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TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY
DATE: AUGUST 3, 2004
SUBJECT: CITY INVESTMENT POLICY – FY04-05
CITY OF RANCHO PALOS VERDES
The City strives to maintain the level of investment of all idle funds as near 100% as possible through the optimum operation of its cash management system. The City has determined that its investment criteria, listed in order of priority, are safety, liquidity and yield.
DELEGATION OF AUTHORITY
The City has delegated the authority to invest to the City Treasurer subject to the limitation set forth in the Investment Policy. The City Treasurer shall be trustee and fiduciary on behalf of the City.
The City can invest in the following investment instruments as approved by the California Government Code:
1. Demand deposits and money market savings accounts totaling up to one million dollars ($1,000,000) with the Bank of America or any other financial institution approved by the City Council; provided, however, that not more than 15% of the City's funds are on deposit at said bank.
2. The Local Agency Investment Fund administered by the Treasurer of the State of California.
3. Certificates of Deposit, which are insured by the Federal Deposit Insurance Corporation.
4. Securities backed by the full faith and credit of the United States Government and which mature in three years or less.
5. Money Market Savings Accounts and demand deposits with institutions other than those specified in paragraph 1 above, provided that no deposit made pursuant to this paragraph in any one institution shall exceed the amount insured by the Federal Deposit Insurance Corporation.
A. The securities subject to the repurchase agreement shall be issued by the United States Government or be backed by its full faith and credit.
B. The term of the repurchase agreement shall be 7 days or less.
C. The aggregate total of the funds deployed in the repurchase agreements shall not exceed 15% of the City's portfolio.
D. The securities, which are the subject of the repurchase agreement, shall be held in the trust department of the bank entering into the repurchase agreement pursuant to a written agreement providing for the segregation from assets of the bank.
The listed investments are the only authorized investments for the City.
POLICY CRITERIA FOR SELECTING INVESTMENTS (IN ORDER OF PRIORITY)
Safety, and the minimizing of risk associated with investing, refers to attempts to reduce the potential for loss of principal, interest, or a combination of the two. The first level of risk control is reduction of default risk by investing in instruments that appear to be the most credit worthy. The second level of risk control is reduction of market risk by investing in instruments that have relatively short maturities, thereby eliminating risk of loss from a forced sale. The City only invests in those instruments that are considered very safe.
Liquidity refers to the ability to easily sell at any time with minimal risk of losing some portion of principal or interest. Liquidity is an important quality for an investment to have, for at any time the City may have unexpected or unusual circumstances that result in larger disbursements than expected, and some investments may need to be sold to meet the contingency. Most investments of the City are highly liquid, with the exception of insured Time Certificates of Deposit issued by banks and savings and loan associations whose maturities are selected in anticipation of disbursement needs, thereby obviating the need for forced liquidation or lost interest penalties.
Yield is the potential dollar earnings an investment can provide, and also is sometimes described as the rate of return. The City attempts to obtain the highest yield possible when selecting an investment, provided that the criteria stated herein for safety and liquidity are met.
POLICY CONSTRAINTS AND GUIDELINES
The City of Rancho Palos Verdes operates its investment program according to the prudent investor standard with many additional, self-imposed constraints. The Treasurer shall act with the care, skill, prudence and diligence to safeguard principal and maintain liquidity. The Treasurer shall: (1) not speculate; (2) not buy corporate debt securities; (3) not deal in futures or options; (4) not purchase on margin or through reverse repurchase agreements; (5) not buy long term securities; and (6) not acquire any investment expressly prohibited by State statute.
The Treasurer shall utilize LAIF to the greatest extent feasible and practical.
The Treasurer shall annually render a Statement of Investment Policy to the City Council for their approval, and this policy shall be in compliance with all applicable State statutes.
