CC Resolution 11671
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RESOLUTION NO.: 1167].
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF CAMPBELL APPROVING THE ANNUAL UPDATE TO THE INVESTMENT
POLICY AND RELATED ADMINISTRATIVE POLICY REVISIONS
WHEREAS, Government Code Section 53646 requires a statement of
Investment Policy be submitted to the City's legislative body annually for its
consideration at a public hearing; and
WHEREAS, there has been submitted to the City Council a statement of the
City's Investment Policy; and
WHEREAS, the Policy has been reviewed by the City Council;
NOW, THEREFORE, BE IT RESOLVED, by the City Council of the City of
Campbell that the changes to the Investment Policy are approved as submitted.
PASSED AND ADOPTED the 6th day of May, 2014 by the following roll call
vote:
AYES: Councilmembers Raker, Low, Kotowski, Cristina, Waterman
NOES: Councilmembers None
V
ABSENT: Councilmembers None
APPROVED:
Mayor
ATTE~
Anne Bybee, City Clerk
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Atrar~ `~
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~~"~~ City of Campbell, California
Investment Policy Date: May 6, 201 d'-.,--'~^'ro
PURPOSE
It is the policy of the City of Campbell to invest public funds in a prudent manner which
conforms to all statutes governing the investment of public funds while providing security and
meeting the daily cash flow needs of the City.
The purpose of this document is to identify the policies guiding prudent investment df the
City's temporarily idle funds and to establish guidelines and objectives for suitable
investments including delegation of authority, prudence, monitoring and reporting, policy
review, diversification, eligible securities, safekeeping, collateralization, selection of financial
institutions and broker/dealers, glossary of terms, and forms utilized.
11. SCOPE
A. This investment policy shall apply to all financial assets, investment activities, and
debt issues of the City of Campbell including the following fund types:
General Fund
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Internal Service Funds
Trust and Agency Funds
The policy does not cover funds held by the Public Employees Retirement System nor
funds of the Deferred Compensation program.
III. OBJECTIVES
A. It is the objective of this policy to provide a system which will monitor and forecast
revenues and expenditures so that the City can invest temporarily idle funds to the
fullest extent possible. The temporarily idle funds shall be invested in accordance
with provisions of California Government Code Section 5360Q et. seq. ,• ~~
B. The City adheres to conservative investment philosophies including investment of all
idle cash, preservation of principal at the risk of yield, maintenance of adequate
liquidity to meet anticipated cash flow needs and diversification to avoid the risks
inherent in over investing in any one asset class.
C. This policy specifically prohibits trading securities for the sole purpose of speculating
on the future direction of interest rates. It further prohibits reverse repurchase
agreements, use of derivative products, and/or leveraging of the portfolio.
D. The City shall ensure the safety of invested funds by limiting credit and interest rate
risks. The three primary objectives of the City's Investment Policy in order of priority
are:
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••~"'~ City of Campbell, California
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` Investment Policy Date: May 6, 2014-203
Safety: Safety of principal is the foremost objective of the Ciry of
Campbell. Safety and the minimizing of risk associated with
investing refer to attempts to reduce the potential for loss of
principal, interest or a combination of the two. The City ensures
safety of its invested idle funds and limits credit and interest rate
risks by following these guidelines (all of which are detailed within
the body of the Investment Policy):
a. Investing only in those instruments that are generally accepted
as safe investment vehicles for local government as authorized
by this Policy,
b. Carefully reviewing the qualifications and financial strength of
financial institutions and broker/dealers prior to conducting
business with them,
c. Diversifying the investment portfolio as prescribed within this
Policy,
d. Structuring the portfolio such that securities mature to meet the
City's cash requirements for ongoing operations, thereby
avoiding the need to sell securities on the open market prior to
their maturation,
e. Limiting the final maturity of purchased securities to five years;
limiting the weighted average maturity of the portfolio to three
years, and
f. Ensuring the physical security or safekeeping of the City's
investments.
2. Liquidity: Liquidity is the second most important objective of the City's Policy.
Liquidity refers to the ability to convert an investment to cash
promptly without loss of principal and minimal loss of interest. For
example, this is accomplished by investing either in the Local
Agency Investment Fund (LAIF) with same day availability, or
investing in securities with active secondary or resale markets.
