Item No. 7AGENDA ITEM NO. 7
AGENDA STAFF REPORT
City of West Covina I Office of the City Manager
DATE: May 17, 2022
TO: Mayor and City Council
FROM: David Carmany
City Manager
SUBJECT: ANNUAL REVIEW OF FINANCIAL POLICIES
RECOMMENDATION:
It is recommended that the City Council adopt the following resolutions:
RESOLUTION NO. 2022-47 — A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WEST
COVINA, CALIFORNIA, AMENDING THE FUND BALANCE POLICY
RESOLUTION NO. 2022-48 — A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WEST
COVINA, CALIFORNIA, APPROVING THE STATEMENT OF INVESTMENT POLICY
BACKGROUND:
Financial policies are used to set the baseline standards for how the City will be managed financially. The
City of West Covina has the following financial policies:
Budget Policy
This policy establishes a budget process to help decision makers make informed choices about the
provision of services and capital assets and to promote stakeholder participation in the process.
(Attachment No. 1)
Debt Management Policy
This policy establishes guidelines for the issuance and management of debt. (Attachment No. 2)
Fund Balance Policy
This Fund Balance Policy establishes the procedures for reporting unrestricted fund balance in the
City's financial statements Certain commitments and assignments of fund balance will help ensure
that there will be adequate financial resources to protect the City against unforeseen circumstances
and events, such as revenue shortfalls and unanticipated expenditures. (Attachment No. 3)
Pension Funding Policy
This policy provides guidance in making annual budget decisions; demonstrates prudent financial
management practices; creates sustainable and affordable budgets for pensions; and reassures
bond rating agencies. (Attachment No. 4)
• Debt policies are available to the public and other stakeholders.
Because these policies are essential to budget decision making,
particularly capital budgets, they will be reviewed by decision makers
during the annual budget process and as an appendix in the budget
document. Debt Policy will be reviewed for every debt issuance for
The City Council has a debt policy and compiles it with other financial
policies.
D. Evaluate the Use of Unpredictable Revenues
• One-time or short-term revenues will be identified clearly in the
budget process. Unpredictable revenue sources cannot be relied on
as to the level of revenue they will generate.
• For each major unpredictable revenue source, the City identifies those
aspects of the revenue source that make the revenue unpredictable.
Such as, grant supported operating costs.
• One-time revenues will never cover the costs of continuing operating
budgets. One-time revenues will only cover one-time costs such as
matching requirements, one-time purchases, one-time payments to
unfunded liabilities, etc.
E. Develop Policy on Balancing the Operating Budget
• The City defines its Balanced Operating Budget as uses of resources
for operating purposes does not exceed available resources over the
budget period, July 1 to June 30th
• The City is committed to a balanced budget under normal
circumstances and will provide disclosures when a deviation from a
balanced operating budget is planned or when it occurs. A balanced
budget is a basic budgetary constraint intended to ensure that the City
does not spend beyond its means.
• Operating resources (revenues) includes all taxes, licenses and
permits, fines and forfeitures, use of money and property, charges for
services, interdepartmental charges, miscellaneous revenues and
intergovernmental revenues in the General Fund, Special Revenue
Funds, Capital Projects, Debt Service Funds, and Internal Service
Funds.
• Operating uses (expenditures) are personnel service costs, material and
service costs, capital purchases, and interdepartmental allocations.
H. Develop Programs, Services, Operating, and Capital Policies and Plans
A. Prepare Policies and Plans to Guide the Design of Programs and Services
• Service and programs directly relate to strategies identified by the City
to achieve set goals.
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• Each department of the City, such as City Council, City Manager, City
Clerk, Police, etc. identify the programs and services along with groups
or populations to be serviced, service delivery issues, specific
programs listed with standards of performance (including level of
service standards or other measures to gauge success), expected
costs, time frames for achievement of goals, issues pertaining to
organization structure, and priorities for service provision.
• Each department identifies their goals and achievements by
department which should correlate to overall goals of the City.
• Each department identifies the resources (revenues) used to obtain the
goals.
B. Prepare Policies and Plans for Capital Asset Acquisition, Maintenance,
Replacement, and Retirement
• The City will annually evaluate the need to budget for acquisition,
maintenance, replacement, and retirement of capital assets to help
ensure that needed capital assets or improvements receive
appropriate consideration in the budget process and that older capital
assets are considered for retirement or replacement. This is necessary
to plan for large expenditures and to minimize deferred maintenance.
• Annual budget evaluation may address inventorying capital assets and
evaluating their condition, criteria for acceptable condition, criteria for
continued maintenance versus replacement or retirement of an
existing asset, and identification of funding for adequate maintenance
and scheduled replacement of capital assets.
• Any assets identified as corning due for replacement will be addressed
in multi -year budgets to address replacement and renewal schedules
and must recognize the linkage of capital expenditures with the annual
operating budget.
• Plans for addressing deferred maintenance may also be an output of
this practice. Once adopted, which may be included in the Capital
Improvement Program (CIP) Budget, the plan will be made publicly
available, particularly as set forth in budget, management, and
planning documents.
C. Develop Options for Meeting Capital Needs and Evaluating Acquisition
Alternatives°
• The City develops Capital Improvement Program Budgets to address
° City is to conduct quarterly reviews of existing capital projects in relation to goal attainment
and to maintain, renovate, and replace, City facilities. Various considerations to be part of
evaluation (i.e. costs, impacts on service, funding levels, use of non -General Funds, stakeholder
input, etc.).
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• capital needs that are consistent with financial, programmatic, and
capital policies and to evaluate alternatives for acquiring the use of
capital assets. Capital project planning is necessary to give adequate
consideration to longer -range needs and goals, evaluate funding
requirements and options, and achieve consensus on the physical
development of the community.
• Annually in the budget process the City evaluates alternative
mechanisms to help ensure that the best approach for providing use of
acapital assetorfacility is chosen based on the policies and goals ofthe
City.
• The City uses the CIP Budget to identify capital projects that are
needed to achieve goals and a general time frame in which these assets
will be needed.
D. Develop Performance Measures
• The City will annually, during the budget process, review and develop
and utilize performance measures for functions, programs, and/or
activities. Performance measures are used for assessing how
efficiently and effectively functions, programs, and activities are
provided and for determining whether program goals are being met.
• Performance measures may be linked to specific program goals and
objectives.
• The measures are to be valid, reliable, and verifiable.
• Whenever feasible, they should be expressed in quantifiable terms.
• Measures will be reported in periodic reviews of functions and
programs, staff reports, and should be integral to resource allocation
decisions.
• They also are to be reported in the budget document and may be
reported in separate management reports or reports to residents.
• Different aggregations of performance measures may be appropriate
for different audiences.
ffi. Develop Management Strategies
A. Develop Strategies to Facilitate Attainment of Program and Financial Goals
• The City has an organizational structure and management strategies
that facilitate attainment of program and financial goals. Goals are
more likely to be achieved if organizational and management
strategies are developed to support and encourage organizational and
individual performance directed toward goal attainment.
• The City has developed a means to review, improve, and implement
strategies that encourage the City and its employees to work toward
achievement of goals.
• These strategies include both positive incentives and penalties.
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• They also include support systems such as technology support,
education, and training.
B. Develop Mechanisms for Budgetary Compliance
• Finance provides monthly budget to actual reports to each
department head and City Manager to ensure proper review for
compliance with the adopted budget. Appropriate management
processes and systems allow the City to detect and correct significant
deviation if it occurs.
• On a quarterly basis Finance provides budget to actual reports to
department heads and City Council.
• These reports provide measures of departments' budget.
• Budgetary compliance is encouraged through use of data collection and
reporting systems that control disbursements of funds and that
facilitate the evaluation of revenue and expenditure trends and
financial projections.
• City Manager will address any deviation of the budget to actual report
(i.e. budget amendments).
• The City has instituted procedures to review the budget quarterly and
decide on actions to bring the budget into balance, if necessary.
C. Develop the Type, Presentation, and Time Period of the Budget
• The City will annually present the budget, which will cover the fiscal
year July lit through June 30th. The type of budget, the time period
covered, and the manner of presenting materials in the budget
documents can have a significant practical impact on the City's
approach to planning, control, and overall management of its
programs, services, and finances, and on the quality of information
provided to stakeholders.
• The output of the budget will provide fund level and department level
program information for the full fiscal year. The adopted budget will
be provided to all stakeholders on the City website.
• A formal review will be undertaken periodically to ensure that the
budget type, time period, and approach to presenting the budget
continue to meet the needs and priorities of the City. Such a review
will be broadly focused, and not directed simply at the format of
individual pages.
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Goal# 3-Develop a Budget Consistent with Approaches to Achieve Goals
L Develop a Process for Preparing and Adopting a Budget
A. Develop a Budget Calendar
• The City publishes a comprehensive budget calendar that specifies
when budget tasks are to be completed and that identifies timelines
forthose tasks. This includes budgetworkshops available to the public.
Stakeholders need to be aware of when key budget tasks, events, and
decisions will occur so they have an opportunity to plan and to
participate in the process. The preparation of a calendar helps ensure
that all aspects of the budget process have been considered and that
adequate time has been provided.
• Multiple calendars can be produced, each with different levels of
detail and emphasis to meet the needs of the different types of
stakeholders. (i.e. Internal Calendar and Public Calendar).
• Calendars list the dates of key events and deadlines.
• At least one calendar describes the overall budget and planning
process and identify roles, responsibilities, and assignments.
• To ensure the greatest impact, calendars will identify when and how
stakeholders can participate in the process.
B. Develop Budget Guidelines and Instructions
• The City will develop annual general policy guidelines and budget
preparation instructions for each budget cycle and accompany the
internal budget calendar. Budget guidelines and instructions help
ensure that the budget is prepared in a manner consistent with
government policies and the desires of management and the City
Council. Instructions are necessary so that all participants know what
isexpected, thereby minimizing misunderstanding and extra work.
• Budget guidelines are specific to the particular budget under
development and will incorporate relevant aspects of the City's
financial policies.
• Each department is required to provide the Projected Actuals for
revenues and expenditures of the current year for their respective
department.
• Each department is required to provide Proposed Revenues and
Appropriations for the upcoming fiscal year for their respective
department.
• Guidelines and instructions may set forth financial constraints and key
assumptions that will be used to guide development of the budget, as
well as policy direction.
• Instructions often include sample forms to be completed by the
operating departments. Guidelines and instructions are prepared in a
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written format but may also be presented in an electronic format or
through training and/or an oral presentation.
C. Develop Mechanisms for Coordinating Budget Preparation and Review
• The City has developed mechanisms and assigned responsibilities to
provide for overall coordination of the preparation and review of the
budget. The complete budget process involves many levels,
departments, and individuals in the City, as well as a number of
distinct processes and disparate groups of stakeholders. Coordination
is needed to ensure that processes move forward as planned, to
prevent confusion and misinformation, and to ensure appropriate
stakeholders are involved.
• The Finance Department is the single point of coordination for all
departments.
• The Finance Department's coordination process will involve a number
of tasks: developing a calendar, identifying responsibilities for
completing various tasks, ensuring that various parts of the budget
process are properly integrated, keeping the process on schedule,
producing reports, identifying issues and problems, and ensuring that
other requirements are met and quality standards are maintained.
• The Finance Director has ultimate responsibility for coordinating the
budget process and will respond to stakeholder issues and concerns
that arise in the context of the budget process with direction from the
City Manager and City Council.
D. Develop Procedures to Facilitate Budget Review, Discussion, Modification,
and Adoption
• The City has a process to facilitate the review, discussion,
modification, and adoption of a proposed budget. Appropriate
procedures are needed to resolve conflicts, to promote acceptance
of the proposed budget by stakeholders, and to assist in timely
adoption of the budget.
• This process allows stakeholders to be informed of the budget
proposal and to allow the legislative body to achieve consensus and
adopt a budget.
• Some examples include: small group meetings, hearings, workshops,
independent analysis, specific decision -making techniques and
procedures, conflict resolution processes, and methods for
presenting portions of the budget.
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E. Identify Opportunities for Stakeholder Input
• The City provides opportunities in the budget process for obtaining
stakeholder input.5 By definition, stakeholders are affected by the
City's resource allocation plans and service and program decisions.
Stakeholders should have clearly defined opportunities to provide
input. This helps ensure that stakeholder priorities are identified and
enhances stakeholder support for the approved budget.
• Stakeholder input can be obtained in a number of ways, including
public hearings, advisory commissions, informal conversations,
roundtable briefings, televised and live online broadcast, opinion
surveys, neighborhood meetings, office hours, letter writing,
telephone calls, and e-mail.
• The budget calendar should identify specific opportunities for
resident input where City officials are available to explain issues and
choices and to receive comments.