The Treasurer shall render a monthly investment report to the City Manager and City Council showing the type of investment, date of purchase, custodian (if applicable), institution, date of maturity, amount of deposit or purchase price, current market value for all securities, and rate of interest. The report shall also include a description of any of the City's funds, investments, or programs that are under the management of contracted parties.
The monthly investment report shall state its relationship to the Investment Policy by indicating each and every instance that there is a divergence from, or violation of, policy or stating that the monthly report is in compliance with the Investment Policy.
The monthly investment report shall include a statement of the City's ability to meet its expenditure requirements for the next six months.
INVESTMENT AUDITS AND INVESTMENT POLICY EVALUATION
As a part of the City's annual independent audit, there shall be a review of the City's Investment Policy regarding compliance with the Policy guidelines. These review procedures will be performed in conjunction with the internal control testing applied to City policies. Any discrepancies will be reported directly to the City Council in the auditor’s management letter issued upon the completion of their examination.
Cash Availability Guidelines:
1. A cash flow analysis shall be developed which will serve as a basis for determining the cash available for investment and maturity dates needed to cover future disbursements.
2. Revenue receipts are consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated according to fund cash and investment balances.
3. Active bank balances are kept as low as possible without jeopardizing good banking relationships by maintaining investment of available cash as near to 100% as possible.
4. Sufficient funds are maintained in very liquid investments to meet most unexpected contingencies.
1. Only investments authorized by the Investment Policy are utilized.
2. A copy of the Investment Policy should be given to each financial institution with which the City does business.
3. Before an unfamiliar security is purchased, the issuer and the instrument are researched and investigated and all contractual agreements and administrative procedures are completed before any transactions are consummated.
4. The City does not permit the purchase of securities on margin or via reverse repurchase agreements (using the security to be purchased as collateral).
5. Every investment transaction is documented and the procedure for monitoring is clearly defined.
6. Investment strategies are reviewed by the City Treasurer for possible need to change at least annually. They are reviewed more frequently as changes in economic conditions dictate.
Guidelines for certain Types of Investments:
California State Local Agency Investment Fund
A resolution is on file with the State Treasurer that permits maintaining an account in LAIF.
Custody of investments in securities backed by the full faith and credit of the United States Government shall be placed, pursuant to a written custody agreement, with Bank of America or any other financial institution approved by the City Council.
INTERNAL CONTROL OBJECTIVES FOR INVESTMENTS
Internal control for investments is the procedure established by management of the City to assist in ensuring as far as practicable:
1. An orderly and efficient conduct of investing, including adherence to investment policies.
2. The safeguarding of assets.
3. The accuracy and completeness of the accounting records for investments.
4. The timely preparation of reliable financial information.
5. The prevention of errors.
6. The detection of fraud.
Elements of Internal Control of Investments:
Adherence to the use of sufficient elements of a system of internal control is the method by which the City can satisfy the objective of internal control. A list of sample elements follows:
Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and understood.
Segregation of functions reduces the risk that a person is in a position to conceal errors. If two different people process the components of a transaction, collusion is necessary to conceal errors or fraud. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, and performing reconciliations.
Only the appropriate responsible individual shall authorize all transactions. The responsibilities and limits of authorization should be clearly delineated. Delegation of authority to authorize transactions should be handled very carefully.
4. Transfers of Investment Funds
The transferring of investment funds will be carried out exclusively by use of the Federal Reserve Bank's electronic wire transfer system. Each Banker or Dealer with whom the City does business shall receive in writing from the City Treasurer a listing that limits transfers of funds to pre-authorized bank accounts only.
The listing will also contain the names of City staff authorized to request such transfers and will be updated in writing for all changes of authorized staff and bank accounts as necessary.
Transfers from one account of the City to another shall require the request of only one authorized staff member. Transfers from the City's account to third parties shall require the request of two authorized members.
The recording system should provide that the recording procedures, both manual and computerized, be carried out independently of the individual doing the investment execution to help assure that recorded transactions are complete, valid, authorized, and properly recorded.