Loading...
01-18-2005 - 2005 Investment PolicyCity of West Covina Memorandum AGENDA ITEM NO. G56 DATE January 18, 2005 TO: Andrew Pasmant, City Manager and City Council FROM: Tom Bachman, Director Finance Department SUBJECT: 2005 INVESTMENT POLICY RECOMMENDATION: Staff recommends that the City Council adopt the City's Investment Policy and accompanying Investment Portfolio Guidelines. DISCUSSION: Section 53646 of the Government Code requires the City's chief fiscal officer to submit a statement of investment policy to the City Council annually. West Covina's Investment Policy and accompanying Investment Portfolio Guidelines cover all financial assets of the City of West Covina, Community Development Commission and West Covina Public Financing Authority. This policy does not apply where superseded by specific bond issue documents, which are more restrictive, or to the West Covina Deferred Compensation Plan (established under the Internal Revenue Code 457). The City's deferred compensation plan provides for self -direction of investments by individual employees and retirees. The objectives of the City's investment policy, in priority order, are to safeguard principal, maintain cash liquidity sufficient to, meet cash flow requirements and maximize yield consistent with the first two objectives. The accompanying investment policy provides guidelines of allowable investments for the City, their maximum maturity, the applicable quality ratings, and state mandated reporting requirements. The policy also includes internal investing procedures and other information to assist readers in understanding the policy. The City, Council adopted the 2004 Investment Policy"on February 17, 2004.. According to the League of California Cities, our current policy complies with all statutory changes in the California State Government Code related to the types of allowable investments, investment policy and portfolio reporting. There are no changes to the previously approved investment policy. FISCAL IMPACT: There is no fiscal impact. Prepared by: ennis Swink City Controller Finance Docs/Xfiles/Invest Policy Reviewed/Approved y: Thomas Bachman Finance Director CITY OF WEST COVINA STATEMENT OF INVESTMENT POLICY FOR CALENDAR YEAR 2005 The purpose of this Investment Policy is to establish cash management and investment guidelines for the City of West Covina (City). The investment of the funds of the City of West Covina is directed towards the goals of safety, liquidity and yield. The State of California authority governing investments for municipal governments is set forth in the California Government Code, Sections 53600 through Sections 53659. The primary objective of the investment policy of the City of West Covina is safety of principal. Investments shall be placed in securities outlined in the authorized investments and maturity sections of this document. Effective cashflow management and resulting cash investment practices are recognized as essential to good fiscal management and control. The City monitors cash flow on a daily basis and reports results to City Council and Community Development Commission (formerly known as the Redevelopment Agency) Board monthly to help ensure that liquidity is never threatened. The City's portfolio shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. This investment policy applies to all financial assets of the City of West Covina, the West Covina Community Development Commission and the West Covina Public Financing Authority, as applicable. All references to the City of West Covina also are references to these agencies. These funds are accounted for in the City's general ledger and reported in the City's Comprehensive Annual Financial Report (CAFR). This policy is applicable, but not limited to all funds listed below: • General Funds • Special Revenue Funds. • Debt Service Funds • Capital Project Funds • Proprietary Funds Trust and Agency Funds Any new fund created unless specifically exempted This policy shall not apply 'where superseded by specific bond documents, or to the West Covina Deferred Compensation Plan under Internal Revenue Code 457. 1 A City of West Covina Investment Policy 2004 The standard to be used by the investment officials shall and shall be applied in. the context of managing all a: Government. Code Section 53600.3 provides that those decisions have been delegated (and the Council or affili; investment decisions) are trustees with a fiduciary duty This standard of care requires that "a trustee shall act diligence under the circumstances then prevailing, that capacity and familiarity with those matters would use in be that of a "prudent investor" ;pects of the overall portfolio. - persons to whom investment ated Agency Board if it makes to act as a prudent investor. with care, skill, prudence, and i prudent person acting in like the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency." , IV. OBJECTIVE The primary objectives, in priority order, of the City of West Covina's investment activities shall be: (A) Safeguard principal,: Safety of principal is the foremost objective of the investment program. 