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CC Resolution No. 8529 RESOLUTlœ!!D. 8529 A RESOLUTlœ OF 'mE CITY axJNCIL OF 'mE CITY OF CIJPERTJ:I!D AOOPI'IN:; INVES'IMENT POLICY BE IT RESOLVED by the City Council of the City of CUpertino that the InvestIœnt Policy attached hereto and nade part hereof by reference is hereby adopted. PASSED AND ADOPTED at City of CUpertino this fOllowing vote: a regular meeting of the city Council of the 21st day of October , 1991, by the vote Melli:Jers of the City Council AYES: Goldman, Rogers, Sorensen, Szabo, Koppel NJES: None ABSENl': None ABSTAIN: None ATlEST¡ APPRO\TED: /s/ Dorothy Cornelius City Clerk /s/ Barb Koppel Mayor, City of CUpertino Cl'I'Y OF aJPERI'INO INVESIMENl' POLICY I. srATEMENT OF OBJECI'IVES Tenporarily idle or surplus furns of the city of CUpertino shall be invested in a=rdance with principles of sound treasury management and in a=rdance with the provisions of California Goverrnnent Code Sections 53600 et seq., the city of CUpertino Municipal Code, and this Investment Policy. A. OVerall Risk Profile 'Ihe basic objective of the city of CUpertino's investment program are, in order of priority: 1. Safety of invested furns; 2. Maintenance of sufficient liquidity to meet cash flow needs; and, 3. Attainment of the maximum yield possible consistent with the first two objectives. 'lhe achievement of these objectives shall be accanplished in the manner des=ibed below: 1. Safety of Invested Funds 'Ihe City shall insure the safety of its invested idle furns by limiting =edit 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 J:usiness; 3. By diversifying the investment portfolio so that the failure of anyone issuer or backer will not place an undue financial b.lrden on the city; and 1 4. By monitoring all of the city's investments on a dailv basis to anticipate and respond appropriately to a significant reduction of =editworthiness of any of the depositories. b. Interest rate risk will be mitigated by: 1. structuring the city's portfolio so that securities mature to meet the City's cash requirements for on:Joing 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-tenn securities, unless it is anticipated that lOn:J-tenn 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 i111portant element of safety. 2. Liquiditv The City's investment portfolio must be structured in a manner which will provide the securities mature at the same ti1ne as cash is needed to meet anticipated derrands. Additionally, since all possible cash derrands 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 i111portance 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. 2 B. Time Frame for Investment Decisions '!he 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 instnnnents and maturities shall be based upon an analysis of anticipated cash needs, existing and anticipated revenues, interest rate trerrls and specific market opportunities. "f./ /Ø-/ /<Atf::ØøtØ-1-/ /IN.Y41 / fI#1 / 1WH'1'IJÞ.I1frM::þ.f:).Jj¡11¢1/ fW.fI t##'f:¢tØ.ý¡f./ IrI¢ItIflr::IW: /'/IWI M¢tf./ ~ /ml /ittè{1:/if,/ 1#4/ m /}:tt'/'#'f:¢tØ.ý¡1- #1.1-/ !tÞNfll /é( 1 ~II ÞtllV:Øt¢1 /WiIJ1.1 /fIW::I1 tl##111t¢rll1 ßIt:t1I ßIJm / ¢1 p¡q:¢JM4.¢¡ /#'ff1¢Ø.1-/ f;þÞ#1f.¢/ <þþýJtt¢f,1./ Ø-JA'ff1¢tU·Ø-1-f.¢1t1 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 minilIIum balances required by the City's banks to compensate them for the cost of banking-services. '!his Policy also applies to the idle or surplus funds of other entities for which the City of CUpertino persormel provide financial management services. II INVEmMENrS This section of the Investment Policy identifirs the types of instnnnents in which the city will invest its idle funds. A. Cataqorv of Investments The citys investments are categorized below to give an indication of the level of risk asstmted by the entity at year-end. Catec!orv l, 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. Catec!orv 2, includes uninsured and unregistered investments for which the securities are held by the broker's or dealer's trust department or agents in the city's name. Cate<torv 3, included uninsured and unregistered investments for which the securities are held by the broker or dealer, or by its trust department or agent, rot not in the city's name. 3 B. Eliqible 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. Govermnent and its affiliated agencies. Additionally, no more than 5% of the total portfolio shall be invested in the uninsured-uncollateralized issuances of arr;¡ single institution. 