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HomeMy WebLinkAboutResolution - 2022-R0508 - Investment Policy and Investment StrategyResolution No. 2022-RO508 Item No. 5.4 December 13, 2022 RESOLUTION WHEREAS, the City Council has reviewed and approved the City of Lubbock's Investment Policy and Investment Strategy and finds that it complies with the Public Funds Investment Act (Chapter 2256 of the Texas Government Code) and the Public Funds Collateral Act (Chapter 2257 of the Texas Government Code); NOW THEREFORE; BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: THAT the City of Lubbock investment policy and investment strategy, as reviewed and recommended by the Audit and Investment Committee in the attached document entitled "City of Lubbock, Texas, Investment Policy and Investment Strategy for FY 2022-23" which is hereby incorporated in the Resolution as if fully set forth, be approved and adopted for the City of Lubbock, Texas, and shall be included in the minutes of the Council. Passed by the City Council on the 13th day of December , 2022. ATTEST: Rebec a Garza, City Secre APPROVED AS TO CONTENT: D. Blu K telich, Chie Financial Officer APPROVED AS TO FORM: RES.Investment Policy Approval for 2022 Resolution No. 2022-RO508 City of Lubbock, TX Finance Department Investment Policy and Investment Strategy for FY 2022-23 Policy The Chief Financial Officer or Designee, of the City of Lubbock, Texas, is charged with the responsibility to prudently and properly manage any and all funds of the City. Time and demand deposits must be fully collateralized and all transactions appropriately authorized. This policy addresses the procedures, controls, and practices, which must be exercised to ensure sound fiscal management. The statutory foundation for this policy is the Public Funds Investment Act (the "Act", Texas Government Code Section 2256) and the Public Funds Collateral Act (Texas Government Code Section 2257). Scope This policy shall apply to the investment of all financial assets and all funds of the City of Lubbock (hereinafter referred to as the "City") over which it exercises financial control. The investment income derived from each account shall be distributed to the various City funds in accordance with the existing City Policy. The funds accounted for in the City of Lubbock Comprehensive Annual Financial Report (CAFR) include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds (excluding WTMPA) Internal Service Funds Agency Funds The Bond Funds Portfolio includes bond proceeds recorded in Capital Projects, Enterprise, and Internal Service Funds, while the Operating Portfolio includes all other resources in the other funds listed. Objectives The City's principal investment objectives are listed in order of priority: A. Compliance with all Federal, State, and other legal requirements (including but not limited to Chapter 2256 Public Funds Investment Act, as amended and Chapter 2257 Public Funds Collateral Act, as amended, of the Texas Government Code). B. Safety: Preservation of capital and the protection of investment principal. C. Liquidity: Maintenance of sufficient liquidity to meet anticipated disbursements and cash flows. D. Diversification: Maintenance of diversity in market sector and maturity to minimize market risk in a particular sector. E. Marketability: Ability to liquidate investments before maturity if the need arises. F. Yield: Attainment of a market rate of return equal to or higher than the performance measure established by the Chief Financial Officer, or Designee. Responsibility and Control Delegation of Authority The ultimate responsibility and authority for investment transactions involving the City resides with Chief Financial Officer, or Designee. The Chief Financial Officer, or Designee, being designated as the City's Investment Officer(s) in accordance with the Texas Government Code Section 2256.005(f), is charged with executing the day-to-day investment functions for the City following the guidance and recommendations of the City's Audit and Investment Committee. Audit and Investment Committee The City will utilize the Audit and Investment Committee to assist in monitoring the performance and structure of the City's investments. The Audit and Investment Committee shall be responsible for the investment strategy decisions, activities, and the establishment of written procedures for the investment operations consistent with this policy. Monitoring of the portfolio shall be performed by the Audit and Investment Committee no less than quarterly and verified by the City's independent auditor at least annually. The Audit and Investment Committee shall discuss investment reports, investment strategies, and investment and banking procedures. Investment Advisors The Chief Financial Officer, or Designee, may in his/her discretion, with Council approval, appoint one or more investment advisor, registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940 (15 U.S.C. Section 80b-1 et seq.), to assist in the management of a portion of the City's assets. To be eligible for consideration, an investment advisor shall demonstrate to the Audit and Investment Committee knowledge of cash management and experience in managing public funds. Selection of any investment advisor shall be based upon their expertise in public cash management. An appointed