HomeMy WebLinkAbout15-01
RESOLUTION NO. 15-01
A RESOLUTION of the City Council of the City of
Port Angeles, Washington, adopting the City's
new Investment Policy and rescinding
Resolution 30-91.
WHEREAS, Ordinance 1882 establishes general policies governing the investment of City
funds and Resolution 20-87 authorizes certain individuals to maintain investment accounts; and
WHEREAS, Resolution 30-91 adopted an Investment Policy for the City of Port Angeles
Policy containing specific policies and procedures for the investment of City funds; and
WHEREAS, it is desirable to update the City's Investment Policy from time to time in
order to meet the criteria as set by the State of Washington.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Port Angeles
that the Investment Policy attached hereto as Exhibit A is hereby adopted for the purpose of
updating policies and procedures for the investment of City funds, and Resolution 30-91 is hereby
rescinded.
PASSED by the City Council of the City of Port Angeles at a regular meeting of said
Council held on the 21 st day of August. 2001.
ATTEST:
.8~~f)>J~~
Becky J. U n, ty Cler
1
II
I
APPROVED AS TO FORM:
Croi~:2~~
Exhibit A
City of Port Angeles
Investment Policy
August 21, 2001
TI .__.m
---,."... ..
Contents
Page
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
2. Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
2.1 General Fund ............................................ 1
2.2 Special Revenue Funds .................................... 1
2.3 Capital Project Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
2.4 Enterprise Funds ......................................... 1
2.5 Trust and Agency Funds ................................... 1
2.6 RetirementlPension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
2.7 Any new funds created by Council ........................... 1
3. Objective ..................................................... 1
3.1 Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
3.2 Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1
3.3 Return on Investment (Yield) ............................... 2
4. Prudence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2
5. Delegation of Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2
6. Ethics and Conflicts of Interest .................................... 3
7. Authorized Financial Dealers and Institutions. . . . . . . . . . . . . . . . . . . . . . . .. 3
8. Authorized Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3
8.1 RCW 43.84.080 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4
8.2 RCW 39.59.020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4
8.3 RCW 39.59.030 . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . .. 4
8.4 Repurchase Agreements .................................. 5
8.5 State Investment Pool ..................................... 5
8.6 Collateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 5
9. Safekeeping and Custody. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 5
10. Diversification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6
11. Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6
12. Selection of Investment Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6
13. Internal Control ................................................ 6
14. Performance Standards .......................................... 7
14.1 Market Yield ............................................ 7
15. Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
15.1 Quarterly Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. 7
15.2 Quarterly Return on Investment Report. . . . . . . . . . . . . . . . . . . . . . .. 7
16. Distribution Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
16.1 Payment to Each Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7
17. Investment Policy Adoption ....................................... 7
-1-
TT
.
Appendix A - Financial Dealers and Institutions. . . . . . . . . . . . . . . . . . . . . . . . . .. A-I
Appendix B - Ineligible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. B-1
Appendix C - Internal Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. C-l
Appendix D - Glossary .............................................. D-l
-11-
.,.,.
....
1.
Purpose
The purpose ofthis document is to identify
various policies and procedures that enhance
opportunities for a prudent and systematic
investment policy and to organize and
formalize investment-related activities.
The policy outlines investments scope,
objectives, delegation of authority, reporting
requirements, internal control, investment
limitations, safeguarding requirements,
liquidity, performance expectation, quality, and
maturity.
The goal of the policy is to invest public
funds in a manner which will provide the
highest investment return with the maximum
security while meeting the daily cash flow
demands and conforming to all Washington
statutes governing the investment of public
funds.
2. Scope
It shall be the general policy ofthe City of
Port Angeles to pool all available cash into a
common investment portfolio as authorized by
RCW 35A.40.050.
