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HomeMy WebLinkAboutResolution - 4933 - Approved & Addopted Investment Policy & Strategy - 08_24_1995Resolution No. 4933 August 24, 1995 Item #25 RESOLUTION BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: WHEREAS, the State Legislative did amend the Public Funds Investment Act requiring cities to formally adopt a financial investment policy and strategy; and WHEREAS, the City Council deems it to be in the best interest of the citizens of the City of Lubbock to establish such a policy with regard to the investment of City funds; NOW THEREFORE: BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LUBBOCK: THAT the attached Investment Policy and Strategy is hereby approved and adopted by the City of Lubbock. A copy of such policy shall be maintained by the City Treasurer and filed with the City Secretary. Passed by the City Council this ATTEST: &JCL'—r A rl��L Betty M. Johnson ity Secretary APPROVED AS TO CONTENT: Mark Hindman, Director of Support Services APPROVED AS TO FORM: Derfiald G. Vandiver, First Assistant City Attorney :dp\ccdocs\1nvest.Res August 16, 1995 CONFO_RINED COPY WITH TYPOGRAPHICAL ERRORS CITY OF LUBBOCK, TEXAS INVESTMENT POLICY AND STRATEGY The City Treasurer of the City of Lubbock, Texas, is charged with the responsibility to prudently and properly manage any and all funds of the City. These funds must be fully collateralized and appropriately authorized. The following investment policy addresses the methods, procedures, and practices which must be exercised to ensure sound fiscal management. 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. In order to effectively make use of the City's cash resources, all moneys, with the exception of certain bond proceeds which must be segregated and accounted for separately, shall be pooled into one investment account. The investment income derived from this account shall be distributed to the various City funds in accordance with the existing City policy. OBJECTIVES The City's principal investment objectives are: • Compliance with all Federal, State, and other legal requirements. • Preservation of capital and the protection of investment principal. • Maintenance of sufficient liquidity to meet anticipated disbursements and cash flows. • Diversification to avoid incurring unreasonable risks regarding securities owned. • Attainment of a market rate of return equal to or higher than the performance measure established by the City Treasurer. DELEGATION OF AUTHORITY The ultimate responsibility and authority for investment transactions involving the City resides with the City Treasurer. The City Treasurer has delegated the investment function to the Assistant City Treasurer. The Assistant City Treasurer is charged with executing the day -today investment functions for the City following the guidance and recommendations of the City's Investment Review Committee. INVESTMENT REVIEW COMMITTEE The City will establish an Investment Review Committee to assist in monitoring the performance and structure of the City's investments. The Investment Review Committee shall be composed of the City Treasurer, the Assistant City Treasurer, and three other persons specifically designated by the City Manager. The Investment Review 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 Investment Review Committee at least monthly and verified by the City's independent auditor at least annually. The Investment Review Committee shall discuss investment reports, investment strategies, and investment and banking procedures. City of Lubbock, Texas, Investment Policy Page 2 INVESTMENT ADVISORS The City Treasurer may in his/her discretion appoint one or more investment advisors, registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940, 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 City Treasurer and to the Assistant City Treasurer knowledge of cash management as well as familiarity 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 limited investment discretion within the guidelines of this Investment Policy with regard to the City's assets placed under its management. PRUDENCE The standard of prudence to be used for managing the City's assets is the "prudent investor" rule, which states, "Investments shall be made with judgment and care --under circumstances then prevailing --which persons of prudence, discretion 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." In determining whether an investment officer has exercised prudence with respect to an investment decision, the investment of all funds over which the officer has control and whether the City's written investment policy was adhered to shall be considered. The City will perform a compliance audit of management controls on investments and adherence to investment policies annually. Investment officers shall attend at least one training session within 12 months after assuming duties. This training must include education in investment controls, security risks, strategy risks, market risks, and compliance with the Public Funds Investment Act as amended. Investment officers acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible 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. ELIGIBLE INVESTMENTS The following are eligible investments as authorized by V.T.C.A., Government Code, Section 2256 (the Public Funds Investment Act) as amended: • Obligations of the United States or its agencies and