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 market 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 grade securities and by diversifying the investment portfolio. f Market risk, defined as the 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 investment portfolio to three years, the maximum maturity of any one security to five years. The structuring of the portfolio will be based on historic and current cash flow analysis, thereby eliminating the need to sell securities prior to maturity and avoiding the purchase of long term securities for the sole purpose of short term speculation. (B) Meet liquidity n�de.: Historical cash flow trends are compared to current cash flow requirements on an ongoing basis in an effort to ensure that the City's investment portfolio will remain sufficiently liquid to enable the City to meet all reasonably anticipated operating requirements for the following six months. 2 City of West Covina Investment Policy 2004 (C) Achieve a return on funds: The City's investment portfolio shall be designed with the objective of maximizing yield consistent with (A) and (B) above. The City Council or its delegate is a fiduciary for investments of City funds. However, when the City deposits funds in the Los Angeles County Pool, that responsibility transfers to the County Board of Supervisors or County Treasurer if the Board has delegated its investment authority to him/her. Authority to manage the City's investment program is derived from -West Covina Municipal Code Section 2-182(i). Management responsibility for the investment program is hereby assigned to the Director of Finance or to his/her authorized designee. Daily management responsibility of the investment program may be delegated to responsible members of the Finance Department staff who shall, under direction of the Director of Finance, establish Investment Policy Guidelines (attached) for the operation of the investment program consistent with this investment policy. Under the direction of the Director of Finance, the Finance Department staff is responsible for daily cash management functions and is authorized to conduct transactions involving pooled. cash accounts, as necessary. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment policy, or which could impair their ability to make impartial investment decisions. Investment officials shall disclose to the City Manager, and as otherwise required by law, any material financial interests (as defined by the Political Reform Act and the regulations thereunder) in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial or investment positions that could be related to the performance of the City's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City, particularly with regard to the time of purchases and sales. . 3 City of West Covina Investment Policv 2004 M The City of West Covina will diversify its investments by security type and institution. With the exception of U.S. Treasury and U.& Agency securities and authorized investment pools, no more than 40% of the City's. total portfolio will be invested in a single security type or with a single financial institution. If a lower percentage is legislatively established, then the legislatively established limit will apply. Investments in a single issuer other than the U.S. Treasury or U.S. Agencies, which exceed 5% of the total portfolio on the day the investment is purchased, must be approved by the Council prior to the purchase. The following percentage limits, maturity matrix, and quality requirements, by individual investment type, are established for the City's total pooled funds portfolio:. Local Agency Investment Fund (LAIF) I N/A I None (not to exceed $40,000,000 per account) None Overnight banks investment pools that invest solely in Investments allowable under this D0IiCY N/A 10% None U.S. Treasury bonds/notes/bills 5 vears None None U.S. Government AgencyAgengy obligations 5 years None None Bankers' acceptances 180 days 40% Federal Reserve 1 KA„ 4 City of West Covina Investment Policy 2004 • M#9[flilp The Director of Finance or his/her authorized designee will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness, who maintain an office in the State of California. These may include primary or secondary dealers or brokers that qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule). No public deposit shall be made except in a qualified public depository as established by state law. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following: A. Audited financial statements B. Proof of National Association of Security Dealers certification C. Proof of State registration D. Certification of having read investment policy E. Depository contracts F. Broker/Dealer questionnaire, as applicable An annual review of the financial condition and registrations of qualified bidders will be conducted by the Director of Finance or his/her authorized designee. A current audited financial statement is required to be on file for each financial institution and broker/dealer with which the City of West Covina invests. The City of West Covina is empowered by California Government Code Section 53601 to invest in the following types of securities, and is .subject to the limitations set out in that section as well as the remainder of this policy. Any investment structure, which has the effect of the City borrowing money, is prohibited. A. TREASURY ISSUES: Treasury Bills, Treasury Notes, and Treasury Bonds , B. FEDERAL AGENCIES: Federal National Mortgage Association (FNMA) securities, Federal. Home Loan Bank .