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01-04-1994 - Amendments to Investment Policy• City of West Covina Memorandum To City Council AGENDA FROM Finance Department ITEM NO. J- lb susiEcr. AMENDMENTS TO INVESTMENT POLICY DATE January 4, .'1994 SUNKARY: The Council will consider -the adoption -of amendments to the City's'current investment policy. BACRGROUND: At the meeting. of May 4, 1993, the Council adopted a new investment policy for the City and related entities. where applicable.ii, This was the, result of the increasingly complex nature of today's financial markets and the more active investment management 'needed by West Covina to help address "its fiscal challenges. Some of the provisions in the new policy' pertain to practices new to West Covina so standard language was Iused. -It. is now apparent that some of these provisions are not well -suited to our situation and should be considered for amendment. , ANALYSIS 1. INCREASE THE LIMIT ON REVERSE REPURCHASE AGREEMENTS Page 12 of the new Investment Policy states that "No more than 10% of the market value,of the.portfolio.may be invested in..reverse repurchase agreements." Under a reverse repurchase agreement the City would sell some of .its securities:to a dealer and invest the proceeds. Then on a specified date and at"a.specified price, the City would repurchase the securities. The interest earned on the sales proceeds would exceed the premium paid with the repurchase. The City currently holds long-term U.S.. Government Agency securities with.a market value of $16,million, which could be used in a reverse repurchase agreement" to,,, generate about $10,000 per month in additional net interest earnings. However, the current. policy limits our investment in reverse repurchase agreements to 10% of the.:portfoliols market value or $5,854;000. it Consequently, staff is"proposing that the language in the policy be amended to read: "No more than 30% of the market value of the, portfolio may be invested in reverse repurchase agreements."'i� This currently translates to $17,563,000 which is. suf f icient to allow the $16 million in -Agency securities to be fully utilized and is more than enough to completely use up.the $15 million capacity of the new account at the Local Agency._Investment Fund authorized by the Council on .September 7, 1993, for this very purpose.; Any surplus would be deposited in the Los Angeles County Pool. I` 2. ENHANCE THE SAFEGUARDS AGAINST ABUSES OF REVERSE REPURCHASE AGREEMENTS The Council will no doubt recall the well -publicized difficulties experienced by other cities (ie. San Jose, Camarillo) which. have used reverse repurchase agreements in the past. These problems were due to abuses of reverse repurchase agreements and would not have occurred if sound :investment practices had been followed. This" entails restricting the investment of reverse repurchase agreement proceeds to non-volatile instruments and not adding more layers of reverse repurchase agreements to the original transactions. Consequently, staff is proposing that the following language be added to the investment policy: Memo to City Council Page 2 "The proceeds from reverse repurchase agreements may be invested only in instruments with a fixed principal value and these instruments may not be used for additional reverse repurchase agreements." By preventing the investment of the proceeds in a volatile instrument. (ie. one where the market value of principal fluctuates), we will avoid the possibility of being forced to sell investments at a loss to raise cash to repurchase the bonds originally sold under the agreement, as occurred in Camarillo. The prohibition against "layering" is meant to prevent the City from using the proceeds from the original reverse repurchase agreement to purchase bonds which are in turn sold in a.second simultaneous reverse repurchase agreement and so on. This is a. highly leveraged transaction with the potential for multiplying risks if a problem develops with one part of the arrangement-, as in San Jose. 3. GENERAL SAFEGUARDS AGAINST ABUSES OF REVERSE REPURCHASE AGREEMENTS It should be pointed out tha, policy, the City screens ar before transacting any busin that only economically viable economic causes for performar deterrent against performanc repurchase agreement which hi City Attorney. pursuant to our ;current investment. i evaluates its securities dealers Ss. This process will help assure iealers are used, thus. minimizing the :e failure by the dealer. The legal : failure. is provided by a master s been reviewed and approved by the The term of any reverse repurchase agreement in limited to 100 days under our investment policy, thus providing an additional safeguard. Staff has consulted with the Investment Committee of the Municipal Treasurers Association of the United States and Canada which agreed that the transaction as proposed is.sound'and prudent. Raising the-10% threshold wo portfolio, management as lai Investment Policy. The inve: the City would hold the cash 1 would be increased through ti RECOMMENDATION: Staff recommends that the 1 portfolio that may be invest 10% of the portfolio's mark, i not be inconsistent with prudent out in state law and the City's ,ent would be safe and liquid since ceeds from the agreement, and yield arbitrage process described above. juage restricting the amount of.the in'a reverse repurchase agreement to value be -amended to read: "No more than 30% of the market value of the portfolio may be' invested in reverse repurchase agreements". - Staff recommends that the following be added to the investment policy:' -