H. Make Choices Necessary to Adopt a Budget
A. Prepare and Present a Recommended Budget
• The City will prepare and present a recommended comprehensive
program and financial plan (the "budget") for review by stakeholders
and consideration for adoption by the City Council. A complete plan
is necessary to allow stakeholders to be informed on how well all the
different aspects of the plan fit together and whether there is an
appropriate balance of resources and assigned uses.
• The proposed budget will consist of a set of recommended actions
regarding programs and services to befunded, including service level,
quality, and goals to be achieved.
• It will also identify funding requirements and sources of funds and
provide the supplemental information necessary to review the plans.
• The budget is to be consistent with policies and goals set by the City.
• The recommended budget must also comply with any statutory
requirements.
5 The budget process should include opportunities for all stakeholders to participate. A
general-purpose public hearing shortly before final decisions are made on the budget is not
adequate as the sole means of soliciting stakeholder input especially on major issues. The
process developed for obtaining stakeholder input should ensure that information is gathered
in a timely and complete manner to be useful in budget decision making, such as City
workshops.
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B. Present the Budget in a Clear, Easy -to -use Format
• Budget documents and related materials made available to
stakeholders is to be presented in a clear and readily comprehensible
format. The budget is the guide that determines the direction of the
City. It is arguably the single most important document routinely
prepared by the City. To be usable, it not only must contain the
appropriate information, but must also be prepared in a manner that
is clear and comprehensible.
• Some items in a budget document that will assist the reader include:
a table of contents, summaries, a consistent format, high-level
summary information that describes overall funding sources and the
organization as a whole, a description of the overall planning and
budgeting process and the interrelationships of those various
processes, supplementary information about the City and the area for
which it has responsibility, charts and graphs to better illustrate
important points, succinct and clearly- written summaries,
uncluttered pages, and detailed information placed in appropriate
locations so that it does not overwhelm the reader.
• Similar requirements apply to the non -written means (e.g., audio,
video) of presenting budget material to stakeholders at various times
during the budget process.
C. Adopt the Budget
• The City should adopt a budget that meets all statutory requirements
prior to the beginning of the fiscal year.6 The timely adoption of a
budget permits the City to proceed with implementing programs and
services that further the achievement of goals.
• The adopted budget will clearly present the financial, operating, and
capital plan.
• It includes all operations and funds, although not necessarily at the
same level of detail.
• Non -appropriated funds, revolving funds, and any other planned
revenues and expenditures are alsoincluded.
• Whenever feasible, the adopted budget should include (though not
necessarily in a single document) all statutorily required materials
such as the appropriation ordinance.
• Legally required documents that otherwise do not contribute to an
understanding of the budget may be included as an appendix.
6 if there are delays in adopting the budget, actions are to be taken to minimize uncertainty
when the new budget period starts, as appropriate. A continuing appropriation may be
legally required.
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Goal# 4 - Evaluate Performance and Make Adiustments
L Monitor, Measure, and Evaluate Performance
A. Monitor, Measure, and Evaluate Program Performance
• The City quarterly evaluate the performance of the programs and
services it provides. The City functions, programs, and activities will
also be periodically reviewed to determine whether they are
accomplishing intended program goals and making efficient use of
resources.
• Performance measures, including efficiency and effectiveness
measures, are to be presented in basic budget materials, including the
operating budget document, and be available to stakeholders.
• Performance measures should be reported using actual data, where
possible.
• At least some of these measures should document progress toward
achievement of previously developed goals and objectives.
• More formal reviews and documentation of those reviews should be
carried out as part of the overall planning, decision -making, and
budget process.
B. Monitor, Measure, and Evaluate Budgetary Performance
• At a minimum, the City will, on a quarterly basis, evaluate its financial
performance relative to the adopted budget. Regular monitoring of
budgetary performance provides an early warning of potential
problems and gives
decision makers time to consider actions that may be needed if major
deviations in budget -to -actual results become evident. It is also an
essential input in demonstrating accountability.
• Budget -to -actual or budget -to -projected actual comparisons of
revenues, expenditures, cash flow, and fund balance will be reviewed
quarterlyduringthe budget period. Staffing levels are also monitored.
• Comparisons for at least the current year will be included in the
budget document and be generally available to stakeholders during
discussions related
to budget preparation and adoption.
• Expenditures shall be limited to the amount budgeted. Expenditures
shall be continuously monitored and projected to the end of the year.
If the projected expenditures exceed the budget, appropriate
remedies shall be implemented immediately.
C. Monitor, Measure, and Evaluate Financial Conditions
• The City will monitor and evaluate its financial condition at least
quarterly. The financial health of the City is critical to its abilityto meet
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• the needs of stakeholders. Financial condition should be evaluated to
identify potential problems and any changes that may be needed to
improve performance over both the short and long terms.
• Financial indicator measures often are developed to monitor financial
condition and achievement of explicitly set financialgoals.
• Indicators to monitor factors that affect financial performance are also
reported.
• A report on financial condition will be periodically prepared and
updated.
• The report may be a separate document or incorporated into other
relevant documents, including the budget document.
D. Monitor, Measure, and Evaluate External Factors
• The City is to constantly monitor and evaluate external factors that
may affect budget and financial performance and achievement of
goals at least quarterly. Factors outside the City's control, such as the
national or regional economy, demographic changes, statutory
changes, legislation, mandates, and weather, may affect
achievement of stated goals. Monitoring these factors helps the City
to evaluate and respond to the effect of these external influences on
goals, programs, and financial plans.
• External factors that are likely to be important in achieving goals are
to be identified and monitored regularly.
• The results of this analysis will be factored into the assessment of
program and financial performance and considered in adjusting these
programs.
• Trends and significant issues may be described in reports to
stakeholders discussing program, budget, and financial performance.
• The assessment of external factors is to be reported, at least in
summary form, and available to stakeholders.
E. Monitor, Measure, and Evaluate Capital Improvement Program
Implementation
• The City will monitor, measure, and evaluate capital improvement
program implementation at least quarterly. Monitoring the status of
capital projects helps to ensure that projects progress as planned,
problems (such as delays in key milestones and cost overruns) are
identified early enough to take corrective action, funds are available
when needed, and legal requirements are met.
• Reports on capital project implementation will be prepared for
decision makers and other stakeholders.
• Summary information is to be considered for projects that are
progressing as planned.
• Project milestones, such as dates for completion of such tasks as
planning, land acquisition, engineering and design, and construction,
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Investment Policy
The purpose of the Investment Policy is to establish prudent investment cash management
guidelines for the City of West Covina, the Successor Agency to the former Redevelopment Agency
of the City of West Covina, and the West Covina Community Facilities District. The investment
goals of the City are safety, liquidity and yield. (Attachment No. 5)
DISCUSSION:
It is a best practice, and for some a requirement, to conduct an annual review of these policies and bring
forward any amendments deemed necessary and appropriate to the City Council for consideration. Staff
has reviewed these policies and recommends the following changes to reflect current practice:
Fund Balance Policy
The current policy states that at the fiscal year-end close, the annual excess revenue over expenditures
in the City's General Fund will be automatically allocated as follows, unless the transfer is overridden by
an action of the City Council: 25% stays in the General Fund Balance reserves, 50% is transferred to the
City's Capital Projects Fund, and 25% goes to pay down the City's Other Post Employment Benefit
(OPEB) liability. Staff recommends lowering the percentage transferred to the Capital Projects Fund to
40% and adding a 10% transfer to the Vehicle Replacement Fund to establish a balance for future
replacement.
Investment Policy
The City's Investment Policy is required to be reviewed and approved on an annual basis. Any
modifications to the Investment Policy must be approved by the City Council. Staff is not proposing any
changes to the Investment Policy at this time.
No changes are proposed at this time for the Budget, Debt, or Pension Policies.
LEGAL REVIEW:
The City Attorney's Office has reviewed the resolutions and approved them as to form.
Prepared by: Stephanie Sikkema, Finance Director
Fiscal Impact
FISCAL IMPACT:
This is strictly an administrative item, therefore; there is no fiscal impact associated with this action.
Attachments
Attachment No.
1 - Budget Policy
Attachment No.
2 - Debt Management Policy
Attachment No.
3 - Fund Balance Policy
Attachment No.
4 - Pension Funding Policy
Attachment No.
5 - Investment Policy
Attachment No. 6 - Resolution No. 2022-47 (Amending Fund Balance Policy)
Attachment No. 7 - Resolution No. 2022-48 (Approving Investment Policy)
CITY COUNCIL GOALS & OBJECTIVES: Achieve Fiscal Sustainability and Financial Stability
A Well -Planned Community
should be identified and progress in meeting these milestones should
be reported at least annually, and as available.
• The City will monitor quality compliance and financial performance.
ii. Make Adjustments as Needed
A. Adjust the Budget
• The budget may be adjusted during the budget period should
unforeseen events require changes to the original budget plan. The
budget isa plan based on a set of assumptions that may not always
match actual experiences during the execution phase. The City should
watch for significant deviations from expectations and make timely
adjustments so that the plan is consistent with revised expectations.
• The City has procedures in place to determine when deviations from
the budget plan merit adjustments to the budget.
• Budget adjustments, whether to programs or to revenues and
expenditures,are to be made as appropriate in a timely manner.7
• Any changes to the budget are to be reported.
• The timing and waythis is done depends on the stakeholder group
and the level of materiality of the changes.
B. Adjust Policies, Plans, Programs, and Management Strategies
• The City may adjust its policies, plans, programs, and management
strategies during the budget period, as appropriate. Changing
conditions or programs and services that are not producing the
desired results or efficiently utilizing resources may require
adjustments forthe Cityto continue to meetthe needs of stakeholders
and to meet its own goals.
• The City's management team will evaluate their monthly budget to
actual report for review, decision making, and implementation of
changes to policies, plans, programs, and management strategies
during the budgetperiod.
• Adjustments are based on findings obtained from monitoring and
assessing program and financial results, stakeholder input, and
external circumstances.
• Regular briefings to management and elected officials on the
contents of the reports permit timely adjustments as needed to the
plan or program activities.
7 Budget adjustments may be administrative or legislative depending on the adjustment needed
and on statutory requirements such as the legal level of control of the budget appropriations.
City Manager may make adjustment within the fund across departments as long as the overall
appropriation is not changed.
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C. Adjust Broad Goals, if Appropriate
• The City will modify or change its broad goals if conditions change
sufficiently that these goals are no longer appropriate. Goals may
need to be adjusted in response to new information about program
results, stakeholder needs, and external circumstances in order to be
more relevant for the community or more practically attainable.
The City department heads meet to evaluate performance or
changes in the annual budget plan to ensure that goals are reviewed
duringthe budget period
and adjusted when appropriate.
Adjustments are based, in part, on findings obtained from monitoring
and assessing program and financial results, stakeholder input, and
external circumstances.
Opportunities and challenges facing the City are also to be considered.
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IIIiIfIV �I Mit
City of West Covina
Debt Management Policy
Adopted - May 19, 2020
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CITY OF WEST COVINA
DEBT MANAGEMENT POLICY
Section 1— Introduction
The purpose of this Debt Management Policy (Policy) is to establish guidelines for the issuance and management
of debt for the City of West Covina and all affiliated city entities (collectively, the "City"). While the City prefers
to finance projects on a pay-as-you-go basis, in the event debt is necessary, this Policy confirms the commitment
of the Council, management, staff, advisors and other decision makers to adhere to sound financial management
practices, including full and timely repayment of borrowing, and achieving the lowest possible cost of capital
within prudent risk parameters.
Debt Issuance Priorities:
1. Achieve the lowest cost of capital while maintaining compliance with state and federal laws and
regulations
2. Maintain a prudent level of financial risk and maintain the City's sound financial position
3. Preserve future financial flexibility
4. Ensure that all debt is structured to maximize the benefit to both current and future taxpayers,
ratepayers, and constituents of the City
5. Maintain full and complete financial disclosure and reporting
6. Obtain and maintain the highest practical credit ratings consistent with maximizing the benefit to both
current and future taxpayers, ratepayers and constituents of the City.
7. Maintain good relations with all investors in City debt
8. Ensure that the City's debt is consistent with the City's planning goals and objectives and capital
improvement program or budget, as applicable
This policy shall govern the issuance and management of all debt and lease financing funded from the capital
markets (including private placement and bank loans), including the selection and management of related
financial services and products and investment of bond and lease proceeds. While adherence to this policy is
required in applicable circumstances, it is recognized that changes in the capital markets, agency programs and
other unforeseen circumstances may from time to time produce situations that are not covered by this policy
and will require modifications or exceptions to achieve policy goals. In these cases, management flexibility is
appropriate, provided specific authorization from the City Manager and City Council is obtained.
Section 2 — Responsibilities
The City's debt program for all City funds shall be operated in conformance with applicable federal, state, and
other legal requirements, including the West Covina Municipal Code.