(FHLB) securities, Federal Home Loan Mortgage Corporation (FHLMC), Federal Farm Credit Bureau (FFCB) securities, Government National Mortgage Association (GNMA) securities, Small Business Administration (SBA) securities, Student Loan Marketing Association (SLMA) securities, etc. C. BANKERS' ACCEPTANCES: The City may not purchase bankers 5 i City of West Covina Investment Policy 2004 acceptances exceeding one hundred and eighty (180) days maturity or forty percent (40%) of the City's surplus money, (Government Code 53601(f).) Furthermore, no more than thirty percent (30%) of the City's surplus funds may be invested in bankers acceptances of any one commercial bank. D. CERTIFICATES OF DEPOSIT E. REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: A Public Securities Association (PSA) Master Repurchase Agreement is required between the City of West Covina and the broker/dealer or financial institution for all repurchase agreements and reverse repurchase agreements transacted. The maturity of repurchase agreements shall not exceed 100 days. The counterparty must be a primary dealer of the Federal Reserve Bank of New York. The market value of securities used as collateral for repurchase agreements shall be monitored daily and will not be allowed to fall below 100% of the value of the repurchase agreement. In order to conform with provisions of the Federal Bankruptcy Code which provides for the liquidation of securities held as collateral for repurchase agreements, the only securities acceptable as collateral shall be eligible negotiable certificates of deposit, eligible bankers' acceptances, or securities that are direct obligations of, or that are fully guaranteed as to principal and interest by, the United States or any agency of the United States. The City may invest in reverse repurchase agreements only with those banks and dealers with whom the City has entered into a master repurchase contract, which outlines the terms and conditions of repurchase and reverse repurchase agreements. The counterparty must be a primary dealer of the Federal Reserve Bank of New York. Prior City Council approval is required. The City may invest in reverse repurchase agreements for two purposes: 1. Unanticipated cash outflow, in the judgement of the Director of Finance, is met more advantageously by entering into a reverse repurchase agreement than by selling securities outright. In such a case, the reverse repurchase shall not exceed 92 days, and shall be matched .to a known cash inflow of sufficient size to repay the -principal and interest of the reverse repurchase agreement. 2. The Director of Finance, under the prevailing market�conditions can reinvest funds obtained through the reverse repurchase agreement i A City of West Covina Investment Policy 2004 in a higher yielding security to obtain additional interest income for the City, at a spread deemed to be acceptable. Reverse repurchase agreements entered into in accordance with this paragraph may not exceed 92 days to maturity unless there is a guaranteed earning spread which would extend the maximum maturity to 100 -days, and must be matched as to maturity and dollars invested with its corresponding reinvestment. No more than 20% of the market value of the portfolio may be invested in reverse repurchase agreements. 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. The security reversed must have been paid for and owned for 30 days prior to the agreement. F. COMMERCIAL PAPER: Commercial paper shall be of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided for by Moody's Investors Service, Inc., or Standard and Poor's Corporation. Eligible paper is further limited to issuing corporations that are organized and operating within the United States, having total assets in excess of five hundred million dollars ($500,000,000), and having an "A- V or higher rating for the issuer's debt, other than commercial paper, if any, as provided for by Moody's Investors Service, Inc. or Standard and Poor's Corporation. Purchases of eligible commercial paper may not exceed 270 days maturity nor represent more than 10 percent of the -outstanding paper of an issuing corporation. Purchases of commercial paper may not exceed 40 percent of the agency's surplus money, which may be invested. Moreover, the bank, savings association, federal association, or federally insured industrial loan company receiving City money must have an overall rating of not less than "satisfactory" in its most recent evaluation by the appropriate federal financial supervisorial agency of its record of meeting the credit needs of California's communities; including low- and moderate -income neighborhoods, pursuant to Section 2906 of Title 12 of the United States Code. (Government Code 53635.2) G. MEDIUM TERM NOTES: Notes eligible for investment shall be rated in a i rating category of "A" or its equivalent or better as provided for by Moody's Investors Service, Inc., or Standard and Poor's Corporation. H. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCD): To be eligible for purchase by the City, the NCD must be issued by a Nationally or State- 7 City of West Covina Investment Policy 2004 Chartered bank or a State or Federal, savings and loan association or State -licensed branch of a foreign bank, and must meet one of the following criteria: • Be a California Bank rated "A" or better by a nationally recognized service; -r • Be a major national or regional bank outside California rated "A" or better by a recognized rating service; Be a domestic branch of a foreign bank ("Yankee" C.D.) rated "I" for country rating, "II" or better for peer -group rating, and "II" or better for dollar access by a recognized rating service; Be a savings and loan association operating in California rated "A" or better by a recognized rating service. Purchases of negotiable certificates of deposits may not exceed 30% of the total portfolio. I. LOCAL AGENCY INVESTMENT FUND (LAIF) J. LOS ANGELES COUNTY INVESTMENT POOL (LACIP) K. BANK INVESTMENT POOLS THAT INVEST SOLELY IN SECURITIES ALLOWABLE UNDER THIS POLICY (items IX.A — IX.J) •■ # ii I 4LIK) California Government Code Section 53601.6 prohibits the following list of investment. types. In addition to this list, any investment which staff does not fully understand shall be included as an ineligible investment. A. INVERSE FLOATERS B. RANGE NOTES C. INTEREST -ONLY MORTGAGE STRIPS, OR ANY SECURITY THAT COULD RESULT IN ZERO INTEREST ACCRUAL IF HELD TO MATURITY. 