1. Banker's Acceutances - are negotiable tilne drafts drawn to finance the export, import or storage of goods. 'Ihey are termed "Accepted" when a bank assumes the obligation to make payment at maturity. ú:Jcation: Dollar Limit: Maturitv: ~ Top 100 U.S. Domestic Banks or top 25 World Banks. 40% Not to exceed 270 days. 3 2. Certificates of Deposit - is a non-negotiable instrument with a depository (Bank or Savings & lDan) representing 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 tilne deposit. ú:Jcation: Dollar Limit: Domestic u.s. Banks Not to exceed 10% of the portfolio in any single Bank or Savings and lDan. Not to exceed 24 months. 3 Maturitv ~ 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. ú:Jcation: Dollar Limit: Maturitv: ~ Domestic u.s. Banks 30% Not to exceed 180 days. 3 4. Corporate Bond - debt instrument issued by a private corporation as distinct from one issued by a govermnent 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 a sinking fund aCClD11lllated for that purpose, (4) they are traded on major exchanges, with prices published in newspapers. ú:Jcation: Dollar Limit: Maturitv: ~ Domestic U.s. Banks 30% Not to exceed 5 years. 3 4 5. Local AfJ.erv::;y Investment F'uJrl - is a special F'uJrl established by the california state Treasurer enabling the City to invest tenp:>rarily idle monies in the state I s pooled money program. Bond pr~'" may be invested in addition to lAIF liroit. Location: Dollar Limit: Maturitv: ~ california state Treasury Not to exceed liroit set by state Treasurer. On demand 1 6. Necrotiable Certificates of Deoosit - is a negotiable instrument payable to the bearer. '!he instrument will specify a maturity date am interest rate am can be sold in a secondary market. Location: Dollar Limit: Maturitv: ~ Domestic u.s. Banks 30% Not to exceed 24 months. 3 7. RepUrchase Am"eements - is an investment transactions of very short t:i1ne pericxi. "Repe" instruments have the backing of pledged security. Repe transactions involve the sale of marketable U. S. Government securities and simultaneous =mrnitment by the seller (Financial institution) to repurchase the security. Location: Dollar Limit: Maturitv ~ Banks and reporting dealers No liroit Not to exceed 1 year. 2 8. United states Treasury and Federal AfJ.encies - would include various instruments issued by the U. S. Treasury and agencies of the U. S. Government. '!he agencies include the Federal Home Loan Bank, Federal Farm er-edit Bank, Federal national Mortgage Association and others. ~ 1 '!he 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. 5 c. QUalification of Brokers. Dealers and Fi11ancial Institutions Aside from IAIF, insured deposits, and U.S. Treasury and Goverrunent Agercy issues, investments shall be placed only in those instruments and institutions rated favorably by the Keefer Bruyer am Woods Bank and Savings and Loan Rating Service of Moody's commercial Paper Recoros. For Banker's Acceptance depositories shall be limited to banks and savings and loans rated "B" = 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 "A/B" or better by Keefe, Bruyette and Woods. F= Time Deposits over $100,000, depositories shall be limited to area banks and savings and loans whose =editworthiness as detennined by fi11ancial statement analysis = other reliable rating services equal or exceeds the Keefe Bruyette and Woods "B" rating. The California Goverrunent 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 =rporation's own indebtedness other than commercial paper. 'Ihe city may not hold more than 10% of an issuing =rporation' s commercial paper . The California Goverrunent Code restricts cities to investing in rnedil.D1l-term =rporate notes of a rnaxi1nurn of three years maturity issued by =rporations operating within the United states. Securities eligible for investment must be rated in the top three note rating categories (Moody's designations: Aaa, As, Ai Standard & Poor's designations: AAA, AA, A) by two of the three largest nationally recognized rating services (Moody's, Standard & Poor's, J)Jff and Phelps). Medil.D1l-term =rporate notes may not exceed 15% of the city's portfolio. 6 D. Reauirement for Financial statements Each bank, savings and loan and security dealer, otheJ:Wise qualified urxier the provisions of this policy, who wishes to do h1siness with the city shall suJ::xnit 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 SEX::, 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 COJrlition, and 2) a separate letter from its CPA firm attesting to the fact that Rule l5c 3-1 has been complied with and the dealer's internal systems and controls have no material inadequacies. 