05. Amended city investment policy for 2008ADMINISTRATIVE SEF:VICES DEPARTMENT
CITY HALL
10300 TORRE AVENUE= • CUPERTINO, CA 950143255
C U P E RT I IV O (408) 777-3220 -FAX 0408) 777-3109
SUMMARY
Agenda Item No. ~ Meeting Date: December 16, 2008
SUBJECT AND ISSUE
Adopt the amended City Investment Policy for 2008.
BACKGROUND
The California Government Code requires a statement of investment policy to be reviewed
and adopted by the City Council on at least an <<nnual basis. This statement is intended to
provide guidelines for the prudent investment of the City's temporary idle cash, and outline
the policies for maximizing the efficiency of the City's cash management system. The
ultimate goal is to enhance the economic status of the City while protecting its pooled cash.
As part of their annual review of the policy, the City's auditors recommended the following
changes to improve internal controls and to improve compliance with this policy.
• Removed policy references to a separate administrative procedure manual for the
operation of the investment program and, instead, use the policy itself for
procedures.
• Expanded internal controls over wire: transfers, cash receipts, and accounts
receivable.
• Removed obsolete State reporting requirements.
The Audit Committee recommended adoption of these changes at their December 9, 2008
meeting.
RECOMMENDATION
Adopt the amended City Investment Policy for 2008.
Submitted by:
Carol A. Atwood
City Treasurer
Approved for submission:
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David W. Knapp
CiTy Manager
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City of Cupertino
Investment Policy
December 16, 2008
DRAFT'
POLICY
Under authority granted by the City Council, the City Treasurer and Deputy Treasurer are
responsible for investing the surplus funds of the City.
The investment of the funds of the City of Cupertino is directed to the goals of safety, liquidity
and yield. The authority -governing investments for municipal governments is set forth in the
California Government Code, Sections 53601-through 53659.
The primary objective of the investment policy- of the City of Cupertino is SAFETY OF
PRINCIPAL. Investments shall be placed in those securities as outlined by type and maturity
sector in this document. Effective cash -flow management and resulting cash investment
practices are recognized as essential to good fiscal management and control. The City's portfolio
shall be designed and managed in a manner responsive to the public trust and consistent with
state and local law. Portfolio management requires continual analysis and as a result the balance
between the various investments and maturities may change in order to_ give the City of
Cupertino the optimum combination of necessary liquidity and optimal yield based on cash flow
projections.
SCOPE
The investment policy applies to all financial assets of the City of Cupertino as accounted for in
the Comprehensive Annual Financial Report (CAFR~. Policy statements outlined in this
document focus on the City of Cupertino's pooled, surplus funds, but will also apply to all other
funds under the City Treasurer's span of control unless .specifically exempted by statue or
ordinance. This policy is applicable, but not limited to all funds listed below:
• General Fund
• Special Revenue Funds
• Capital Project Funds
• Enterprise Funds
• Internal Service Funds
• Trust and Agency Funds
• Any new fund unless specifically exempted
Investments of bond proceeds shall be governed by the provisions of the related bond indentures
and/or cash flow requirements and therefore may extend beyond the maturity limitations as
outlined in this document.
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City of Cupertino Investment Policy December 16, 2008
DRAMT
PRIJ DENCE
The standard to be used by investment officials shall be that of a "prudent person" and shall be
applied in the context of managing all aspects of the overall portfolio. Investments shall be made
with judgment and care, under circumstances then prevailing, which persons of prudence,
direction 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.
It is the City's full intent, at the time of purchase, Ito hold all investments until maturity to ensure
the return of all invested principal dollars. However, it is realized that market prices of securities
will vary depending on economic and interest rate conditions at any point in time. It is further
recognized that in a well-diversified investmer~t portfolio, occasional measured losses are
inevitable due to economic, bond market or individual security credit analysis. These occasional
losses must be considered within the context of the overall investment program objectives and
the resultant long-term rate of return.
The City Treasurer and Deputy Treasurer, acting within the intent and scope of the investment
policy and other written procedures and exercising due diligence, shall be relieved of personal
responsibility and liability for an individual sec;urity's credit risk or mazket price changes,
provided deviations from expectations are reported in a timely manner and appropriate action is
taken to control adverse developments.