instrumentalities • Direct obligations of this state or its agencies and instrumentalities • 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 • 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 • Obligations of states, 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 • Certificates of deposit issued by a state or national bank domiciled in this state or a savings and loan association domiciled in this state and guaranteed by the Federal Deposit Insurance Corporation or its successor, secured by obligations authorized by this subchapter, or secured in any other manner and amount provided by law for deposits of the investing entity • Repurchase agreements with a defined termination date; and secured by obligations authorized by V.T.C.A., Government Code, Section 2256.009(a)(1); and pledged to the City, held in the City's name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City; placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state. The term of any reverse repurchase agreements may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire addtional authorized investments, but the term City of Lubbock, Texas, Investment Policy Page 3 of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. • Bankers' acceptances with a stated maturity of 270 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 • Commercial paper with a stated maturity of 270 days or fewer from the date of its issuance, and rated not less than A-1 or P-1 or an equivalent rating by at least two nationally recognized credit rating agencies or one nationally recognized credit rating agency and 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 • No-load money market mutual funds regulated by the Securities and Exchange Commission, and with a dollar -weighted average stated maturity of 90 days or fewer, and whose investment objectives include the maintenance of a stable net asset value of $1 for each share • No-load mutual funds registered with the Securities and Exchange Commission, with an average weighted maturity of less than two years, invested exclusively in obligations approved by this subchapter, continuously rated as to investment quality by at lest one nationally recognized investment rating firm of not less than AAA or its equivalent, and conforms to the requirements of V.T.C.A., Government Code, Section 2256.016(b) and (c) • Investment pools authorized by the City's governing body which invests in eligible securities as authorized by this subchapter The following investments are prohibited by V.T.C.A., Government Code, Section 2256: • Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage -backed security collateral and pays no principal, i.e. interest -only collateralized mortgage obligations (IO's). • Obligations whose payment represents the principal stream of cash flow from the underlying mortgage backed security collateral and bears no interest, i.e. principal -only collateralized mortgage obligations (PO's). • Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years. • Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index, i.e. CMO inverse floaters. • Investment in the aggregate of more than 80 percent of the entity's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in money market mutal funds or mutual funds; investment in the aggregate of more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in mutual funds; investment of any portion of bond proceeds, reserves, and funds held for debt service, in mutual funds; and investment of its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund in an amount that exceeds 10 percent of the total assets of the mutual fund In addition to the ineligible securities designated above, the City prohibits any investment in derivatives as defined in a later section, money market mutual funds, and mutual funds as well as securities lending and reverse repurchase agreements. The City further limits and clarifies V.T.C.A., Government Code, Section 2256 as follows: Fully collateralized repurchase agreements shall in addition to the wording of the act be limited as follows: repurchase agreements shall be collateralized at 102% of the money value of the transaction at the time of purchase and in no case should the collateral value be allowed to go below 101%, the maturity of the collateral security shall be no longer than ten years, and the market value of the collateral shall be priced at least weekly City of Lubbock, Texas, Investment Policy Page 4 INVESTMENT DIVERSIFICATION It is the intent of the City to diversify the investment instruments within the portfolio to avoid incurring unreasonable risks inherent in overinvesting 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 Investment Review Committee. The City may invest to the following limits as a percentage of its total portfolio: 100% in United States Treasury Obligations 50% in Certificates of Deposit 40% in Federal Instrumentalities or Agencies 30% in Repurchase Agreements collateralized by Federal Instrumentalities, or 100% in Repurchase Agreements collateralized by United States Treasury Obligations Investments in a qualifying Investment Pool (in accordance with Resolution dated May 28, 1992) should be limited to no more than 5% of the total assets in the pool. No more than 25% of the City's portfolio may be included in any one pool. INVESTMENT STRATEGY Investment strategies for operating funds, or the consolidated fund, have as their primary objective to assure 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 consolidated fund is to create a portfolio structure which will experience minimal volatility during economic cycles. This will be accomplished by purchasing high quality, short- to medium -term securities which will complement each other in a laddered maturity structure. The City shall maintain a dollar -weighted average maturity of 2 years or less based on the stated final maturity dates of each security in its consolidated fund. The City shall at all times maintain at least 10% of its consolidated investment portfolio in instruments maturing in 120 days or less. 