Responsibility for managing the coordinating of all activities related to the structure, issuance and administration
of all long and short-term debt obligations shall rest with the Finance Director.
No debt obligations shall be presented to the City Council for their authorization without the joint assessment
and recommendation of the City Manager, Finance Director and the City Attorney. Departments planning debt -
financed capital programs or equipment acquisitions shall work closely with the City Manager, Finance Director
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and City Attorney to provide information and otherwise facilitate the issuance and on -going administration of
debt.
The Finance Director shall have the authority to periodically select service providers as necessary to meet legal
requirements and minimize debt costs. Such services may include financial advisory, underwriting, trustee,
verification agent, escrow agent, arbitrage consulting, special tax consulting, bond and disclosure counsel, and
other consultants as needed. To achieve an appropriate balance between service and cost, the Finance Director
is authorized to select such service providers through sole source selection or a competitive process using a
Request for Proposals.
The Finance Director shall be responsible for maintaining good communications with rating agencies, investors
and other debt related service providers about the City's financial condition and will follow a policy of full
disclosure.
The Finance Director shall conduct an annual review of the Policy and bring forward to the City Council any
amendments deemed necessary and appropriate.
Section 3 — Debt Considerations
The City will evaluate the need for debt financing a project compared to a pay-as-you-go financing methodology.
The City prefers to fund projects on a pay-as-you-go basis.
A. Factors favoring a pay-as-you-go methodology include:
a. Current projected revenues and fund balances available are sufficient to fund the project
b. Long term total costs are lower due to the avoidance of interest expense
c. Existing debt capacity is insufficient to absorb the additional debt without adverse impact to
credit ratings
d. Market conditions are unfavorable or present difficulties in marketing
B. Factors favoring debt financing include:
a. Current and projected revenues available for debt service are sufficient and reliable so that
financing can be marketed with investment grade credit ratings
b. Market conditions present favorable interest rates and demand for the City financings
c. A project is mandated by state or federal requirements, and current resources are insufficient
or unavailable to fully fund the project
d. The project is immediately required to meet or relieve capacity needs or emergency conditions
and current resources are insufficient or unavailable
e. The savings from the project are sufficient to pay for the debt service costs
The City will review debt limits in conjunction with any proposed financing. It is the City's goal to limit debt
service costs in the General Fund to no more than twenty-five (25%) percent of revenues, including transfers.
Payments on bonds that are tied to a specified revenue stream other than General Fund resources (e.g.
enterprise revenue bonds, tax allocation bonds, and land secured bonds) are not subject to the twenty-five (25%)
percent limit. The debt limit will exclude pension obligation bonds and other refunding bonds. Each proposed
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financing will be individually assessed by the Finance Director and subject to the approval policies contained
herein.
Section 4 — Debt Term
The City Council recognizes that any new debt obligation will have an impact on the long-term affordability of
all outstanding debt and anyfuture planned debt, as well as budgetary impacts associated with the maintenance
and operating costs of debt financed facilities.
A. Term of Debt— Debt will be structured for the shortest period possible, consistent with a fair allocation
of costs to current and future beneficiaries or users. The weighted average maturity of the debt (or the
portion of the debt allocated to the project) shall not exceed the useful life of the project.
B. Debt Repayment — Typically, the City desires level debt service payments over the term of the debt.
However, the cost of capital, financial risk, current economic conditions, future financial flexibility, credit
ratings and available cash flow will be evaluated to determine the most appropriate method of debt
amortizations for each debt issue. Notwithstanding the above, back loading of debt service will be
evaluated as the circumstances dictate. Back loading occurs when debt service payments are lower in
the initial years of a debt term and higher toward the later years of a debt term.
Section 5 — Debt Issuance
The City has the capacity to issue long and short-term debt and to refund any outstanding debt. The following
section details the purposes of debt issuance and the method of determining the type of sale for such debt.
A. Long-term Debt — Long-term debt financings are appropriate when the project to be financed is
necessary to provide basic services and long-term debt may be used to finance the acquisition or
improvement of land, infrastructure, facilities or equipment for which it is appropriate to spread the
costs of such over more than one budget year. Long-term debt may be used to fund capitalized interest,
cost of issuance, required reserves and any other financing related costs that may be legally capitalized.
Long-term debt shall not be used to fund City operating costs.
B. Short-term Debt— Short-term debt will be considered as an interim source of funding in anticipation of
long-term debt. Short-term debt may be issued for any purpose for which long-term debt may be issued,
including capitalized interest and financing related costs. Short-term debt is also appropriate to address
legitimate short-term cash flow requirements during a given fiscal year to fund the operating costs of
the City to provide necessary public services. The City will not engage in short-term borrowing solely for
the purpose of generating investment income.
C. Financings on Behalf of Other Entities - The City may also find it beneficial to issue debt on behalf of
other governmental agencies or private third parties to benefit the public purposes of the City. In such
cases, the City shall take reasonable steps to confirm the financial feasibility of the project to be financed
and the financial solvency of any borrower and that the issuance of such debt is consistent with the
policies set forth herein.
D. Refunding — Refunding opportunities will be identified by periodic reviews of outstanding debt
obligations. Refunding will be considered when there is a net economic benefit from the refunding of a
least three (3) percent on a net present value basis. Non -economic refunding may be undertaken to
achieve City objectives relating to changes in covenants, call provisions, operational flexibility, tax status,
issuer, or other non -economic factors related to the debt.
Page 4 of 6
E. Method of Sale —The City shall have the flexibility to determine which method of sale is appropriate for
each debt issuance in light of market interest rates and City objectives. Determination of the appropriate
method of sale will rest collectively with the City Manager, Finance Director, and City Attorney. Potential
methods of sale include:
a. A competitive bidding process through which interested underwriters submit proposals to
purchase an issue of bonds and the award is based on, among other factors, the lowest offered
true interest cost.
b. A negotiated sale process through which a selected underwriter, or team of underwriters,
negotiate the terms of an issue and sell bonds in the municipal market. Negotiated sales are
often used where there are unusual conditions or unique considerations related to the bond
sale. A negotiated sale is subject to approval by the City to ensure that interest costs are in
accordance with comparable market interest rates.
c. A private (or direct) placement sale typically occurs when the financing can or must be
structured for a single or limited number of purchasers or where the terms of the private
placement are more beneficial to the City than either a negotiated or competitive sale.
F. Pooled Financing — The City may also consider use of pooled financing as a method of accessing the
capital markets. Use of pooled financing will be evaluated collectively by the City Manager, Finance
Director, and City Attorney.
Section 6 - Debt Structure
A. Credit Ratings — The City seeks to obtain and maintain the highest possible credit rating when issuing
debt. The City will seek credit ratings from at least one major credit rating agency on all debt, as
appropriate. Ratings from multiple rating agencies may be sought for a single debt issue based upon the
market conditions at the time of the issuance.
B. Fixed Rate and Variable Rate Debt — The City prefers to issue fixed rate debt. Variable rate debt may be
used, if market conditions warrant at the time of issuance. It is acknowledged that variable rate debt
passes an unknown obligation onto future budget cycles.
C. Call Provisions — The timing for when bonds are callable varies and is determined at the time of pricing
such bonds. The City's preferred structure is to negotiate for optional redemption at par in order to
maintain flexibility in the future, but a final decision will be made on a case by case basis after evaluation
of the marketability of the City's bonds.
D. Credit Enhancements —The City may use credit enhancements (letters of credit, bond insurance, surety
bonds, etc.) when such credit enhancements prove to be cost effective. The City will consider the use of
credit enhancements on a case -by -case basis.
E. Reserve Funds —A debt service reserve fund provides an added measure of security to bond holders and
may improve the credit rating and thus lower the costs of borrowing. Reserve funds may be necessary
for specific transactions, or the City may choose to create one if it is determined to be cost effective.
When cost beneficial, the City may consider the use of surety bonds, lines of credit, or similar
instruments to satisfy the reserve requirements.
Section 7 — Private Activity Use Limitations on Tax Exempt Debt
IRS Tax Code Section 141 sets forth private activity tests for the purpose of limiting the volume of tax-exempt
bonds that finance activities of persons other than state and local governmental entities. These tests serve to
identify arrangements that actually or reasonably expect to transfer the benefits of tax-exempt financing to non -
Page 5 of 6
governmental persons. The law includes tests of private use, security and payment as well as private loan
financing tests. The law also provides for various safe harbors and nuances to the application of these limits. The
City will manage a process to ensure private use compliance and will consult with bond counsel to obtain federal
tax advice regarding whether anticipated project use will be consistent with the restrictions on private business
use of the bond financed property and, if not, whether any "remedial action" permitted under §141 of the code
may be taken as means of enabling that use arrangement to be put into effect without adversely affecting the
tax-exempt status of the bonds.
With respect to tax-exempt bonds, the City pledges in each bond issuance that it will monitor and control the
receipt, investment, expenditure, and use of all bond proceeds and will take or omit to take any actions as
necessary to cause interest on tax-exempt bonds to remain excludable from the gross income of bond holders.
City staff will ensure appropriate lease and building use policies to maintain compliance with this pledge.
Section 8 — Interfund Borrowings
The City may borrow internally from other funds with temporary cash surpluses to meet short term cash needs
in lieu of issuing debt. Interfund borrowing extending for more than one year will be brought to Council for
approval.
Section 9 — Debt Administration
The Finance Director shall be responsible for administering the City's debt management program. To that end,
this position shall:
A. Ensure compliance with all disclosure and reporting requirements outlined in the City's Disclosure Policy
B. Periodically review outstanding debt for refunding opportunities
C. Maintain positive working relationships with rating agencies and other financial professionals
D. Review and recommend appropriate structures for all new debt issuances
E. Ensure compliance with the Investment Policy and bond documents regarding investing bond proceeds
Section 10 — Arbitrage Compliance
Arbitrage is defined as the profit earned when tax-exempt bond proceeds are invested in higher yielding
securities than the interest rates of the bonds issued. The City shall comply with its investment policy and
California and federal laws.
To ensure compliance with federal arbitrage laws, the City will monitor ongoing activities, including remittance
of any required arbitrage rebate. If necessary, the City will utilize a consultant for arbitrage rebate calculations
and preparation of the required Internal Revenue Service forms. Arbitrage rebate calculations on outstanding
bond issues will be performed periodically, but never longer than the 5th year after a bond issuance.
Section 11— Disclosure Policy
The Finance Director will be the disclosure coordinator for the City and will have the responsibility of complying
with the City's Disclosure Policy document, as adopted by City Council.
Page 6 of 6
RESOLUTION NO.2018-64
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF WEST COVINA, CALIFORNIA, AMENDING THE FUND
BALANCE RESERVE POLICY FOR THE GENERAL FUND
WHEREAS, in an effort to become more financially secure, the City Council adopted a
Fund Balance Reserve Policy for the General Fund on July 7, 2015, with the adoption of
Resolution No. 2015-52; and
WHEREAS, the City Council amended the Fund Balance Reserve Policy for the General
Fund on March 1, 2016, with the adoption of Resolution No. 2016-18; and
WHEREAS, the City Council amended the Fund Balance Reserve Policy for the General
Fund on June 21, 2016 with the adoption of Resolution No. 2016-60; and
WHEREAS, the City Council had previously adopted a fund balance reserve policy of
maintaining a minimum unassigned fund balance of at least 20% of General Fund operating
expenditures. At the end of the fiscal year end close, the annual excess revenue over expenditures
in the City's General Fund will be automatically allocated as follows, unless the transfer is
overridden by an action of the City Council: 25% stays in the General Fund Balance reserves,
50% is transferred to the City's Capital Projects Fund, and 25% goes to pay down the City's
Other Post Employment Benefit (OPEB) liability; and
WHEREAS, the City Council has determined that the City shall maintain a minimum
unassigned fund balance of at least 17% of the General Fund operating expenditures. If the
reserve level falls below 17%, the City must amend this policy, including a plan to rebuild the
fund within three years. At the end of the fiscal year end close, the annual excess revenue over
expenditures in the City's General Fund will be automatically allocated as follows, unless the
transfer is overridden by an action of the City Council: 25% stays in the General Fund Balance
reserves, 50% is transferred to the City's Capital Projects Fund, and 25% goes to pay down the
City's Other Post Employment Benefit (OPEB) liability.
WHEREAS, the City Council has determined that the City has met the reserve level at a
minimum of no less than two months of regular General Fund operating expenditures which is
consistent with the Government Finance Officers Association (GFOA) recommended fund
balance reserve level; and
NOW, THEREFORE, the City Council of the City of West Covina does resolve as
follows:
Section 1. This resolution supersedes Resolution No. 2016-60 and adopts the
Amended Fund Balance Policy for the General Fund as reflected in Exhibit A to this resolution.