OBJECTIVES
The primary objectives, in order of priority, of the City of Cupertino's investment activities shall
be:
A. Safety of Principal
Safety of principal is the foremost objective of the City of Cupertino. Each investment
transaction shall seek to ensure that capital losses are avoided, whether from securities
default, broker-dealer default or erosion of market value. The City shall seek to preserve
principal by mitigating the two types of risk, credit risk and mazket risk.
Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be
mitigated by investing in investment grad-e securities and by diversifying the investment
portfolio so that the failure of any one issuer does not unduly harm the City's capital
base and cash flow.
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City of Cupertino Investment Policy December 16, 2005
DF2AFT
Market risk, defined as market value fluctuations due to overall changes in the general
level of interest rates, shall be mitigated by limiting the average maturity of the City's
investmen# portfolio (see maximum maturities) and structuring the portfolio based on
historic and current cash flow analysis eliminating the need to sell securities prior to
maturity and avoiding the purchase of long term securities for the so}e purpose of short
term speculation.
B. Liquidity
The City's investment portfolio will remain sufficiently liquid to meet all operating
requirements which might be reasonably anticipated and provide the City with adequate cash
flows to pay its obligations over the -next six months. Additionally, the portfolio should
consist largely of securities with active secondary resale markets.
C. Yield
The City's investment portfolio shall be designed with the objective of attaining a rate of
return throughout budgetary and economic cycles, commensurate with Cupertino's
investment risk constraints and cash flow characteristics of the portfolio.
MAXIMUM MATURITIES
Maturities of investments will be selected based on liquidity requirements to minimize interest
rate and maximiie earnings. Investment of surplus funds shall comply with the maturity limits as
set forth in the California Government Code 53600, et seq. Where this section does not specify a
limitation on the term or remaining maturity at the time of the investment, no investment shall be
made in any security that at the time of the investment has a term remaining to maturity in excess
of five years, unless the Council has granted express authority to make that investment either
specifically or as a part of an investment program approved by the Council no less than three
months prior to the investment.
Reserve funds may be invested in securities exceeding five years if the maturity of such
investments is made to coincide as nearly as practicable with the expected use of the funds.
PERFORMANCE EVALUATION
Investment performance is continually -monitored and evaluated by the City Treasurer.
Investment performance statistics and activity reports aze generated on a monthly basis for
presentation to the oversight (audit) committee,.City Manager and City Council_
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City of Cupertino Investment Policy December 16, 2008
DRAIP'T
Yield on the City's investment portfolio is of secondary importance compared to the 'safety and
liquidity objectives described above. The City's investment portfolio shall be designed to attain
a mazket average rate of return through economic cycles. The market average rate of return is
defined as the average return on the Local Agency Investment Fund (assuming the State does not
adversely affect LAIF's returns due to budget constraints). Whenever possible, and consistent
with risk limitations as defined herein and prudent investment principles, the Treasurer shall seek
to augment return above the mazket average rate of return.
DELEGATION OF AUTHORITY
The Treasurer is responsible for investment management decisions and activities per City
Council Resolution.
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The Treasurer shall designate a staff person as a li:uson/deputy in the event circumstances require
timely action and the Treasurer is not present.
No officer or designee may engage in an investment transaction except as provided under terms
of this policy and the procedures by the Treasurer :uzd approved by the City Manager/Council.
The Treasurer shall be responsible for all transactions undertaken and shall establish a system of
controls to regulate the activities of subordinate officials.
OVERSIGHT COMMITTEE
An audit committee consisting of appropriate intarnal and external members, appointed by the
City Council, shall be established to provide general oversight and direction concerning the
policy related to management of the City's investment pool. The City Treasurer shall serve in a
staff and advisory capacity. The committee shall meet at least quarterly to review policy
changes, new legislation and portfolio status.
ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investmenrt process shall refrain from personal business
activity that conflicts with proper execu#ion of the investment program, or impairs their ability to
make impartial investment decisions. Additionally the City Treasurer and the Deputy Treasurer
are required to annually file applicable financial disclosures as required by the Fair Political
Practices Commission (FPPC).
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City of Cupertino Investment Policy December 16, 2008
DRt1F'I'
SAFEKEEPING OF SECURITIES
To protect against fraud or embezzlement or losses caused by collapse of an individual securities
dealer, all securities owned by the City shall be held in safekeeping by a third party custodian
acting as agent for the City under the terms of a custody agreement. All trades executed by a
dealer will settle delivery versus payment (DVP) through the City's safekeeping agent.
