HomeMy WebLinkAboutResolution 17-041 Resolution 17-041
City of Brookings Investment Policy
Amended: April 25, 2017
Objective: The purpose of"The City of Brookings Investment Policy" is to set
investment objectives, policies, establish guidelines, and define
responsibilities for the investment of funds for the City of Brookings.
Policy: City of Brookings Investment Policy
1.0 Purpose ................................................................................................................... 2
2.0 Policy ....................:.................................................................................................. 2
3.0 Scope ....................................................................................................................... 2
4.0 Objective .................................................................................................................. 2
5.0 Standard of Care ..................................................................................................... 4
6.0 Authority and Responsibility ................................................................................ 5
7.0 Authorized Financial Dealers and Institutions ..................................................... 6
8.0 Authorized & Suitable Investments ...................................................................... 6
9.0 Safekeeping and Custody ...................................................................................... 7
10.0 Collateralization .................................................................................................... 7
11.0 Diversification ........................................................................................................7
12.0 Maximum Maturities ............................................................................................. 8
13.0 Reporting ............................................................................................................... 8
14.0 Policy Control ....................................................................................................... 8
GLOSSARY..................................................................................................................... 9
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1.0 PURPOSE
The purpose of"The City of Brookings Investment Policy" is to set investment
objectives, policies, establish guidelines, and define responsibilities for the
investment of funds for the City of Brookings.
2.0 POLICY
The policy of the City of Brookings is to invest idfe public funds in a manner
based upon state law, that will provide the maximum security, sufficient liquidity,
and competitive investment return to meet the daily cash fiow demands of the
City. The primary goals are:
A. To ensure compliance with all Federal, State, and local laws governing the
investment of public funds under the control of the City Manager.
B. To protect the principal monies entrusted to the City's Finance
Department.
C. Achieve a reasonable rate of return within the parameters of prudent risk
management while minimizing the potential for capital losses arising from
market changes or issuer default.
3.0 SCOPE
This policy applies to the investment of all funds of Brookings, South Dakota.
Except for funds held in trust or special funds that are otherwise specifically
provided for, the city will consolidate the balances from all funds to maximize
investment
3.1 Poolinq of Funds
Except for cash in certain restricted and special funds the City of Brookings will
consolidate cash balances from all funds, including utilities and hospital, to
maximize investment earnings and meet the liquidity requirements of the city
subject to the primary objective of providing security of principal. Investment
income will be allocated to the various funds based on their respective
participation of capital in the overall portfolio in accordance with generally
accepted accounting principles.
4.0 OBJECTIVE
Pursuant to South Dakota Codified Law, Chapter 4-5-8 it is the policy of the City
of Brookings to invest funds in a manner to meet the daily cash flow demands of
the City. The primary objectives, in priority order, being: a) Safety of Principal b)
Liquidity c) Return on Investments:
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A) Safety of Principal
Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. The objective will be to
mitigate the following risks.
1. Credit Risk
The City of Brookings will minimize credit risk, which is the risk of
loss due to the failure of the investment issuer or backer, by limiting
the portfolio to the types of investments listed in section8.
Authorized and Suitable Investments of this policy and diversifying
the investment portfolio to diminish the impact of potential losses
from any one type of investment or from any one individual issuer.
2. Interest Rate Risk
The City of Brookings wiH minimize interest rate risk, which is the
risk that the market value of securities in the portfolio will fall due to
changes in market interest rates, by structuring the portfolio to meet
the cash requirements of ongoing operations, thereby mitigating the
need to liquidate securities at a loss prior to maturity.
3. Concentration Risk
The City of Brookings will minimize Concentration of Credit Risk,
which is the risk of loss due to having a significant portion of
resources invested in a single issuer, by diversifying the investment
portfolio as described in section11. Diversification so the impact of
potential losses from any one type of security or issuer will be
minimized. Investments issued or explicitly guaranteed by the U.S.
government and investments in mutual funds, external investment
pools, and other pooled investments are excluded from this
requirement.
4. Custodial Credit Risk
The City of Brookings wiA minimize Custodial Credit Risk for
deposits, which is the risk that in the event of the failure of a
depository financial institution the deposits or collateral securities
that are in the possession of an outside party would not be able to
be recovered, as addressed in section10. Collateralization.
The City of Brookings will minimize Custodial Credit Risk for
investments, which is the risk that in the event of the failure of the
counterparty to a transaction the value or collateral securities that
are in the possession of an outside party would not be able to be
recovered, as addressed in section9. Safekeeping and Custody.
