05. City Investment policy
City Hall
10300 Torre Avenue
Cupertino, CA 95014-3255
Telephone: (408) 777-3220
Fax: (408) 777-3366
CITY OF
CUPEIUINO
DEP ARTMENT OF ADMINISTRATIVE SERVICES
SUMMARY
Agenda Item No. ~
Meeting Date: April 17, 2007
SUBJECT AND ISSUE
Approve the City Investment Policy for 2007.
BACKGROUND
The California Government Code requires a statement of investment policy to be reviewed and
adopted by the City Council on an annual basis. This statement is intended to provide guidelines
for the prudent investment of the City's temporary idle cash, and outline the policies for
maximizing the efficiency of the City's cash management system. The ultimate goal is to
enhance the economic status of the City while protecting its pooled cash.
The investment policy is modified each year to incorporate any change in procedures,
authorizations, or State legislation. Three changes are proposed for 2007. The Audit Committee
recommended approval of these changes and adoption of the investment policy at their April 5,
2007 meeting.
Current policy requires an independent audit of portfolio holdings and investment policy
compliance. The external auditor does not regularly perform this review as part of their annual
audit, but offers to do this at an additional cost of $4,153. The Audit Committee recommends
accepting the additional service and adding a provision that the review results be reported to the
Committee annually.
Current policy allows the City to invest up to 20% of its portfolio in money market funds
comprising U.S. Treasury and Government agency obligations. The money market fund that the
City currently invests in, however, also contains repurchase agreements backed by Treasuries and
agencies. The attached policy proposes formalizing the allowance of such investments.
Finally, State code allows deposits with credit unions. These institutions offer a competitive rate
that is federally insured. Staff recommends amending the policy to allow such investments.
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Investment Policy
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RECOMMENDATION
Adopt the City Investment Policy for 2007.
Submitted by:
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David Woo
Finance Director
Reviewed by:
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Carol A. Atwood
Director of Administrative Services
Approved for submission:
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David W. Knapp
City Manager
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City of Cupertino
Investment Policy
April 17, 2007
POLICY
Under authority granted by the City Council, the City Treasurer and Deputy Treasurer are
responsible for investing the surplus funds of the City.
The investment of the funds of the City of Cupertino is directed to the goals of safety, liquidity
and yield. The authority governing investments for municipal governments is set forth in the
California Government Code, Sections 53601 through 53659.
The primary objective of the investment policy of the City of Cupertino is SAFETY OF
PRINCIP AL. Investments shall be placed in those securities as outlined by type and maturity
sector in this document. Effective cash flow management and resulting cash investment
practices are recognized as essential to good fiscal management and control. The City's portfolio
shall be designed and managed in a manner responsive to the public trust and consistent with
state and local law. Portfolio management requires continual analysis and as a result the balance
between the various investments and maturities may change in order to give the City of
Cupertino the optimum combination of necessary liquidity and optimal yield based on cash flow
projections.
SCOPE
The investment policy applies to all financial assets of the City of Cupertino as accounted for in
the Comprehensive Annual Financial Report (CAFR). Policy statements outlined in this
document focus on the City of Cupertino's pooled, surplus funds, but will also apply to all other
funds under the City Treasurer's span of control unless specifically exempted by statue or
ordinance. This policy is applicable, but not limited to all funds listed below:
. General Fund
. Special Revenue Funds
. Capital Project Funds
. Enterprise Funds
. Internal Service Funds
. Trust and Agency Funds
. Any new fund unless specifically exempted
Investments of bond proceeds shall be governed by the provisions of the related bond indentures
and/or cash flow requirements and therefore may extend beyond the maturity limitations as
outlined in this document.
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Investment Policy
April 17, 2007
PRUDENCE
The standard to be used by investment officials shall be that of a "prudent person" and shall be
applied in the context of managing all aspects of the overall portfolio. Investments shall be made
with judgment and care, under circumstances then prevailing, which persons of prudence,
direction and intelligence exercise in the management of their own affairs, not for speculation,
but for investment, considering the probable safety of their capital as well as the probable income
to be derived.
It is the City's full intent, at the time of purchase, to hold all investments until maturity to ensure
the return of all invested principal dollars. However, it is realized that market prices of securities
will vary depending on economic and interest rate conditions at any point in time. It is further
recognized that in a well-diversified investment portfolio, occasional measured losses are
inevitable due to economic, bond market or individual security credit analysis. These occasional
losses must be considered within the context of the overall investment program objectives and
the resultant long-term rate of return.
