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Item 8C#. AGENDA ITEM #SC JUNE 26, 2006 CITY OF ATLANTIC BEACH ""• CITY COMMISSION MEETING STAFF REPORT AGENDA ITEM: Investment Policy Update SUBMITTED BY: Nelson Van Liere, Finance Director~~ DATE: June 19, 2006 BACKGROUND: In 1995, the City adopted an investment policy as was required by Florida Statues. The '"~' purpose of this investment policy is to protect the assets of the organization as well as the elected officials and the finance and management staff. This document serves as the working document that directs the investment activities of the staff and protects the government from potential losses stemming from unsuitable investment practices. The objectives of a municipal investment policy are: 1.) The investment program must conform with federal laws, state statutes and local ordinances as well as ~. internal policies and procedures. 2.) Besides legality, the foremost investment objective should be safety of principal. 3.) Governments must maintain sufficient liquidity to meet operating requirements. ~ 4.) Governments depend on investment income to supplement other revenues. The investment portfolio should earn a market rate of return. The attached policy is the original policy with deletions and additions indicated by strikeout or underlines text ~+ respectively. Most of the changes were made to simply make the document a little more user friendly and to make more clear what the intent is. The primary reason for the update at this time is to clazify the limit of the term of the investments allowed. The original document appeazed to limit the maturity term of our investments to eighteen months because it did not distinguish the types of funds being invested. The changes provide language that defines current operating funds as those expected to be needed within a year. Therefore non-current means those funds that are not expected to be needed for more than a year. These funds may be invested up to ten years. Although the City has been fully invested in the State Board Administration Investment Pool for years, the staff would like to make this change in the policy to enable the City to purchase longer term investments if deemed ~. prudent. Other items addressed in the revisions include: • Improved language in the scope and objective sections and adding the "Prudent Person Rule". • In the Authorized Investment Section, the list of specific investments allowed was deleted. • The section on Risk and Diversification had minor language revisions • The section on authorized investors was changed to eliminate the requirement that a financial institution must have a physical presence in Florida. • The internal control section was amended to add requirements for bank reconciliations and audit requirements. • The money manger section was deleted. Any arrangement of this type would be covered by the purchasing code. • A requirement that the Finance Director and appropriate staff shall complete 8 hours of continuing education on investments annually was added. • Language on ethics and conflicts of interest was added. • Language prohibiting the investment in derivatives was added. '~" RECOMMENDATION: Approve updated Investment Policy ATTACHED: Updated Investor t Policy REVIEWED BY CITY MANGER: ~. CITY OF ATLANTIC BEACH, FLORIDA INVESTMENT POLICY e~-Fier~39-5 June 2006 AGENDA ITIJ~I #8C JUNE 26, 2006 City of Atlantic Beach, Florida Investment Policy AGENDA ITEM #8C JUNE 26, 2006 i. scope This Investment policy applies to all financial assets, other than pension fund assets and-defefred ~ , ' held by the City of Atlantic Beach (City) or for the benefit of the City by a third party custodian This policy does not apply to the uninvested funds of the City, for example, demand deposit accounts and cash "~ on hand, or to the assets of municipal trusts for which separate Investment Policies are adopted, or certain other non-City funds in the custody of the Finance Director. ae. , The purpose of this policy is to set forth the policy and objectives ovg erning the internal and external investment management of the City's cash reserves The City recognizes that liquidityneeds must be met and ~' have established cash flow projections for the debt service fund capital project funds and general operating ' funds. II. Investment Objectives ~rt, v n ,.,, « t,' ,.«• •tt ~e „t;°a ... «t,o nti ,.~+~o r;*. ~~ fi,..a~ r J 11 v - ~~ - - -- - ~ The investment objectives for the Cites cash reserves aze (in this order): 1) to ensure the safet~and preservation of investment principal 2) provide for sufficient liquidity 3) maximize the return on investment (yield) while controlling risk through diversification. The City's investment portfolio shall be managed in a manner to attain a mazket rate of return throughout budgetary and economic cycles while preserving_and protecting capital in the overall portfolio mss: G , 13: The Finance Director will set procedures to control risks and diversify investments regazding specific security types, maturities and financial institutions. III. Delesation of Authority The Finance Director is responsible for investment decisions and activities, under the direction of the City