investment advisor may be granted investment discretion within the guidelines of this policy with regard to the City's assets placed under its management. A contract made under authority of the Act may not be for a term longer than two years on the original contract term. A renewal or extension of the contract must be made by the City Council by resolution (Texas Government Code Section 2256.003). Standard of Care The standard of care is to be used for managing the City's assets (Texas Government Code Section 2256.006), which states, "Investments shall be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived." The Investment Officer(s) acting in accordance with written procedures and exercising due diligence shall not be held personally liable for a specific security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. The City's independent auditor will perform a compliance audit of management controls on investments and adherence to investment policies annually. In accordance with the Act (Texas Government Code Sections 2256.005 and 2256.008), the Investment Officer(s) shall attend 10 hours of investment training within 12 months of assuming duties and 8 hours not less than once in a two-year period that begins on the first day of the City's fiscal year and consists of the two consecutive fiscal years after that date. The investment training session shall be provided by an independent source approved by the Audit and Investment Committee. Training must include education in investment controls, security risks, strategy risks market risks, and diversification of investment portfolio in order to ensure the quality and capability of investment management in compliance with the Act. Investment Portfolio Authorized Investments The following are authorized investments for the City and all are authorized and further defined by the Act: • Obligations, including letters of credit, of the United States or its agencies and instrumentalities (Texas Government Code Section 2256.009(1)) • Direct obligations of this state or its agencies and instrumentalities (Texas Government Code Section 2256.009(2)) • Collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States (Texas Government Code Section 2256.009(3)) • Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States (Texas Government Code Section 2256.009(4)) • Obligations of state, agencies, counties, cities and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent (Texas Government Code Section 2256.009(5)) with no more than a $5 million investment into any one issuance/offering • Fully collateralized certificates of deposit issued by a state or national bank that has its main office or a branch office in Texas and guaranteed and insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or secured in any other manner and amount provided by law for deposits of the City (Texas Government Code Section 2256.0010) • Bankers' acceptances with a stated maturity of 365 days or fewer from the date of its issuance; and liquidated in full at maturity; and eligible for collateral for borrowing from a Federal Reserve Bank; and accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A-1 or P-1 or an equivalent rating by at least one nationally recognized credit rating agency (Texas Government Code Section 2256.012) • Commercial paper with a stated maturity of 365 days or fewer from the date of its issuance, and rated not less than A-1 or P-1 by nationally recognized credit rating agencies or two nationally recognized credit rating agency and is fully secured by an irrevocable letter of credit issued by a bank organized and existing under the laws of the United States or any State (Texas Government Code Section 2256.013) with no more than a $5 million investment into any one issuance/offering • No-load money market mutual funds registered and regulated by the Securities and Exchange Commission, provides the City with a prospectus and other information required by the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) or the Investment company Act of 1940 (15 U.S.C. Section 80a-1 et seq.), has a dollar - weighted average stated maturity of 90 days or fewer, and includes in its investment objectives the maintenance of a stable net asset value of $1 for each share (Texas Government Code Section 2256.014(a)) • Investment pools rated not less than AAA or an equivalent rating by at least one nationally recognized rating service and authorized by the City Council and as further defined by the Act (Texas Government Code Section 2256.016) The following investments are not authorized: Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage -backed security collateral and pays no principal (Texas Government Code Section 2256.009(b)(1)) Obligations whose payment represents the principal stream of cash flow from the underlying mortgage -backed security collateral and bears no interest (Texas Government Code Section 2256.009(b)(2)) Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years (Texas Government Code Section 2256.009(b)(3)) Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index (Texas Government Code Section 2256.009(b)(4)) Existing Investments The Investment Officer(s) is not required to liquidate investments that were authorized investments at the time of purchase (Texas Government Code Section 2256.017). Effect of Loss of Required Rating An