the fund groups represented in the portfolios: A. Investment strategies for operating -funds and co-mingled pools containing operating funds have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure that will experience minimal volatility during economic cycles. This may be accomplished by purchasing high quality; short to medium term securities that will complement each other in a laddered or barbell maturity structure. The dollar weighted average maturity of 365 days or less will be calculated using the stated final maturity date of each security. B. Investment strategies for special projects or special purpose fund portfolios will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays.. The stated final maturity dates of securities held should not exceed the estimated project completion date or the necessary progress payments .for construction projects. . V. INVESTMENT OBJECTIVES The City shall manage and invesYits cash with four primazy objectives, listed in order of priority: safety, liquidity, public trust, and yield expressed as optimization of interest earnings. The safety.of the principal invested always remains the primazy,objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. The -City shall maintain a comprehensive cash management program, which includes collection of account receivables, vendor payments in accordance with invoice terms, and prudent investment of available cash. Cash management is defined as the process of managing monies in order to insure maximum cash , availability and maximum earnings on short-teen investment of idle cash. Safety 1PFIA 2256.005(b)(2)T Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit and interest rate risk. ^ Credit Risk and Concentration of credit risk -The City will minimize credit risk, the risk of loss due.to the failure of the issuer or backer of the investment, by: • Limiting investments to the safest type of investments. • Diversifying the investment portfolio so that potential losses on individual issueis will be minimized. ^ Interest Rate Risk -the City will minimize the risk that the interest earnings and the matket value of investments in the portfolio will fall due to changes in general interest rates, by: • Investing operating funds primarily in shorter-term securities, money market mutual funds, or local government investment pools functioning as money market mutual funds. • Diversifying maturities and staggering purchase dates to minimize the impact of market movements over time. Liquidity IPFIA 2256.005(6)(2)1 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 investments mature concurrent with cash needs'to meet anticipated demands. Because all possible cash demands cannot be anticipated; a portion of the portfolio will be invested in shares of money market mutual funds or local government investment pools that offer same-day liquidity. In addition, a portion of-the portfolio will consist of securities with active secondary or resale markets. Public Trust All participants in the City's investment process shall seek.to act responsibly as custodians of the public trust. Investment officers shall avoid any transaction that might impair public confidence in the City's. ability to govern effectively. " Yield (Optimization of Interest Earnings) 1PFIA 2256.005(6)(3)1 The investment portfolio shall be designed with the objective of attaining a market rate of :return throughout budgetazy and economic cycles, taking into- account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compazed to the safety and liquidity- objectives described above. VI. RESPONSIBILITY AND CONTROL Delegation of Authority 1PFIA 2256.005(nl In accordance with the Public Funds Investment Act, the Council designates the Finance Director and the Assistant Finance Director as the City's Investment Officers. An Investment Officer is authorized to execute investment transactions on behalf of the City. No person may engage in an im~estment transaction or the management of City funds except as provided under the terms of this Investment Policy as approved by the Council. The investment authority granted to the im~esting officers is effective until rescinded by the Council. puality and Capability of Investment Management IPFIA 2256.005(b)(3)1 The City shall provide periodic training in investments for the designated investment officers and other investment personnel through courses and seminars offered by professional organizations, associations, and other independent sources in order to insure the quality and capability of investment management in compliance with the Public Funds Investment Act. Training Requirement (PFIA 2256.008) In accordance with the Public Funds Investment Act, designated Investment Officers shall attend an investment training session no less often than once every two years commencing September I, 1997 and shall receive not less than 10 hours of instruction relating to investment responsibilities. A newly appointed Investment Officer must attend a training session of at least 10 hours of instruction within twelve months of the date the officer took office or assumed the officer's duties: The investment training session shall be provided by an independent source (Attachment A) approved by the Council (Note: a designated investment committee may approve the independent source of training).