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. Volatility shall be further controlled through the purchase of securities carrying the highest coupon available within the desired maturity and quality range using a laddered maturity structure. Such securities will tend to hold their value during economic cycles. Investment strategies 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 maturity of any individual security the City may invest in shall be 5 years. DERIVATIVES A derivative shall be defined by the City as any security whose cash flow characteristics (coupon, redemption amount, or stated maturity) depend upon one or more indices or that have embedded futures or options. They can be linked to different market sectors or interest rate scenarios including: 1)increasing or decreasing interest rates, 2)U.S. Treasury yield curve, 3)foreign yield curves, 4)relationship between two different yield curves, 5)foreign exchange rates, 6)equity price movements, and 7)commodity price movements. City of Lubbock, Texas, Investment Policy Page 5 Following is a description of the more common derivative products: • Collateralized Mortgage Obligations (CMOs). CMOs are collateralized by mortgages or mortgage -backed securities in which the principal and interest payments from the collateral are allocated to the various classes of bonds, or tranches, based on prepayment rates. When prepayment rates decrease, the maturity of a CMO extends and vice versa. Additionally, some tranches receive interest only (IOs), while others receive principal only (POs). • Step-up and/or Callable Bonds. Step-up securities initially pay the investor an above -market yield for a short non -call period and then, if not called, "step up" to a higher coupon rate. A multistep bond has a series of fixed and successively higher coupons over its life. At each call date, if the bond is not called, the coupon rate increases. • Index Amortizing Notes (IANs). IANs repay principal according to a predetermined amortization schedule that is linked to the level of a specific index or a specified prepayment rate. As market interest rates increase or prepayment rates decrease, the maturity of an IAN extends, similar to that of a collateralized mortgage obligation. • Dual Index Notes. These bonds have coupon rates that are determined by the difference between two market indices. These bonds often have a fixed coupon rate for a brief period, followed by a longer period of variable rates. • De -leveraged Bonds. These bonds pay investors according to a formula that is based upon a fraction of the increase or decrease in a specified index. • Range Bonds. Range bonds (or accrual bonds) pay the investor an above -market coupon rate as long as the reference rate is between levels established at issue. For each day that the reference rate is outside this range, the bonds earn no interest. • Inverse Floaters. These bonds have coupons that increase as rates decline and decrease as rates rise. The Assistant City Treasurer will monitor the development of new financial instruments and may present to the Investment Review Committee amendments to the above definition. OTHER INVESTMENT GUIDELINES All investment transactions must be executed with broker/dealers and financial institutions that have been authorized by the City, and each transaction must be competitively transacted with at least three authorized broker/dealers or financial institutions. In addition, before any repurchase agreements shall be executed with an authorized broker/dealer or financial institution, a Master Repurchase Agreement must be signed between the City and that broker/dealer or financial institution. The Assistant City Treasurer shall maintain a file of all executed Master Repurchase Agreements. The purchase and sale of all securities shall be on a delivery versus payment basis. The City seeks an active, rather than passive, management of its portfolio assets. Assets may be sold at a loss only if the City Treasurer or the Investment Advisor feels that the sale of the security is in the best long-term interest of the City. Supporting documentations shall be maintained by the Assistant City Treasurer 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. SELECTION OF FINANCIAL INSTITUTIONS AND BROKER/DEALERS The City shall maintain a list of authorized broker/dealers and financial institutions which are approved by the Investment Review Committee for investment purposes, and it shall be the policy of the City to purchase securities only from those authorized institutions and firms. To be eligible for authorization, each broker/dealer or financial institution must complete and submit to the City a Broker/Dealer Questionnaire which includes the firm's most recent financial statements. In addition, each broker/dealer must provide