'Ihe city requires that an agreement for services be executed prior to entrusting its funds to any dealer or financial institution, and that up-to-àate financial statements be sent to the Director of Finance upon their issuance. E. Reauirernents for RePUrchase AQreements 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 lOO 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 æoount equal to at least lOO percent of the repurchase agreement face value. 'Ihe market value of the transferred securities may be required to exceed the repurchase agreement's face value by an æoount which is expected to protect against a sudden decrease in the market value of the transferred securities. '!he types of securities to be accepted as transferred securities in repurchase agreements in which the city is the royer shall be limited to the types of eligible U.S. Treasury or Government Agency issues. 7 F. Reauirements f= Restructur:incr Transactions 1. General Definitions '!he restructuring process involves a c:han:¡'es 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 opportunities are not a function of time rot rather a result of c:han:¡'ing market corxiitions. Corxiitions that are generally favorable to restructurings are: 1) availability of more efficient issues, 2) c:han:¡'es 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 inpairing the overall quality diversification constraints of the portfolio. 2. Specific Reauirements b. Prior conceptual approval shall be obtained in writing from the City Manager. d. A brief description of the executed restructuring transactions shall be included in the monthly investJnent report. e. Net sales gains or losses shall not be in=ed to the point of radically altering the =ent month's earned interest yield. III. SAFEKEEPING OF SIDJRITIES A. Safekeep:incr AQreernent '!he City shall contract with a bank or banks for the safekeeping of securities which are owned by the City as part of its investJnents portfolio or transferred to the City under the terms of repurchase agreements. B. Handl:incr of citv-owned Securities and Time Deoosit 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. '!he collateral for time deposits in savings am loans is held by the Federal Home Loan Bank. '!he collateral for time deposits in banks is held in the city's name in the bank I s trust department. 8 C. Handlinq of Reuurchase Aclreement Securities The securities transferred to the City under the terms of repurchase agreements with banks nay be held in the issuing bank's trust deparbnent 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 '!he authorization to release City securities will be telephoned to the appropriate bank. A written confinnation outlining details for the transaction and confirming the telephoned insb:uctions will be sent to the bank within 5 working days. IV. SI'RUCIURE AND RESPONSIBILITY This section of the Investment Policy defines the overall sb:ucture of the investment management program. A. Responsibilities of the Finance Deœrtment '!he city Treasurer is charged with responsibility for naintaining custody of all public funds and securities belonging to = 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 citv Manaqer 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. C. Responsibilities of the citv 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. REPORI'ING The City Treasurer shall prepare a monthly Investment Report, including a succinct management stnmI\arY that provides a clear picture of the status of the =ent investment portfolio. '!he report will be prepared in a manner which will allow the City Manager and city Council to ascertain whether investment acti vi ties during the reporting period have deviated from the City's Investment Policy. 9 VI. REVIEW OF INVESIMENI' MANAGEMENl' A. Policv Exceptions While this Policy prescribes various maximums, minimtnns and other relatively arbitrary m.nnerical 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 rosiness day of its discovery. Major exceptions are to be reported .irmnediately. 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 tenporary percentage exceptions need not be reported as violations or exceptions to this Policy. B. Policv Review This Investment Policy shall be reviewed armually to ensure its consistency with respect to the overall objectives of safety, liquidity am yield, and its relevance to cu=ent laws and financial trends . 10