The investment policy applies to all
financial assets of the City of Port Angeles
("City"). These funds are accounted for in the
City's Financial Reports and include all funds:
2.1 General Fund
2.2 Special Revenue Funds
2.3 Capital Project Funds
2.4 Enterprise Funds
2.5 Trust and Agency Funds
2.6 Retirement/Pension Funds
2.7 Any new funds created by Council
3. Objective
The primary obj ectives, in priority order, of
the City's investment activities shall be:
3.1
Safety
Safety of principal is the foremost
objective. It is the primary duty and
responsibility of the City Treasurer to protect,
preserve, and maintain cash and investments
placed in his/her trust on behalf ofthe citizens
of the community.
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 credit risk and interest rate
risk.
a. Credit Risk - The City of Port Angeles
will minimize credit risk, the risk of
loss due to the failure of the security
issuer or backer, by:
· Limiting investments to the safest
types of securities
· Pre-qualifying the financial
institutions, brokers/dealers,
intermediaries, and advisers with
which the City will do business.
· Diversify the investment portfolio so
that potential losses on individual
securities will be minimized.
b. Interest Rate Risk - The City will
minimize the risk that the market value
of securities in the portfolio will fall
due to changes in general interest rates,
by:
· Structuring the investment portfolio
so that securities mature to meet
cash requirements for ongoing
operations, thereby avoiding the
need to sell securities on the open
market prior to maturity.
· Investing operating funds primarily
in shorter-term securities, money
market mutual funds, or similar
investment pools.
1
3.2 Liquidity
The City's investment portfolio shall
remain sufficiently liquid to enable the City to
meet all operating requirements which might
be reasonably anticipated. Because all cash
requirements cannot be anticipated,
investments in securities with active secondary
or resale markets are recommended.
A portion of the portfolio also may be
placed in money market mutual funds or local
government investment pools which offer same
day liquidity for short-term funds.
3.3 Return on Investment (Yield)
Yield should become a consideration only after
the basic requirements of safety and liquidity
have been met. The City's investment
portfolio shall be managed in a manner to
attain a market rate of return throughout
budgetary and economic cycles, taking into
account the investment risk constraints and
liquidity needs. The core of investments are
limited to relatively low risk securities in
anticipation of earning a fair return relative to
the risk being assumed. Securities shall not be
sold prior to maturity with the following
exceptions:
· A security with declining credit may be
sold early to minimize loss of
principal.
· A security swap would improve the
quality, yield, or target duration in the
portfolio.
· Liquidity needs ofthe portfolio require
that the security be sold.
4. Prudence
The standard of prudence to be applied by
investment officials shall be the "prudent
investor" rule, which states "...investments
shall be made with judgement 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 oftheir capital
as well as the probable income to be derived."
The Investment officer, acting in
accordance with written procedures and
exercising due diligence, shall be relieved of
personal responsibility for an individual
security's credit risk or market price changes,
provided deviations from expectations are
reported in a timely fashion and appropriate
action is taken to control adverse development.
5. Delegation of Authority
Authority for investment decisions as
derived from the City of Port Angeles
Resolution 1-84, shall be granted to the City
Manager, Finance Director/City Treasurer, and
Accounting Manager. Each is authorized to
sign necessary agreements and documents for
the purpose of carrying out this policy which
do not obligate the City for the expenditure of
funds.
Management responsibility for the
investment program is hereby delegated to the
Finance Director/City Treasurer.
The City Treasurer (Finance Director) or
Accounting Manager shall be responsible for
managing the day-to-day operation of the
portfolio. No person may engage in an
investment transaction except as provided
under the terms of this policy and the
procedures established by the City Treasurer
and adopted by the City Council.
Procedures should include reference to:
Safekeeping, delivery vs payment, investment
accounting, repurchase agreements, wire
transfer agreements, and collateral/depository
agreements. The City Treasurer shall be
responsible for all transactions undertaken and
shall establish a system of controls to regulate
the activities of subordinates.
2
6. 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.
6.1 Employees and investment officials
authorized to place or approve investments
shall not personally, nor through a close
relative, maintain any accounts, interest, or
private dealings with any firm with which the
City places investments, except for regular
savings accounts, checking accounts, money
market accounts, or other similar transactions
which are offered on a non-negotiable basis to
the general public.
6.2 All persons authorized or approved for
investments shall disclose to the City Manager
any material financial interest in [mancial
institutions that conduct business within this
jurisdiction.