- For purposes of this policy, an "independent. source" from which investment training shall be obtained shall include a professional organization, an institution of higher education or any other sponsor other than a business organization with whom the City may engage in an investment transaction. Internal Controls (Best Practice) The Finance Director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected- from lass, thefr, or misuse: The ihtemal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Finance Director shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points: • Control of collusion • Separation of transaction authority from accounting and record keeping • Custodial safekeeping • Avoidance of physical delivery securities • Cleaz delegation of authority to subordinate staff members • Written confirmation for telephone (voice) transactions for investments and wire transfers • Development of a wire transfer agreement with the depository bank or third party custodian Prudence (PFIA 2256.00 The standard of prudence to be applied by the Investment Officer shall be the "prudent investor "rule. This rule states that "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." In determining.whether an Investment Officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration: • The investment of all funds, or funds under the City's. control, over which the officer had responsibility rather than a consideration as to the prudence of a single investment. • Whether the investment decisior was consistent with the written approved investment policy of the City. Indemnification (Best Practice) The Investment Officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific investment's credit risk or market price changes, provided that these deviations are reported immediately and the appropriate action is taken to control adverse developments. Ethics and Conflicts of Interest (PFIA 2256.005(r11 Officers and employees involved in the investment process shall refrain from personal business activity that would conflict with the proper execution and management of the investment program, or that would impair their ability to make impartial decisions. Employees and Investment Officers shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. An Investment Officer of the City who has a personal business relationship with an organization seeking to sell an investment to the City shall file a statement disclosing that personal business interest. An Investment Officer who is related within the second degree by affinity or con"sanguinity to an individual seeking to sell an investment to the City shalt file a statement disclosing that relationship. A statement required under this subsection must be filed with the Texas Ethics Commission and the Council. VII. SUITABLE AND AUTHORIZED INVESTMENTS Portfolio Manaeement The City currently has a "buy and hold" portfolio strategy. Maturity dates are matched with cash flow requirements and investments are purchased with the intent to be held until maturity. However, investments may be liquidated prior to maturity for the following reasons: • An investment with declining credit may be liquidated early to minimize loss of principal. • Cash flow needs of the City require that the investment be liquidated. Investments fPFIA2256.005(b)(41(A)1 City funds governed by this policy will only be invested in the instruments described below, all of which are authorized by Chapter 2256 of the Government Code (Public Funds Investment Act). Investment of City funds in any instrument or security not authorized for investment under the Act is prohibited. The City will not be required to liquidate an investment that becomes unauthorized subsequent to its purchase. I. Authorized 1. Obligations of the United States of America, its agencies and instrumentalities. 2. Certificates of Deposit issued by a bank organized under Texas law, the laws of another state, or federal law, that has its main office or a branch office in Texas, or by a savings and loan association or a savings bank organized under Texas law, the laws of another state, or federal law, that has its main office or a branch office in Texas and that is guaranteed or insured by the Federal Deposit Insurance or its successor or secured by obligations in a manner and amount provided by law for deposits of the City. 3. Fully collateralized direct repurchase agreements with a defined termination date secured by obligations of the United States or its agencies and instrumentalities. These shall be pledged to the City, held in the City's name; and deposited at the time the investment is made with the City or with a third party selected and approved by the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in Texas. A Master Repurchase Agreement must be signed by the bank dealer prior to investment in a repurchase agreement. All repurchase agreement transactions will be on a delivery vs. payment basis. Securities received for repurchase agreements must have a mazket value greater than or equal to 102 percent at the time funds are disbursed. 4. Money Mazket Mutual funds that are 1) registered and regulated by the Securities and Exchange Commission, 2) have a dollar weighted average stated maturity of 90 days or less, 3) rated AAA by at least one nationally recognized rating service, and 4) seek to maintain a net asset value of $1.00 per shaze. 5. Local government investment pools, which 1) meet the requirements of Chapter 2256.016 of the Public Funds Investment Act, 2) are rated no lower than AAA or an equivalent rating by at least one nationally recognized rating service, 3) seek to maintain a $1.00 net asset value, and 4) are authorized by resolution or ordinance by the Council. All prudent measures will be taken to liquidate an investment that is downgraded to less than the required.. minimum rating. (PFIA 2256.021) IL NotAuthorized 1PFIA 2256.009(b)(I-mil Investments including interest-only or principal-only strips of obligations with underlying mortgage- backed security collateral, collateralized mortgage obligations with an inverse floating interest rate or a maturity date of over 10 years are strictly prohibited. VIII. INVESTMENT PARAMETERS Maximum Maturities 1PFIA 2256.005(b)(~(B)1 The longer the maturity o£investments, the greater their price volatility. Therefore, it is the City's policy to concentrate its investment- portfolio in shorter-term securities in order to limit principal risk caused by changes in interest rates. The City attempts to match its investments with anticipated