HomeMy WebLinkAboutR-2011-134 City Investment Policy - Revised RESOLUTION NO. R- 2011 -134
A RESOLUTION revising the City of Yakima investment policy for public funds.
WHEREAS, the City Council resolution number R- 2009 -50 (adopted March 24 2009) has
previously served as the City's adopted investment policy for public funds; and
WHEREAS, the City Council wishes to adopt a revised version of said policy in order to
enhance the rate of return on the investment portfolio without compromising security or liquidity,
and
WHEREAS, the City of Yakima holds and invests significant amounts of public money each
year through its Department of Finance and Budget; and
WHEREAS, the City Council deems it to be in the best interest of the public to adopt a
revised formal, internal investment policy for public funds for the purpose of providing a secure and
orderly method of investment of such funds; now, therefore,
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF YAKIMA:
The City Council hereby adopts the attached and incorporated City of Yakima investment policy.
ADOPTED BY THE CITY COUNCIL this 6th day of September, 2011.
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Micah Cawley, ayor
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9 Ijji ,r i Clerk
City of Yakima
Administrative Policies
Policy Number: FB-
Department: Finance Authorized by: City Council
Effective Date: 09/06/11 Supersedes: Policy Dated 03/24/09
Policy: Investment Policy
Purpose
To set forth a policy with regard to the investment of excess cash for the City of Yakima.
Policy
It is the policy at the City of Yakima to invest public funds in a manner which will provide the
highest investment return consistent with maximum security; will meet the daily cash flow
demands of the Treasury; and will conform to all State of Washington statutes governing the
investment of public funds.
Scope and Applicability
The investment policy applies to all financial assets of the City of Yakima. These are accounted
for in the city at Yakima's Comprehensive Annual Financial Report and include:
Y General Fund
D Special Revenue Funds
D Capital Project Funds
D Enterprise Funds
D Internal Service Funds
D Trust and Agency Funds
D Any new fund created by Council, unless specifically exempted by Council.
Prudence
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.
The Standard of prudence to be used by investment officials shall be the "prudent person"
standard and shall be applied in the context of managing an overall portfolio. Investment officers
acting in accordance with the written procedures and exercising due diligence shall be relieved
of personal responsibility for individual security's credit risk or marketplace changes, provided
deviations from expectations are reported in a timely fashion and appropriate action is taken to
control adverse developments.
Objective
The prime objectives, in priority order, of this City's investment activities shall be:
D Safety: Safety of principal is the foremost objective of the investment program.
Investments of the City of Yakima shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio. To attain this objective,
diversification is required so that the potential loss on individual securities do not
exceed the income generated for the remainder of the portfolio.
D Liquidity: The City's investment portfolio will remain sufficiently liquid to enable the
City of Yakima to meet all operating requirements which might be a reasonably
anticipated.
D Return on investment: The City's investment portfolio shall be designed with the
objective of attaining a market rate of return throughout budgetary and economic
cycles, taking into account the City's investment risk constraints and the cash flow
characteristics of the portfolio.
Delegation of Authority
Management responsibility for the investment program is hereby delegated to the Director of
Finance and Technology, as specified in Sec. 1.18.080(2)(b) of that Municipal Code, who shall
establish written procedures for the operation of the investment program consistent with this
investment policy. Such procedures shall include explicit delegation of authority to persons
responsible for investment transactions. No person may engage in an investment transaction
except as provided under the terms of this policy and the procedures established by the Director
of Finance and Technology. The Director shall be responsible for all transactions undertaken
and shall establish a system of controls to regulate the activities of subordinate officials.
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 Manager any material financial interests in the financial institutions to
conduct business with in this jurisdiction, and they shall further disclose any large personal
financial /investment positions that could be related to the performance of the City's portfolio.
Employees and officers shall subordinate their personal investment transaction to those of the
City of Yakima, particularly with regard to the time of purchases and sales.
Consistent with general City Policy, officers and employees involved in the investment process
may not accept any valuable gift, favor or gratuity which is made on the basis of his or her
position in the City's service.
Authorized Financial Dealers and Institutions
The Director of Finance and Technology or his /her designee will maintain a list of
broker /dealers, which are authorized to provide investment services. To be eligible to do
business with Yakima, a broker /dealer must maintain an office within the State of Washington.
Eligible broker /dealers may be Primary dealers or Regional Dealers.
All financial institutions and broker /dealers who desire to become qualified bidders for
investment transactions must supply the Director of Finance and Technology, or his /her
designee, with the following: audited financial statements, proof of state registration and
certification of having read the City's investment policy. An annual review of the financial
condition of qualified bidders will be conducted by the Director of Finance and Technology, or
his /her designee. A current financial statement is required to be on file for each financial
institution and broker /dealer with whom the City trades.