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B) Liquidity
The investment portfolio shall remain sufficiently liquid to meet all
operating requirements that may be reasonably anticipated. This is
accomplished by structuring the portfolio so that securities mature
concurrent with cash needs to meet anticipated demands (static liquidity).
Furthermore, since all possible cash demands cannot be anticipated, the -
portfolio should include securities with active secondary or resale
markets (dynamic liquidity). Alternatively, a portion of the portfolio may be
placed in money market mutual funds or local government investment
pools which offer same-day liquidity for short-term funds.
C) Return on Investments
The portfolio shall be designed to obtain a reasonable rate of return
throughout budgetary and economic cycles. The return on investments is
to be accorded secondary importance compared to the safety and liquidity
objectives described above. The core of investments will focus on
relatively low risk securities with an expectation of earning a reasonable
return relative to the risk being assumed. Securities shall not be sold prior
to maturity, with the following exceptions:
• A security with declining value may be sold early to minimize loss of
principal.
• A security may be exchanged to improue the quality, yield, or target
duration in the portfolio.
• A security may be sold in order to satisfy liquidity requirements.
When selling a security prior to maturity, the City Manager shall provide an
explanation for any gains or losses.
Policy compliance does not provide a benchmark to meet or exceed, but is
a model to follow. The City will benchmark its portfolio pertormance to the
appropriate "treasuries constant maturity" rate based on portfolio
maturities of the investment plan.
5.0 Standard of Care
5.1 Prudence
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 written
procedures and this investment policy and exercising due diligence shall
be relieved of personal responsibility for an individual security's credit risk
or market price changes.
The "prudent person" standard states that "Investments shall be made
with judgment and care, under circumstances then prevailing, which
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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."
5.2 Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain
from personal business activity that could conflict with the proper
execution and management of the investment program, or that could
impair their ability to make impartial decisions. Employees and investment
officials shall disclose any material interests in financial institutions with
which they conduct business. They shall further disclose any personat
financial/investment positions that could be related to the perFormance of
the investment portfolio. Employees and officers shail refrain from
undertaking personal investment transactions with the same individual
with whom business is conducted on behalf of the City of Brookings.
The City Investment program shall be managed in a professional and prudent
manner worthy of the public trust and review.
6.0 Authority and Responsibility
6.1 Authority
In accordance with the City of Brookings, the responsibility for conducting
investment transactions resides with the City Manager. The Finance
Director, under the general direction of the City Manager, sha!! be
responsible for all transactions undertaken and shall establish a system of
controls to regulate activities.
6.2 Responsibility
Parties shall refrain from personal business activity that could impair
his/her ability to make impartial decisions. The Finance Director acting in
accordance with this investment policy and exercising due diligence shall
be relieved of personal responsibility for an individual investment's credit
risk or market price changes, provided deviations form expeatations are
reported in a timely fashion and the liquidity and the sale of investments
are carried out in accordance with the terms of this poticy. 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 probably income to be derived.
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6,3 Local Preference
The City of Brookings strives to support the local economy and community. To
honor this, the City wili give a local preference to bids from qualified financial
institutions in the City of Brookings by allowing the closest, non-successful, local
bidder the opportunity to match the high, non-local bidder. This post-bid match
opportunity would only occur when the high bidder was a non-local institution.
There would be no preference recognized among all local bidders. The purpose
of this is to strike a balance between giving local financial institutions credit for
their community investments to the local economy and still preserving the
fiduciary responsibility of attempting to receive the highest rate of return possibls.
Example:
Financial Institution "A" not located in Brookings bids 1.2%
Financial institution "B" located in Brookings bids 1%
Financial Institution "C" located in Brookings bids .9%
Financial Institution "A" has winning bid, however, if Financial Institution "B" is
willing to match Financial Institution "A" bid, Financial Institution "B" will be
awarded the bid.
7.0 Authorized Financial Dealers and Institutions
7.1 Selection Process
A list of financial institutions authorized to provide investment services to
the City of Brookings will be maintained.