Manager. The Finance Director shall develop and maintain written administrative procedures for the operation of the investment program, consistent with these policies. IV. Investment Performance and Reportin¢ A portfolio report shall be provided monthly to the City Manager and the City Commission. This report shall include a breakdown of the portfolio, as well as the performance during the period. V. Prudence and Ethical Standards AGENDA ITEM #8C JUNE 26, 2006 The " " City shall adopt the Prudent Person Rule which states that: "Investments shall be made with ,,, jud¢ment and care under circumstances then ~revailin~ which persons of prudence, discretion, and intelli ence exercise in the management of their own affairs not for speculation but for investment considering_the probable safety of their coital as well as the probable income to be derived from the investment " ~. VI. Authorized Instruments The Finance Director shall purchase or sell investment securities at prevailing market rates. All investments shall be limited to the following: A. The Florida Local Government Surplus Funds Trust Fund (SBA): B. Negotiable, direct obligations, or obligations the principal and interest of which are unconditionally guaranteed by the United States Government. Such securities will include, but not be limited to, the following: ~. 2. Treasury Securities -State Government Series (BEGS) 3. Treasury Bills 4. Treasury Notes '""' S. Treasury Bonds 6. Treasury Strips C. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by a United States Government agency, provided such obligations are backed by the full faith and credit of the United States Government. , D. Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by a United States Government agency (Federal Instrumentalities) which are non-full faith and credit agencies limited to the following: 1. Federal Farm Credit Bank (FFCB) 0 AGENDA ITEM #8C JUNE 26, 2006 `"' 2. Federal Home Loan Bank or its district banks (FHLB) 3. Federal National Mortgage Association (FNMA) 4. Federal Home Loan Mortgage Association (FHLMA)([Freddie Macs] including Federal Home ,,.,, Loan Mortgage Corporation participation certificates) ~~mavrrrn c=ns'~ _ ~ E. Nonnegotiable interest bearing time certificates of deposit or savings accounts in banks or savings ~"' associations organized under the laws of this state and/or in national banks or savings associations organized under the laws of the United States and that any such deposits are secured by the Florida Security of Public Deposits Act, Chapter 280, Florida Statutes, and provided that the bank or savings ~,,, association is not listed with any recognized credit watch information service. F. Repurchase agreements comprised of only those investments as authorized in Sections B, C and D. ~'" G. Bankers' Acceptances which are inventory-based and issued by a domestic bank which has an unsecured, uninsured and unguazanteed obligation rating of at least "Prime-1" and "A" by Moody's Investor Service and "A-1" and "A" by Standard and Poor's Corporation and ranked in the top fifty (50) United States ~, banks in terms of total assets by the American Banker's yeazly report. H. Commercial Paper rated, at the time of purchase, "Prime-1" by Moody's and "A-1" by Standard & Poor's (prime commercial paper). I. State and/or local government taxable and/or tax-exempt debt, General Obligation and/or Revenue Bonds rated at least "Aa" by Moody's and "AA" by Standazd & Poor's for long-term debt, or rated at least "MIG- ,~, 2" by Moody's and "SP-2" by Standard & Poor's for short-term debt. J. > 1~-aed-1- ~. J Government fixed income mutual funds as defined by the SEC• which primarily invest in instruments as authorized in Sections B, C, D, I, and H. VII. Investment Maturity ~. To the extent possible, an attempt will be made to match investment maturities with known cash needs and anticipated cash flow requirements. Investments of current operating funds, funds that have been determined to be needed within one near, shall have maturities of no longer than three 3) months eighteea{-I8}me~s. Investments of bond reserves, construction funds, and other non-current operating funds shall have a term appropriate to the need for (ands and in accordance with debt covenants, but in no event shall exceed ten (10) years. VIII. Risk and Diversification Assets held shall should be diversified to control the risk of loss resulting from over ~ investing_in specific instruments individual fmancial institutions or maturities e€ ~ ~ , .Diversification strategies within the established guidelines shall be reviewed and revised periodically, as necessary, by the appropriate management staff. 1X. Authorized Investment Institutions and Dealers The Finance Director shall only purchase securities from financial institutions which are qualified as public depositories of the State of Florida as identified by the Treasurer of the State of Florida or fr-e>~sest.ies - .............., ~......,.,.,.,,.,.,..