CC Resolution No. 8796
RESOLUTION NO. 8796
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CUPERTINO ADOPTING INVESTMENT POLICY
BE IT RESOLVED by the City Council of the City of Cupertino that the
Investment Policy attached hereto and made part hereof by reference is hereby adopted.
PASSED AND ADOPTED at a regular meting of the City Council of the City of
Cupertino this 16th day of November , 1992, by the following vote:
Vote Members of the City Council
AYES: Dean, Goldman, Koppel, Sorensen, Szabo
NOES: None
ABSENT: None
ABSTAIN: None
ATTEST: APPROVED:
/s/ Dorothy Cornelius
City Clerk
/s/ Nick Szabo
Mayor, City of Cupertino
CITY OF CUPERTINO
INVESTMENT POLICY
November 12, 1992
I. STATEMENT OF OBJECfIVES
Temporarily idle or surplus funds of the City of Cupertino shall be invested in
accordance with principles of sound treasury management and in accordance with
the provisions of California Government Code Sections 53600 et seq., the City of
Cupertino Municipal Code, and this Investment Policy.
A. Overall Risk Profile
The basic objective of the City of Cupertino's investment program are, in order
of priority:
1. Safety of invested funds;
2. Maintenance of sufficient liquidity to meet cash flow needs; and,
3. Attainment of the maximum yield possible consistent with the first two
objectives.
The achievement of these objectives shall be accomplished in the manner described
below:
1. Safetv of Invested Funds
The City shall insure the safety of its invested idle funds by limiting credit
and interest rate risks. Credit risk is the risk of loss due to the failure of
the security issuer or backer. Interest rate risk is the risk that the market
value of portfolio securities will fall due to an increase in general interest
rates.
a. Credit risk will be mitigated by:
1. Limiting investments to the safest types of securities;
2. By pre-qualifying the financial institutions with which it will do
business;
3. By diversifying the investment portfolio so that the failure of any
one issuer or backer will not place an undue financial burden on
the City; and
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4. By monitoring all of the City's investments on a daily basis to
anticipate and respond appropriately to a significant reduction of
creditworthiness of any of the depositories.
b. Interest rate risk will be mitigated by:
1. Structuring the City's portfolio so that secuntJes mature to meet
the City's cash requirements for ongoing operations, thereby
avoiding the need to sell securities on the open market prior to
their maturation to meet those specific needs and;
2. Investing primarily in shorter-term securities, unless it is an-
ticipated that long-term securities can be held to maturity without
jeopardizing liquidity requirements.
3. Occasionally restructuring the portfolio to minimize the loss of
market value and/or maximize cash flows subject to the constraints
described in Section II.H.
c. The physical security or safekeeping of the City's investments is also
an important element of safety.
2. Liquidity
The City's investment portfolio must be structured in a manner which will
provide the securities mature at the same time as cash is needed to meet
anticipated demands. Additionally, since all possible cash demands cannot be
anticipated, the portfolio should consist largely of securities with active
secondary of resale markets.
3. Yield
Yield on the City's investment portfolio is of secondary importance compared
to the safety and liquidity objectives described above. Investments are limited
to relatively low-risk securities in anticipation of earning a fair return relative
to the risk being assumed. While it may occasionally be necessary or
strategically prudent for the City to sell a security prior to maturity to either
meet unanticipated cash needs or to restructure the portfolio, this Policy
specifically prohibits trading securities for the sole purpose of speculating or
taking an unhedged position the future direction of interest rates.
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B. Time Frame for Investment Decisions
The City's investment portfolio shall be structured to provide that sufficient
funds from investments are available every month to meet the City's
anticipated cash needs. Subject to the safety provisions outlined above, the
choice of investment instruments and maturities shall be based upon an
analysis of anticipated cash needs, existing and anticipated revenues, interest
rate trends and specific market opportunities.
No investment shall have a maturity of more than ten years from it's date of
purchase. No more than 25% of the portfolio may be invested with a
maturity greater than five years without specific Council authorization. For
purposes of control, the percentage limit shall be measured against the
portfolio value when a specific investment is purchased.