Section 2. That the City Clerk shall certify to the adoption of this resolution and the
same shall be in full force in effect immediately upon adoption.
PASSED, APPROVED AND ADOPTED this 51h day of June, 2018.
�i
Mayor Pro Tem
APPROVED AS TO FORM: ATTEST:
Isla vG „J (n v
Kimberly Hal arlow ickolas S. Lew
City Attorney City Clerk
City of West Covina
Budget Policy
Updated — May 19, 2020
1, HEREBY CERTIFY that the foregoing resolution was duly adopted by the City Council
of the City of West Covina, California, at a regular meeting thereof on the 51" day of June 2018,
by the following vote of the City Council:
AYES:
Toma, Warshaw, Wu, Johnson
NOES:
None
ABSENT:
Spence
ABSTAIN:
None
ickolas S. Le'
City Clerk
CITY OF WEST COVINA
FUND BALANCE
POLICY
POLICY
EXHIBIT A
In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement No.
54; Fund Balance Reporting and Governmental Fund 7Type Definitions. This•new standard has not
changed the total amount of reported fund balance, but has substantially altered the categories and
terminology used to describe its components. The new categories and terminology reflect an
approach that will focus; not on financial resources available for appropriation within a fund, but
on the extent to which the City is bound to honor constraints on the speciftc purposes for which
amounts in the fund can be spent.
This Fund Balance Policy establishes the procedures for reporting unrestricted fund -balance in the
City's financial statements. Certain commitments and assignments of fund balance will help ensure
that there will be adequate financial resources to protect the City against unforeseen circumstances
and events such as revenue shortfalls and unanticipated expenditures. The policy also authorizes
and directs the Finance Director to prepare financial. reports which, accurately categorize Fund
balance as per Governmental Accounting Standards Board (GASB) Statement. No. 54, Fund
Balance Reporting and Governmental Fund Type Definitions.
The term "Fund Balance" is used to describe the difference between assets (what is owned) and
liabilities (what is owed) reported within a fund. In the, past,. fund balance has Veen classified into
basically three separate components: Reserved, Designated, and Undesignated. There are almost
always important limitations on the purpose for which.all or a portion of the resources of a fund.
can be used. The force of these limitations can vary significantly, depending on their. source. The
various components of the "new" fund balance are designed to indicate the extent to which the
City is bound by these limitations placed upon thexesources.
GASB Statement No. 54 defines five separate components of fund balance, each of .which
identifies the extent to which the City is bound to honor constraints on the specific purposes for
which amounts can be spent. These new components of fund, balance will replace the current
existing three components. The five components are:
• Nonspendable fund balance (inherently nonspendable)
• Restricted fund balance (externally enforceable limitations on use)
• Committed fund balance (self-imposed limitations on use)
• Assigned fund balance (limitation resulting from intended use)
• Unassigned fund balance (residual net resources)
The first two components listed above are not addressed in this policy due to the nature of their
restrictions. Some examples of nonspendable fund balance are prepaid expenses, notes receivable;
inventory and land held for resale. Restricted fund balance is either imposed by law or constrained
by grantors, contributors, or laws or regulationsof other, governments. This policy is focused on
financial reporting of unrestricted fund balance, or the last"tbi'ee components listed above. These
three components are further defined below.
COMMITTED FUND BALANCE
The City Council, as the City's highest level of decision -making authority, may commit fund
balance for specific purposes pursuant to constraints imposed by formal actions taken, such as an
ordinance or resolution. These committed amounts cannot be used for any other purpose unless
the City Council removes or changes the specified use through the same type of formal action
taken to establish the commitment. City Council, action to commit fund balance needs to occur
within the fiscal reporting period; however, the amount can be determined subsequently.
ASSIGNED FUND BALANCE
Amounts that are constrained by the City's intent to be used for specific purposes, but are neither
restricted nor committed, should be reported as assigned fund balance: Such intent needs to be
established at either the highest level of decision making, or by an official designated for that
purpose.
This.policy hereby delegates the authority to assigrr amounts to be used for specific purposes to
the City Manager for the purpose of reporting these amounts in the annual financial statements.
UNASSIGNED FUND BALANCE
These are residual positive net resource of the general fund in excess of what can properly be
classified in one of the other four categories.
The City shall maintain a minimum unassigned fund balance of at least 17% of the General Fund
operating expenditures. If the reserve level falls below 17%, the City must amend this policy,
including a plan to rebuild the fund within three years: This is considered the minimum level
necessary to maintain the City's credit worthiness and to adequately provide for:
Economic uncertainties,, local, disasters and other hardships or downturns in the local
economy
Contingencies for unforeseen operating or capital needs
Cash flow requirements
At the end of the fiscal year, the annual excess revenue over expenditures in the City's General
Fund will be automatically allocated as follows, unlessthe transfer is overridden by an action of
City Council: 25% stays in the General Fund Balance reserves, 50% is transferred to the City's
Capital, Projects Fund, and 25% goes to pay down the, City's Other Post Employment Benefit
(OPEB) liability.
FUND BALANCE CLASSIFICATION
When an expenditure .is incurred for purposes for which both restricted .and unrestricted fund
balance is -available the policy shall be to expend.the restricted fund balance first before expending
the unrestricted fund balance. Similarly, when an expenditure is incurred.for purposes for which.
amounts in any of the unrestrictedclassification of fund balance could.be used, the City'considers
committed amounts to be reduced 'first, followed by assigned amounts and. then unassigned
amounts.
This policy is in place to provide a measure of protection for the City against unforeseen
circumstances. and to comply with GASB Statement No.. 54. No other policy or procedure
supersedes the authority and provisions of this policy.
City of West Covina
Pension Funding Policy
Adopted — May 19, 2020
I
PURPOSE
The City's Pension Funding Policy documents the method the City will use to determine
its actuarially determined contributions to fund the long-term cost of benefits to the
plan participants and annuitants. The policy also:
• Provides guidance in making annual budget decisions;
• Demonstrates prudent financial management practices;
• Create sustainable and affordable budgets for pensions;
• Reassures bond rating agencies; and
• Shows employees and the public how pensions will be funded.
I. BACKGROUND
The City provides defined benefit retirement plan through the California Public
Employees' Retirement System (CaIPERS). CalPERS is a multiple -employer public
employee defined benefit pension plan.
All full-time and certain part-time City employees are eligible to participate in CalPERS.
CalPERS provides retirement and disability benefits, annual cost of living adjustments
and death benefits to plan members and their beneficiaries. CalPERS acts as a common
investment and administrative agent for participating public entities within the State of
California. Benefit provisions and all other requirements are established by state
statute.
The financial objective of a defined benefit pension plan is to fund the long-term cost of
benefits provided to the plan participants. In order to assure that the plan is financially
sustainable, the plan should accumulate adequate resources in a systematic and
disciplined manner over the active service life of benefitting employees. This funding
policy outlines the method the City will utilize to determine its actuarially determined
contributions to fund the long-term cost of benefits to the plan participants and
annuitants.
Pension Funding: A Guide for Elected Officials, issued by eleven national groups
including the U.S. Conference of Mayors, the International City/County Management
Association, and the Government Finance Officers Association, established the following
five general policy objectives for a pension funding policy:
Actuarially Determined Contributions. A pension funding plan should be
based upon an actuarially determined contribution (ADC) that incorporates
both the cost of benefits in the current year and the amortization of the
plan's unfunded actuarial accrued liability.
21 3ge
Funding Discipline. A commitment to make timely, actuarially
determined contributions to the retirement system is needed to
ensure that sufficient assets are available for all current and
future retirees.
Intergenerational equity. Annual contributions should be
reasonably related to the expected and actual cost of each year
of service so that the cost of employee benefits is paid by the
generation of taxpayers who receives services from those
employees.
Contributions as a stable percentage of payroll. Contributions
should be managed so that employer costs remain consistent
as a percentage of payroll overtime.
Accountability and transparency. Clear reporting of pension
funding should include an assessment of whether, how, and when
the plan sponsor will ensure sufficient assets are available for all
current and future retirees.
III. POLICY
A. Actuarially Determined Contribution (ADC). CalPERS actuaries will
determine the City's ADC to CalPERS based on annual actuarial valuations. The
ADC will include the normal cost for current service and amortization of any
under -funded amount. The normal cost will be calculated using the entry age
normal cost method using economic and non -economic assumptions
approved by the CalPERS Board of Administration.
The City will review the CalPERS annual actuarial valuations to validate
the completeness and accuracy of the member census data and the
reasonableness of the actuarial assumptions.
B. Additional Discretionary Payment (ADP) Contribution. The City will
consider making ADP contributions with one-time General Fund resources,
with the objectives of increasing the plan's funded status, by reducing the
unfunded actuarially accrued liability, and reducing ongoing pension costs.
C. Pension Obligations Bonds. The City will consider pension obligation bonds if
such bonds have expected savings using borrowing costs and CalPERS'
discount rate.
The City and its advisors will discuss and consider the risks of any potential
pension obligation bonds.
3 1 P a g e
Any pension obligation bonds, or refundings of pension obligation bonds, must
be voted upon by the City Council.
D. Contributions as a Manageable Budget Expense. The City will always make its
required annual contributions to CaIPERS. Contributions should be stable and
a manageable portion of revenue. The City may:
• Make additional discretionary contributions directly to CaIPERS.
• Consider establishing a pension stabilization trust, subject to approval
by the Council.
• Issue, call, or refund pension obligation bonds.
E. Transparency and Reporting. Funding of the City's pension plans should
be transparent to vested parties including plan participants, annuitants, the
City Council, and residents. In order to achieve this transparency, the
following information shall be available:
• Copies of the annual actuarial valuations for the City's CaIPERS
plans shall be made available to the City Council.
• The City's Comprehensive Annual Financial Report shall be
published on its website. This report includes information on the
City's annual contributions to the pension systems and their funded
status.
• The City's annual operating budget shall include the City's
contributions to CaIPERS.
F. Review of Funding Policy. Funding a defined benefit pension plan requires
a long-term horizon. As such, the City will review this policy at least every two
years.
4 1 P a g e
RESOLUTION NO.2021-68
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF WEST COVINA, CALIFORNIA, APPROVING AND
ADOPTING THE UPDATED STATEMENT OF
INVESTMENT POLICY FOR FISCAL YEAR 2020-21
WHEREAS, California Government Code Section 53646 requires the City Treasurer or
the Chief Fiscal Officer to annually render to the City Council a statement of investment policy,
which must be considered at a public meeting; and
WHEREAS, California Government Code Section 53600 et seq. provides guidelines and
regulations pertaining to investment of temporary idle funds.
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF WEST COVINA,
CALIFORNIA, DOES HEREBY RESOLVE AS FOLLOWS:
SECTION 1. The City Council does hereby adopt the Statement of Investment Policy for
Fiscal Year 2020-21 attached hereto as Exlubit "A."
SECTION 2. Any and all prior resolutions adopting a Statement of Investment Policy for
the City of West Covina are hereby rescinded.
APPROVED AND ADOPTED this 15th day of June, 2021.
OEM-
.a
APPROVE TO FORM ATTEST
�A44 J
Thomas P. Du e Lisa She r k
City Attorney Assistan ity Clerk
I, LISA SHERRICK, Assistant City Clerk of the City of West Covina, California, do
hereby certify that the foregoing Resolution No. 2021-68 was duly adopted by the City Council of
the City of West Covina, California, at a regular meeting thereof held on the 15th day of June,
2021, by the following vote of the City Council:
AYES: Castellanos, Diaz, Lopez-Viado, Tabatabai Wu
NOES: None
ABSENT: None
ABSTAIN: None
Lisa She k
Assista ity Clerk
INTRODUCTION
This document defines the policies and procedures for the budget for the City of West
Covina.
The procedures serve as a guide for maintaining the City's reputation for fairness and
integrity of fiscal responsibility in preparation of the annual budget using proper checks and
balances. The budget functions will be conducted using the highest ethical standards.
The objective of the budget policy is to establish a budget process that helps decision makers
make informed choices about the provision of services and capital assets and to promote
stakeholder participation in the process. The term "stakeholder" refers to anyone affected
by or has a stake in the City of West Covina with priority to residents and West Covina
businesses. The use of "shall" is synonymous with will.
Page 2 of 19
CITY OF WEST COVINA
STATEMENT OF INVESTMENT POLICY
FOR FISCAL YEAR 2020-21
POLICY
EXHIBIT A
The purpose of this Policy is to establish prudent investment cash management
guidelines for the City of West Covina, the Successor Agency to the Redevelopment
Agency of the City of West Covina, and the West Covina Community Facilities District,
collectively (City). The investment goals of the City are safety, liquidity and yield. The
State of California authority governing investments for local agencies is set forth in the
California Government Code, Section 53600 et seq. The City's portfolio is designed and
managed in a manner responsive to the public trust and consistent with State and local
law.