6.3 All personnel involved in the
investment function shall adhere closely to the
City's Code of Ethics.
7. Authorized Financial Dealers and
Institutions
The City Treasurer will maintain a list of
financial institutions as seen in Appendix A.
As required by the Public Deposit Protection
Commission (PDPC) all authorized public
depositories will be located in the State of
Washington (RCW 39.58.080).
Authorized broker/dealers and financial
institutions will be limited to those that meet
one or more of the following:
· financial institutions approved by the
Washington Public Deposit Protection
Commission; or
· primary dealers recognized by the
Federal Reserve Bank; or
· non-primary dealers or institutions
qualified under U.S. Securities and
Exchange Commission Rule 15c3-1,
the Uniform Net Capital Rule, and a
certified member of the National
Association of Securities Dealers.
7.1 Whenever possible, the City shall make
an effort to utilize brokers or dealers doing
business in the State of Washington, or
recognized adequately capitalized dealers on
the west coast.
7.2 A current audited financial statement is
required to be on file for each financial
institution and broker/dealer in which the City
invests.
7.3 In selecting financial institutions for the
deposit or investment ,of City funds, the
Treasurer shall continue to monitor the
financial institutions' credit characteristics and
financial history throughout the period in
which City funds are deposited or invested.
7.4 From time to time, the investment
officer may choose to invest in instruments
offered by minority and community [mancial
institutions. In such situations, a waiver to the
criteria may be granted. All terms and
relationships will be fully disclosed prior to
purchase and will be reported to the
appropriate entity on a consistent basis and
should be consistent with state or local law.
These types of investment purchases should be
approved by the appropriate legislative or
governing body in advance.
8. Authorized Investments
All municipal corporations in Washington
3
~
.
State, including the City of Port Angeles, are
empowered by statute to invest in the
following types of securities. (The enabling
legislation is contained in RCW. 36.29.020, as
amended, and as limited by RCW 39.58.080,
as amended.) (See Appendix B for a listing of
ineligible securities.)
8.1 RCW 43.84.080
For the City of Port Angeles, the following
securities are authorized investments:
· United States Treasury Debt Obligations
· Agency NoteslBonds
~ Federal Home Loan Bank
~ Federal National Mortgage Association
~ Federal Farm Credit Banks
~ Federal Home Loan Mortgage
Corporation
~ Government National Mortgage
Association
· Agency Discount Notes
~ Federal Home Loan Bank
~ Federal National Mortgage Association
~ Federal Farm Credit Banks
~ Federal Home Loan Mortgage
Corporation
~ Government National Mortgage
Association
· Obligations of any other government
sponsored corporation whose obligations
are, or may become, eligible as collateral
for advances to member banks as
determined by the Board of Governors of
the Federal Reserve System.
· Bankers' acceptances purchased on the
secondary market
· Commercial paper: Provided that the
Treasurer shall adhere to the investment
policies and procedures adopted by the
Sate Investment Board. Note: While
statutory authority for the investment of
public funds in commercial paper resides
in the State Treasurer's Investment Statute,
there is considerable controversy regarding
the constitutionality of this investment
vehicle.
· State, county, municipal, or school district
bonds, or in warrants oftaxing districts of
the state. Such bonds and warrants shall be
only those found to be within the limit of
indebtedness prescribed by law for the
taxing district issuing them and to be
general obligations.
8.2 RCW 39.59.020
· Bonds of the State of Washington and any
local government in 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.
· 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.
· Any investments authorized by law for the
Treasurer of the State of Washington or
any local government of the State of
Washington other than a metropolitan
municipal corporation but, except as
provided in Chapter 39.58 RCW, such
investments shall not include certificates of
deposit of banks or bank branches not
located in the State of Washington.
8.3 RCW 39.59.030
Funds subject to the arbitrage provisions of
section 148 of the Federal Internal Revenue
Code as follows:
· Utility revenue bonds or warrants of any
city or town in the State of Washington
4
· Bonds or warrants of a local improvement
district which are within the protection of
the Local Improvement Guaranty Fund
Law.