In order to verify investment holdings, an external auditor, on an annual basis, shall
independently verify securities held in custody for the City.
All exceptions to this safekeeping policy must be approved by the. City Treasurer in written form
and included in ihe.monthly report to City Council.
INTERNAL CONTROL
Separation of duties between the Treasurer's function and Finance is designed to provide an
ongoing internal review to prevent the potential for converting assets or concealing transactions.
Wire transfers shalt be approved prior to being submitted to the financial institution. ~g
Wire transfers initiated by the Treasury Section must be reconfirmed by
the appropriate financial institution to non-treasury staff Proper documentation obtained from
confirmation and cash disbursement-wire transfers is required for each investment transaction.
Timely bank reconciliation is conducted to ensure proper handling of all transactions.
Separation of duties, transaction approvals, security, and reconciliations shall be included in
the wire, receipting, and account receivable processes. Transaction controls, notifications, and
reports provided by financial institutions shalt be used to help implement these controls_
The investment portfolio and all related transactions are reviewed and balanced to appropriate
general ledger accounts by Finance on a monthly basis.
An independent analysis by an external auditor shall be conducted annually to review internal
control, account activity, an4d compliance with policies and procedures. The analysis shall be
reported to the audit committee.
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 that will report a!1 information required under this policy and
the California Government Code. The Treasurer will submit the report to Council no later than
the second regular council meeting, or approximately 45 days following the end of the month
covered by the report.
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City of Cupertino Investment Policy December I6, 2008
DRAI,+'T
^° *'~~* ^••~-~°~. Following its annual or interim adoption by the City Council, ~sP~f this
investment policy will also -shall be remitted ~1 to t/ze California
Debt and Investment Advisory Commissson.
QUALIFIED BROKER/DEALERS
Minimum eligibility criteria for dealers brokers include a minimum of $1 billion in assets and a
minimum of five years in business. The registration status of all dealers is checked with the
National Association of Securities Dealers.
Dealers are required to acknowledge the receipt and review of the Statement of Investment
Policy, to be familiar with the government code restrictions, and have experience with dealing
with other municipal investors. Dealers are then selected on the basis of yields, services offered,
and references obtained. They may be primary o:r secondary dealers. The financial institutions
must submit a current annual audited financial statement to ascertain capital adequacy.
COLLATERAL REQUIREMENTS
Collateral is required for investments in certificates of deposit and repurchase agreements. In
order to reduce market risk, the collateral level will be at least 102% of market value of principal
and accrued interest.
In order to conform with the provisions of the :Federal Bankruptcy Code which provides for
liquidation of securities held as collateral, the only securities acceptable as collateral shall be
certificates of deposit, commercial paper, eligible: banker's acceptances, medium term notes or
securities that are the direct obligations of, or aze sully guaranteed as to principal- and interest by,
the United States or any agency of the United .States.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code Sections 53600 et seq.
Within the context of the limitations, the following; investments are authorized, as further limited
herein:
1. United States Treasury Bills, Bonds, and Notes or those for which the full faith and
credit of the United States are pledged for payment of principal and interest. There is
no percentage limitation of the portfolio that can be invested in this category, although a
five-year maturity limitation is applicable.
2. Obligations issued . by the Government '1Tational Mortgage Association (GNMA), the
Federal Farm Credit System (FFCB), the Federal Home Loan Bank Board (FHLB), the
Federal National Mortgage Association (FNMA), the Student Loan Mazketing
Association (SLMA), and the Federal Home Loan Mortgage Association (FHLMC).
There is no percentage limitation of the portfolio that can be invested in this category.
A five-year maturity limitation is applicable.
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City of Cupertino Investment Policy December 16, 2008
D12AFT'
3. Banker's Acceptances (bills of exchange or time drafts drawn on and accepted by
commercial banks) may not exceed 180 days to maturity or 40% of the cost value of the
portfolio.
4. Local Agency Investment Fund (LAIF), which is a State of California managed
investment pool, may be used up to the maximum permitted by California state law.
Investment officers will review LAIF's investment policy, investment mix, rate of
return, etc. on a monthly basis.