cash flow requirements. The City will not directly invest in securities maturing more than three (3) years from the date of purchase; however, the above described obligations, certificates, or agreements may be collateralized using longer dated investments. Because no secondary market exists for repurchase agreements, the maximum.maturity shall be 120 days except in the case of a flexible repurchase agreement for bond proceeds. The maximum maturity for such an investment shall be determined in accordance with project cash flow projections and the requirements of the governing bond ordinance. The composite portfolio will have a weighted average maturity of 365 davs or less. This dollar-weighted average maturity will.. be calculated using the stated final maturity dates of each security. [PFIA 2256.005(b)(4)(C)] Diversification (PFIA 2256.005(6)(3)1 The City recognizes that investment risks can result from issuer defaults, market price changes or various technical complications leading to temporary ,illiquidity. Risk is controlled through portfolio diversification that shall be achieved by the following general guidelines: • Limiting investments to avoid overconcentration in investments from a specific issuer or business sector (excluding U.S. Treasury securities and certificates of deposit that are fully insured and collateralized in accordance with state and federal' law), • Limiting investment in investmentsthat have higher credit risks (example: commercial paper), • Investing in investments with varying maturities, and • Continuously investing a portion of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds or overnight .repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. The following maximum limits, by instrument, are established for the City's total portfolio: 1. U. S. Treasury Securities ....................100% 2. Agencies and Instrumentalities,.....:.... 85% 3. Certificates of Deposit ...... ~ ...........:...100% 4. Repurchase Agreements ..................... 20% 5. Money Market Mutual Funds ............... 50% 6. Authorized Pools ..............:......:.....:. 50%. IX. SELECTION OF.BANKS AND DEALERS Depositorv At least every five (5) years a Depository shall be selected through the City's banking services procurement process, which shall' include a formal request for proposal (RFP). The selection of a depository will be determined by competitive bid and evaluation of bids will be based on the following selection criteria: • The ability to qualify as a depository for public funds in accordance with state law. • The ability to provide requested information or financial statements for the periods specified. • The ability to meet all requirements in the banking RFP. • Complete response to all required items on the bid form • Lowest net banking service cost, consistent with the ability to provide an appropriate level of service. Authorized Brokers/Dealers (PFIA 2256.02.E The City shall, at least annually,. review, revise, and adopt a list of qualified broker/dealers and financial institutions authorized to engage in securities transactions with the City.-The existing list of qualified broker/dealers is attached hereto as Attachment "B" which is herein adopted. Those firms that request to become qualified brokers/dealers for securities transactions will be supplied a copy of this investment policy. Additional authorized firms may include primary dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C~-1 (Uniform Net Capital Rule), and qualified depositories.. All investment providers, including financial institutions,. banks, money mazket mutual funds, and local government investment pools, must sign a certification acknowledging that the organization has received and reviewed the City's investment policy and that reasonable procedures and controls have been implemented to preclude investment transactions -that are not authorized by the City's policy. [PF/A 2256.005(k-~] Comnetitive Bids (Best Practice) It is the policy of the City to require competitive bidding for all individual security purchases and sales except for: a) transactions with money mazket mutual funds and local government investment pools and b) treasury and agency securities purchased at issue through an approved broker/dealer or financial institution.. The Finance Director shall develop and maintain procedures for ensuring. a competition in the investment of the City's funds. Delivery vs. Payment 1PFIA 2256.005(b)(~(E.'tl Securities shall be purchased using the delivery vs. payment method with the exception of investment pools and inutdal funds. Funds will be released .after notification that the purchased security has been received. X. SAFEKEEPING OF SECURITIES AND COLLATERAL Safekeening and Custodian Agreements (Best Practice) The City shall contract with a bank or banks for the safekeeping of securities either awned by the City as part of its investment portfolio or held as collateral to secure demand or time deposits. Securities owned by the City shall be held in the City's name as evidenced by safekeeping receipts of the institution holding the securities. Collateral for deposits will be held.by a third party custodian designated by the City and pledged to the City as evidenced by safekeeping receipts of the institution with which the collateral is deposited. Original safekeeping receipts shall be obtained. Collateral may be held by the depository bank's trust department, a Federal Reserve Bank or branch of a Federal Reserve Bank, a Federal Home Loan Bank, or a third party bank approved by the City. Collateral Policy (PFCA 2257.023) Consistent with the requirements of the Public Funds Collateral Act, it is the policy of the City to require full collateralization of all City funds on deposit with a depository bank, other than investments. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and- accrued interest on the deposits or investments less an amount insured by the FDIC. At its discretion, the City may require a higher level of collateralization for certain investment securities. Securities pledged as collateral shall be held by an-independent third party with which the City has a current custodial. agreement. The Finance Director is responsible for entering into collateralization agreements with third party custodians in compliance with this Policy. The agreements are to specify the acceptable investment securities for collateral, including provisions relating to possession of the collateral, the substitution or release of investment securities, ownership of securities, and the method of valuation of securities. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the City and retained. Collateral shall be reviewed at-least monthly to assure that the market value of the pledged securities is adequate: Collateral Defined The City shall accept only the following types of collateral • Obligations of the United States or its agencies and instrumentalities • Direct obligations of the state of Texas or its agencies and instrumentalities • Collateralized mortgage obligations directly issued by aTederal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States Obligations of states, agencies; counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized rating firm not less than A or its equivalent with a remaining maturity often (10) years or less • A surety bond issued by an insurance company rated as to investment quality by a nationally recognized rating firm not less than A • A letter of credit issued to the City by the Federal Home Loan Bank Subiect to Audit All collateral shall be subject to inspection and audit by the Finance Director or the City's independent auditors. XI. PERFORMANCE Performance Standards The City's inveshnent portfolio will be managed in accordance with the parameters specified within this policy. The portfolio shall be designed with the objective of obtaining a rate of return through budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow requirements of the City. Performance Benchmark It is the policy of the City to purchase investments with maturity dates coinciding with cash flow needs. Through this strategy, the City shall seek to optimize interest earnings utilizing allowable investments available on the market at that time. Market value will'be calculated on a quarterly basis on all securities owned and compared to current book value. The City's portfolio shall be designed with the objective of regularly meeting or exceeding the average rate of return- on U.S. Treasury Bills at a maturity level comparable to the City's weighted average maturity in days. XII. REPORTING (PFIA 2256.023) Methods The Investment Officer shall prepare an investment report on a quarterly basis that summarizes investment strategies employed in the most recent quarter and describes the portfolio in terms of investment securities, maturities, and shall explain the total investment return for the quarter. The quarterly investment report shall include a summazy statement of investment activity prepared in compliance with generally accepted accounting principals. This summazy will be prepazed in a manner that will allow the City to ascertain whether investmenf activities during the reporting period have conformed to the Investment Policy. The report will be provided to the Council. The report will include the following: • A listing of individual securities held at the end of the reporting period. • Unrealized gains or losses resulting from appreciation or depreciation by listing the beginning and. ending book and market value of securities for the period. • Additions and changes to. the market value during the period. • Average weighted yield to maturity of portfolio as compared to applicable benchmark. • Listing of investments by maturity date. • Fully accrued interest for the reporting period The percentage of the total portfolio that each type of investment represents. • Statement of compliance of the City's investment portfolio with state law and the investment strategy and policy approved by the Council. An independent auditor will perform a formal annual review of the quarterly reports with the results reported to the goveming body [PFIA 2256.023(cz7]. Monitoring Market Value (PFIA 2256.005(bl(4)(DN Market value of all securities in the portfolio will be determined on a quarterly basis. These values will be obtained from a reputable and independent source and disclosed to the goveming body quarterly in a written report. XIII. INVESTMENT POLICY ADOPTION [PFIA 2256.005(e)] The City's investment policy shall be adopted ,by resolution of the Council. It ,-is the City's intent to comply with state laws and regulations. The City's investment policy shall be subject to revisions consistent with changing .laws; regulations, and needs of the City. The Council shall adopt a resolution stating that. it has reviewed the policy and investment strategies .annually, approving any changes or modifications. Attachment, A Approved List of Independent Sourcc of Training Texas Institutions of Higher Learning The Texas Society of CPA's Government Finance Officers Association Government Treasurers Organization of Texas Texas Municipal League Center for Public Management at University of North Texas Attachment B Qualified Broker/Dealers and Financial Institutions Authorized to Engage in Securities Transactions with the City of Port Arthur MorganStanley The Brock Group. Anthony W. Brock Senior Vice President Financial Advisor 713-968-3147 888-886-4042 713-968-3148 FAX t Coastal Securities Tony D. Sekaly Vice President 800-681-4121 713-435-4334 713-435-4534 Fax Vining Sparks Gary Gough Senior Vice President 1 /800/772/3800 Bonds.comInc. Jack A. Polsky Vice President 1-888-BONDS08 TexPool 1-866-839-3291 TexSfar 1-800-839-7827 J. P. Morgan Chase Richard D. Chapell Senior Vice President ° Relationship Manager 409-898-5100 .~