~ - r------~ --- . dealers designated as "Primary Securities Dealers" by the Federal Reserve Bank of New Yor for purchases and sales of securities The firm must have a minimum of $500 million in annual underwriting_of U S Government Agency Securities or Instrumentalities for the previous calendar year The firm must have capital of no less than $10,000,000. AGENDA ITEM #3C t'"' JUNE 26, 2006 Bond funds subject to arbitrage rebate shall be invested in accordance with specific bond covenants. „~, Repurchase agreements shall only be entered into with primary securities dealers and financial institutions wh-isl} that are state qualified public depositories. All repurchase agreement transactions shall adhere to the requirements of the Master Repurchase Agreement. "' X. Third Party Custodial Agreements The Finance Director may execute a third party Custodial Safekeeping Agreement with a commercial bank ~, having trust powers or a trust company which is chartered by the United States Government or the State of Florida. All securities purchased and/or collateral obtained by the City shall be properly designated as an asset of the City and held in safekeeping by the trust department or trust company, and no withdrawal of such securities, in whole or in part, shall be made from safekeeping, except by an authorized City staff member. ~. The third party Custodial Safekeeping Agreement shall include letters of authority from the City with details as to responsibilities of parties, notification of security purchases, sales, delivery, repurchase agreements, wire ,~ transfers, safekeeping and transaction costs, procedures in case of wire failure or other unforeseen mishaps, ' including liability of each party. XI. Bid Rectuirements When feasible and appropriate, investment purchases will be competitively bid. A minimum of three (3) banks and/or dealers must be contacted and asked to provide bids on securities in question. Bids will be held in confidence until the best bid is determined and awarded. Due to the cost of safekeeping, one business day repurchase agreements and overnight sweep repurchase agreements will not be bid. ~. XII. Internal Controls The Finance Director shall establish and monitor a set of internal controls designed to ~ ' ~ prevent loss of funds b~fraud, empooyee error misrepresentation by third parties or imprudent actions by employees of the City and ensure proper accounting and reporting of the securities transacrions. Such internal controls, shall include, but not be limited to, the following: ~• A. All securities purchased or sold will be transferred only under the "deliver versus payment" (D.V.P.) method to ensure that funds or securities are not released until all criteria relating to the specific transaction are met; B. The Finance Director is authorized to accept, on behalf of and in the name of the City of Atlantic B.,ach,- bank trust receipts or confirmations as evidence of actual delivery of the obligations or securities in return for investment of funds; C. Trust receipts or confirmations shall fully describe the various obligations or securities held, and the receipt or confirmation shall state that the investment is held in the name of the City of Atlantic Beach; D. The actual obligations, or securities, whether in book entry or physical form, on which trust receipts or confirmations are issued, may be held by a third party custodial bank and/or institution or a designated correspondent bank which has a correspondent relationship to the City's third party custodian; and, E. Other internal controls such as: 1. Written documentation of telephone transactions; 2. Adequate segregation of duties; 3. Custodial safekeeping; 4. Supervisory control of employee actions and operations review; 5. Performance evaluations and interim reporting; 6. Requirement of dual signatures on all investment transactions (except overnight repurchase agreements and sweep accounts) from two of the following authorized personnel: AGENDA ITEM #SC JUNE 26, 2006 Finance Director City Manager City Clerk 7 Staff in the Finance Department reconciles the City's general depository account on a monthly basis. 8 Independent auditors as a normal dart of the annual financial audit to the City shall conduct a review of the system of internal controls to ensure compliance with policies and procedures. 0 +~ > > i~ f il AF -1; ~ate--6 ~. XIII. Continuing Education The Finance Director and appropriate staff shall annually complete eight (8) hours of continuing education in subjects or courses of study related to investment practices and products. ~. XiX. Ethics and Conflicts of Interest The City's staff involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program or which could unpa~r then ability to make impartial investment decisions Also e~loyees involved in the investment process shall disclose to the City any material financial interests in financial institutions that conduct busmess with the Crtv, and they shall further disclose any materia~ersonal financial/investment positions that could be related to the performance of the City's investment pro rg_am. ~. _ XVlE Derivatives and Reverse Repurchase Agreements ~„ Investment in any derivative products or the use of reverse repurchase agreements is not permitted. A "derivative" is defined as a financial instrument the value of which depends on or is denved from, the value of one or more underlying assets or indices or asset values.