. Shares of mutual funds with portfolios
consisting of only United States
Government bonds or United States
Government guaranteed bonds issued by
federal agencies with average maturities
less than four years.
. Shares of money market funds with
portfolios consisting of only bonds of state
and local governments or other issuers
authorized by law for investment by local
governments, which bonds have at the time
of investment one of the two highest credit
ratings of a nationally recognized rating
agency.
8.4 In addition, the City may participate in
repurchase agreements provided the
securities for the agreement are included in the
above list. The City shall obtain control of the
securities purchased through repurchase
agreements.
Prior to entering a repurchase transaction,
the City must have a Master Repurchase
Agreement with the banklbroker.
8.5 State Investment Pool
8.6 Collateralization
Where allowed by state law and in
accordance with the GFOA Recommended
Practices on the Collateralization of Public
Deposits, full collateralization will be required
on non-negotiable certificates of deposit. (See
GFOA Recommended Practices, Appendix 3)
9. Safekeeping and Custody
The City recognizes that investment risks
can result from issuer defaults, market price
changes or various technical complications
leading to temporary illiquidity.
To decrease the risk of default, the City
Treasurer shall periodically establish
guidelines and strategies for investment.
In addition to general policy consideration,
the following specific policies shall be
implemented.
9.1 All security transactions, including
collateral for repurchase agreements, entered
into by the City of Port Angeles shall be
conducted on a delivery-versus-payment
(DVP) basis. Securities purchased by the
entity will be delivered against payment and
held in a custodial safekeeping account with
the trust department of a bank. The trust
department of a bank, a third party custodian,
will be designated by the Investment
Committee and all transactions will be
evidenced by safekeeping records.
9.2 To protect against potential fraud and
embezzlement, bearer instruments shall be
secured through third-party custody and
safekeeping procedures provided by a financial
institution designated as primary agent. The
primary agent shall issue a safekeeping receipt
to the City of Port Angeles listing the specific
instrument, rate, maturity and all other
pertinent information.
9.3 Purchases of Bankers' Acceptances
shall be limited to the top 25 national banks
and the top six national banks chartered to do
business in the State of Washington.
Acceptances from highly rated foreign
banks should be in the top 100 world banks.
9.4 For purchasing certificates of deposit
(CDs) the City's investments should be limited
to 85% of net worth of such institution. The
Institution's status shall be reviewed and
accepted by the Public Deposit Protection
Commission (PDPC) or properly collateralized
as required by the state for amounts exceeding
FDIC and FSLIC coverage.
5
'IT
...
10.
Diversification
The investment portfolio shall be
diversified to avoid incurring unreasonable and
avoidable risks regarding specific security
types or individual financial institutions.
The City shall diversify its investments by
security type and institution. With the
exception of U.S. Treasury securities and the
State Investment Pool, no more than 50% of
the City's total investment portfolio shall be
invested in a single financial institution.
In the case of Repurchase Agreements
(Repos) the maximum percent of the portfolio
invested shall not be greater than 25%.
The maximum percent of portfolio per
issuer for Bankers Acceptances and
Commercial Paper will be 5%.
11. Maturities
To the extent possible, the City will
attempt to match its investments with
anticipated cash flow requirements.
In order to avoid an undesirable loss on
premature liquidation of investments, the City
will comply with the following guidelines.
Because of inherent difficulties in
accurately forecasting cash flow requirements,
a portion of the portfolio should be
continuously invested in readily available
funds such as LGIPs, money market funds, or
overnight repurchase agreements to ensure that
appropriate liquidity is maintained to meet
ongoing obligations.
The maximum maturity will be established
at 10 years.
11.1 At least 2% ofthe current operating
budget shall be available on a single day's
notice.
11.2 A minimum 5% ofthe portfolio shall
mature in less than 30 days.
11.3 A minimum 20% of the portfolio
shall mature in less than one year.
11.4 No more than 40% of the portfolio
shall mature in greater than two years.
11.5 For specific funds, like Firemen's
Pension, reserve, or CIP Trust, funds may be
invested in securities where extended
maturities may be of greater value.