Authorized Investments
Eligible investments are those securities and deposits authorized by statute RCW 35.39, 39.59,
and 43.84.080, but are limited to the following:
D Non - Negotiable Certificates of deposit with financial institutions qualified by the
Washington Public Deposit Protection Commission.
D Certificates, Notes, or Bonds of the United States, or other obligations of the United
States or its agencies, or any corporation wholly owned by the government of the
United States (such as the Government National Mortgage Association).
D Obligations of government - sponsored entities which are eligible as collateral for
advances to member banks as determined by the Board of Governors of the Federal
Reserve System. These include but are not limited to Federal Home Loan Bank
notes and bonds, Federal Farm Credit Bank consolidated notes and bonds, Federal
National Mortgage Association notes, debentures, and guaranteed certificates of
participation.)
D Bankers' acceptances purchased on the secondary market where the issuing bank's
credit rating at the time of investment is not less than one of the three highest ratings
as rated by a nationally recognized rating agency and a short term credit rating at the
time of investment is not less than P -1 as rated by Moody's and /or A -1 by Standard
& Poor's and /or F -1 by Fitch Rating Agency.
D State of Washington Local Government Investment Pool (LGIP).
D Commercial Paper purchased on the secondary market with maturities not
exceeding 270 days, and with a short term credit rating at time of investment not less
than A -1 by Standard & Poor's Rating Services and /or P -1 by Moody's Investors
Service and /or F -1 by Fitch Rating Agency. Furthermore, the long -term credit ratings
of the issuer at the time of investment shall not be less than one of the three highest
ratings as rated by a nationally recognized rating agency.
D Obligations of the State of Washington or local governments of the state of
Washington which at the time of investment have one of the three highest credit
ratings of a nationally recognized rating agency.
D General obligation bonds of a state other than the state of Washington and general
obligation bonds of a local government of a state other than the state of Washington,
which bonds have at the time of investment one of the three highest credit ratings of
a nationally recognized rating agency
Note: Repurchase and Reverse Repurchase Agreements are not eligible investments for the
City.
The Director Of Finance and Technology or his /her designee will maintain a list of specific
Investment Instruments, of the type described above, that will constitute the only instruments
authorized for the investment of funds of the City of Yakima.
Investment Restrictions
To provide for the safety and liquidity of City funds, the investment portfolio will be subject to the
following restrictions:
➢ The average maturity of the portfolio will not exceed 2.5 years. (For the purposes of
this calculation, the maturity date of callable securities will be either the most likely
date of call, as determined by the Finance Director or her designee, or the final
maturity date, as appropriate based on market conditions.)
➢ The expected and final maturity of any security will ordinarily not exceed 5- years;
however, up to 10 % of the portfolio may be invested in securities with maturities of
up to eight (8) years when rates and market conditions so warrant.
➢ Investments in securities shall not exceed the following percentages of the portfolio:
Bankers Acceptances 15%
Commercial Paper 15%
Certificates of deposit 10%
State /Municipal Securities 15%
Treasury Securities 100%
Government Sponsored Agency Securities 100%
Washington State's Local Government Investment Pool 100%
Collateralization
State law requires that all deposits of public funds over and above federally insured amounts
(including Certificates Of Deposit) be collateralized in accordance with regulations of the
Washington Public Deposit Protection Commission (RCW 39.58). All collateral is held by the
Washington Public Deposit Protection Commission. The amount of collateral varies for different
institutions, but is never to be less than 10% of public funds deposited in the institution.
Safekeeping and Custody
Security transactions entered into by the City of Yakima shall be conducted on a delivery-
versus- payment (DVP) basis. Securities will be held by third party custodian designated by the
Director of Finance and Technology, or his /her designee, and evidenced by safekeeping reports
which will be reconciled monthly to the portfolio.
Internal Control
The Office of the State Auditor has described that in accordance with Revised Code of
Washington 43.09.260, the City of Yakima must undergo annual financial examinations
performed by State Examiners. As a part of these examinations, internal controls over
investments are carefully scrutinized. These examinations may result in recommendations to
change operating procedures to improve internal control.
Performance Standards
The City of Yakima investment portfolio will be designed to obtain a market average rate of
return during budgeting and economic cycles, taking into account the City's investment risk
constraints and cash flow needs.
Reporting
The Director of Finance and Technology is charged with the responsibility of providing City
Council with including a quarterly report on investment activity and returns.
