TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DENNIS McLEAN, DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY
DATE: OCTOBER 4, 2005
SUBJECT: CITY INVESTMENT POLICY – FY05-06
"The Treasurer shall utilize LAIF or substantially comparable pooled funds to the greatest extent feasible and practical."
The City Council approved the selection of Fieldman and Rolapp as the City’s financial advisor at a meeting on June 17, 2003. Fieldman & Rolapp have served the City in an advisory capacity as a member of the Infrastructure Financing Team that included its review of the City’s Five Year Financial Model and other financial models and schedules. FRFS, the investment advisory affiliate of Fieldman & Rolapp, serves a number of municipal clients throughout California. Staff believes that the firm’s expertise and experience working with the City will enable a successful investment advisory relationship for this project and any implementation of proposed changes of the City’s investment strategy in the future. Staff has attached the Memorandum of Understanding, dated August 26, 2005, outlining the proposed engagement of FRFS as well as the resume of the FRFS professional staff member that would be assigned.
Exhibit A – City of Rancho Palos Verdes Investment Policy
Exhibit B – Fieldman, Rolapp Financial Services, LLC Memorandum
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 or substantially comparable pooled funds 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 which 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.
To: Mr. Dennis McLean and Ms. Kathryn Downs
From: Ms. Michelle L. Durgy
cc: Mr. James Fabian; Gary Gyves
Re: Proposed Investment Advisory Services
Date: August 26, 2005
Pursuant to the City’s request, on August 16, 2005, the parties as listed above participated in a general discussion regarding possible revisions to the City’s current investment strategy.
The following is a list of items that were discussed in detail:
In consideration of developing a new investment strategy, City staff provided our firm with a copy of the City’s investment policies. It was noted that with regard to the three-year duration limit on Treasury and Agency securities, the City’ s policies are more conservative than the California state law allows (maximum of five years or longer as approved by a legislative body) and other public agencies. However, it was recommended that no revision to the policies be made at this time. It is suggested that the City continue to review its policies on an annual basis in conjunction with its investment portfolio.
Investment Needs and Goals
In order to develop an appropriate investment recommendation, the City’s revenue sources and spending patterns for operating and capital funds should be thoroughly considered. The City’s specific liquidity needs will be analyzed to ensure that neither too much nor too little of the City’s money is invested in longer term or less liquid securities. City staff has provided our firm with a detailed cash flow analysis and has agreed to provide additional information upon request.
The risk tolerance of City management and its staff is crucial in developing both investment policies and strategies for its investment portfolio. Sensitivity to a particular investment or market segment must be identified. City staff has informed us that the City is seeking a conservative Treasury strategy for the investment of its excess funds.
Staff Time Available for Portfolio Management
To ensure proper security selection, one fundamental consideration is the amount of time that would be required to effectively manage an investment portfolio. Typically, a fixed income portfolio with shorter maturities will require more time to manage than one with longer maturities. Although, it should be noted that one can employ a more active management style with longer maturities, this is not typically employed in the public sector. At this time, a more passive management style is recommended.
Expertise and Experience
The type and complexity of the investments that comprise an investment portfolio should be consistent with the level of investment expertise of the staff responsible for portfolio management, monitoring and reporting. It was discussed that the initial investment portfolio should not consist of complex investment vehicles.
Market Climate and Other Investment Considerations
Provided that the City is currently investing 100% of its assets or approximately $35 million in the Local Agency Investment Fund (LAIF), it was suggested that the City could
Increase portfolio safety and possibly, enhance yield through investments in Treasury securities. Specifically, an investment in Treasury securities would effectively diversify the City’s portfolio and reduce the market and duration risks associated with a portfolio invested in one market sector.
At the conclusion of the discussion, City staff requested that Fieldman, Rolapp Financial Services serve as Investment Advisor to the City, subject to approval by the City Council. The request included development of the City’s investment strategy, its implementation and ongoing investment advice as needed.
Goal-oriented, bright Financial and Investment Advisor with a proven ability to achieve and exceed client expectations in high-pressure and fast-paced environments.
FIELDMAN, ROLAPP AND ASSOCIATES – Irvine, CA 2003 to Present Senior Associate
Project manager on non-profit and public investment advisory-based accounts. Assess financial situations and develop strategic investment solutions for high profile public and non-profit sector clients. Serve as technical consultant in capital financing transactions (special district, tax anticipation and others) for public sector clients. Perform quantitative analysis (interest rate/yield, present value) for bond structuring, cash flow utilization and potential refinancing opportunities. Draft, review and amend investment policies. Assess performance relative to benchmarks and advise on risks associated with client investment portfolios. Oversee securities transactions, funds transfers, and options trades as both project manager and technical consultant. Prepare and deliver financial reports and presentations.
morgan stanley – Cupertino, CA 1998 to 2001
Regional Financial Planning Specialist and Team Manager
Built successful 100+ client base and managed portfolios totaling over $35 million in assets (cash, fixed income and equities). Produced over $250,000 in net annual profits. Developed and managed highly skilled investment team to counsel high net-worth individuals and corporate clients with regard to investment opportunities and risk analysis. Cross-sold insurance, estate planning, college planning and lending products. Created and delivered proposals exhibiting extensive detail in restricted securities laws and hedging transactions. Managed relationships with the several high profile clients as well as external agencies and internal staff.
Education and Credentials
Master of Public Policy, Finance emphasis (2004)
University of Southern California– Los Angeles, CA
Bachelor of Arts in Comparative Literature and Classics with Latin emphasis (1996)
University of California, Irvine – Irvine, CA
Professional Licenses: NASD Series 7, 31 & 66; currently pursuing CFA designation