The City Treasurer and Deputy Treasurer, acting within the intent and scope of the investment
policy and other written procedures and exercising due diligence, shall be relieved of personal
responsibility and liability for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely manner and appropriate action is
taken to control adverse developments.
OBJECTIVES
The primary objectives, in order of priority, of the City of Cupertino's investment activities shall
be:
A. Safety of Principal
Safety of principal is the foremost objective of the City of Cupertino. Each investment
transaction shall seek to ensure that capital losses are avoided, whether from securities
default, broker-dealer default or erosion of market value. The City shall seek to preserve
principal by mitigating the two types of risk, credit risk and market risk.
Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be
mitigated by investing in investment grade securities and by diversifying the investment
portfolio so that the failure of anyone issuer does not unduly harm the City's capital
base and cash flow.
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City of Cupertino
Investment Policy
April 17, 2007
Market risk, defined as market value fluctuations due to overall changes in the general
level of interest rates, shall be mitigated by limiting the average maturity of the City's
investment portfolio (see maximum maturities) and structuring the portfolio based on
historic and current cash flow analysis eliminating the need to sell securities prior to
maturity and avoiding the purchase of long term securities for the sole purpose of short
term speculation.
B. Liquidity
The City's investment portfolio will remain sufficiently liquid to meet all operating
requirements which might be reasonably anticipated and provide the City with adequate cash
flows to pay its obligations over the next six months. Additionally, the portfolio should
consist largely of securities with active secondary resale markets.
C. Yield
The City's investment portfolio shall be designed with the objective of attaining a rate of
return throughout budgetary and economic cycles, commensurate with Cupertino's
investment risk constraints and cash flow characteristics of the portfolio.
MAXIMUM MATURITIES
Maturities of investments will be selected based on liquidity requirements to minimize interest
rate and maximize earnings. Investment of surplus funds shall comply with the maturity limits as
set forth in the California Government Code 53600, et seq. Where this section does not specify a
limitation on the term or remaining maturity at the time of the investment, no investment shall be
made in any security that at the time of the investment has a term remaining to maturity in excess
of five years, unless the Council has granted express authority to make that investment either
specifically or as a part of an investment program approved by the Council no less than three
months prior to the investment.
Reserve funds may be invested in securities exceeding five years if the maturity of such
investments is made to coincide as nearly as practicable with the expected use of the funds.
PERFORMANCE EV ALUA TION
Investment performance is continually monitored and evaluated by the City Treasurer.
Investment performance statistics and activity reports are generated on a monthly basis for
presentation to the oversight (audit) committee, City Manager and City Council.
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City of Cupertino
Investment Policy
April 17, 2007
Yield on the City's investment portfolio is of secondary importance compared to the safety and
liquidity objectives described above. The City's investment portfolio shall be designed to attain
a market average rate of return through economic cycles. The market average rate of return is
defined as the average return on the Local Agency Investment Fund (assuming the State does not
adversely affect LAIF's returns due to budget constraints). Whenever possible, and consistent
with risk limitations as defined herein and prudent investment principles, the Treasurer shall seek
to augment return above the market average rate of return.
DELEGA nON OF AUTHORITY
The Treasurer is responsible for investment management decisions and activities per City
Council Resolution.
The Treasurer shall develop and maintain written administrative procedures for the operation of
the investment program, which are consistent with this investment policy. Procedures will
include reference to safekeeping, wire transfer agreements, collateral/deposit agreements,
banking service contacts, and other investment related activities.
The Treasurer shall designate a staff person as a liaison/deputy in the event circumstances require
timely action and the Treasurer is not present.
No officer or designee may engage in an investment transaction except as provided under terms
of this policy and the procedures by the Treasurer and approved by the City Manager/Council.
The Treasurer shall be responsible for all transactions undertaken and shall establish a system of
controls to regulate the activities of subordinate officials.
OVERSIGHT COMMITTEE
An audit committee consisting of appropriate internal and external members, appointed by the
City Council, shall be established to provide general oversight and direction concerning the
policy related to management of the City's investment pool. The City Treasurer shall serve in a
staff and advisory capacity. The committee shall meet at least quarterly to review policy
changes, new legislation and portfolio status.
ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business
activity that conflicts with proper execution of the investment program, or impairs their ability to
make impartial investment decisions. Additionally the City Treasurer and the Deputy Treasurer
are required to annually file applicable financial disclosures as required by the Fair Political
Practices Commission (FPPC).
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City of Cupertino
Investment Policy
April 17,2007
SAFEKEEPING OF SECURITIES
To protect against fraud or embezzlement or losses caused by collapse of an individual securities
dealer, all securities owned by the City shall be held in safekeeping by a third party custodian
acting as agent for the City under the terms of a custody agreement. All trades executed by a
dealer will settle delivery versus payment (DVP) through the City's safekeeping agent.
In order to verify investment holdings, an external auditor, on an annual basis, shall
independently verify securities held in custody for the City.
All exceptions to this safekeeping policy must be approved by the City Treasurer in written form
and included in the monthly report to City Council.
INTERNAL CONTROL
Separation of duties between the Treasurer's function and Finance is designed to provide an
ongoing internal review to prevent the potential for converting assets or concealing transactions.
Existing procedures require all wire transfers initiated by the Treasury Section be reconfirmed by
the appropriate financial institution to non-treasury staff. Proper documentation obtained from
confirmation and cash disbursement wire transfers is required for each investment transaction.
Timely bank reconciliation is conducted to ensure proper handling of all transactions.
The investment portfolio and all related transactions are reviewed and balanced to appropriate
general ledger accounts by Finance on a monthly basis.
An independent analysis by an external auditor shall be conducted annually to review internal
control, account activity, and compliance with policies and procedures. The analysis shall be
reported to the audit committee.
REPORTING
The City Treasurer shall prepare a monthly investment report, including a succinct management
summary that provides a clear picture of the status of the current investment portfolio. The
report will be prepared in a manner that will report all information required under this policy and
the California Government Code. The Treasurer will submit the report to Council no later than
the second regular council meeting, or approximately 45 days following the end of the month
covered by the report.
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City of Cupertino
Investment Policy
April 17, 2007
In addition, the City Treasurer shall submit a copy of the second and fourth quarter investment
reports to the California Debt and Investment Advisory Commission within 60 days of the close
of that quarter. A copy of this investment policy will also be remitted with the second quarter
report.
QUALIFIED BROKER/DEALERS
Minimum eligibility criteria for dealers/brokers include a minimum of $1 billion in assets and a
minimum of five years in business. The registration status of all dealers is checked with the
National Association of Securities Dealers.
Dealers are required to acknowledge the receipt and review of the Statement of Investment
Policy, to be familiar with the government code restrictions, and have experience with dealing
with other municipal investors. Dealers are then selected on the basis of yields, services offered,
and references obtained. They may be primary or secondary dealers. The financial institutions
must submit a current annual audited financial statement to ascertain capital adequacy.
COLLATERAL REQUIREMENTS
Collateral is required for investments in certificates of deposit and repurchase agreements. In
order to reduce market risk, the collateral level will be at least 102% of market value of principal
and accrued interest.
In order to conform with the provisions of the Federal Bankruptcy Code which provides for
liquidation of securities held as collateral, the only securities acceptable as collateral shall be
certificates of deposit, commercial paper, eligible banker's acceptances, medium term notes or
securities that are the direct obligations of, or are fully guaranteed as to principal and interest by,
the United States or any agency of the United States.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code Sections 53600 et seq.
Within the context of the limitations, the following investments are authorized, as further limited
herein:
1. United States Treasury Bills, Bonds, and Notes or those for which the full faith and
credit of the United States are pledged for payment of principal and interest. There is
no percentage limitation of the portfolio that can be invested in this category, although a
five-year maturity limitation is applicable.
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City of Cupertino
Investment Policy
April 17, 2007
2. Obligations issued by the Government National Mortgage Association (GNMA), the
Federal Farm Credit System (FFCB), the Federal Home Loan Bank Board (FHLB), the
Federal National Mortgage Association (FNMA), the Student Loan Marketing
Association (SLMA), and the Federal Home Loan Mortgage Association (FHLMC).
There is no percentage limitation of the portfolio that can be invested in this category.
A five-year maturity limitation is applicable with the exception of one FHLMC
investment approved by City Council, purchased in 1993, and maturing in 2007. Such
investment has a maturity value of $1 00,000.