3. Yield: Yield on the City's portfolio is last in rank among investment
objectives. Investments are limited to relatively low risk securities
in anticipation of earning a fair return relative to the risk being
assumed.
IV. STRUCTURE AND RESPONSIBILITY
A. DELEGATION OF AUTHORITY:
The City Council assumes direction over the City's investments, and assigns
management responsibility for the investment program to the Finance Director,
who shall serve as Chief Fiscal Officer, and have legal custody of funds. The
Finance Director may provide for delegation of his/her responsibilities to other
persons under his/her control responsible for investment transactions,
including designation of certain portions of the investment portfolio related to
debt financing to be administered by professional portfolio administrators, i.e.
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` ~ Investment Policy Date: May 6, 201"'~-'moo
California Arbitrage Management Program (C.A.M.P.) or such other
designated administrators approved by the Finance Sub-Committee.
B. POLICY REVIEW:
This Investment Policy shall be reviewed and approved annually as required by
California Government Code Section 53600 et. seq.
C. RESPONSIBILITIES:
Responsibilities of the City Council: The City Council consists of a Mayor
and four Council members and is the policy setting board for the City of
Campbell. The City Council has considered and adopted a written Investment
Policy for the City of Campbell. Pursuant to the City's Financial Policies, the
City Council shall on an annual basis, approve necessary changes to the
Investment Policy as recommended by the Finance Sub-Committee. On a
monthly basis, the City Council shall receive, review and accept the Monthly
Investment Report submitted by the Finance Department.
2. Responsibilities of the Finance Sub-Committee: The Finance Sub-
committee consists of two Council members, the City Manager, the Finance
Director, and the Finance Manager. On an annual basis, this Sub-Committee
shall review necessary revisions to the established Investment Policy of the
City of Campbell and make a recommendation to the City Council accordingly.
No less than once per fiscal year, the City's investment strategy will be
reviewed by the Finance Sub-Committee. A summary of the investment
strategy will be shared with the City Council at that time. Should market activity
encourage revisions in the City's strategy, the Finance Sub-Committee shall be
advised accordingly. .
3. Responsibilities of the City Manager: The City Manager is.responsible for
directing and supervising the Finance Director. He/she has the responsibility of
keeping the City Council fully advised as to the financial condition of the City.
a. Wire Transfer Authority: The City Manager has unlimited wire transfer
authority for a single transaction. Such a transaction requires joint review,
approval and verification in advance by the City Manager and Finance
Director. The transaction shall be highlighted in the Monthly Investment
Report to Council.
4. Responsibilities of the Finance Director: The Finance Director is appointed
by the City Manager and serves as Chief Fiscal Offcer. He/she is subject to
the direction and supervision of the City Manager. The Finance Director is
charged with the responsibility for the conduct of all Finance Department
functions including the custody and investment of City funds, and investment of
those funds in accordance with principles of sound treasury management and
in accordance with applicable laws and policies. Refer_ to "Delegation of
Authority" for additional information pertaining to delegation of investment
responsibilities.
a. Wire Transfer Authority: The Finance Director has wire transfer
authority not to exceed $5,000,000 for a single transaction. Such a
transaction shall be reviewed, approved and verified in advance by the
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Investment Policy Date: May 6, 201 d',,--'~^'ro
City Manager. The transaction shall be highlighted in the Monthly
Investment Report to Council.
Responsibilities of the Finance Manager: The Finance Manager is
appointed by the Finance Director and serves as the Investment Manager for
the City pursuant to specific delegation authority provided by this Investment
Policy. He/she is subject to the direction and supervision of the Finance
Director and is charged with the responsibility and conduct of the day-to-day
accounting and cash management functions of the City. This includes the
custody and investment of City funds, and investment of those funds in
accordance with principles of sound treasury management and in accordance
with applicable laws and policies. Refer to "Delegation of Authority" for
additional information pertaining to delegation of investment responsibilities.
Implementation and maintenance of the Investment Policy are the responsibility
of this individual. On an annual basis, the Finance Manager shall present to
the Finance Sub-Committee, recommended changes to the City's Investment
Policy. On a monthly basis, the Finance Manager shall present to the City
Council, via the City Manager, a Monthly Investment Report. Refer to
"Monitoring and Reporting" for additional information.
a. Wire Transfer.Authority: The Finance Manager has wire transfer
authority not to exceed $3,000,000 for a single investment transaction.