Investment Policy Adoption
The City of Yakima investment policy shall be adopted by resolution of the City Council. The
policy shall be reviewed on a regular basis by the Director of Finance and Technology or his /her
designee and any significant modifications made thereto must be approved by the City Council.
Definitions
Agencies — (See Government Sponsored Entities)
Asked — The price at which securities are offered.
Bankers' Acceptance (BA) — A draft, or bin of goods, or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
Bid — The price offered for securities.
Broker— A broker brings buyers and Sellers together for a commission paid by the initiator of
the transaction or by both sides; he does not hold a position. In the money market, brokers are
active in markets in which banks and institutional investors buy and sell bills, notes or bonds
and in interdealer markets.
Collateral — Securities, evidenced by a deposit or other property which a borrower pledges to
secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of
public moneys.
Comprehensive Annual Financial Report (CAFR) — The official annual report for the City of
Yakima. It includes entity -wide financial statements as well as financial statements for major
funds and fund types, notes to the financial statements and required schedules.
Certificates of Deposit (CD) — A time deposit with specific maturity and interest rate evidenced
by a certificate.
Commercial Paper— Unsecured short-term corporate obligations with maturities less than 270
days.
Coupon — (a) The annual rate of interest that a bond's issuer promises to pay the bondholder as
a percentage of the bond's face value.
Dealer — A dealer, as opposed to a broker, acts as a principal in all transactions, buying and
selling for their own account.
Delivery versus Payment — There are two methods for delivery of securities: delivery versus
payment and delivery versus receipt (also called free delivery). Delivery versus payment is a
delivery of securities with a simultaneous exchange of money for the securities. (Delivery versus
receipt is a delivery of securities with an exchange of a signed receipt for the securities.)
Debenture — A bond secured only by the general credit of the issuer.
Discount — The difference between the cost price of a security and its value at maturity when
quoted at lower than its face value. A security selling below original offering price shortly after
sale is also considered to be at a discount.
Discount Securities — Non - interest bearing money market instruments that are issued at a
discount and redeemed at maturity for full face value, i.e., U.S. Treasury and Agency bills.
Diversification — Dividing investment funds among a variety of securities offering independent
returns and credit quality.
Federal Credit Agencies — Agencies of the Federal government and guaranteed by the full faith
and credit of the US Government set up to supply credit to various classes of institutions and
individuals, e.g., Ginnie Mae, Sallie Mae, Tennessee Valley Authority.
Federal Funds Rate — The target rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Open Market Committee.
Federal Open Market Committee (FOMC) — Consists of seven members of the Federal Reserve
Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York
Federal Reserve Bank is a permanent member while the other presidents serve on a rotating
basis. The Committee periodically meets to set Federal Reserve funds target rate and
guidelines regarding purchases and sales of Governments Securities in an open market as a
means of the influencing the volume of bank credit and money supply in the economy.
Federal Reserve System — The central bank of the United States created by Congress and
consisting of a seven member Board of Governors in Washington, DC. There are 12 Region
Banks and about 5700 commercial banks that are members of the system.
Federal Deposit Insurance Corporation (FDIC) — A Federal Agency that insures bank deposits,
currently capped at $250,000 dollars per deposit.
Government Sponsored Entities — ( "Agencies ") Entities chartered by Congress, such as: Fannie
Mae (FNMA) Freddie Mac (FHLMC), Federal Home Loan Bank (FHLB), Federal Farm Credit
Bank (FFCB), and others, whose bonds and notes are eligible as collateral for inter -bank and
discount window loans, and that provide liquidity for various banks, S &L's and individuals
through open market operations. These entities are not backed by the Full Faith and Credit of
the US Government, but do carry an implicit guaranty of the Government.
Investment Committee — The investment committee was created under 1.73 of the City Code
and is comprised of the City Manager, Finance Director and Treasurer. Currently the Finance
Director also serves as Treasurer.
Liquidity — A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. And the money market, a security is said to be liquid that the spread
between bid and asked prices is narrowed and reasonable size can be done at those quotes.
Market Value — The price at which a security is trading and could presumably be purchased or
sold.
Safekeeping — A service to customers rendered by banks for a fee whereby securities and
valuables of an types and descriptions are held in the bank's vaults for protection.
Secondary Market — A market made for the purchase and sale of outstanding issues following
the initial distribution.
SEC Rule 15C3 -1 — See uniform net capital rule.
Securities and Exchange Commission — Agency created by Congress to protect investors in
securities transactions by administering securities legislation.
Treasury Bills — A non - interest bearing discount security issued by the U.S. Treasury to finance
the National Debt. The above most bills are issued to mature in three months, six months, or
one year.