SCOPE
This investment policy governs the pooled investment of funds in the treasury which are
not required for the immediate needs of the City. 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 Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Projects Funds
• Proprietary Funds
This policy does not apply where superseded by specific bond documents.
III. PRUDENCE
The standard to be used by the investment officials shall be that of a "prudent investor"
and shall be applied in the context of managing all aspects of the overall portfolio.
Government Code Section 53600.3 provides that those persons to whom investment
decisions have been delegated are trustees with a fiduciary duty to act as a prudent
investor. This standard of care directs that a trustee shall act with care, skill, prudence,
and diligence under the circumstances then prevailing, that a prudent person acting in
like capacity and familiarity with those matters would use in 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 objectives, in order of priority, for the City's investment activities are:
(A) Safeguard principal: Preservation of principal is the primary 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 interest rate risk.
Credit risk, defined as the risk of loss due to issuer's failure to fulfill
obligations, shall be mitigated by investing in high grade securities that
conform to California Code and by diversifying the investment portfolio.
Interest rate risk, defined as the risk that market interest rates will
adversely affect the fair value of an investment, shall be mitigated by
purchasing a combination of shorter term and longer term investments
and by timing cash flows from maturities so that a portion of the portfolio is
maturing or coming close to maturity evenly over time as necessary to
provide cash flow and liquidity needed for operations.
(B) Meet liquidity needs: 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 flexible to enable the City to meet
reasonably anticipated operating requirements.
(C) Achieve a return on funds: The City's investment portfolio is designed with
the objective of attaining a market rate of return, while safeguarding principal and
meeting the City's liquidity needs.
V. DELEGATION OF AUTHORITY
The City Council or its delegate is a fiduciary for investments of City funds.
Authority to manage the City's investment program is specified in West Covina
Municipal Code Section 2-182(i); "The chief financial officer also shall be responsible for
the investment of surplus funds subject to the restrictions and requirements of
applicable law." Daily management responsibility of the investment program may be
delegated to responsible members of the Finance Department staff who, under direction
of the Finance Director, shall establish Investment Policy Guidelines for the operation of
the investment program consistent with this Investment Policy. Under the direction of
the Finance Director, the Finance Department staff is responsible for investment cash
management functions, is authorized to conduct transactions involving pooled cash
accounts, as necessary, and is required to adhere to the requirements set forth in this
Investment Policy.
2
The City may engage the services of one or more external investment advisers, who are
registered under the Investment Advisers Act of 1940, to assist in the management of
the City's investment portfolio in a manner consistent with the City's objectives. External
investment advisers may be granted discretion to purchase and sell investment
securities in accordance with this investment policy.
VI. ETHICS AND CONFLICTS OF INTEREST
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.
VII. DIVERSIFICATION AND RISK MANAGEMENT
Market risk is the risk that the portfolio value will fluctuate due to changes in the general
level of interest rates. The City recognizes that over time, longer -term portfolios have
the potential to achieve higher returns. On the other hand, longer -term portfolios have
higher volatility of return. The City will mitigate market risk by providing adequate
liquidity for short-term cash needs, and by making longer -term investments only with
funds that are not needed for current cash flow purposes.
The City further recognizes that certain types of securities, including variable rate
securities, securities with principal paydowns prior to maturity, and securities with
embedded options, will affect the market risk profile of the portfolio differently in different
interest rate environments. Therefore, the City adopts the following strategies to control
and mitigate its exposure to market risk:
• The City will maintain a minimum of six (6) months of budgeted operating
expenditures in short-term investments to provide sufficient liquidity for
expected disbursements.
• The maximum percent of callable securities (does not include "make whole
call" securities as defined in the Glossary) in the portfolio will be 20%.
• The maximum stated final maturity of individual securities in the portfolio will
be five (5) years, except as otherwise stated in this policy.
• The duration of the portfolio will generally be approximately equal to the
duration (typically, plus or minus 20%) of a Market Benchmark, an index
selected by the City based on the City's investment objectives, constraints
and risk tolerances.
47
If securities owned by the City are downgraded to a level below the credit quality
required by this Investment Policy, it shall be the City's policy to review the credit
situation and make a determination as to whether to sell or retain such securities in the
portfolio. If a security is downgraded, the City will use discretion in determining whether
to sell or hold the security based on its current maturity, the economic outlook for the
issuer, and other relevant factors. If a decision is made to retain a downgraded security
in the portfolio, its presence in the portfolio will be monitored and reported monthly to
the City Council.
The following percentage limits, maturity matrix, and quality requirements, by individual
investment type, are established for the City's total pooled funds portfolio:
Investment Type
Maximum
Maximum.
Specified % of
Minimum
Quality
Requirements
--Maturity,Portfolio
Local Agency Investment Fund (LAIF)
(not to exceed legal maximum)
N/A
None
None
Los Angeles County Investment Pool
LACIP
N/A
None
None
Mutual Funds and Money Market Mutual
Funds
N/A
20% - no more
than 10% in any
one mutual fund
Multiple
U.S. Treasu bonds/notes/bills
5 years
None
None
U.S. Government Agency obligations
5 years
None
None
Bankers' acceptances
180 days
40%
None
Commercial paper
270 days
25%
A1/P1 rating
Negotiable certificates of deposit
5 vears
30%
None
Certificates of De osit
5 years
25%
None
Medium term corporate notes
5 years
30%
"A" rating
Repurchase agreements
100 days
20%
None
Municipal Securities
5 years
30%
"A" Rating
Asset Backed Securities
5 Years
20%
"AA" Rating
Su ranational
5 vears
30%
"AA" Rating
Vill. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Finance Director 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 brokers/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.
4
All financial institutions and brokers/dealers who desire to become qualified bidders for
investment transactions must supply the following:
A. Audited financial statements of all financial institutions
B. Proof of Financial Industry Regulatory Authority certification
C. Proof of State registration
D. Certification of having read Investment Policy
E. Depository contracts of all financial institutions
F. Broker/Dealer questionnaire, as applicable
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Finance Director or his/her authorized designee.
IX. AUTHORIZED AND SUITABLE INVESTMENTS
The City 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 an effect on the City borrowing money, is
prohibited.
A. TREASURY ISSUES: Treasury Bills, Treasury Notes, and Treasury
Bonds. The maximum maturity shall not be greater than five (5) years.
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. The City restricts the
maximum percentage of investment in Federal Agencies to 25%, per issuer.
The maximum maturity shall not be greater than five (5) years.
C. BANKERS' ACCEPTANCES: The City may not purchase bankers'
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: A type of collateralized bank deposit with
a specific maturity evidenced by a certificate. The City restricts the
maximum percentage of investment in Certificates of Deposit to 25% of
the City's total portfolio. The maximum maturity shall not be greater than
five (5) years.
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E. REPURCHASE AGREEMENTS: A Public Securities Association (PSA)
Master Repurchase Agreement is required between the City and the
broker/dealer or financial institution for all 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 102% 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.
F. COMMERCIAL PAPER: Must be of prime quality of the highest rating by
both Moody's and Standard and Poor's (P-1 by Moody's and A-1 by
Standard and Poor's). Eligible paper is limited to corporations organized
and operating within the U.S. and having total assets of at least
$500,000,000. Purchases of commercial paper shall not exceed two
hundred and seventy (270) days to maturity and no more than 25% of the
City's surplus funds should be invested in commercial paper. No more
than 5% of the amount invested shall be in any one issuer.
G. MEDIUM TERM NOTES: 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. Notes
eligible for investment under this subdivision shall be rated in a rating
category of "A" or its equivalent or better by a NRSRO. Purchases of
medium -term notes may not exceed 30% of the City's surplus money
which may be invested pursuant to this section. The maximum maturity
shall not be greater than five (5) years.
H. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCD): To be eligible for
purchase by the City, the NCD must be issued by a Nationally or State -
Chartered bank, 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
statistical rating organization (NRSRO);
• Be a major national or regional bank outside California rated "A" or
better by a NRSRO;
• Be a domestic branch of a foreign bank ("Yankee" C.D.) rated "I" for
M
country rating, "II" or better for peer -group rating, and "II" or better for
dollar access by a NRSRO;
• Be a savings and loan association operating in California rated "A" or
better by a NRSRO;
• Purchases of negotiable certificates of deposits may not exceed 30%
of the total portfolio.
The maximum maturity shall not be greater than five (5) years.
I. 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.
J. 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.
K. MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS: To be
eligible for purchase by the City, the investment instruments must meet
multiple minimum requirements. Instruments must receive the highest
ranking, or the highest letter and numerical rating as provided for by a
NRSRO, must comply with all investment restrictions and regulations that
apply to public agencies in California Code 53601 (a-k, m-o), and must
follow regulations specified by the Securities and Exchange Commission
under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1, et
seq.).
L. MUNICIPAL SECURITIES: Include obligations of the City, the State of
California, any of the other 49 states, and any local city within the State of
California, provided that the securities are rated "A" or higher by at least
one NRSRO. No more than 5% of the portfolio may be invested in any
single issuer. No more than 30% of the portfolio may be in Municipal
Securities. The maximum maturity does not exceed five years.
M. SUPRANATIONALS: Securities that are unsubordinated obligations
issued by the International Bank for Reconstruction and Development
(IBRD), International Finance Corporation (IFC), or Inter -American
Development Bank (IADB). The securities must be rated "AA" or higher by
a NRSRO. No more than 30% of the total portfolio may be invested in
these securities. No more than 10% of the total portfolio shall be invested
in any single issuer. The maximum maturity of any security of this type
shall not exceed five years.
N. ASSET BACKED SECURITIES: Including mortgage pass through,
collateralized mortgage obligation, mortgage backed or other pay through
bond, equipment lease backed certificate, consumer receivable pass
through certificate, or consumer receivable backed bond with a maximum
maturity of five years. Securities eligible for investment under this
subdivision shall be issued by an issuer having an "A" or higher rating for
the issuer's debt as provided by a NRSRO and rated in a rating category
of "AA" or its equivalent or better by a NRSRO. Purchase of securities
authorized by this subdivision may not exceed 20% of the City's surplus
money that may be invested pursuant to this section.
X. PROHIBITED INVESTMENTS
California Government Code Section 53601.6 prohibits the following list of investment
types.
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.
The City further restricts investment activities by prohibiting investments in
reverse repurchase agreements.
XL COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and
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 102% 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, 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 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.
XII. INVESTMENT POOLS/MUTUAL FUNDS
The City shall conduct a thorough investigation of any pool or mutual fund prior to
making an investment, and on a continual basis thereafter. The Finance Director or
his/her authorized designee shall develop a questionnaire which will answer the
following general questions:
• A description of eligible investment securities, and a written statement of
investment policy and objectives.
• A description of interest calculations and how it is distributed, and how gains
and losses are treated.
• A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced, and the program audited.
• A description of who may invest in the program, how often, what size deposit
and withdrawal are allowed.
• A schedule for receiving statements and portfolio listings.
• Are reserves, retained earnings, etc. utilized by the pool/fund?
• A fee schedule, and when and how is it assessed.
• Is the pool/fund eligible for bond proceeds and/or will it accept such
proceeds?
X111. SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, entered into by
the City shall be conducted on a delivery -versus -payment (DVP) basis. Securities will
be held by a third -party custodian designated by the Finance Director or his/her
authorized designee and evidenced by safekeeping records.
XIV. MAXIMUM MATURITIES
To the extent possible, the City will attempt to match its investments with anticipated
cash flow requirements. However, the City may collateralize its repurchase agreements
using longer -dated investments not to exceed five (5) years to maturity.
XV. INTERNAL CONTROL
The Finance Director 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.
0
The Finance Director or his/her authorized designee shall establish an annual process of
independent review of internal control by an external auditor. This review will ensure
compliance with policies and procedures. Specific areas of review are investment
authorizations, proper safekeeping methods, and comparison of broker/dealer with
safekeeping confirmations.
XVI. MINIMUM PERFORMANCE STANDARDS
The City Treasurer shall monitor and evaluate the portfolio's performance relative to the
chosen market benchmark(s), which will be included in the monthly Investment Report.
The Finance Director or his/her authorized designee shall select an appropriate, readily
available index to use as a market benchmark.
XVII. REPORTING
A. MONTHLY REPORTS: The Finance Director will submit a monthly
investment report to the City Council which provides full disclosure of the
City's investment activities within 30 days after the end of the month in
accordance with California Government Code Section 53607. These
reports will disclose, at a minimum, the following information about the
City's portfolio:
• An asset listing showing par value, cost and independent third -party
fair market value of each security as of the date of the report, the
source of the valuation, type of investment, issuer, maturity date, and
interest rate.
• Transactions for the period.
• A description of the funds, investments and programs (including
lending programs) managed by contracted parties (i.e. IAIF,
investment pools, outside money managers and securities lending
agents).