investment that requires a minimum rating does not qualify as an authorized investment during the period the investment does not have a minimum rating. The Investment Officer(s) shall take all prudent measures that are consistent with the City's investment policy to liquidate the investment(s) that does not have the minimum rating (Texas Government Code Section 2256.021). Investment Diversification It is the intent of the City to diversify the investment instruments within the portfolio to avoid incurring unreasonable risks inherent in over -investing in specific instruments, individual financial institutions, or maturities. The asset allocation in the portfolio should, however, be flexible depending upon the outlook for the economy and the securities markets. When conditions warrant, the guidelines below may be exceeded by approval of the Audit and Investment Committee. The City may invest to the following limits as a percentage of its total investment portfolio (these limitations do not apply to Bond Funds): 100% in United States Treasury Obligations 100% in Investment Pools 80% in Federal Instrumentalities or Agencies 50% in Municipal Bonds 30% in Certificates of Deposit 30% in No Load Money Market Fund 10% in Commercial Paper 10% in Banker Acceptance Investment Strate The City of Lubbock maintains portfolios, which utilize four specific investment strategy considerations, designed to address the unique characteristics of the fund groups represented in the investment portfolios. The policies detailed below are subject to an annual review to occur prior to the annual City Council action regarding the Investment Policy (Texas Government Code Section 2256.005(d)). (1) Operating Funds and Commingled Pools Containing Operating Funds The investment strategy for the portfolio containing operating funds, the Operating Portfolio, has as its primary objective to ensure that anticipated cash flows are matched with adequate investment liquidity. Investment maturities shall be matched against liabilities, including debt service requirements. The secondary objective of the Operating Portfolio is to create a portfolio structure that will experience minimal volatility during economic cycles. This is accomplished by purchasing high quality, short- to medium -term securities that complement each other in a laddered maturity structure. The City shall maintain a dollar -weighted average maturity of two (2) years or less based on the stated final maturity dates of each security in its Operating Portfolio. The City shall at all times maintain at least 10% of its Operating Portfolio in instruments maturing in 120 days or less. (2) Debt Service Funds The investment strategy for debt service funds shall have as the primary objective the assurance of investment liquidity adequate to cover each succeeding debt service obligation on the required payment date. Securities purchased shall not have a stated final maturity date which exceeds any unfunded debt service payment date. The maximum weighted average maturity shall not exceed one (1) year. (3) Debt Service Reserve Funds The investment strategies for debt service reserve funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund from securities with a low degree of volatility. Except as may be required by the bond ordinance specific to an individual issue, securities should be of high quality with short- to intermediate -term maturities. The maximum weighted average maturity shall not exceed one (1) year. (4) Bond Funds The investment strategy for bond funds will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held shall not exceed the estimated project completion date. The maximum weighted average maturity shall not exceed two (2) years. Cash Flow A cash flow analysis shall be reviewed and updated no less than quarterly. This cash flow analysis is the basis for matching liabilities or obligations with security maturities as outlined in the strategies previously listed. Maximum Maturity The maximum maturity of any individual security the City may invest in shall be 5 years. Management Style The City seeks an active, rather than passive, management of its portfolio assets. Assets may be sold at a loss only if the Investment Officer(s) feel that the sale of the security is in the best long-term interest of the City. Supporting documentation shall be maintained by the Investment Officer(s) for all sales of securities in which there is a book loss or where a security is sold in order to simultaneously purchase another security. Authorized Financial Broker/Dealers and Institutions The City shall maintain a list of authorized broker/dealers and financial institutions, which are approved by the Audit and Investment Committee for investment purposes. It shall be the polity of the City to purchase securities only from those authorized institutions and firms. The Committee will review and approve the list no less than annually. To be eligible for authorization, each broker/dealer or financial institution shall: 1. Complete and submit to the City a Broker/Dealer Questionnaire 2. Provide the firm's most recent financial statements 3. Provide a written instrument certifying that they have received and thoroughly reviewed the City's Investment Policy 4. All broker/dealers must submit: (a) audited financial reports (b) Financial Industry Regulatory Authority (FINRA) registration (c) Central Registration Depository Number (CRD) (d) proof of Texas Securities Registration The Investment Officer(s), or investment advisor, shall maintain a file of all Broker/Dealer Questionnaires. Authorized Broker/dealers and other financial institutions will be selected after a review of performance, financial conditions, and ability to provide service to the City. The Investment Officer(s) shall exercise due diligence in monitoring the activities of other officers and staff members engaged in transactions with the City. Employees of any firm or financial institution offering securities or investments to the City of Lubbock shall be trained in the precautions appropriate to public sector investments and shall be required to familiarize themselves with the City's investment objectives, policies, and constraints. In the event of a material adverse change in the financial condition of the firm or financial institution, the City will be informed immediately by telephone and in writing. All investment transactions must be competitively transacted and executed with broker/dealers or financial institutions that have been authorized by the City. The City will obtain no less than three (3) competitive offers. (Exception: new issues will not be required to be competitively transacted as all broker/dealers would show the same price and yield.) Selection of Financial Institutions Depositories shall be selected through the City's banking services procurement process, which shall include a formal Request for Proposal (RFP). In selecting depositories, the services available, service costs, and credit -worthiness of institutions shall be considered, and the Investment Officer(s), shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. The City shall select financial institutions from which the City may purchase certificates of deposit in accordance with the Act and this Policy. The City of Lubbock will have a written depository agreement with any financial institution with whom the City of Lubbock has time or demand deposits. The Investment Officer shall monitor the financial condition of financial institutions where certificates of deposit are held and report quarterly to the Audit and Investment Committee. Collateralization of Public Deposits Collateralization requirements are governed by Texas Government Code Chapter 2257, Public Funds Collateral Act. Collateralization will be required on three types of investments: time deposits, demand deposits, and repurchase agreements. In order to anticipate market changes and provide a level of security for all funds, collateral will be maintained and monitored by the pledging depository at no less than 102% of market value of principal and accrued interest maintained by the financial institution. The City of Lubbock chooses to limit collateral in the manner following. Underlying collateral shall be composed of those investments approved in this policy and mortgage -backed securities as defined in Texas Government Code Section 2257.002. The maturity of the collateral security shall be no longer than a 30-year stated final maturity. The bank shall monitor and maintain the margins on a daily basis. All collateral shall be subject to inspection and audit by the City or its auditors. To allow for compliance verification by the City, monthly reports of pledged collateral shall include, at a minimum, information for each security that identifies its (i) type, (ii) CUSIP Number, and (iii) face value. Collateral shall always be held by an independent third party with whom the City of Lubbock has a current custodial agreement. This should be evidenced by a written agreement in an effort to satisfy the Uniform Commercial Code (UCC) requirement for control. A safekeeping receipt must be supplied to the City of Lubbock for any transaction involving sales/purchases/maturities of securities and/or underlying collateral, which the City of Lubbock will retain. The right of collateral substitution is granted provided the substitution has prior approval of the City and is followed by the delivery of an original safekeeping receipt to the City of Lubbock, and the replacement collateral is received prior to the release of original collateral. The collateral agreement must be in writing. Safekeeping of Securities All securities owned by the City shall be held in City designated third -party safekeeping. All trades executed by a dealer will settle delivery -versus -payment through the City's safekeeping agent. Securities held in custody for the City shall be independently audited on an annual basis to verify investment holdings. Delivery versus Payment All security transactions, including collateral for repurchase agreements, entered into by the City of Lubbock shall be conducted on a delivery -versus -payment (DVP) basis. That is, funds shall not be wired or paid until verification has been made that the collateral was received by the Trustee. Reporting Investment reports shall be prepared monthly and be signed and submitted by the Investment Officer(s) in a timely manner. These reports will be submitted to the City Manager and City Council. This report shall describe in detail the investment position of the City, disclose the market value and book value of each fund group as well as each separate investment, and state the maturity date of each security