In addition, a list of broker/dealers will be maintained. This list may include
both primary and regional dealers. Dealers will be approved by the
Finance Director on the following:
• Credit worthiness
• License to conduct business in South Dakota
• Qualification under Securities and Exchange Commission (SEC)
Rule 15C3-1 (uniform net capital rule)
8.0 Authorized & Suitable Investments
The City of Brookings is empowered by statue to invest in the following types of
securities:
• Interest bearing checking accounts
• Savings accounts
• United States Treasury bills, bonds and notes (SDCL 4-5-6)
• United States Government Agencies (SDCL 4-5-6)
Securities issued by government-sponsored enterprises (GSEs) or
federally related institutions that are guaranteed directly or indirectly by the
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US Government. Securities issued by the Government National Mortgage
Association (GNMA or Ginnie Mae) are an example of securities directly
guaranteed by the government. Securities issued by other GSEs may be
allowable. Interest bearing checking accounts
• Certificates of Deposit (CDs) (SDCL 9-22(municipalities), Certificates of
Deposit (CDs) purchased through CDARS�(certiflcate of�eposit account Registry
Service) (SDCL 4-5-6.1)*
• Money Market Mutuat Funds - open-end, no-load (SDCL 4-5-6)
Mutual and money market funds that invest in US Treasury securities or
securities issued by GSEs or federally related institutions that are
guaranteed directly or indirectly by the US Government.
• Repurchase Agreements fully collateralized by allowable securities (SDCL
4-5-6)
• South Dakota Public Funds Investment Trust (SD FIT) Local Government
Investment Pool
When investing in Certificates of Deposit (CDs) public funds will be invested at
the highest rate of interest possible.
The above listed authorized deposits will be kept in banks in South Dakota as
required by SDCL 9-22-6.
9.0 Safekeeping and Custody
-9.1 Deliverv vs. Pavment
All trades vf marketable securities, where applicable, will be executed by
delivery vs. payment (DVP) to ensure that securities are deposited in an
eligible financial institution prior to the release of funds. Securities will be
held by a third party custodian as evidenced by safekeeping receipts.
9.2 Safekeepinp
Securities will be held by a centralized custodian selected by the city as
evidenced by safekeeping receipts in the City's name as per SDCL 4-5-9.
9.3 Internal Controls
The Finance Director is responsible for establishing and maintaining an
internal control structure designed to ensure that the assets of the City of
Brookings are protected from loss, theft, or misuse.
The internal controls shall address the following points:
• Control of collusion
• Separation of transaction authority from accounting and
recordkeeping
• Custodial safekeeping
• Delivery versus payment
• Clear delegation of authority
• Confirmation of transactions for investments and wire transfers
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10.0 Collateralization
In accordance with the SDCL 4-6A and 51A-10-9 Qualified Public Depositories
will furnish collateral in the sum equal to one hundred percent (100%) of the
public deposit account that exceed deposit insurance. The Finance Director will
review semi-annually the Under-Collateralized Bank Accounts report found on
the SD Department of Legislative Audit website to ascertain compliance by
financial institutions of adequate collateral coverage.
SDCL 4-6A-3 requires that collateral be segregated by each depository in such
manner as approved by the South Dakota Deposit Protection Commission.
11.0 Diversi�cation
The purpose of diversification is to reduce overall portfolio risk while attaining
market rates of return and to enable the City of Brookings to meet all anticipated
cash requirements.
The investments shall be diversified by:
• Limiting investments to avoid over-concentration in securities of a
specific issuer (excluding treasury bills).
• Limiting investment in securities that have higher credit risks.
• Investing in securities with varying maturities.
12.0 Maximum Maturities
To the extent possible, the City of Brookings will attempt to match its investments
with anticipated cash flow requirements. The City of Brookings will keep
investments for duration not to exceed five (5) years
13.0 Reporting
13.1 Methods
The Finance Director shall prepare an investment report quarterly for the
City Council. This report will include the following:
• List of individual securities hetd at the end of the reporting
period further broken down by issuer, purchase date, maturity
date, coupon rate, par value, and yield to maturity.
13.2 Performance Standards
The investment portfolio shall be designed with the objective of obtaining a
competitive rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and cash flow needs.
14.0 Policy Control
14.1 Exemption
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Any investment currently heid that does not meet the guidelines of this
policy shall be exempted from the requirements of this policy as long as it
was in compliance with State of South Dakota Law and the City's
investment policy in effect at the time of purchase. At maturity or
liquidation, such monies shall be reinvested only as provided by this
policy.
14.2 Amendments
This policy shall be reviewed to ensure consistency to overall objectives of
safety, liquidity, yield, compliance to current law, and economic trends.
14.3 Requirements
This investment policy is required by SDCL 4-5-8 and approved by the city
council.