C. Definition of Idle or Surplus Funds
Idle or surplus funds for the purpose of this Policy are all City funds which
are available for investment at anyone time, including the estimated
checking account float, excepting those minimum balances required by the
City's banks to compensate them for the cost of banking-services. This
Policy also applies to the idle or surplus funds of other entities for which the
City of Cupertino personnel provide financial management services.
II. INVESTMENTS
This section of the Investment Policy identifies the types of instruments in which
the city will invest its idle funds.
A. Category of Investments
The citys investments are categorized below to gIve an indication of the
level of risk assumed by the entity at year-end.
Category 1, includes investments that are insured or registered or for which
the securities are held by the city or its safekeeping agent in the City's
name.
Categorv 2, includes uninsured and unregistered investments for which the
securities are held by the brokers or dealer's trust department or agents in
the City's name.
Cate~ory 3, included uninsured and unregistered investments for which the
securities are held by the broker or dealer" or by its trust department or
agent, but not in the City's name.
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B. Eligible Securities
No more than 10% of the total portfolio shall be invested in the issuances
of any single institution other than securities issued by the U.S. Government
and its affiliated agencies. Additionally, no more than 5% of the total
portfolio shall be invested in the uninsured-uncollateralized issuances of any
single institution.
1. Bankers Acceptances - are negotiable time drafts drawn to finance
the export, import or storage of goods. They are termed "Accepted"
when a bank assumes the obligation to make payment at maturity.
Location:
Top 100 U.S. Domestic Banks or top 25
World Banks.
40%
Not to exceed 270 days.
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Dollar Limit:
Maturitv:
~:
2. Certificates of Deposit - is a non-negotiable instrument with a
depository (Bank or Savings & Loan) representin~ a contract
specifying (1) a fixed rate of interest to be paid and (2) a fixed date
on which the principal may be withdrawn (maturity date). A "C.D." is
commonly referred to as a time deposit.
Location:
Dollar Limit:
Domestic U.S. Banks
Not to exceed 10% of the portfolio in any
single Bank or Savings and Loan.
Not to exceed 24 months.
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Maturity:
~:
3. Commercial Paper - is a short term, negotiable, unsecured promissory
note with maturities of 270 days or less. Cities may purchase
commercial paper issued by companies organized and operating
within the U.S. and having total assets in excess of $500 million.
Location:
Dollar Limit:
Maturity:
Type:
Domestic U.S. Banks
30%
Not to exceed 180 days.
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4. Corporate Bond - debt instrument issued by a private corporation as
distinct from one issued by a government agency or a municipality.
Corporate Bonds typically have four distinguishing features (1) they
are taxable, (2) they have a par value of $1,000, (3) they have a term
maturity which means they come due all at once - and are paid for
out of sinking fund accumulated for that purpose, (4) they are traded
on major exchanges, with prices published in newspapers.
Location:
Dollar Limit:
Maturitv:
Type:
Domestic U.S. Banks
30%
Not to exceed 5 years.
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5. Local Agency Investment Fund - is a special Fund established by the
California State Treasurer enabling the City to invest temporarily idle
monies in the State's pooled money program. bond proceeds may be
invested in addition to LAIF limit.
Location:
Dollar Limit:
Maturitv:
Type:
California State Treasury.
Not to exceed limit set by State Treasurer.
On demand
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6. Ne~otiable Certificates of Deposit - is a negotiable instrument
payable to the bearer. The instrument will specify a maturity date
and interest rate and can be sold in a secondary market.
Location:
Dollar Limit:
Maturity:
Ixm;.:
Domestic U.S. Banks.
30%
Not to exceed 24 months.
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7. Repurchase Agreements - is an investment transactions of very short
time period. "Repo" instruments have the backing of pledged security.
Repo transactions involve the sale of marketable U. S. Government
securities and simultaneous commitment by the seller (Financial
institution) to repurchase the security.
Location:
Dollar Limit:
Maturity:
Ixm;.:
Banks and reporting dealers.
No limit
Not to exceed 1 year.
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8. United States Treasury and Federal Agencies - would include various
instruments issued by the U. S. Treasury and agencies of the U. S.
Government. The agencies include the Federal Home Loan Bank,
Federal Farm Credit Bank, Federal national Mortgage Association
and others.
Type:
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The instruments would include notes and other evidences of indebtedness of
the respective agency. These instruments generally are longer term issues
initially offered at a fixed price and actively traded in the secondary market.