12. Selection oflnvestment Instruments
Investments shall be placed using an
informal bidding procedure where rates will be
received from at least three institutions.
With the following exception, the
investment will be placed with the highest
bidder. In order to stimulate the local economy,
the City may place an investment with a local
institution that is not the highest bidder,
provided that the bid is not more than 25 basis
points below the highest bidder. A local
institution is defined as a bank or savings and
loan association doing business inside the
corporate limits ofthe City of Port Angeles.
If a specific maturity date is required, either
for cash flow purposes or for conformance to
maturity guidelines, bids will be requested for
instruments which meet the maturity
requirement. If no specific maturity is
required, a market trend analysis will
determine which maturities would be most
advantageous.
The City shall not knowingly make direct
investments in companies supporting policies
contrary to the U.S. Government position on
Human Rights.
13.
Internal Control
The controls shall be designed to prevent
losses of public funds arising from fraud,
employee error, misrepresentation of third
parties, unanticipated changes in financial
6
markets, or imprudent actions by employees
and officers of the City.
Training should be provided to staff in
investments, and personnel should keep current
with fmancial development by participating in
GFOA and MT A of US and Canada,
subscribing to financial journals and
periodicals, and participating in continuing
education in investment management.
Controls deemed most important include:
control of collusion, separating transaction
authority from accounting and record keeping,
custodial safekeeping, clear delegation of
authority, specific limitations regarding
securities losses and remedial action, written
confirmation of telephone transactions,
minimizing the number of authorized
investment officials, documentation of
transactions and strategies, and code of ethics
standards.
Appendix C shows the internal control
strategy .
14. Performance Standards
The investment portfolio shall be designed
to attain a market-average rate of return
throughout budgetary and economic cycles,
taking into account the City's investment risk
constraints, the cash flow characteristics ofthe
portfolio, and State and local laws and
ordinances that restrict investments.
14.1 Market Yield
The basis used by the City Treasurer to
determine whether market yields are being
achieved shall be six-month U.S. Treasury
Bills or 90-day CD rates.
15. Reporting
The City Treasurer is charged with the
responsibility of preparing a report on
investment activity.
15.1 Quarterly Reports
The City Treasurer shall submit an
investment report to the City Council. This
report should include:
· Type ofInvestment
· Institution
· Date of Maturity
· Amount of deposit or cost of the
security
· Yield
15.2 Quarterly Return on Investment
Report
The quarterly Return on Investment Report
shall be prepared by the City Treasurer.
Information in this report should include:
· Interest earned
· Average weighted yield
· Comparison of yield to six-month T-
Bills or 90-day CDs.
16. Distribution of Income
Interest mcome received shall be
distributed monthly from the common
portfolio to all participating funds in the
following order:
16.1 Payment to Each Fund
Payment to each fund of an amount based
on the ending cash balance included in the
common portfolio for the earning period.
17. Investment Policy Adoption
The City of Port Angeles' investment
policy shall be adopted by a resolution of the
City Council. The policy shall be reviewed on
an annual basis and any modifications made
thereto must be approved by the City Council.
7
TT
..
Appendix A
Financial Dealers
and
Institutions
A-I
Tr ~^..__...
...
Financial dealers and institutions used by the CIty of Port Angeles:
~ First Federal Savings
Renton, W A 98005
~ First Federal Savings & Loan Assoc.
Port Angeles, W A 98362
~ Cruttenden Roth
Donald Bordelon, Vice President
Newport Beach, CA 92660
~ Vining-Sparks ffiG
Donald K. Koch, Vice President
Seattle, W A 98121
~ Seattle Northwest
Mark E. Rodgers, Vice President
Seattle, W A 98101
~ US BanCorp
Paul V. Jarvis, Vice President
Seattle, W A 98101
~ McDonald Investments, Inc. A Key Corp. Company
Michael Wallblom, Vice President
Phillip J. Bailey, Senior Vice President
Seattle, W A 98111
~ Duncan-Williams, Inc.
