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HomeMy WebLinkAboutResolution 007-2011Resolution No. 07 -1 1 City of Brookings Investment Policy Amended: January 25, 201 1 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 5 8.0 Authorized & Suitable Investments 6 9.0 Investment Pool 6 10.0 Safekeeping and Custody 7 1 1.0 Collateralization 7 12.0 Diversification 8 13.0 Maximum Maturities 8 14.0 Reporting 8 15.0 Policy Control 8 GLOSSARY 10 -14 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 all funds in a manner based upon state law, that will provide the highest investment return while maintaining maximum security and meeting cash flow demands. 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 Pooling 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: 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 section 9. 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 will 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 section 16. 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 will 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 section 15. 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 section 14. Safekeeping and Custody. 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 consist largely of 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 improve 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 must be prepared to justify the reasons and explain 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 performance 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 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 personal financial /investment positions that could be related to the performance of the investment portfolio. Employees and officers shall 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 Manager, under the general direction of the City Manager, shall 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 Manager 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 expectations are reported in a timely fashion and the liquidity and the sale of investments are carried out in accordance with the terms of this policy. 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. 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 Manger on the following: • Credit worthiness • License to conduct business in South Dakota • Qualification under Securities and Exchange Commission (SEC) Rule 1 5C3- I (uniform net capital rule) 7.2 Financial Institutions and Brokers /Dealers All financial institutions and broker /dealers who desire to conduct business with the City of Brookings shall supply the City with the following: • Audited financial statements, provided annually • Trading resolutions • Proof of state registration, if applicable • Copy of the broker's license for the individuals servicing the account • Resume of individual servicing the account • Any pending legal or regulatory sanctions • Certification of having read and understood and agreeing to comply with the City of Brookings investment policy • Evidence of adequate insurance coverage 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 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® (Certificate of Deposit Account Registry Service) (SDCL 4- 5 -6.l)* • Money Market Mutual 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) • Local Government Investment Pool (SD FIT) 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 Investment Pool Government sponsored investment pools are sources for short -term cash management. A thorough investigation of the pool is required prior to investing, and on a continual basis. Before investing in these pools, the following issues must be reviewed: • The pool must provide a written statement of policy and objectives. • A questionnaire should be developed that will address the following general topics: • A description of eligible investment securities, and a written statement of investment policy and objectives. • A description of interest calculations and how it is distributed, and how gains and losses are treated. • A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. • A description of who may invest in the program, how often, what size deposit and withdrawal are allowed. • A schedule for receiving statements and portfolio listings. • A description of how reserves, retained earnings, etc. are utilized by the pool. • A model of the fee schedule, and when and how it is assessed. • A description of eligibility and /or acceptance of bond proceeds. • The pool must contain only the types of investment allowed by this policy. 10.0 Safekeeping and Custody 10.1 Delivery vs. Payment All trades of 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. 10.2 Safekeeping Securities will be held by a (centralized independent third -party custodian selected by the city as evidenced by safekeeping receipts in the City's name as per SDCL 4 -5 -9. The safekeeping institution shall annually provide a copy of their most recent report on internal controls (SAS 70). 10.3 Internal Controls The Finance Manager 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 11.0 Collateralization In accordance with the SDCL 4 -6A and 51 A -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 Manager will review quarterly the liability report and report of condition filed with the Office of the State Treasurer on website, www.sdtreasurer.gov to ascertain compliance by financial institutions of adequate collateral coverage. SDCL 5 -6A -3 requires that collateral be segregated by each depository in such manner as approved by the South Dakota Deposit Protection Commission. Collateral may not be held in any safety deposit vault owned or controlled either by directly or indirectly by the pledging financial institution but must be deposited for safekeeping in a financial institution that is a member of the Federal Reserve. 12.0 Diversification 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. • Limiting certificates of deposit to the amount approved for each financial institution. • Investing in securities with varying maturities. 13.0 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 I4.0 Reporting I4.1 Methods The Finance Manager shall prepare an investment report quarterly for the City Council. This report will include the following: • List of individual securities held at the end of the reporting period further broken down by issuer, purchase date, maturity date, coupon rate, par value, and yield to maturity. 14.2 Performance Standards The portfolio is benchmarked to the applicable treasuries constant maturities rate as reported by the Federal Reserve. 15.0 Policy Control 15.1 Exemption Any investment currently held 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. 15.2 Amendments This policy shall be reviewed to ensure consistency to overall objectives of safety, liquidity, yield, compliance to current law, and economic trends. 15.3 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, 201 1 Shari Thornes, City Clerk City of Brookings Tim Reed, Ma or GLOSSARY ACCRUED INTEREST: The accumulated interest payable on a security since the last interest payment made by the issuer. 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). AMORTIZATION: The systematic reduction of the amount owed on a debt issue through periodic payments of principal. ASKED: The price at which securities are offered. 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. BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. BOOK ENTRY: An electronic system of accountability, custody, transfer, and settlement of securities. Book -entry systems allow rapid and accurate transfers of securities with simultaneous cash settlement. BOOK VALUE: The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security's current value in the market. BROKER: A broker brings buyers and sellers together for a commission. CALL PRICE: The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond's original issue price to compensate the holder for loss of income and ownership. 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 public 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. CREDIT QUALITY: The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer's ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. CREDIT 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. DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is 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, e.g., U. S. Treasury Bills. 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 maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. FAIR VALUE: The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S &L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS (Fed Funds): Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same -day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open- market operations. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D. C., 12 regional banks and about 5,700 commercial banks that are members of the system. FIDUCIARY: Person, company, or association holding assets in trust of a beneficiary. FUTURES CONTRACT: Agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. INVERTED YIELD CURVE: A chart formation that illustrates long -term securities having lower yields than short -term securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy. 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 between 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. MARK -TO- MARKET: The process whereby the book value or collateral value of a security is adjusted to reflect its current market value. 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. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase - -- reverse repurchase agreement that establishes each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer - lender to liquidate the underlying securities in the event of default by the seller- borrower. 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. OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. OPTION: Right to buy or sell property that is granted in exchange for an agreed upon sum. If the right is not exercised after a specified period, the option expires and the option buyer forfeits the money. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)- registered securities broker - dealers, banks, and a few unregulated firms. PRUDENT PERSON 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 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. REINVESTMENT RISK: The risk that a fixed- income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding. 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 lending 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. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SPECULATION: Assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and corporations which have imbedded options (e.g., call features, step -up coupons, floating rate coupons, and derivative -based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. SWAP: Trading one asset for another. TOTAL RETURN: The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) + (Dividends Paid) + (Capital Gains) = Total Return 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 valuation of securities. WHEN ISSUED (WI): A conditional transaction in which an authorized new security has not been issued. All "when issued" transactions are settled when the actual security is issued. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for 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. YIELD CURVE: A graphic representation that depicts the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity. A normal yield curve may be alternatively referred to as a positive yield curve. YIELD -TO -CALL (YTC): The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date.