and accrued interest for the reporting period. It must also express the compliance of the portfolio to the investment strategy contained in the City's Investment Policy, the Act, and Generally Accepted Accounting Principles (GAAP). Market pricing information is obtained through the use of appropriate software available either internally or externally through investment advisors. A written record shall be maintained of all bids and offerings for securities transactions in order to ensure that the City receives competitive pricing. An independent auditor will review monthly investment reports on an annual basis, as required by the Act. Changes in Statutes, Ordinances or Procedures This policy is designed to operate within the restrictions set forth in applicable State of Texas and Federal laws and statutes, but it does not permit all activity allowed by those laws. Changes to state or federal laws, which restrict a permitted activity under this policy shall be incorporated into this policy immediately upon becoming law. Changes to state or federal laws that do not further restrict this policy shall be reviewed by the Audit and Investment Committee and recommended to the City Council when appropriate. Performance Review The Audit and Investment Committee shall meet no less than quarterly to review the portfolio's adherence to appropriate risk levels and to compare the portfolio's total return to the established investment objectives and goals. The Investment Officer(s) shall periodically establish a benchmark yield for the City's investments equal to the average yield on the United States Treasury security, which most closely corresponds to the portfolio's actual weighted average maturity, or any other benchmark as approved by the Audit and Investment Committee. When comparing the performance of the City's portfolio, all fees and expenses involved with managing the portfolio will be included in the computation of the portfolio's rate of return. Ethics and Conflicts of Interest Investment Officer(s), employees, and Audit and Investment Committee Members involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or that could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the City Manager and the Texas Ethics Commission, any material financial interests in financial institutions that conduct business within this City, and they shall further disclose any large personal financial/investment positions that could be related to the performance of this City's portfolio. A disclosure statement with the Texas Ethics Commission and the City Manager will also be filed if an Investment Officer, employee, or Audit and Investment Committee Member is related within the third degree by consanguinity or within the second degree by affinity, as determined under Chapter 573, to an individual seeking to sell an investment to the City. Employees and officers shall subordinate their personal investment transactions to those of the City particularly with regard to the timing of purchases and sales. Internal Controls The Investment Officers shall establish a system of internal controls, which shall be documented in writing. The internal controls shall be reviewed by the Audit and Investment Committee and with the independent auditor on an annual basis. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated market changes, or imprudent actions by employees and officers of the City. Policy Revisions The City Council shall adopt a written instrument by rule, order, ordinance, or resolution stating that it has reviewed the investment policy and investment strategies and that the written instrument so adopted shall record any changes made to either the investment policy or investment strategies (Texas Government Code Section 2256.005(e)). The Audit and Investment Committee will review the Investment Policy and Investment Strategies annually. The Audit and Investment Committee shall forward modifications to the Policy or a resolution stating there are no changes to the City Council annually for City Council action. Authority/Date Issued: City Council Resolution # 5728/December 18, 1997 City Council Resolution # 5867/May 28, 1998 City Council Resolution #6600/November 4, 1999 City Council Resolution #2000-R0418/November 27, 2000 City Council Resolution #2001-R0471/November 8, 2001 City Council Resolution #2003-R0065/February 13, 2003 City Council Resolution #2003-R0474/October 23, 2003 City Council Resolution #2004- R0560/November 18, 2004 City Council Resolution #2005- R0478/October 13, 2005 City Council Resolution #2007- R0242/June 14, 2007 City Council Resolution #2007- R0402/August, 23, 2007 City Council Resolution #2008-R0113/April 10, 2008 City Council Resolution #2009-R0138/April 9, 2009 City Council Resolution #2010-R0159/April 8, 2010 City Council Resolution #2011-R0135/April 14, 2011 City Council Resolution #2012-R0033/January 26, 2012 City Council Resolution #2013-R0050/January 31, 2013 City Council Resolution #2014-R0002/January 9, 2014 City Council Resolution #2015-R0002/January 8, 2015 City Council Resolution #2016-R0030/January 28, 2016 City Council Resolution #2017-R0003/January 12, 2017 City Council Resolution #2018-R0173/May 24, 2018 City Council Resolution #2019-R0284/August 27, 2019 City Council Resolution #2020-R0406/December 1, 2020 City Council Resolution #2021-00126/September 14, 2021