• A one -page summary report that shows:
i. Average maturity of the portfolio and modified duration of the
portfolio;
ii. Maturity distribution of the portfolio;
iii. Percentage of the portfolio represented by each investment
category;
iv. Average portfolio credit quality; and,
v. Time -weighted total rate of return for the portfolio for the prior one
month, three months, twelve months and since inception compared
to the City's market benchmark returns for the same periods.
• A statement of compliance with investment policy, including a schedule
of any transactions or holdings which do not comply with this policy or
with the California Government Code, including a justification for their
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POLICY PURPOSE
Policy and procedures have been established in order to provide the most efficient and
effective operations of preparing the budget. The budget process will cover four main Goals:
1. Establish Broad Goals to Guide City Decision Making
• The City Council does adopt broad goals on an annual basis that provide
overall direction for the City and serve as a basis for decision making.
i. Assess community needs, priorities, challenges and
opportunities.
ii. Identify opportunities and challenges for City services,
capital assets, and management.
iii. Develop and disseminate broad goals.
2. Develop Approaches to Achieve Goals
• The City will utilize specific policies, plans, programs, and management
strategies to define how it will achieve its long-term goals.
i. Adopt and review financial policies.
ii. Develop programs, services, operating, and capital policies
and plans.
iii. Develop management strategies.
3. Develop a Budget Consistent with Approaches to Achieve Goals
• A financial plan and budget that moves toward achievement of goals,
within the constraints of available financial resources, is to be prepared
and adopted.
i. Develop a process for preparing and adopting a budget.
ii. Make choices necessary to adopt a budget.
4. Evaluate Performance and Make Adiustments
• Programs and financial performance will be continually evaluated, and
adjustments made, to encourage progress toward achievinggoals.
i. Monitor, measure, and evaluate performance.
ii. Make adjustments as needed.
Page 3 of 19
presence in the portfolio and a timetable for resolution.
• A statement that the City has adequate funds to meet its cash flow
requirements for the next six (6) months.
XVIII. LEGISLATIVE CHANGES
Any State of California legislative action, that further restricts allowable maturities,
investment type or percentage allocations, will be incorporated into the City's
Investment Policy and supersede any and all previous applicable language.
XIX. INTEREST EARNINGS
All monies earned and collected from investments authorized in this policy shall be
allocated monthly based on cash balances in each fund as a percentage of the entire
pooled portfolio.
XX. INVESTMENT POLICY ADOPTION
The City's Investment Policy shall be reviewed and approved on an annual basis. Any
modifications made thereto must be approved by the City Council.
It
GLOSSARY
AGENCIES: Shorthand market terminology for any obligation issued by a government -
sponsored entity (GSE), or a federally related institution. Most obligations of GSE's are
not guaranteed by the full faith and credit of the US government.
ASKED: The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES: Securities supported by pools of installment loans or
leases or by pools of revolving lines of credit.
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. Brokers are active in markets, where banks buy
and sell money, as well as 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
report of the City. It includes combined statements for each individual fund 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
W
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 i.e., 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, 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 $250,000 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 are highly liquid and are widely accepted. FNMA assumes and guarantees that
all security holders will receive timely payment of principal and interest.
13
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.
FFCB: The Federal Farm Credit Bank System provides credit and liquidity in the
agricultural industry. FFCB issues discount notes and bonds.
FHLB: The Federal Home Loan Bank provides credit and liquidity in the housing
market. FHLB issues discount notes and bonds.
FHLMC: Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and
liquidity in the housing market. FHLMC, also called "FreddieMac" issues discount notes,
bonds and mortgage pass -through securities.
FNMA: Like FHLB and FreddieMac, the Federal National Mortgage Association was
established to provide credit and liquidity in the housing market. FNMA, also known as
"FannieMae," issues discount notes, bonds and mortgage pass -through securities.
GNMA: The Government National Mortgage Association, known as "GinnieMae," issues
mortgage pass -through securities, which are guaranteed by the full faith and credit of
the US Government.
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.
ill
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.
MAKE WHOLE CALL: A type of call provision on a bond allowing the issuer to pay off
remaining debt early. The issuer typically has to make a lump sum payment to the
investor derived from a formula based on the net present value (NPV) of future coupon
payments that will not be paid incrementally because of the call combined with the
principal payment the investor would have received at maturity.
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 parry's rights in the transactions. A master agreement will
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.
MUNICIPAL SECURITIES: Securities issued by state and local agencies to finance
capital and operating expenses.
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 earns 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.
15
PEFCO: The Private Export Funding Corporation assists exporters. Obligations of
PEFCO are not guaranteed by the full faith and credit of the US government.
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.
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.
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 (i.e., call features,
16
step-up coupons, floating rate coupons, and 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.
SUPRANATIONAL: A Supranational is a multi -national organization whereby member
states transcend national boundaries or interests to share in the decision making to
promote economic development in the member countries.
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.
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.
TVA: The Tennessee Valley Authority provides flood control and power and promotes
development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA
currently issues discount notes and bonds.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember brokers/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.
17
ATTACHMENT NO.6
RESOLUTION NO. 202247
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF WEST COVINA, CALIFORNIA, AMENDING THE FUND
BALANCE POLICY
WHEREAS, in an effort to become more financially secure, the City Council adopted a
Fund Balance Policy to implement Governmental Accounting Standards Board (GASB) Statement
No. 54 and a reserve policy for the General Fund on July 7, 2015, with the adoption of Resolution
No. 2015-52; and
WHEREAS, the City Council amended the Fund Balance Policy on March 1, 2016, with
the adoption of Resolution No. 2016-18, on June 21, 2016, with the adoption of Resolution No.
2016-60, and on June 5, 2018, with the adoption of Resolution No. 2018-64; and
WHEREAS, pursuant to the Fund Balance Policy, the City Council has determined that
the City shall maintain a minimum unassigned fund balance of at least 17% of the General Fund
operating expenditures. If the reserve level falls below 17%, the City must amend the Fund
Balance Policy, including a plan to rebuild the fund within three years. Pursuant to the current
version of the Fund Balance Policy, at the fiscal year end close, the annual excess revenue over
expenditures in the City's General Fund will be automatically allocated as follows, unless the
transfer is overridden by an action of the City Council: 25% stays in the General Fund balance
reserves, 50% is transferred to the City's Capital Projects Fund and 25% goes to pay down the
City's Other Post Employment Benefit (OPEB) liability; and
WHEREAS, the City Council desires to amend the Fund Balance Policy to amend the
allocations of annual excess revenue over expenditures as follows: 25% stays in the General
Fund balance reserves, 40% is transferred to the City's Capital Projects Fund, 10% is transferred
to the Vehicle Replacement Fund and 25% goes to pay down the City's Other Post Employment
Benefit (OPEB) liability; and
WHEREAS, the City Council has determined that the City has met the reserve level at a
minimum of no less than two months of regular General Fund operating expenditures, which is
consistent with the Government Finance Officers Association (GFOA) recommended fund
balance reserve level.
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF WEST COVINA,
CALIFORNIA DOES RESOLVE AS FOLLOWS:
SECTION 1. The City Council hereby adopts the amended Fund Balance Policy attached
hereto as Exhibit "A."
SECTION 2. Any and all prior resolutions adopting a Fund Balance Policy for the City of
West Covina are hereby rescinded.
SECTION 3. The City Clerk shall certify to the adoption of this resolution and shall enter
the same in the book of original resolutions and it shall become effective immediately.
APPROVED AND ADOPTED this 17th day of May, 2022.
APPROVED AS TO FORM
Thomas P. Duarte
City Attorney
Dario Castellanos
Mayor
ATTEST
Lisa Sherrick
Assistant City Clerk
I, LISA SHERRICK, Assistant City Clerk of the City of West Covina, California, do
hereby certify that the foregoing Resolution No. 2022-47 was duly adopted by the City Council of
the City of West Covina, California, at a regular meeting thereof held on the 17th day of May,
2022, by the following vote of the City Council:
AYES:
NOES:
ABSENT:
ABSTAIN:
Lisa Sherrick
Assistant City Clerk
EXHIBIT A
FUND BALANCE POLICY
Goal # 1- Establish Broad Goals to Guide City Decision Making
i. Assess Community Needs, Priorities, Challenges, and Opportunities
A. Identify Stakeholder Priorities, Needs, and Concerns
• The City Council meetings are an open forum providing opportunity
to stakeholders to bring forthconcerns, needs, and priorities.
• Among other mechanisms that might be considered are special
public hearings, surveys, meetings of leading residents and resident
interestgroups, City strategic planning processes, meetings with City
employees, and workshops involving City administrative staff and/or
the City Council.
B. Evaluate Community Condition, External Factors, Opportunities, and
Challenges'
• The City Council will regularly collect and evaluate information about
trends in community condition, the external factors affecting it,
opportunities that may be available, and problems and issues that
need to be addressed.
• Some mechanisms will involve data gathering from pre-existing
sources or through opinion surveys.
• Other mechanisms will be subjective, such as observing physical
characteristics of geographic areas within the community or talking
to residents, experts, business and community leaders, and
legislative bodies. Formal studies of particular issues or trends may
also be undertaken.
• The frequency and extensiveness of the evaluation should be
consistent with how frequently the information changes and the
relative importance of the information being gathered.
ii. Identify Opportunities and Challenges for City Services, Capital Assets,
and Management
A. Assess Services and Programs, and Identify Issues, Opportunities, and
Challenges
• The City shall inventory, identify, and assess the programs and
services that it provides, their intended purpose, and factors that
could affect their provision in the future.
I The intent of this practice is for the City to have up-to-date information with which to evaluate
community conditions and majorissues that are integral to the development and achievement
of goals. In evaluating community condition, the City may want to consider local, regional,
national, and global factors affecting the community (i.e. economic and financial factors,
demographics, physical or environmental factors, changes in technology, etc.).
Page 4 of 19
CITY OF WEST COVINA
FUND BALANCE POLICY
POLICY
In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement No.
54, Fund Balance Reporting and Governmental Fund Type Definitions. This new standard has
not changed the total amount of reported fund balance, but has substantially altered the categories
and terminology used to describe its components. The new categories and terminology reflect an
approach that will focus, not on financial resources available for appropriation within a fund, but
on the extent to which the City is bound to honor constraints on the specific purposes for which
amounts in the fund can be spent.
This Fund Balance Policy establishes the procedures for reporting unrestricted fund balance in
the City's financial statements. Certain commitments and assignments of fund balance will help
ensure that there will be adequate financial resources to protect the City against unforeseen
circumstances and events such as revenue shortfalls and unanticipated expenditures. The policy
also authorizes and directs the Finance Director to prepare financial reports which accurately
categorize fund balance as per Governmental Accounting Standards Board (GASB) Statement
No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.
The term "Fund Balance" is used to describe the difference between assets (what is owned) and
liabilities (what is owed) reported within a fund. In the past, fund balance has been classified into
basically three separate components: Reserved, Designated, and Undesignated. There are almost
always important limitations on the purpose for which all or a portion of the resources of a fund
can be used. The force of these limitations can vary significantly, depending on their source. The
various components of the "new" fund balance are designed to indicate the extent to which the
City is bound by these limitations placed upon the resources.
GASB Statement No. 54 defines five separate components of fund balance, each of which
identifies the extent to which the City is bound to honor constraints on the specific purposes for
which amounts can be spent. These new components of fund balance will replace the current
existing three components. The five components are:
• Nonspendable fund balance (inherently nonspendable)
• Restricted fund balance (externally enforceable limitations on use)
• Committed fund balance (self-imposed limitations on use)
• Assigned fund balance (limitation resulting from intended use)
• Unassigned fund balance (residual net resources)
The first two components listed above are not addressed in this policy due to the nature of their
restrictions. Some examples of nonspendable fund balance are prepaid expenses, notes
receivable, inventory and land held for resale. Restricted fund balance is either imposed by law
or constrained by grantors, contributors, or laws or regulations of other governments. This policy
is focused on financial reporting of unrestricted fund balance, or the last three components listed
above. These three components are further defined below.
COMMITTED FUND BALANCE
The City Council, as the City's highest level of decision -making authority, may commit fund
balance for specific purposes pursuant to constraints imposed by formal actions taken, such as an
ordinance or resolution. These committed amounts cannot be used for any other purpose unless
the City Council removes or changes the specified use through the same type of formal action
taken to establish the commitment. City Council action to commit fund balance needs to occur
within the fiscal reporting period; however, the amount can be determined subsequently.
ASSIGNED FUND BALANCE
Amounts that are constrained by the City's intent to be used for specific purposes, but are neither
restricted nor committed, should be reported as assigned fund balance. Such intent needs to be
established at either the highest level of decision making, or by an official designated for that
purpose.