Investments detailed in items 5 through 1 O are further restricted to percentage of the cost value of
the portfolio in any one-issuer name to a maximum of 10%. The total value invested in any one
issuer shall not exceed 5% of the issuers net worth. Again, a five-year maximum maturity
limitation is applicable unless further restricted by this policy.
5. Commercial paper ranked P1 by Moody's Investor Services or A1+ by Standard 8r.
Poors, and issued by domestic corporations- having assets in excess of $500,000,000 and
having an AA or better rating on its long-term debentures as provided by Moody's or
Standard 8s Poors. Purchases of eligible commercial paper may not exceed 270 days to
maturity nor represent more than 1O% of the outstanding paper of the issuing
corporation. Purchases of commercial paper may not exceed 25% of the cost value of
the portfolio.
6. Negotiable Certificates of Deposits issued by nationally or state chartered banks, state
or federal savings institutions, or state or federal credit unions. These institutions may
use a private sector entity to assist in the placement of the certificates of deposit under
the conditions specified by the Government Code. Purchases of Negotiable .Certificates
of Deposit may not exceed 30% of the cost value of the. portfolio. A maturity limitation
of five years is applicable.
7. Repurchase agreements that specify terms and conditions may be transacted with banks
and broker dealers. The maturity of the repurchase agreements shall not exceed one
year. The market value of the securities used as collateral for the repurchase
agreements shall be,monitored by the investment staff and shall not be allowed to fall
below 102% of the value of the repurchase agreement. A PSA Master Repurchase
Agreement is required between the City of Cupertino and the broker/dealer or financial
institution for all repurchase agreements transacted.
8. Reverse repurchase agreements are not authorized.
9. Certificates of Deposit (time deposits), non-negotiable and collateralized in accordance
with the California Government Code, may be purchased through banks, savings and
loan associations, or credit unions. Within a limit of 30% of the cost value of the
portfolio, these institutions may use a private sector entity to assist in the placement of
the time deposits under the conditions specified by the Government Code.
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-City of Cupertino Investment Pollicy December 16, 2008
DRAI"I'
10. Medium Term Corporate Notes issued by corporations organized and operating in the
United States with a maximum maturit;~ of five years may be purchased. Securities
eligible for investment shall be rated A or better by Moody's or Standard 8i Poor's
rating services. Purchase of medium teen notes may not exceed 30% of the cost value
of the portfolio.
1 1. Bonds issued by the local agency, including .bonds payable solely out of the revenues
from a revenue producing property owned, controlled or operated by the local agency or
by a department, board, agency, or authority of the local agency.
12. Registered state warrants or treasury notes or bonds of this state, including bonds
payable solely out of the revenues from a revenue producing property owned, controlled
or operated by the state or by a department, board, agency or authority of the state.
13. Bonds, notes, warrants or other evidences of indebtedness of any local agency within
this state.
14. Various daily money market funds administered for or by trustees, paying agents and
custodian banks contracted by the City of Cupertino may be purchased as allowed under
State of California Government Code. Only funds holding U.S. Treasury obligations,
Government agency obligations, or repurchase agreements collateralized by U.S.
Treasury or Government agency obligations can be utilized and m_ ay not exceed 20% of
the cost value of the portfolio.
15. Ineligible investments are those that are not described herein, including but not limited
to, common stocks and long #erm (over five years in maturity) notes and bonds are
prohibited from use in this portfolio. It is noted that special circumstances arise that
necessitate the purchase of securities beyond the five-year limitation. On such
occasions, requests must be approved by ~~ity Council prior to purchase.
DEPOSTI'S
To be eligible to receive local agency money; a bank, savings association, federal association, or
federally insured industrial loan company shall have received an overall rating of not less than
"satisfactory" in its most recent evaluation by t:he appropriate federal financial supervisorial
agency of its record of meeting the credit needs of California's communities.
1NTEREST EARNINGS
All moneys earned and collected from investments authorized in this policy shall be allocated
monthly to various fund accounts based on the ca:~h balance in each fund as a percentage of the
entire pooled portfolio.
POLICY REVIEW
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City of Cupertino Investment Policy December 16, 2008
DRAFT
The City of Cupertino's investment policy shall be adopted by resolution of the City Council on
an annual basis. This investment policy shall be reviewed at least annually to ensure its
consistency with the overall objectives of preservation of principal, liquidity and yield, and its
relevance to current law and financial and economic trends.
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