a written instrument certifying that they City of Lubbock, Texas, Investment Policy Page 6 have received and thoroughly reviewed the City's investment policy and have implemented reasonable procedures and controls in an effort to preclude imprudent investment activities. Banks and Savings and Loan Associations must be members of the FDIC or FSLIC in order to be eligible for authorization. All other non -primary broker/dealers must submit financial reports documenting good standing as National Association of Security Dealers members and they must meet capital adequacy standards. The Assistant City Treasurer shall maintain a file of all Broker/Dealer Questionnaires. Broker/dealers and other financial institutions will be selected on the basis of their expertise in cash management and their ability to provide service to the City's account. Depositories shall be selected through the city's banking services procurement process, which shall include a formal request for proposals. In selecting depositories, the credit -worthiness of institutions shall be considered, and the City Treasurer shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. The supervising officer shall agree to exercise due diligence in monitoring the activities of other officers and subordinate 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 advent 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. SELECTION OF BANKS AND SAVINGS AND LOANS The City shall maintain a list of authorized banks and savings and loans which are approved to provide banking services or from whom the City may purchase Certificates of Deposit. The Investment Review Committee shall monitor the financial condition of approved financial institutions. Those banks and savings and loans which in the judgment of the Investment Review Committee no longer offer adequate safety to the City will be removed from the approved list. Institutions in this section are required to pledge collateral or be insured by the FDIC or FSLIC or their successor pursuant to V.T.C.A., Government Code, Section 2256. SAFEKEEPING Investment securities purchased by the City will be delivered by either book entry or physical delivery, and held in third party safekeeping by a Federal Reserve member financial institution designated as the City's depository. The trust department of the institution designated as depository will be considered to be a third party for the purposes of safekeeping securities. Securities purchased by the City that are wirable via the Federal Reserve System shall be held by the City's depository bank in their Customer Account (02). Collateral pledged to the City securing Certificates of Deposit shall be held in joint custody at the Federal Reserve Bank (07). It is the intent of the City that all securities be perfected in the name of the City. REPORTING Investment reports shall be prepared, on a monthly, quarterly, and annual basis and be submitted to the City Treasurer in a timely manner. A written record shall be maintained of all bids and offerings for securities transactions in order to insure that the City receives competitive pricing. The Investment Review Committee will meet monthly to review the investment activity. The monthly reports should include listings of all the investments held by the City, the current market valuation of the investments, transactions summaries, and performance results. Within a month after the end of each quarter, the Assistant City Treasurer shall prepare and submit to the City Treasurer, City Manager, and City Council a written report of the quarter's investment activity. This report must be signed by each official member of the Investment Review Committee. 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 City of Lubbock, Texas, Investment Policy Page 7 separate investment, and state the maturity date of each security. It must also express the compliance of the portfolio to the investment strategy contained in the City's investment policy and the Public Funds Investment Act as amended. CHANGES IN STATUTES, ORDINANCES OR PROCEDURE 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 which do not further restrict this policy shall be reviewed by the Investment Review Committee and recommended to the City Council when appropriate. PERFORMANCE REVIEW The Investment Review Committee shall meet at least monthly 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 City Treasurer or his appointee shall periodically establish a benchmark yield for the City's investments which shall be equal to the average yield on the United States Treasury security which most closely corresponds to the portfolio's actual weighted average maturity. When comparing the performance of the City's portfolio, all fees and expenses involved with managing the portfolio should be included in the computation of the portfolio's rate of return. 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 program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the City Treasurer 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. 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 City Treasurer shall establish a system of internal controls, which shall be documented in writing. The internal controls shall be reviewed by the 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 This Investment Policy will be reviewed not less than annually by the City Treasurer and may be amended as conditions warrant by the City Council.