9. Mutual Funds or shares of beneficial interest issued by diversified
management companies defined in section 23701 (m) of the Revenue
and Taxation Code, investing in the securities and obligations as
authorized by subdivisions (a) to (1), inclusive, of that section and
which comply with the investment restrictions (California Government
Code, commencing with Section 53600).
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C. Qualification of Brokers. Dealers and Financial Institutions
Aside from LAIF, insured deposits, and U.S. Treasury and Government
Agency issues, investments shall be placed only in those instruments and
institutions rated favorably by the Keefer Bruyer and Woods Bank and
Savings and Loan Rating Service of Moody's Commercial Paper Records.
For Banker's Acceptance depositories shall be limited to banks and savings
and loans rated "B" or better, and selected major California banks rated "C"
or better. For Negotiable Certificates of Deposit, depositories shall be
limited to banks and savings and loans rated "AIB" or better by Keefe,
Bruyette and Woods. For Time Deposits over $100,000, depositories shall be
limited to area banks and savings and loans whose creditworthiness as
determined by financial statement analysis or other reliable rating services
equal or exceeds the Keefe Bruyette and Woods "B" rating.
The California Government Code restricts cities to investing in commercial
paper of the highest ranking provided for by Moody's Investment Service or
Standards and Poor's. Issuing corporations must be organized and operating
within the United States and have total assets in excess of $500,000,000, and
an "A" or higher rating for the corporation's own indebtedness other than
commercial paper. The City may not hold more than 10% of an issuing
corporation's commercial paper.
The California Government Code restricts cities to investing in medium-term
corporate notes of a maximum of three years maturity issued by corpora-
tions operating within the United States. Securities eligible for investment
must be rated in the top three note rating categories (Moody's designations:
Aaa, As, A; Standard & Poor's designations: AAA, AA, A) by two of the
three largest nationally recognized rating services (Moody's, Standard &
Poor's, Duff and Phelps). Medium-term corporate notes may not exceed
15% of the City's portfolio.
D. Requirement for Financial Statements
Each bank, savings and loan and security dealer, otherwise qualified under
the provisions of this policy, who wishes to do business with the City shall
submit a copy of its latest financial statement to the City including a balance
sheet and profit and loss statement. If the security dealer is a private
partnership registered with the SEC, the following shall be required in lieu
of a profit and loss statement:
1) disclosure of its excess net capital in the notes to the statement of
financial condition, and 2) a separate letter from its CPA firm attesting to
the fact that Rule 15c 3-1 has been complied with and the dealer's internal
systems and controls have no material inadequacies.
The City requires that an agreement for services be executed prior to
entrusting its funds to any dealer or financial institution, and that up-to-date
financial statements be sent to the Director of Finance upon their issuance.
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E. Requirements for Repurchase Agreements
A repurchase agreement is a transaction in which a counter party agrees to
transfer to the City securities or financial instruments in exchange for funds
with a simultaneous agreement by the City to resell the securities to the
counter party at a date certain. In such cases, the transferred securities shall
be U.S. Treasury or Government Agency issues who market value at the
time of transfer is equal to at least 100 percent of the repurchase
agreement's face value. For other than overnight investments, the securities
transferred shall be marked to market on a daily basis and maintained at an
amount equal to at least 100 percent of the repurchase agreement face
value. The market value of the transferred securities may be required to
exceed the repurchase agreement's face value by an amount which is
expected to protect against a sudden decrease in the market value of the
transferred securities.
The types of securities to be accepted as transferred securities in repurchase
agreements in which the city is the buyer shall be limited to the types of
eligible U.S. Treasury or Government Agency issues.
F. Requirements for Restructuring Transactions
1. General Definitions
The restructuring process involves a changes in the composition of
the portfolio such that the aggregate portfolio after all transactions
are executed meets original goals and constraints of the Investment
Policy and performance has been improved. Restructuring opportuni-
ties are not a function of time but rather a result of changing market
conditions. Conditions that are generally favorable to restructuring
are: 1) availability of more efficient issues, 2) changes in the shape of
the yield curve or 3) changes in quality or set for spreads. A
restructured portfolio must continue to generate sufficient cash flow
to meet the City's cash requirements without impairing the overall
quality diversification constraints of the portfolio.