Treasury Bond — Long -term U.S. Treasury securities having initial maturities of more than 10
years.
Treasury Notes — Intermediate term coupon bearing U.S. Treasury securities having initial
maturities of from one to ten years.
Yield — the rate of annual income return on investment, expressed as a percentage. (A) income
yield is obtained by dividing the current dollar income by the face value of the security. (B) net
yield or yield to maturity is the current income yield minus any premium above par or plus any
discount from par in purchase price, with the adjustment spread over the period from the date of
purchase to the date of maturity of the bond.
® BUSINESS OF THE CITY COUNCIL
YAKIMA, WASHINGTON
AGENDA STATEMENT �,
Item No.
For Meeting Of September 6, 2011
ITEM TITLE: A Resolution to amend the City's Investment Policy
SUBMITTED BY: Rita DeBord, Director of Finance and Technology
CONTACT PERSON /TELEPHONE: Rita DeBord, Finance Director 576 -6771
Tara Lewis, Financial Services Officer 576 -6639
SUMMARY EXPLANATION: The City's current Investment Policy was last amended in early
2009 to update polices to better address market conditions at that time; (those changes included
allowing the purchase of general obligation bonds issued by a state or local governments and
removal of the restriction to 20% of the portfolio of investment in callable Agency securities). The
recent recession and lagging recovery have resulted in changes in the investment market that
require the City to change our investment strategies in order to earn the best returns on our
investments. If approved by Council, this Resolution will make two primary amendments to the
City's Investment Policy, as outlined below; these changes will improve our ability to maximize
our returns under current market conditions.
® First proposed change: The current olic requires that the average maturity of the
p Y a q (a) 9 Y portfolio
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will not exceed 2.5 years; thus, requiring investments to primarily remain in the short -term
market,. and (b) that the final maturity date of an investment be utilized when calculating the
average maturity of the portfolio. While this worked well in the past; these requirements are not
serving the City well in today's market.
Continued on next page...
Resolution X Ordinance Other (Specify) Investment Policy
Contract Mail to (name and address): Phone:
Funding Source
APPROVED FOR SUBMITTAL: City Manager
STAFF RECOMMENDATION: Adopt Resolution
BOARD /COMMISSION /COMMITTEE RECOMMENDATION: Council Budget Committee
recommended forward to full Council for discussion
- COUNCIL ACTION:
S
•
Today, "long -term callable" investments are being offered at higher interest rates than short-term
debt, thus offering higher returns while at the same time these investments are being "called" on
their call dates; essentially turning them into short-term investments. Under our current policy,
these investments are deemed long -term investments (for purposes of calculating the average
maturity of the investment portfolio) based on their stated maturity date; however, they are
effectively short-term debt based on the most likely redemption / call date.
Requiring that the investments maturity be based on the stated maturity date of the investment
rather than the most likely callable date coupled with the 2.5 years average maturity restriction, is
inhibiting the City's ability to earn optimal rates of interest on its investments in Agency Callable
Securities (refer to further definitions in attached policy). Since callable securities consistently
bear a higher yield, in current market conditions such securities will rarely, if ever, be allowed to
mature as they are issued at the higher long term rates. Long term rates tend to be significantly
higher than short term rates in our current market conditions. Careful attention to yield curves
allows the City to take advantage of these higher long term rates for relatively short term
investments. (Example: agency callable securities with full terms of five years are generally being
called within 6 months to a year of issue.)
By using the maturity date of such callable securities in calculating their term, not only is the
average maturity of the portfolio grossly overstated, but the City cannot take advantage of the
optimal rates available in a short term environment. Therefore, staff is recommending that the
calculation of the average maturity of the investment portfolio be changed to allow either the
most likely call date of the security or the final maturity date, based on market conditions.
Second proposed change: is to allow up to 10% of the investment portfolio to be invested in
securities with maturities of up to eight (8) years; current policy restricts investments to a five (5)
year maximum maturity.
Currently the rate differential between a 5 year Agency Callable security and a 6 year is as much
as 50 basis points (0.5 %). These securities are paying higher rates yet are just as likely to be
called within 6 months to a year as their 5 year counterparts. The difference in interest earnings
on $1 million for 1 year is $5,000. Such leeway in the policy would be used with discretion to
assure that liquidity is maintained in the overall portfolio.
Attached is a copy of the current policy — with recommended changes noted; these include the
above two proposed changes and a couple of housekeeping updates. (All proposed changes
occur in the "Investment Restrictions" section of the policy.) Council's adoption of the attached
Resolution will authorize these changes to the City's Investment. Policy.