Stephen F. Capoferi, Vice President
Houston, TX 77042
~ Shay Financial Services, Inc.
Tamara A. McGovern-Blaser, Account Executive
Miami, FL 33131
~ Washington Credit Union
Port Angeles, W A 98362
A-2
Appendix B
Ineligible Securities
B-1
....
Securities that are not eligible as investments for public funds in the State of Washington.
· Corporate stocks
· Corporate bonds
· Foreign government obligations
· Future contracts
· Investments in commodities
· Real estate
· Limited partnerships
· Negotiable certificates of deposit
B-2
Appendix C
Internal Control
C-l
Scope:
To establish an adequate system of internal control over the treasury function.
Objectives:
This is a plan to ensure:
· The orderly and efficient conduct of business, including adherence to management policies
· The safeguarding of assets
· The accuracy and completeness of the accounting records
· The timely preparation of reliable financial information
Limitations:
No internal control system, however elaborate, can by itself guarantee the achievement of
management's objectives. Internal control, because of its inherent limitations, can only provide
reasonable assurance that the objectives are met.
Elements of Internal Control:
· Organization
· Personnel
· Segregation of functions
· Authorization
· Controls over an accounting system
· Safeguarding of assets and records
· Management
C-2
Tr-
.
Responsibilities of the Treasurer Function
Functions
1. Authorization of investment transactions
· Formal investment policy
- Prepared by
- Adopted by
2.
Execution of investment transactions
3.
Timely recording investment transactions
· Recording of investment transactions in
Treasurer's records
· Recording of investment transactions
in the accounting records
4.
Verification of investment, i.e., match broker
confirmation to Treasurer's records
5.
Safeguarding of Assets and Records
· Reconciliation of Treasurer's records
to accounting records
· Reconciliation of Treasurer's records
to bank statement and safekeeping records
· Review of
a. Financial institution's financial condition
b. Safety, liquidity, and yields of investments
· Maintaining complete and current financial
institution and brokerage company files
· Periodic reviews of collateral
6.
Management's periodic review of the investment
portfolio in conformance to stated investment policy
· Monthly
· Quarterly
7.
Annual review of the Investment Policy
and Investment Program
8.
Changes in the Investment Policy
· Prepared by
· Adopted by
C-3
Responsibilities
Treasurer/Finance Director
City Council
Treasurer/Finance Director
Treasurer
Accountant
Accountant
Accountant
Treasurer
Accountant
Plccountant/Sr.Accountant
Finance Director
Accountant
Finance Director
Finance Director/ Plccounting Mgr.
City Manager
City Council
Treasurer/Finance Director
Treasurer/Finance Director
City Council
Appendix D
Glossary
D-l
.~-'-"-_..,...
....
Glossary of Cash Management Terms
The following is a glossary of key investing terms, many of which appear in the City of Port
Angeles Investment Policy.
Agency - A debt security issued by a federal
or federally sponsored agency. Federal
agencies are backed by the full faith and credit
ofthe 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.
Average Life - The average length of time
that an issue of serial bonds and/or term bonds
with a mandatory sinking fund feature is
expected to be outstanding.
Bankers' Acceptance (BA) - A draft or bill
or exchange accepted by a bank or trust
company. The accepting institution
guarantees payment of the bill, as well as the
Issuer.
Basis Point - A unit of measurement used in
the valuation of fixed-income securities equal
to 1/100 of 1 percent of yield, e.g., "1/4" of 1
percent is equal to 25 basis points.
Bid - The indicated price at which a buyer is
willing to purchase a security or commodity.
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 paid by the initiator
of the transaction or by both sides; he does not
position. In the money market, brokers are
active in markets in which banks buy and sell
money and in interdealer markets.
Callable Bond - A bond issue in which all or
part of its outstanding principal amount may
be redeemed before maturity by the issuer
under specified conditions.
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.
Call Risk - The risk to a bondholder that a
bond may be redeemed prior to maturity.
Cash SalelPurchase - A transaction which
calls for delivery and payment of securities on
the same day that the transaction is initiated.