3 City of West Covina Investment Policy 2004 Collateral ization will be required on two types of investments: certificates of deposit and repurchase agreements including reverse repurchase agreements. In order to anticipate market changes and provide a level of security for all funds, the market value of securities used as collateral for repurchase agreements shall be monitored daily and will not be allowed to fall below 100% of the value of the repurchase agreement. In order to conform with provisions of the Federal Bankruptcy Code which provides for the liquidation of securities held as collateral for repurchase agreements, the only securities acceptable as collateral shall be eligible negotiable certificates of deposit, eligible banker's acceptances, or securities that are direct obligations of, or that are fully guaranteed as to principal and interest by, the United States or any agency of the United States. A third party custodian with whom .the City of West Covina has a current custodial agreement will always hold collateral. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the City and retained. 1.1 . Zi 11kTICY!All szoi• All security transactions, including collateral for repurchase agreements, entered into by the City of West Covina shall be conducted on a delivery -versus -payment (DVP) basis. Securities will be held by a third party custodian designated by the Director of Finance or his/her authorized designee and evidenced by safekeeping records. To the extent possible, the City of West Covina will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, and as authorized no less than three months in advance by specific Council action, the City will not directly invest in securities maturing more than five years from the date of purchase. However, the City may collateralize its repurchase agreements using longer dated investments not to exceed five years to maturity. Reserve funds may be invested in securities exceeding 5 years if the maturityof such investments is made to coincide as nearly as practicable with the expected use of funds. 9 10 City of West Covina Investment Policy 2004 The Director of Finance will establish internal controls covering investing procedures designed to protect the City's investments from unauthorized use or disposition and ensure compliance with the Investment Policy. The controls established are attached to this document. See the attached "Investment Procedures". The Director of Finance or his/her authorized designee shall establish an annual process of independent review of internal control by an external auditor. This review will assure compliance with policies and procedures. Specific areas of review are investment authorizations, proper safekeeping methods, and comparison of broker dealer with safekeeping confirmations. The investment portfolio will be designed to obtain a market average rate of return during budgetary and economic cycles, taking into account the City's investment risk constraints and cash flow needs. The City's investment strategy is active. Given this strategy, the basis used by the Director of Finance or his/her authorized designee to determine whether market yields are being achieved shall be no lower than the six month U.S. Treasury Bill yield at month end. TheCity Treasurer shall review and submit monthly reports to the City Council which shall include the cost or par value of the cash investment, the classification of the investment, the name of the institution or entity, the rate of interest, the maturity date, the current market value and accrued interest due for all securities, as well as all bank account activity. The report shall also include cash held by trustees in various funds for all bond issues and cash in the various City bank accounts. It most detail compliance or non-compliance with the investment policy and must provide a statement of the ability to meet budgeted expenditure needs for the following six months. The City Treasurer shall also submit copies of its second and fourth quarter reports to the California Debt and Investment Advisory Commission within 60 days after the close of the second and fourth quarters of each calendar year. 10 City of West Covina Investment Policy 2004 XVII. LEGISLATIVE CHANGES Any State of California legislative action, that further restricts allowable maturities, investment type or percentage allocations, will be incorporated into the City of West Covina's Investment Policy and supersede any and all previous applicable language. XVlll. INTEREST EARNINGS All monies earned and collected from investments authorized in this policy shall be' allocated quarterly based on cash balances in each fund as a percentage of the entire pooled portfolio. XIX. INVESTMENT POLICY ADOPTION The City of West Covina's investment policy shall be reviewed on an annual basis, and any modifications made thereto must. be approved by the City Council. 