This policy hereby delegates the authority to assign amounts to be used for specific purposes to
the City Manager for the purpose of reporting these amounts in the annual financial statements.
UNASSIGNED FUND BALANCE
These are residual positive net resource of the general fund in excess of what can properly be
classified in one of the other four categories.
RESERVE POLICIES
The City shall maintain a minimum unassigned fund balance of at least 17% of the General Fund
operating expenditures. If the reserve level falls below 17%, the City must amend this policy,
including a plan to rebuild the fund within three years. This is considered the minimum level
necessary to maintain the City's credit worthiness and to adequately provide for:
• Economic uncertainties, local disasters and other hardships or downturns in the local
economy
• Contingencies for unforeseen operating or capital needs
• Cash flow requirements
At the end of the fiscal year, the annual excess revenue over expenditures in the City's General
Fund will be automatically allocated as follows, unless the transfer is overridden by an action of
City Council: 25% will stay in the General Fund balance reserves, 40% will be transferred to the
City's Capital Projects Fund, 10% will be transferred to the Vehicle Replacement Fund and 25%
will go to pay down the City's Other Post Employment Benefit (OPEB) liability.
FUND BALANCE CLASSIFICATION
When an expenditure is incurred for purposes for which both restricted and unrestricted fund
balance is available, the policy shall be to expend the restricted fund balance first before expending
the unrestricted fund balance. Similarly, when an expenditure is incurred for purposes for which
amounts in any of the unrestricted classification of fund balance could be used, the City shall
consider committed amounts to be reduced first, followed by assigned amounts and then
unassigned amounts.
This policy is in place to provide a measure of protection for the City against unforeseen
circumstances and to comply with GASB Statement No. 54. No other policy or procedure
supersedes the authority and provisions of this policy.
ATTACHMENT NO.7
RESOLUTION NO.2022-48
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF WEST COVINA, CALIFORNIA, APPROVING THE
STATEMENT OF INVESTMENT POLICY
WHEREAS, California Government Code Section 53646 authorizes the City Treasurer or
the Chief Fiscal Officer to annually render to the City Council a statement of investment policy,
which must be considered at a public meeting; and
WHEREAS, California Government Code Section 53600 et seq. provides guidelines and
regulations pertaining to investment of temporary idle funds; and
WHEREAS, pursuant to the Section XX of the City's Investment Policy, the Investment
Policy shall be reviewed and approved on an annual basis; and
WHEREAS, the City Council has reviewed the Investment Policy and desires to approve
it.
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF WEST COVINA,
CALIFORNIA, DOES HEREBY RESOLVE AS FOLLOWS:
SECTION 1. The City Council hereby approves the Statement of Investment Policy
attached hereto as Exhibit "A."
SECTION 2. The City Clerk shall certify to the adoption of this resolution and shall enter
the same in the book of original resolutions and it shall become effective immediately.
APPROVED AND ADOPTED this 17th day of May, 2022.
APPROVED AS TO FORM
Thomas P. Duarte
City Attorney
Dario Castellanos
Mayor
ATTEST
Lisa Sherrick
Assistant City Clerk
I, LISA SHERRICK, Assistant City Clerk of the City of West Covina, California, do
hereby certify that the foregoing Resolution No. 2022-48 was duly adopted by the City Council of
the City of West Covina, California, at a regular meeting thereof held on the 17th day of May,
2022, by the following vote of the City Council:
AYES:
NOES:
ABSENT:
ABSTAIN:
Lisa Sherrick
Assistant City Clerk
EXHIBIT A
STATEMENT OF INVESTMENT POLICY
CITY OF WEST COVINA
STATEMENT OF INVESTMENT POLICY
POLICY
The purpose of this Policy is to establish prudent investment cash management
guidelines for the City of West Covina, the Successor Agency to the Redevelopment
Agency of the City of West Covina, and the West Covina Community Facilities District,
collectively (City). The investment goals of the City are safety, liquidity and yield. The
State of California authority governing investments for local agencies is set forth in the
California Government Code, Section 53600 et seq. The City's portfolio is designed and
managed in a manner responsive to the public trust and consistent with State and local
law.
This investment policy governs the pooled investment of funds in the treasury which are
not required for the immediate needs of the City. 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 Fund
• Special Revenue Funds
• Debt Service Funds
• Capital Projects Funds
• Proprietary Funds
This policy does not apply where superseded by specific bond documents.
III. PRUDENCE
The standard to be used by the investment officials shall be that of a "prudent investor"
and shall be applied in the context of managing all aspects of the overall portfolio.
Government Code Section 53600.3 provides that those persons to whom investment
decisions have been delegated are trustees with a fiduciary duty to act as a prudent
investor. This standard of care directs that a trustee shall act with care, skill, prudence,
and diligence under the circumstances then prevailing, that a prudent person acting in
like capacity and familiarity with those matters would use in 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 objectives, in order of priority, for the City's investment activities are:
(A) Safeguard principal: Preservation of principal is the primary 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 interest rate risk.
Credit risk, defined as the risk of loss due to issuer's failure to fulfill
obligations, shall be mitigated by investing in high grade securities that
conform to California Code and by diversifying the investment portfolio.
Interest rate risk, defined as the risk that market interest rates will adversely
affect the fair value of an investment, shall be mitigated by purchasing a
combination of shorter term and longer term investments and by timing cash
flows from maturities so that a portion of the portfolio is maturing or coming
close to maturity evenly over time as necessary to provide cash flow and
liquidity needed for operations.
(B) Meet liquidity needs: 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 flexible to enable the City to meet
reasonably anticipated operating requirements.
(C) Achieve a return on funds: The City's investment portfolio is designed with
the objective of attaining a market rate of return, while safeguarding principal and
meeting the City's liquidity needs.
V. DELEGATION OF AUTHORITY
The City Council or its delegate is a fiduciary for investments of City funds.
Authority to manage the City's investment program is specified in West Covina Municipal
Code Section 2-182(i); "The chief financial officer also shall be responsible for the
investment of surplus funds subject to the restrictions and requirements of applicable
law." Daily management responsibility of the investment program may be delegated to
responsible members of the Finance Department staff who, under direction of the Finance
Director, shall establish Investment Policy Guidelines for the operation of the investment
program consistent with this Investment Policy. Under the direction of the Finance
Director, the Finance Department staff is responsible for investment cash management
functions, is authorized to conduct transactions involving pooled cash accounts, as
necessary, and is required to adhere to the requirements set forth in this Investment
Policy.
The City may engage the services of one or more external investment advisers, who are
registered under the Investment Advisers Act of 1940, to assist in the management of the
City's investment portfolio in a manner consistent with the City's objectives. External
investment advisers may be granted discretion to purchase and sell investment securities
in accordance with this investment policy.
VI. ETHICS AND CONFLICTS OF INTEREST
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.
VII. DIVERSIFICATION AND RISK MANAGEMENT
Market risk is the risk that the portfolio value will fluctuate due to changes in the general
level of interest rates. The City recognizes that over time, longer -term portfolios have the
potential to achieve higher returns. On the other hand, longer -term portfolios have higher
volatility of return. The City will mitigate market risk by providing adequate liquidity for
short-term cash needs, and by making longer -term investments only with funds that are
not needed for current cash flow purposes.
The City further recognizes that certain types of securities, including variable rate
securities, securities with principal paydowns prior to maturity, and securities with
embedded options, will affect the market risk profile of the portfolio differently in different
interest rate environments. Therefore, the City adopts the following strategies to control
and mitigate its exposure to market risk:
• The City will maintain a minimum of six (6) months of budgeted operating
expenditures in short-term investments to provide sufficient liquidity for
expected disbursements.
• The maximum percent of callable securities (does not include "make whole call"
securities as defined in the Glossary) in the portfolio will be 20%.
• The maximum stated final maturity of individual securities in the portfolio will be
five (5) years, except as otherwise stated in this policy.
• The duration of the portfolio will generally be approximately equal to the
duration (typically, plus or minus 20%) of a Market Benchmark, an index
selected by the City based on the City's investment objectives, constraints and
risk tolerances.
If securities owned by the City are downgraded to a level below the credit quality required
by this Investment Policy, it shall be the City's policy to review the credit situation and
make a determination as to whether to sell or retain such securities in the portfolio. If a
security is downgraded, the City will use discretion in determining whether to sell or hold
the security based on its current maturity, the economic outlook for the issuer, and other
relevant factors. If a decision is made to retain a downgraded security in the portfolio, its
presence in the portfolio will be monitored and reported monthly to the City Council.
The following percentage limits, maturity matrix, and quality requirements, by individual
investment type, are established for the City's total pooled funds portfolio:
Investment Type
Maximu
Maturity
Maximum
Specified % of
Portfolio
Minimum
Quality
Requirements
Local Agency Investment Fund (LAIF) (not
to exceed legal maximum)
N/A
None
None
Los Angeles County Investment Pool
(LACIP)
N/A
None
None
Mutual Funds and Money Market Mutual
Funds
N/A
20% - no more
than 10% in any
one mutual fund
Multiple
U.S. Treasury bonds/notes/bills
5 years
None
None
U.S. Government Agency obligations
5 years
None
None
Bankers' acceptances
180 days
40%
None
Commercial paper
270 days
25%
A1/P1 rating
Negotiable certificates of deposit
5 years
30%
None
Certificates of Deposit
5 years
25%
None
Medium term corporate notes
5 years
30%
"A" rating
Repurchase agreements
100 days
20%
None
Municipal Securities
5 years
30%
"A" Rating
Asset Backed Securities
5 Years
20%
"AA" Rating
Supranational
5 years
30%
"AA" Rating
VIII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS
The Finance Director 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 brokers/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.
• Identify the changes in community conditions or other factors that
may result in a program or service no longer addressing the needs it
was intended to serve. Also, identify any changes in the operating
environment that may affect the cost or effectiveness of service
delivery in the future.
• The review will involve each department's assessment of the
programs'
• purposes, beneficiaries and needs served, their success in achieving
goals, and issues, challenges, and opportunities affecting theirfuture
provision.
• The inventory of programs and services will identify the organization
responsible for service delivery if it is not the City itself. An evaluation
of factors affecting service delivery will also be undertaken, such as
funding issues; changes in technology; economic, demographic, or
other factors that may affect demand; and legal or regulatory
changes. These reviews will typically utilize a variety of information
sources.
• Stakeholder involvement in these reviews is encouraged, such as
through budget study workshops.
B. Assess Capital Assets, and Identify Issues, Opportunities, and Challenges
• The City will identify and conduct an assessment of its capital assets,
including the condition of the assets and factors that could affect the
need for or ability to maintain the assets in the future. The capital
assets of the City and their condition are critical to the quality of
services provided, and hence are important in determining whether
the needs and priorities of stakeholders can be met.
• The City shall establish a process for inventorying its capital assets
and assessing the need for and the condition of these assets. (See
Capital Asset Management Policy)
• The City will assess and evaluate issues, challenges, and opportunities
affecting the provision of capital assets in the future, such as
community needs and priorities; the impact of deferred maintenance;
funding issues; changes in technology; economic, demographic, or
other factors that may affect demand; and legal or regulatory changes.
This review may be undertaken in conjunction with an evaluation of
the program or service utilizing the particular assets.
• The assessment of capital asset condition must consider the impact
of any deferred maintenance and needed improvements.
Identification or development of measurement standards for the
condition of capital assets (including what is regarded as acceptable)
are a valuable output of this practice.
Page 5 of 19
All financial institutions and brokers/dealers who desire to become qualified bidders for
investment transactions must supply the following:
A. Audited financial statements of all financial institutions
B. Proof of Financial Industry Regulatory Authority certification
C. Proof of State registration
D. Certification of having read Investment Policy
E. Depository contracts of all financial institutions
F. Broker/Dealer questionnaire, as applicable
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Finance Director or his/her authorized designee.
IX. AUTHORIZED AND SUITABLE INVESTMENTS
The City 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 an effect on the City borrowing money, is prohibited.
A. TREASURY ISSUES: Treasury Bills, Treasury Notes, and Treasury
Bonds. The maximum maturity shall not be greater than five (5) years.
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. The City restricts the maximum
percentage of investment in Federal Agencies to 25%, per issuer. The
maximum maturity shall not be greater than five (5) years.
C. BANKERS' ACCEPTANCES: The City may not purchase bankers'
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: A type of collateralized bank deposit
with a specific maturity evidenced by a certificate. The City restricts the
maximum percentage of investment in Certificates of Deposit to 25% of the
City's total portfolio. The maximum maturity shall not be greater than five
(5) years.
E. REPURCHASE AGREEMENTS: A Public Securities Association (PSA)
Master Repurchase Agreement is required between the City and the
broker/dealer or financial institution for all 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 102% 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.