Such a transaction shall be reviewed, approved and verified. in advance by
the Finance Director, and shall be "'^"0n"'^~' ^^ '"^ ^^~'~• '^~•^°'^^^^'
reported in the Monthly
Investment Report to Council.
6. Responsibilities of the Accountant: The Accountant is appointed by the
Finance Director and is subject to the direction and supervision of the Finance
Manager. 'The Accountant carries out the specific instructions provided by the
Finance Manager regarding the purchase and sale of securities in accordance
with principles of sound treasury management and in accordance with
applicable laws and policies. Accounting for the various investment
transactions is the responsibility of the Accountant.
a. Wire Transfer Authority: The Accountant has wire transfer authority not
to exceed $2,1800,000 for a single investment transaction. The standard
operating procedure is that all cash and investment wire. transfers made by
the Accountant are reviewed, approved and verified in advance by the
Finance Manager, and are reportedrepeFte_in the
Monthly Investment Report to
Council.
D. Prudence:
It is'the understanding of the individuals holding positions with investment
responsibilities that the "prudent person" rule applies. This means 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 and income to be derived.
The City's overall investment program shall be designed and managed with a
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Investment Policy Date: May 6, 201"'t,-~'.o
degree of professionalism that is worthy of the public trust. The City recognizes
that no investment is totally riskless and that the investment activities of the City
are a matter of public record. Accordingly, while the intent of the City is to hold
purchased securities to maturity, the City recognizes that occasional measured
losses may be advisable in a diversified portfolio and shall be considered within
the context of the overall portfolio's return, provided that (a) adequate
diversification has been implemented, (b) the sale.of a security is in the.best
long-term interest of the City and (c) the City Manager approves in writing.
E. Ethics and Conflicts of Interest:
Elected officials and employees involved in the investment process shall refrain from
personal business activity that could conflict with proper execution of the City's
investment program or could impair or create the appearance of an impairment of
their ability to make impartial investment decisions. Employees and investment
officials shall disclose to the City Manager any business interests they have in
financial institutions that conduct business with the City, and they shall subordinate
their personal investment transactions to those of the City. In addition, the City
Manager, the Finance Director and others with delegated investment authority shall
file a Statement of Economic Interests each year pursuant to California Government
Code Section 87203 and regulations of the Fair Political Practices Commission.
F. Conflict with State Statutes or Regulations
Any conflict between the City of Campbell Investment Policy and Government
Code Section 53600 et seq, shall be interpreted in favor of the Government
Code.
V. AUTHORIZED SECURITIES AND TRANSACTIONS
All investments and deposits of. the City shall be made in accordance with California
Government Code Sections 16429.1, 53600-53609 and 53630-53686, except that pursuant
to California Government Code Section 5903(e), proceeds of bonds and any moneys set
aside or pledged to secure payment of the bonds may be invested in securities or obligations
described in the ordinance, resolution, indenture, agreement, or other instrument providing for
the issuance of the bonds. Any revisions or extensions of these code sections will be
assumed to be part of this Policy immediately upon being enacted. However, in the event
that amendments to these sections conflict with this Policy and past City investment
practices, the City may delay adherence to the new requirements when it is deemed in the
best interest of the City to do so.
The City has further restricted the eligible types of securities and transactions to the following:
1. United States Treasury bills, notes, bonds, or strips with a final maturity not exceeding five
years from the date of purchase.
2. Federal Agency debentures and mortgage-backed securities with a final maturity not
exceeding five years from the date of purchase issued by the Government National
Mortgage Association (GNMA). The aggregate investment in Federal Agency obligations
shall not exceed 75% of the City's total portfolio.
3. Federal Instrumentality (government sponsored enterprise) debentures, discount notes,
callable and step-up securities, with a final maturity not exceeding five years from the date
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` Investment Policy Date: May 6, 201d',,--'~^'ro
of purchase, issued by the following only: Federal Home Loan Banks (FHLB), Federal
National Mortgage Association (FNMA), Federal Farm Credit Banks (FFCB) and Federal
Home Loan Mortgage Corporation (FHLMC). The aggregate investment in Federal
Instrumentality obligations shall not exceed 75% of the City's total portfolio.