11 City of West Covina Investment Policy 2004 CITY OF WEST COVINA INVESTMENT PORTFOLIO GUIDELINES These guidelines were established to direct and control investment activities in such a manner to assure that the goals established in the Investment Policy are attained. 1. Cash Forecast. The cash flow of the City shall be updated daily with an analysis of cash receipts and expenditures and a review of the scheduled investment maturities to ensure that adequate cash will be available to meet disbursement requirements. 2. Lona Term Maturities. As a general rule, long term maturities should not represent a significant percentage of the total portfolio, as the principal risk involved can outweigh the potential for higher earnings. However, investments may be made with maturities longer than five years with City Council approval. No more than 15% of the total portfolio may be invested in securities with maturities greater than five years unless authorized three months in advance by specific Council action. 3. Diversification. The portfolio should consist of a mix of various types of securities, issuers, and maturities. 4.. Solicitation of Bids. Purchase and sale of securities shall be made on the basis of informal competitive bids and offers with a minimum of two quotes being obtained, when practical 5. Authorized Institutions. Investment transactions will only be executed with previously approved entities. A list of these institutions shall be authorized and maintained by the Director of Finance or his/her authorized designee. 6. Investment Transaction. Every investment transaction must be reviewed and authorized by the Director of Finance or his/her authorized designee. 7. Automated Wire Transfers. Whenever possible, pre -formatted wire transfers (templates) will be used to restrict the transfer of funds to pre -authorized accounts only. When transferring funds to a bank account not previously authorized, callback verification to the Director of Finance or his/her authorized designee is required to complete the wire transfer order. 8. Safekeeping. The Trust Department of the Bank designated by the Director of Finance shall hold securities purchased from broker/dealers in third party safekeeping. Said securities shall be held in the name of the City of West Covina 12 City of West Covina Investment Policy 2004 with the trustee executing transactions as directed by the Director of Finance or his/her authorized designee. 9. Stratea . Strategy refers to the plan of action for managing financial resources in the most advantageous manner. The following elements are used in developing strategy: . a. Economic Forecasts. Economic forecast information developed by economists and financial experts and obtained through bankers, financial analysts and brokers is used to assist in the formulation of an investment strategy for the City. b. Investment Implementing. Execute - only investment transactions which conform with anticipated cash flow requirements, economic condition and interest rate trends and are consistent with the established Investment Policy Statement. C. Rapport. A close working relationship within the Finance Department and other City departments such as Public Safety and Public Services Department and all other Departments having a significant impact on cash flow, is maintained in order to maximize the efficiency of the City's cash management system and establish cash flow requirements. d. Preserve Portfolio Value. Develop yield standards in order to maintain earnings consistent with the market average rate of return to preserve the value of the portfolio. (1) Investment instrument characteristics should be known and understood before a purchase of the investment instrument is undertaken; and (2) Recognizing that there are no firm and steadfast rules (strategies) for portfolio management due to the fact that investor expectations change by the day, hour and minute, and because of this market instability, prudent principles of fiscal management mud be applied. 13 City of West Covina Investment Policy 2004 GLOSSARY AGENCIES: Federal agency securities. ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft, bill, or exchange accepted by a bank or trust company accepting institution guarantees payment of the bill, as well as the issuer. BID: The price offered for securities. ' . BROKER: A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets, in which banks buy and sell money, and in inter -dealer markets. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large -denomination CD's are typically negotiable. COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also, refers to securities pledged by a bank to secure deposits of public monies. COMMERCIAL PAPER (CP): Short-term, unsecured, promissory notes issued by corporations to finance short-term credit needs. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual financial reportof the City of West Covina. It includes combined statements for each individual fund and account group in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance -related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. COUPON: (a). The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b). A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only'by the general credit of the issuer. 14 City of West Covina Investment Policy 2004 DELIVERY VERSUS PAYMENT (DVP): There are two methods of delivery of securities: delivery versus _payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with -an exchange of a signed receipt for the securities. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index. or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non -interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply, credit to various classes of institutions and individuals, e.g., such as savings and loan associates, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district Bank.. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the United States Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder -owned corporation. The corporation's purchases include a variety of adjustable rate mortgages and second loans in addition to fixed rate mortgages. FNMA's securities 15 City of West Covina Investment Policy 2004 are highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of ,the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven -member Board of Governors and 12 regional banks. About 5,700 commercial banks are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank' credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations and other institutions. The full faith and credit of the U.S. Government protect the security holder. Ginnie Mae securities are backed by FHA, VA or FMHM mortgages. The term "pass-throughs" is often used to describe Ginnie Mae Securities. LIQUID ASSET: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LIQUIDITY: The ability to convert investments to cash. LOCAL AGENCY INVESTMENT FUND (LAIF): The aggregate of all funds from political subdivisions that are placed in the custody of the State of California Treasurer for the benefit of local agencies. State law (California Government Code Section 16429.1) establishes the maximum deposits for each local agency. LOS ANGELES COUNTY INVESTMENT POOL (LACIP): Similar to LAIF, this pool is established by the Los Angeles County Treasurer for the benefit of local agencies under California Government Code Section 53684. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties related to repurchase or reverse repurchase agreements. The contract establishes each party's rights in the transactions. A master agreement will 16 City of West Covina Investment Policy 2004 often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the event of default of the seller -borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MEDIUM TERM NOTES: Notes with a maximum of five years maturity issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCD): Although technically a deposit, it is similar to a short-term note, which eams the depositor a competitive rate of return. Negotiable certificates of deposit were developed so that large deposits could be made at a competitive interest rate with some liquidity. OFFER: The price asked by the seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. _ OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank, system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: A collection of securities held by an individual organization or institution. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and'Exchange Commission (SEC) -registered securities brokers -dealers, banks, and a few unregulated firms. PRUDENT INVESTOR RULE: This rule is an investment standard. In some states, the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state. The securities are commonly referred to as the legal list. In other states the trustee may invest in a security if it .is one, which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital, 17 City of West Covina Investment Policy 2004 QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return. REPURCHASE AGREEMENT (REPO): Agreements with banks and dealers under which the City has entered into a master repurchase agreement that specifies terms and conditions of individual repurchase agreements. The agreement requires the seller of a security to repurchase an investment on a specific date for an agreed -upon price. REVERSE REPURCHASE AGREEMENTS: Agreements with banks and dealers under which the City has entered into a master reverse repurchase agreement and specifies the terms and conditions of individual reverse repurchase agreements. The agreement requires the purchaser of an investment to sell the investment back on a specific date for an agreed -upon price. SAFEKEEPING: A service to customers rendered by banks and other security custodians for a fee. For the fee, the customer's securities and valuables of all types and descriptions are held in the service provider's vaults for protection. Securities are commonly held electronically in lieu of physical custody in a vault. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See Uniform Net Capital Rule. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations, which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative -based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. TREASURY BILLS: A non -interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. 18 In i City of West Covina Investment Policy 2004 TREASURY BONDS: Long-term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium -term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. —UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker -dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital, ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) Income yield is obtained by dividing the current dollar income by the current market price for the security. (b) Net yield or yield to maturity (YTM) is the current income yield minus any premium above par or plus any discount from, purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. 