F. COMMERCIAL PAPER: Must be of prime quality of the highest rating by
both Moody's and Standard and Poor's (P-1 by Moody's and A-1 by
Standard and Poor's). Eligible paper is limited to corporations organized
and operating within the U.S. and having total assets of at least
$500,000,000. Purchases of commercial paper shall not exceed two
hundred and seventy (270) days to maturity and no more than 25% of the
City's surplus funds should be invested in commercial paper. No more than
5% of the amount invested shall be in any one issuer.
G. MEDIUM TERM NOTES: 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. Notes eligible
for investment under this subdivision shall be rated in a rating category of
"A" or its equivalent or better by a NRSRO. Purchases of medium -term
notes may not exceed 30% of the City's surplus money which may be
invested pursuant to this section. The maximum maturity shall not be
greater than five (5) years.
H. NEGOTIABLE CERTIFICATES OF DEPOSIT (NCD): To be eligible for
purchase by the City, the NCD must be issued by a Nationally or State -
Chartered bank, 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
statistical rating organization (NRSRO);
Bea major national or regional bank outside California rated "A" or better
by a NRSRO;
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 NRSRO;
Be a savings and loan association operating in California rated "A" or
better by a NRSRO;
Purchases of negotiable certificates of deposits may not exceed 30% of
the total portfolio.
The maximum maturity shall not be greater than five (5) years.
I. 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.
J. 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.
K. MUTUAL FUNDS AND MONEY MARKET MUTUAL FUNDS: To be
eligible for purchase by the City, the investment instruments must meet
multiple minimum requirements. Instruments must receive the highest
ranking, or the highest letter and numerical rating as provided for by a
NRSRO, must comply with all investment restrictions and regulations that
apply to public agencies in California Code 53601 (a-k, m-o), and must
follow regulations specified by the Securities and Exchange Commission
under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1, et
seq.).
L. MUNICIPAL SECURITIES: Include obligations of the City, the State of
California, any of the other 49 states, and any local city within the State of
California, provided that the securities are rated "A" or higher by at least one
NRSRO. No more than 5% of the portfolio may be invested in any single
issuer. No more than 30% of the portfolio may be in Municipal Securities.
The maximum maturity does not exceed five years.
M. SUPRANATIONALS: Securities that are unsubordinated obligations issued
by the International Bank for Reconstruction and Development (IBRD),
International Finance Corporation (IFC), or Inter -American Development
Bank (IADB). The securities must be rated "AA" or higher by a NRSRO. No
more than 30% of the total portfolio may be invested in these securities. No
more than 10% of the total portfolio shall be invested in any single issuer.
The maximum maturity of any security of this type shall not exceed five
years.
N. ASSET BACKED SECURITIES: Including mortgage pass through,
collateralized mortgage obligation, mortgage backed or other pay through
bond, equipment lease backed certificate, consumer receivable pass
through certificate, or consumer receivable backed bond with a maximum
maturity of five years. Securities eligible for investment under this
subdivision shall be issued by an issuer having an "A" or higher rating for
the issuer's debt as provided by a NRSRO and rated in a rating category of
"AA" or its equivalent or better by a NRSRO. Purchase of securities
authorized by this subdivision may not exceed 20% of the City's surplus
money that may be invested pursuant to this section.
X.
California Government Code Section 53601.6 prohibits the following list of investment
types.
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.
The City further restricts investment activities by prohibiting investments in
reverse repurchase agreements.
XI. COLLATERALIZATION
Collateralization will be required on two types of investments: certificates of deposit and
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 102% 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, 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 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.
XII. INVESTMENT POOLS/MUTUAL FUNDS
The City shall conduct a thorough investigation of any pool or mutual fund prior to making
an investment, and on a continual basis thereafter. The Finance Director or his/her
authorized designee shall develop a questionnaire which will answer the following general
questions:
A description of eligible investment securities, and a written statement of
investment policy and objectives.
A description of interest calculations and how it is distributed, and how gains
and losses are treated.
A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced, and the program audited.
A description of who may invest in the program, how often, what size deposit
and withdrawal are allowed.
A schedule for receiving statements and portfolio listings.
Are reserves, retained earnings, etc. utilized by the pool/fund?
A fee schedule, and when and how is it assessed.
Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
XIII. SAFEKEEPING AND CUSTODY
All security transactions, including collateral for repurchase agreements, entered into by
the City shall be conducted on a delivery -versus -payment (DVP) basis. Securities will be
held by a third -party custodian designated by the Finance Director or his/her authorized
designee and evidenced by safekeeping records.
XIV. MAXIMUM MATURITIES
To the extent possible, the City will attempt to match its investments with anticipated cash
flow requirements. However, the City may collateralize its repurchase agreements using
longer -dated investments not to exceed five (5) years to maturity.
XV. INTERNAL CONTROL
The Finance Director 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 Finance Director or his/her authorized designee shall establish an annual process of
independent review of internal control by an external auditor. This review will ensure
compliance with policies and procedures. Specific areas of review are investment
authorizations, proper safekeeping methods, and comparison of broker/dealer with
safekeeping confirmations.
XVI. MINIMUM PERFORMANCE STANDARDS
The City Treasurer shall monitor and evaluate the portfolio's performance relative to the
chosen market benchmark(s), which will be included in the monthly Investment Report. The
Finance Director or his/her authorized designee shall select an appropriate, readily available
index to use as a market benchmark.
XVII.
A. MONTHLY REPORTS: The Finance Director will submit a monthly
investment report to the City Council which provides full disclosure of the
City's investment activities within 30 days after the end of the month in
accordance with California Government Code Section 53607. These
reports will disclose, at a minimum, the following information about the City's
portfolio:
An asset listing showing par value, cost and independent third -party fair
market value of each security as of the date of the report, the source of
the valuation, type of investment, issuer, maturity date, and interest rate.
Transactions for the period.
A description of the funds, investments and programs (including lending
programs) managed by contracted parties (i.e. LAIF, investment pools,
outside money managers and securities lending agents).
A one -page summary report that shows:
i. Average maturity of the portfolio and modified duration of the
portfolio;
ii. Maturity distribution of the portfolio;
iii. Percentage of the portfolio represented by each investment
category;
iv. Average portfolio credit quality; and,
v. Time -weighted total rate of return for the portfolio for the prior one
month, three months, twelve months and since inception compared
to the City's market benchmark returns for the same periods.
A statement of compliance with investment policy, including a schedule
of any transactions or holdings which do not comply with this policy or
with the California Government Code, including a justification for their
presence in the portfolio and a timetable for resolution.
A statement that the City has adequate funds to meet its cash flow
requirements for the next six (6) months.
XVIII. LEGISLATIVE CHANGES
Any State of California legislative action, that further restricts allowable maturities,
investment type or percentage allocations, will be incorporated into the City's Investment
Policy and supersede any and all previous applicable language.
XIX. INTEREST EARNINGS
All monies earned and collected from investments authorized in this policy shall be allocated
monthly based on cash balances in each fund as a percentage of the entire pooled portfolio.
XX. INVESTMENT POLICY ADOPTION
The City's Investment Policy shall be reviewed and approved on an annual basis. Any
modifications made thereto must be approved by the City Council.
GLOSSARY
AGENCIES: Shorthand market terminology for any obligation issued by a government -
sponsored entity (GSE), or a federally related institution. Most obligations of LSE's are
not guaranteed by the full faith and credit of the US government.
ASKED: The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES: Securities supported by pools of installment loans or
leases or by pools of revolving lines of credit.
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. Brokers are active in markets, where banks buy and sell
money, as well as 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
report of the City. It includes combined statements for each individual fund 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.
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 i.e., 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, 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 $250,000 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 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.
FFCB: The Federal Farm Credit Bank System provides credit and liquidity in the
agricultural industry. FFCB issues discount notes and bonds.
FHLB: The Federal Home Loan Bank provides credit and liquidity in the housing market.
FHLB issues discount notes and bonds.
FHLMC: Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and
liquidity in the housing market. FHLMC, also called "FreddieMac" issues discount notes,
bonds and mortgage pass -through securities.
FNMA: Like FHLB and FreddieMac, the Federal National Mortgage Association was
established to provide credit and liquidity in the housing market. FNMA, also known as
"FannieMae," issues discount notes, bonds and mortgage pass -through securities.
GNMA: The Government National Mortgage Association, known as "GinnieMae," issues
mortgage pass -through securities, which are guaranteed by the full faith and credit of the
US Government.
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.
C. Assess City Management Systems, and Identify Issues, Opportunities, and
Challenges
• The City will identify and analyze its organization and management
systems, including system strengths and weaknesses and factors
that could affect these systems in the future. The support systems
established to manage the City are integral to the achievement of
goals.
• The City will inventory management systems by department and
routinely identify, analyze, and address issues related to the City's
organization and management systems and the environment in
which these systems operate.
• Each department will include an examination of strengths and
weaknesses of the organizational structure, interdepartmental
communication and cooperation, communication of goals and
directives, motivation of staff, conflict management, and provision
of other internal needs and supportsystems.
• The reviewwill alsoinclude an assessment of management policies,
procedures, and systems that support achievement of goals.
iii. Develop and Disseminate Broad Goals
A. Identify Broad Goals
• The City is to identify broad goals based on its assessment of the
community it serves and its operating environment. Broad goals
define the priorities and preferred future state of the community or
area served. They provide a basis for making resource allocation
decisions during the budget process and serve as a focal point for
assessing and coordinating various long-range or strategic plans.
• Goals are to be expressed in written form and should reflect
stakeholder concerns, needs, and priorities as well as factors
affecting the community and the City.
• They must be sufficiently specific to help define the services to be
emphasized and make difficult resource allocation decisions in the
budget process.
• Define priorities among goals to improve their usefulness in
allocating resources.
B. Disseminate Goals and Review with Stakeholders
• The City will disseminate broad goals and review them with
stakeholders. Disseminating and reviewing goals helps foster
participation, awareness, consensus, pride, and a sense of direction.
• Dissemination may occur by conducting public forums and by
publishing goals in key public documents, such as strategic and other
planning documents and budget documents. Electronic media may
also be used including the City website.
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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.
MAKE WHOLE CALL: A type of call provision on a bond allowing the issuer to pay off
remaining debt early. The issuer typically has to make a lump sum payment to the investor
derived from a formula based on the net present value (NPV) of future coupon payments
that will not be paid incrementally because of the call combined with the principal payment
the investor would have received at maturity.
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 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.
MUNICIPAL SECURITIES: Securities issued by state and local agencies to finance
capital and operating expenses.
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 earns 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.
PEFCO: The Private Export Funding Corporation assists exporters. Obligations of
PEFCO are not guaranteed by the full faith and credit of the US government.
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.
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.
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 (i.e., call features,
step-up coupons, floating rate coupons, and 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.
SUPRANATIONAL: A Supranational is a multi -national organization whereby member
states transcend national boundaries or interests to share in the decision making to
promote economic development in the member countries.
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.
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.
TVA: The Tennessee Valley Authority provides flood control and power and promotes
development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA
currently issues discount notes and bonds.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
memberfirms as well as nonmember brokers/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.
Goal # 2 - Develop Approaches to Achieve Goals
i. Adopt and Review Financial Policies
A. Develop Policy on Stabilization Funds
• The City developed policies to guide the creation, maintenance, and
use of resources for financial stabilization purposes. (See Fund
Balance Policy2).
• The policy establishes how and when the City builds up stabilization
funds and will identify the purposes for which they may beused.
B. Develop Policy on Fees and Charges
• The City has established a master fee schedule that identifies the
manner in which fees and charges are set and the extent to which
they cover the cost of the service provided.
• The fee schedules are to be evaluated annually in the budget process
to review all fees and charges, the level of cost recovery for services
and the reasonfor any subsidy, and the frequency with which cost-
of- services studies will be undertaken.
• Policies on fees and charges are publicly available and summarized
in materials used in budget preparation.
C. Develop Policy on Debt Issuance and Management
• The City has established a Debt Management Policy to guide the
issuance and management of debt. Issuing debt commits the City's
revenues several years into the future and may limit the City's
flexibilityto respond to changing service priorities, revenue inflows, or
cost structures. Adherence to a debt policy helps ensure that debt is
issued and managed prudently in order to maintain a sound fiscal
position and protect credit quality. compliance.
z The Fund Balance Policy is reviewed annually to assess the alignment with set goals
established in the budget process. The City should evaluate reserves set in the fund balance
policy. These funds may be used at the City's discretion to address temporary cash flow
shortages, emergencies, unanticipated economic downturns, and one-time opportunities.
3 Costs of service include direct and indirect costs such as operating and maintenance costs,
overhead, and charges for use of capital. The City may choose not to recover all costs, but
it must identify such costs. Reasons for not recovering full costs will be identified and
explained. State and local law may govern the establishment of fees and charges.
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