3. Banker's Acceptances (bills of exchange or time drafts drawn on and accepted by
commercial banks) may not exceed 180 days to maturity or 40% of the cost value of the
portfolio.
4. Local Agency Investment Fund (LJ\IF), which is a State of California managed
investment pool, may be used up to the maximum permitted by California state law.
Investment officers will review LAIF's investment policy, investment mix, rate of
return, etc. on a monthly basis.
Investments detailed in items 5 through 10 are further restricted to percentage of the cost value of
the portfolio in anyone-issuer name to a maximum of 10%. The total value invested in anyone
issuer shall not exceed 5% of the issuers net worth. Again, a five-year maximum maturity
limitation is applicable unless further restricted by this policy.
5. Commercial paper ranked PI by Moody's Investor Services or Al + by Standard &
Poors, and issued by domestic corporations having assets in excess of $500,000,000 and
having an AA or better rating on its long term debentures as provided by Moody's or
Standard & Poors. Purchases of eligible commercial paper may not exceed 270 days to
maturity nor represent more than 10% of the outstanding paper of the issuing
corporation. Purchases of commercial paper may not exceed 25% of the cost value of
the portfolio.
6. Negotiable Certificates of Deposits issued by nationally or state chartered banks, state
or federal savings institutions, or state or federal credit unions. Purchases of Negotiable
Certificates of Deposit may not exceed 30% of the cost value of the portfolio. A
maturity limitation of five years is applicable.
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Investment Policy
April 17, 2007
7. Repurchase agreements that specify terms and conditions may be transacted with banks
and broker dealers. The maturity of the repurchase agreements shall not exceed one
year. The market value of the securities used as collateral for the repurchase
agreements shall be monitored by the investment staff and shall not be allowed to fall
below 102% of the value of the repurchase agreement. A PSA Master Repurchase
Agreement is required between the City of Cupertino and the broker/dealer or financial
institution for all repurchase agreements transacted.
8. Reverse repurchase agreements are not authorized.
9. Certificates of Deposit (time deposits), non-negotiable and collateralized in accordance
with the California Government Code, may be purchased through banks, savings and
loan associations, or credit unions.
10. Medium Term Corporate Notes issued by corporations organized and operating in the
United States with a maximum maturity of five years may be purchased. Securities
eligible for investment shall be rated A or better by Moody's or Standard & Poor's
rating services. Purchase of medium term notes may not exceed 30% of the cost value
of the portfolio.
11. Bonds issued by the local agency, including bonds payable solely out of the revenues
from a revenue producing property owned, controlled or operated by the local agency or
by a department, board, agency, or authority of the local agency.
12. Registered state warrants or treasury notes or bonds of this state, including bonds
payable solely out of the revenues from a revenue producing property owned, controlled
or operated by the state or by a department, board, agency or authority of the state.
13. Bonds, notes, warrants or other evidences of indebtedness of any local agency within
this state.
14. Various daily money market funds administered for or by trustees, paying agents and
custodian banks contracted by the City of Cupertino may be purchased as allowed under
State of California Government Code. Only funds holding U.S. Treasury obligations,
Government agency obligations, or repurchase agreements collateralized by U.S.
Treasury or Government agency obligations can be utilized and may not exceed 20% of
the cost value of the portfolio.
15. Ineligible investments are those that are not described herein, including but not limited
to, common stocks and long term (over five years in maturity) notes and bonds are
prohibited from use in this portfolio. It is noted that special circumstances arise that
necessitate the purchase of securities beyond the five-year limitation. On such
occasions, requests must be approved by City Council prior to purchase.
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Investment Policy
April 17, 2007
DEPOSITS
To be eligible to receive local agency money, a bank, savings association, federal association, or
federally insured industrial loan company shall have received an overall rating of not less than
"satisfactory" in its most recent evaluation by the appropriate federal financial supervisorial
agency of its record of meeting the credit needs of California's communities.
INTEREST EARNINGS
All moneys earned and collected from investments authorized in this policy shall be allocated
monthly to various fund accounts based on the cash balance in each fund as a percentage of the
entire pooled portfolio.
POLICY REVIEW
The City of Cupertino's investment policy shall be adopted by resolution of the City Council on
an annual basis. This investment policy shall be reviewed at least annually to ensure its
consistency with the overall objectives of preservation of principal, liquidity and yield, and its
relevance to current law and financial and economic trends.
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