19 } City of West Covina Investment Policy 2004 CERTIFICATION I hereby certify that I have personally read the City of West Covina's Investment Policy and the California Government Codes pertaining to the investments of the City of West Covina, and have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of West Covina. All sales personnel will be routinely informed of the City of West Covina's investment objectives, horizon, outlook, strategies and risk constraints whenever we are so advised. We pledge to exercise due diligence in informing the City of West Covina investment officers of all foreseeable risks associated with financial transactions conducted with our firm. I attest to the accuracy of our responses to your questionnaire. NOTE: Completion of Questionnaire is only part of the City of West Covina's certification process and does not guarantee the applicant will be approved to do business with the City of West Covina. SIGNED: DATE: COUNTERSIGNED: DATE: (Person in charge of government securities operations.) . 20. City of West Covina Investment Policy 2004 INVESTMENT PROCEDURES The Revenue. Services Supervisor projects daily cash flow needs.' These needs are updated and reported to the City Controller daily. The City Controller tracks economic trends related to investments, including, but not limited to interest rates, inflation rates, unemployment rates, and stock market trends. Based upon the cash flow analysis, the holdings in the portfolio and trend analysis, the City Controller develops an investment strategy for the upcoming month. The Director of Finance approves the investment strategy. Based upon the approved investment strategy for the month, the City Controller arranges to purchase investments, as follows: Daily, the City Controller determines which investments should be purchased or sold based upon current market conditions, and allowable investments under this policy. The City Controller selects the investments that will provide the City the greatest return on investment within the established safety and liquidity policies. The City Controller obtains at least 2 bids for each investment purchased or sold from authorized brokers/dealers, with the exception of new issues by a government issuer which sell at a set price, usually par value, and selects the bid that provides the greatest return on investment to the City. The City Controller documents compliance with all established criteria and the rational for each sale or purchase (investment transaction package). The Director of Finance approves each sale or purchase, as documented (approved investment transaction package). The City Controller contacts the selected broker/dealer to execute the approved transactions The City Controller directs brokers to deliver all investments to the City's custodial bank for safekeeping, and executes transactions on the DVP basis. The Revenue Services Supervisor agrees the terms of the trade, as evidenced by the safekeeping receipt, to the approved investment transaction package. The safekeeping receipt is attached to the approved investment transaction package. The approved investment transaction package is retained in a' chronological file and a 21 ' City of West Covina Investment Policv 2004 copy is forwarded to the accountant for recording in the general ledger. Monthly, the Accountant reconciles the safekeeping statement and the treasury balance to the general ledger. 22 City of.West Covina Investment Policy 2004 CITY OF WEST COVINA BROKER/DEALER . QUESTIONNAIRE AND CERTIFICATION 1. Name of firm: 2. Address: 3. Telephone: Telephone: 4. Primary Representative name Manager/Partner-in-charge name Title Title Telephone No. Telephone No. No. of years in Institutional Sales No. of years in Institutional Sales No. of years with firm No. of years with firm 5. Are you a Primary Dealer in U.S. Government Securities? o Yes o No 6. Are you a Regional Dealer in U.S. Government Securities? o Yes o No 7. Are you a Broker. instead of a Dealer, i.e., you DO NOT own positions of Securities? o Yes o No 8. What is the net capitalization of your firm? 9. What. is the date of your Firm's fiscal year-end? t City of West Covina Investment Policy 2004 10. Is your Firm owned by a holding company? If so, what is its name and net capitalization? 11. Please provide your wiring and delivery instructions: 12. Which of the following instruments are offered regs la�rly by your local desk? o T-Bills o Treasury Notes/Bonds o Discount Notes o NCD's o BA's (Domestic) o BA's (Foreign) o Commercial Paper Mid -Term Notes o Agencies (Specify) 13. Which of the above does your Firm specialize in marketing? 14. Please identify your most directly comparable City/Local Agency clients in our geographical area. En2y Contact Person Telephone No Client Since 15. What reports, transactions, confirmations and paper trail would we receive? r City of West Covina " Investment Policy 2004 16. Please include samples of research reports or market information that your firm regularly provides to local agency clients. 17. What precautions are taken by your Firm to protect the interest of the public when dealing with government agencies as investors? 18. Have you or your Firm" been censored or punished by a State or Federal regulatory agency for improper or fraudulent activities, related to the sale of securities? o Yes o No If yes, please explain: 19. Attach certified documentation of your capital adequacy and financial solvency. In addition, an audited financial statement must be provided within 120 days of your fiscal year-end.