4. Repurchase Aoreements with a final termination date not exceeding one year
collateralized by U.S. Treasury obligations, Federal Agency securities, or Federal
Instrumentality securities listed in items 1, 2 and 3 above with the maturity of the collateral
not exceeding five years. For the purpose of this section, the term collateral shall-mean
purchased securities under the terms of the City's approved Master Repurchase
Agreement. The purchased securities shall have a minimum market value including
accrued interest of 102% of the dollar value of the transaction. Collateral shall be held in
the City's custodian bank, as safekeeping agent, and the market value of the collateral
securities shall be marked-to-the-market daily. The aggregate investment in repurchase
agreements shall not exceed 10% of the City's total portfolio.
Repurchase Agreements shall be entered into only with broker/dealers that have
executed a City approved Master Repurchase Agreement with the City. Repurchase
counterparties shall be recognized as Primary Dealers with the Federal Reserve Bank of
New York, or shall have a primary dealer within their holding company structure.
Broker/dealers approved as Repurchase Agreement counterparties shall have ashort-
term credit rating of at least A-1 or the equivalent and along-term credit rating of at least
A or the equivalent. The Finance Director shall maintain a copy of the City's approved
Master Repurchase Agreement along with a list of the broker/dealers that have executed
a Master Repurchase Agreement with the City.
Prime Commercial Paper with a maturity not exceeding 270 days from the date of
purchase with the highest ranking or of the highest letter and number rating as provided
for by a NRSRO. The entity that issues the commercial paper shall meet all of the
following conditions in either sub-paragraph a. orsub-paragraph b. below:
a. The entity shall (1) be organized and operating in the United States as a general
corporation, (2) have total assets in excess of five hundred million dollars
($500,000,000) and (3) have debt other than commercial paper, if any, that is rated "A"
or higher by a NRSRO.
b. The entity shall (1) be organized within the United States as a special purpose
corporation, trust, or limited liability company, (2) have program wide credit
enhancements, including, but not limited to, over collateralization, letters of credit or
surety bond and (3) have commercial paper that is rated "A-1" or higher, or the
equivalent, by a NRSRO.
Purchases of eligible commercial paper may not represent more than 10% of the
outstanding commercial paper of any single corporate issuer. No more than 10% of the
City's total portfolio may be invested in the commercial paper of any one issuer, and the
aggregate investment in commercial paper shall not exceed 25% of the City's total
portfolio.
6. Eligible Bankers Acceptances rated at least A-1 by Standard & Poor's, P-1 by Moody's, or
F1 by Fitch at the time of purchase by each service that rates the commercial paper, with
a maturity not exceeding 180 days from the date of purchase, issued by a state or
national bank that has combined capital and surplus of at least $250 million, whose
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~~"''~K City of Campbell, California
Jnvestment Policy Date: May 6, 207"'~-'~^"ro
deposits are insured by the FDIC, and whose senior long-term debt is rated at least A by
Standard & Poor's, A2 by Moody's or A by Fitch at the time of purchase. No more than
10% of the City's total portfolio may be invested in banker's acceptances of any one
issuer, and the aggregate investment in banker's acceptances shall not exceed 30% of
the City's total portfolio.
Medium Term Notes issued by corporations organized and operating within the United
States or by depository institutions licensed by the United States or any state and
operating within the United States, with a final maturity not exceeding five years from the
date of purchase, and rated at least AA by Standard & Poor's, Aa2 by Moody's or AA by
Fitch. The aggregate investment in medium term notes shall not exceed 10% of the City's
total portfolio.
8. Non-negotiable Time Certificates of Deposit and savings deposits with a maturity not
exceeding five years, in state or nationally chartered banks or savings and loans with a
California branch office that are insured by the FDIC. Time Certificates of Deposit
exceeding the FDIC insured amount must be secured pursuant to California Government
Code Sectiori 53652. No more than $1 million may be invested in non-negotiable time
certificates of deposit of any one issuer and the aggregate amount invested in non-
negotiable time certificates of deposit shall not exceed 25% of the City's total portfolio.
J
9. Certificates of Deposit at commercial bank, savings bank, or savings and loan association
that uses a private sector entity (Certificate of Deposit Account Registry Service) that
assists in the placement of certificates of deposit, provided that the purchase of
certificates of deposit do not, in total, exceed 30% of the City's funds that may be invested
for this purpose. The City shall choose a nationally or state chartered commercial bank in
California as the "selected" depository institution to invest the funds. The selected
depository institution may submit the funds to a CDARS for the benefit of the City's
account. The full amount of the principal and interest that may be accrued during the
maximum term of each certificate shall be insured by the FDIC...