Certificate of Deposit (CD) - A time deposit
with a specific maturity evidenced by a
certificate. Large-denomination CDs are
typically negotiable.
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.
D-2
IT
.
Commercial Paper - An unsecured short-
term promissory note issued by corporations,
with maturities ranging from 2 to 270 days.
Convexity - A measure of a bond's price
sensitivity to changing interest rates. A high
convexity indicates greater sensitivity of a
bond's price to interest rate changes.
Coupon Rate - The annual rate of interest
received by an investor from the issuer of
certain types of fixed-income securities. Also
known as the "interest rate".
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.
Current Yield (Current Return) - A yield
calculation determined by dividing the annual
interest received on a security by the current
market price of that security.
Dealer - A dealer, as opposed to a broker, acts
as a principal in all transactions, buying and
selling for his own account.
Delivery Versus Payment (DVP) - A type of
securities transaction in which the purchaser
pays for the securities when they are delivered
either to the purchaser or his/her custodian.
Derivative Security - Financial instrument
created from, or whose value depends upon,
one or more underlying assets or indexes of
asset values.
Discount - The difference between the cost
price of security and its value at maturity
when quoted at lower than 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, e.g., U.S. Treasury bills.
Diversification - A process of investing assets
among range of security types by sector,
maturity, and quality rating.
Duration - A measure of the timing of the
cash flows, such as the interest payment 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&Ls, 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.
D-3
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 Home Loan Banks (FHLB) - The
institutions that regulate and lend to savings
and loan associations. The Federal Home
Loan Banks play a role analogous to that
played by the Federal Reserve Banks vis-a-vis
member commercial banks.
Federal National Mortgage Association
(FNMA) - FNMA, like GNMA, was chartered
under the Federal National Mortgage
Association Act in 1938. FNMA is a federal
corporation working under the auspices of the
Department of Housing and Urban
Development, H.U.D. It is the largest single
provider of residential mortgage funds in the
United States. Fannie Mae, as the corporation
is called, is a private stockholder-owned
corporation. The corporation's purchases
include a variety of adjustable mortgages and
second loans in addition to fixed-rate
mortgages. FNMA's securities are also highly
liquid and are widely accepted. FNMA
assumes and guarantees that all security
holders will receive timely payment of
principal and interest.
Federal Open Market Committee
(FOMC) - Consists of seven members of the
Federal Reserve Board and five ofthe 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 guidelines regarding purchases and
sales of Government Securities in the open
market as a means of influencing the volume
of bank credit and money.
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.
Government National Mortgage
Association (GNMA or Ginnie Mae) -
Securities guaranteed by GNMA and issued
by mortgage bankers, commercial banks,
savings and loan associations and other
institutions. Security holder is protected by
full faith and credit of the U.S. Government,
Ginnie Mae securities are backed by FHA,
VA, or FMHM mortgages. The term pass-
through is often used to describe Ginnie Maes.
Government Securities - An obligation ofthe
U.S. government, backed by the full faith and
credit ofthe government. These securities are
regarded as the highest quality of investment
securities available in the U.S. securities
market. See "Treasury Bill, Notes, and
Bonds."
Interest Rate - See "Coupon Rate".
Interest Rate Risk - The risk associated with
declines or rises in interest rates which cause
an investment in a fixed-income security to
increase or decrease in value.
Internal Controls - An internal control
structure designed to ensure that the assets of
the entity are protected from loss, theft, or
misuse. The internal control structure is
designed to provide reasonable assurance that
these objectives are met. The concept of
reasonable assurance recognizes that 1) the
D-4
cost of a control should not exceed the
benefits likely to be derived; and 2) the
valuation of costs and benefits requires
estimates and judgments by management.
Internal controls should address the following
points:
1. Control of collusion - Collusion is a
situation where two or more employees
are working in conjunction to defraud
their employer.
2. Separation of transaction authority
from accounting and record keeping -
By separating the person who authorizes
or performs the transaction from the
people who record or otherwise account
for the transaction, a separation of duties
is achieved.
3. Custodial safekeeping - Securities
purchased from any bank or dealer
including appropriate collateral (as
defined by state law) shall be placed with
an independent third party for custodial
safekeeping.