Approved on July 24, 2000
Revised on March 26, 2001
Revised on July 27, 2004 `
Revised on January 25, 2011
Revised on January 10, 2017
Revised on April 25, 2017
' of Brookings
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GLOSSARY
AGENCY: A debt security issued by a federal or federally sponsored agency. Federal
agencies are backed by the full faith and credit of the U. S. Government. Federally
sponsored agencies (FSAs) are backed by each particular agency with a market
perception that there is an implicit government guarantee. An example of a federal
agency is the Government National Mortgage Association (GNMA). An example of an
FSA is the Federal National Mortgage Association (FNMA).
BENCHMARK: A comparative base for measuring the performance or risk tolerance of
the investment portfolio. A benchmark should represent a close correlation to the level
of risk and the average duration of the portfolio's investment.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced
by a certificate. Large-denomination CDs are typically negotiable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SERVICE (CDARS): A program
with an approved depository that removes the need for collateral by providing full FDIC
insurance for certificates of deposit.
COLLATERAL: Securities, evidence of 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 pub(ic monies.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the
bondholder on the bond's face value. (b) A certificate attached to a bond evidencing
interest due on a payment date.
CREDtT RISK: The risk to an investor that an issuer will default in the payment of
interest and/or principal on a security.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
delivery versus payment and delivery versus receipt. Delivery versus payment is
delivery of securities with an exchange of money for the securities. Delivery versus
receipt is delivery of securities with an exchange of a signed receipt for the securities.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
DURATION: A measure of the timing of the cash flows, such as the interest payments
and the principal repayment, to be received from a given fixed-income security. This
calculation is based on three variables; term to maturity, coupon rate, and yield to
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maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures bank deposits, currentiy up to $100,000 per deposit.
FIDUCIARY: Person, company, or association holding assets in trust of a beneficiary.
INVESTMENT POLICY: A concise and clear statement of the objectives and
parameters formulated by an investor or investment manager for a portFolio of
investment securities.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread befinreen bid and asked prices is narrow and reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from
political subdivisions that are placed in the custody of the State Treasurer for investment
and reinvestment.
MARKET RISK: The risk that the value of a security will rise or decline as a result of
changes in market conditions.
MARKET VALUE: The price at which a security is trading and could presumably be
purchased or sold.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial
paper, bankers' acceptances, etc.) are issued and traded.
PORTFOLIO: Collection of securities held by an investor.
PRUDENT PERSC?N RULE: An investment standard. In some states the law requires
that a fiduciary, such as a trustee, may invest money only in a list of securities selected
by the custody state---the so-called legal list. In other states the trustee may invest in a
security if it is one which would be bought by a prudent person of discretion and
intelligence who is seeking a reasonable income and preservation of capital.
QUALIFIED FINANCIAL INSTITUTIONS: Pursuant to SDCL 9-22-6 and 6.1, the City
Council of the City of Brookings, South Dakota, annually designates depositories for
Municipal Funds of the City of Brookings. Qualified financial institutions would be those
listed in the adopted annual Resolution.
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QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim
exemption from the payment of any sales or compensating use or ad valorem taxes
under the laws of this state, which has segregated for the benefit of the commission
eligible collateral having a value of not less than its maximum liability and which has
been approved by the Public Deposit Protection Commission to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or
its current market price. This may be the amortized yield to maturity.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these
securities to an investor with an agreement to repurchase them at a fixed price on a
fixed date. The security "buyer" in effect lends the "seller" money for the period of the
agreement, and the terms of the agreement are structured to compensate him for this.
Dealers use RP extensively to finance their positions. Exception: When the Fed is said
to be doing RP, it is iending money that is, increasing bank reserves.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection.
SPECULATION: Assumption of risk in anticipation of gain but recognizing a higher
than average possibility of loss.
TREASURY BILLS: A non-interest bearing discount security issued by the U. S.
Treasury to finance the national debt. Most bills are issued to mature in three months,
six months, or one year.
TREASURY BONDS: Long-term coupon-bearing U. S. Treasury securities issued as
direct obligations of the U. S. Government and having initial maturities of more than ten
years.
TREASURY NOTES: Medium-term coupon-bearing U. S. Treasury securities issued as
direct obligations of the U. S. Government and having initial maturities from two to ten
years.
VOLATILITY: A degree of fluctuation in the price and va(uation of securities.
YIELD: The rate of annual income return on an investment, expressed as a
percentage.
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