10. State of California's Local Agency Investment Fund (LAIF), pursuant to California
Government Code Section 16429.1.
11. Mutual Funds registered under the Investment Company Act of 1940 that (1) are "no-load"
(meaning no commission or fee shall be charged on purchases or sales of shares); (2)
invest only in the securities and obligations authorized in this policy and (3) have a rating
of AAAm by Standard and Poor's, Aaa by Moody's or AAAN1+ by Fitch. No more than
10% of the City's total portfolio may be invested in mutual funds of any one issuer, and
the aggregate investment in mutual funds shall not exceed 15% of the City's total
portfolio.
12. Money Market Mutual Funds registered under the Investment Company Act of 1940 that
(1) are "no-load" (meaning no commission or fee shall be charged on purchases or sales
of shares); (2) have a constant daily net asset value per share of $1.00; (3) invest only in
the securities and obligations authorized in this policy and (4) have a rating of at least two
of the following: AAAm by Standard and Poor's, Aaa by Moody's or AAAA/1+ by Fitch. No
more than 10% of the City's total portfolio may be invested iri money market funds of any
one issuer, and the aggregate investment in money market funds shall not exceed 15% of
the total portfolio.
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13. Municipal and State Obligations with a minimum long-term rating of A/A-1 or higher by
Standard and Poor's and not exceeding 10% of the portfolio:
(a) Bonds Issued by the Local Agency (City of Campbell) including bonds payable solely
out of the revenue from arevenue-producing property owned, controlled, or operated
by the local agency or by a department, board, agency, or authority of the local
agency.)
(b) State Obligations including registered treasury notes or bonds of this State and any of
the other 49 states in addition to California, including bonds payable solely out of the
revenue from arevenue-producing property owned, controlled, or operated by a state
or by a department, board, agency, or authority of the any of the other 49 United
States. in addition to California.
(c) California Local Agency obligations including bonds, notes, warrants, or other
evidence of indebtedness of any local agency within this state, including bonds
payable solely out of the revenue from a revenue-producing property owned,
controlled, or operated by the local agency or by a department, board, agency, or
authority of the any of the local agency.
Note: Per state statute, the maximum combination of Mutual Funds and Money Market Mutual
Funds is 20% of the portfolio.
It is the intent of the City that the foregoing list of authorized securities and transactions is
strictly interpreted. Any deviation from this list must be preapproved by the City Council
writing.
VI. PORTFOLIO MATURITIES AND LIQUIDITY
To the extent possible, investments shall be matched with anticipated cash flow requirements
and known future liabilities. The City will not invest in securities maturing more than five years
from the date of purchase, unless the City Council has granted authority to make such an
investment at least three months prior to the date of investment. The weighted average final
maturity of the City's portfolio shall at no time exceed 3 years.
VII. MONITORING AND REPORTING
A. The Finance Director shall routinely monitor the contents of the portfolio and shall file
with the City Council the Finance Manager's Investment Report within 30 days of the
end of the quarter. The reports shall be prepared and submitted in accordance with
California Government Code Section 53646 and shall include the following on all
invested monies:
Type of Investment and Issuer
Beginning Balances
Purchases During Month
~ Maturities or Sales During the Month
~ Ending Balances
Maturity Date
~ Weighted Average Final Maturity
Call Provisions (if any)
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Investment Policy Date: May 6, 201^'T.--20',x'
9 Interest Rate
~ Weighted Average Yield
Face Value or Purchase Cost
~ Market Value including source
Interest Earned During Month
~ Interest Earned to Maturity
Cash Flow Projection for the Following Month
Summary of Cash Invested to Total Cash Balances
~ Comparative Statistics by Fiscal Year
Reconciliation of Cash & Investments to General Ledger Balances
- Investments under the Management of Contracted Parties
Statement of Compliance with the Investment Policy
~ Statement of Ability to Meet Obligations of Next Six Months
B. Each time an investment transaction is made, an "Investment Transaction Record" form
shall be prepared by the Accountant and approved by the Finance Manager. Copies of
the form are to be distributed to the City Manager, and Finance Director.