2. Specific Requirements
a. Prior conceptual approval shall be obtained in writing from the
City Manager.
b. A brief description of the executed restructuring transactions
shall be included in the monthly investment report.
c. Net sales gains or losses shall not be incurred to the point of
radically altering the current month's earned interest yield.
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III. SAFEKEEPING OF SECURITIES
A. Safekeeping Agreement
The City shall contract with a bank or banks for the safekeeping of
securities which are owned by the City as part of its investments portfolio or
transferred to the City under the terms of repurchase agreements.
B. Handling of City-Owned Securities and Time Deposit Collateral
All securities owned by the City shall be held by its safekeeping agent,
except the collateral for time deposits in banks and savings and loans. The
collateral for time deposits in savings and loans is held by the Federal
Home Loan Bank. The collateral for time deposits in banks is held in the
City's name in the bank's trust department.
C. Handling of Repurchase Agreement Securities
The securities transferred to the City under the terms of repurchase
agreements with banks may be held in the issuing bank's trust department
provided that a master trust agreement has been executed insuring fiduciary
separation of these terms of repurchase agreements with dealers must be
delivered to a third-party custodian with which the City has established a
safekeeping agreement.
D. Securitv Transfers
The authorization to release City secuntJes will be telephoned to the
appropriate bank. A written confirmation outlining details for the transac-
tion and confirming the telephoned instructions will be sent to the bank
within 5 working days.
IV. STRUCTURE AND RESPONSIBILITY
This section of the Investment Policy defines the overall structure of the investment
management program.
A. Responsibilities of the Finance Department
The City Treasurer is charged with responsibility for maintaining custody of
all public funds and securities belonging to or under the control of the City,
and for the deposit and investment of those funds in accordance with
principles of sound treasury management and in accordance with applicable
laws and ordinances.
B. Responsibilities of the City Manager
The City Manager is responsible for directing and supervising the City
Treasurer. He or she is responsible further to keep the City Council fully
advised as to the financial condition of the City.
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C. Responsibilities of the City Council
The City Council shall consider and adopt a written Investment Policy. As
provided in that Policy, the Council shall receive, review, and accept
monthly Investment Reports.
V. INTERNAL CONTROLS
A system of internal controls shall be established and documented in writing. The
controls shall be designed to prevent losses of public funds arising from fraud,
employee error, misrepresentation of third parties, unanticipated change in
financial markets or imprudent actions by employees and officers of the City.
Controls deemed most important include the following: separating transaction
authority from accounting and record keeping, custodial safekeeping, clear delega-
tion of authority, written confirmation of telephone transactions, minimizing the
number of authorized investment officials, and documentation of transactions.
Finance Department personnel who do not have responsibility for effecting the
investment transactions shall carry out the accounting for, and verification of the
investment transactions. Accounting personnel shall obtain monthly receipts or
account statements from banks and dealers confirming all investment transactions
and accounts which in turn shall be reconciled with the monthly investment report
and subsidiary ledgers.
VI. REPORTING
The City Treasurer shall prepare a monthly Investment Report, including a
succinct management summary that provides a clear picture of the status of the
current investment portfolio. The report will be prepared in a manner which will
compare yield performance to LAIF, and allow the City Manager and City Council
to ascertain whether investment activities during the reporting period are in
compliance with Section I B, and Section II of this policy.
VII REVIEW OF INVESTMENT MANAGEMENT
A. Policy Exceptions
While this Policy prescribes various maximums, mlmmums and other
relatively arbitrary numerical limits, it is intended primarily to be a
management tool. Whenever an exception or violation of this Policy is made
that fact shall be reported to the City Manager and the City Council within
one business day of its discovery. Major exceptions are to be reported
immediately.
Sudden large fluctuations in portfolio assets can cause technical exceptions
to the various percentage limits of the Investment Policy which should not
be interpreted as "reportable exceptions". Such temporary percentage
exceptions need not be reported as violations or exceptions to this Policy.
B. Policy Review
This Investment Policy shall be reviewed annually to ensure its consistency
with respect to the overall objectives of safety, liquidity and yield, and its
relevance to current laws and financial trends.
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