4. Avoidance of physical delivery
securities - Book-entry securities are
much easier to transfer and account for
since actual delivery of a document never
takes place. Delivered securities must be
properly safeguarded against loss or
destruction. The potential for fraud and
loss increases with physically delivered
securities.
5. Clear delegation of authority to
subordinate staff members - Subordinate
staff members must have a clear
understanding of their authority and
responsibilities to avoid improper actions.
Clear delegation of authority also
preserves the internal control structure that
is contingent on the various staffpositions
and their respective responsibilities.
6. Written confirmation of transactions
for investments and wire transfers - Due
to the potential for error and improprieties
ansmg from telephone and electronic
transactions, all transactions should be
supported by written communications and
approved by the appropriate person.
Written communications may be via fax if
on letterhead and if the safekeeping
institution has a list of authorized
signatures.
7. Development of a wire transfer
agreement with the lead bank and
third-party custodian - The designated
official should ensure than an agreement
will be entered into and will address the
following points: controls, security
provisions, and responsibilities of each
party making and receiving wire transfers.
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 Company Act of 1940 - Federal
legislation which sets the standards by which
investment companies, such as mutual funds,
are regulated in the areas of advertising,
promotion, performance reporting
requirements, and securities valuations.
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.
Investment-grade Obligations An
investment instrument suitable for purchase
by institutional investors under the prudent
person rule. Investment-grade is restricted to
those obligations rated BBB or higher by a
rating agency.
D-5
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 price 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.
Master Repurchase Agreement - A written
contract covering all future transactions
between the parties to repurchase-reverse
repurchase agreements 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.
Open Market Operations - Purchases and
sales of government and certain other
securities in the open market by the New York
Federal Reserve Bank as directed by the
FOMC in order to influence the volume of
money and credit in the economy. Purchases
inject reserves into the bank system and
stimulate growth of money and credit; sales
have the opposite effect. Open market
operations are the Federal Reserve's most
important and most flexible monetary policy
too 1.
National Association of Securities Dealers
(NASD) - A self-regulatory organization
(SRO) of brokers and dealers in the over-the-
counter securities business. Its regulatory
mandate includes authority over firms that
distribute mutual fund shares as well as other
securities.
Net Asset Value - The market value of one
share of an investment company, such as a
mutual fund. This figure is calculated by
totaling a fund's assets which includes
securities, cash, and any accrued earnings,
subtracting this from the fund's liabilities and
dividing this total by the number of shares
outstanding. This is calculated once a day
based on the closing price for each security in
the fund's portfolio. (See below) (Total
assets )-(Liabilities )/(Number of shares
outstanding).
Nominal Yield - The stated rate of interest
that a bond pays its current owner, based on
par value of the security. It is also known as
the "coupon", "coupon rate", or "interest
rate" .
Offer - An indicated price at which market
participants are willing to sell a security or
commodity. Also referred to as the "ask
price" .
Par - Face value or principal value of a bond,
typically $1,000 per bond.
D-6
Portfolio - Collection of securities held by an
investor.
Positive Yield Curve - A chart formation that
illustrates short-term securities having lower
yields than long-term securities.
Premium - The amount by which the price
paid for a security exceeds the security's par
value.
Primary Dealer - A group of government
securities dealers that 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.
Prime Rate - A preferred interest rate charged
by commercial banks to their most
creditworthy customers. Many interest rates
are keyed to this rate.
Principal - The face value or par value of a
debt instrument. Also may refer to the
amount of capital invested in a given security.
Prudent Person Rule - An investment
standard outlining the fiduciary
responsibilities of public funds investors
relating to investment practices.
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 ofthis 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 on a bond or the
current income return.
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 it, increasing bank reserves.
Reverse Repurchase Agreement (Reverse
Repo) - An agreement of one party to
purchase securities at a specified price from a
second party and a simultaneous agreement by
the first party to resell the securities at a
specified price to the second party on demand
or at a specified date.
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.
Swap - Trading one asset for another.
D-7