VIII. SELECTION OF BROKER/DEALERS
The City shall transact business with securities broker/dealers after careful review of their
qualifications and creditworthiness. In selecting broker /dealers, the Finance Director or
designated staff member shall select broker/dealers representing primary dealers in
government securities that have established offices and. order desks within the State of
California, or with such firms that have a primary dealer within their holding company structure.
Exceptions to this rule will be made only upon the joint written authorization of the Finance
Director and City Manager. Staff shall investigate broker/dealers wishing to do business with
the City to determine if they are adequately capitalized, are reputable, have pending legal
action against the firm or the individual broker, have established offices and order desks within
the State of California, and make markets in the securities appropriate to the City's needs.
Before accepting funds or engaging in investment transactions with the City, the supervising
officer at each authorized broker/dealer shall submit and annually update a City approved
Broker/Dealer Information Request form that includes the firm's most recent audited financial
statement. The Finance Director, or his or her designee, shall maintain a list of approved
broker/dealers. Broker/dealers shall attest in writing that they have received and reviewed a
copy of this Investment Policy, and that they will comply with it and disclose potential conflicts
or risks to public funds that might arise out of business transactions between the firm and the
City of Campbell.
IX. SAFEKEEPING AND COLLATERALIZATION
A. Safekeeping:
The City shall contract with a bank or banks for the safekeeping of securities
which are owned by the City as a part of the investment portfolio. Staff shall
periodically review the performance and pricing of the third-party, safekeeping
agent services.
2. All investment securities (except the collateral for certificates of deposit in
banks, and/or savings and loans) purchased by the City shall be held in
third-party safekeeping by an institution designated as primary agent. The
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` Investment Policy Date:- May 6, 201"'~-'??~^-'moo
primary agent shall issue a safekeeping receipt to the City listing the specific
instrument, rate, maturity and other pertinent information, and shall provide
monthly reports of activity and ending balances for all securities held on behalf
of the City.
B. Collateralization:
Deposit-type securities (i.e. certificates of deposit) shall be collateralized
through the State of California collateral pool requirements for any amount
exceeding FDIC coverage in accordance with California Government Code
Section 53652 and/or 53651(m) (1). Collateral for certificates of deposit shall
be held in a trust company located in California, the trust department of a bank
located in California or the Federal Home Loan Bank of San Francisco.
2. Other securities shall be collateralized by the actual security held in third-party
safekeeping by the primary agent.
X. DIVERSIFICATION AND ELIGIBLE SECURITIES
The City will diversify investment instruments to avoid incurring unreasonable risks in
overinvesting in specific instruments, individual financial institutions or maturities. The
following portfolio maximums shall apply:
Authorized Securities and Transactions Maximum Portfolio
CA. Gov't. Authorized Investment Maximum Authorized Investment Credit Rating Limit
Code Section Maturit Limits - % of Portfolio
53601 (a) City of Campbell Local 5years None/10% Per Issuer A/A-1 or Higher
Agency Bonds
53601 (c) State Obligations 5years None/10% Per Issuer A/A-1 or Higher
53601 (e) California Local Agencies 5years None/10% Per Issuer A/A-1 or Higher
53601(b) United States Treasuries 5years None None
53601(e) Federal Agency Securities 5years 75% None
53601(e) Federal Instrumentality 5years 75% None
53691(1) Repurchase Agreements 1 year 10% A-1/A
25%
53601(8) Prime Commercial Paper 270 days A/A-1 or higher
10% Per Issuer
53601(f)- Eligible Bankers 180 days 10% per issuer/30% A-1/P-1/F-1
Acceptances Aggregate
53601(j) Medium Term Notes 5years 10% AA/Aa2/AA
53601(n) Non-negotiable Certificates 5years 25% -
of Deposit
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$1 million per issuer
7.5% Aggregate
53601.5 (a)- Certificates of Deposit
through Account Registry 5 years Maximum Up to the -
(h) Services FDIC Insured Limit Per
Issuer
16429.1 State of California LAIF Avg onths- None -
53601(k) 'Mutual Funds None 15% AAAm/Aaa/AAAV1+
53601(k) Money Market Mutual None 15%
AAAm/Aaa/AAAV1+
Funds
'Combined total not to 20%
exceed 20% perState
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Investment Policy Date: May 6, 2014~28~3
EXHIBIT A
GLOSSARY OF ELIGIBLE INVESTMENTS
Local Agencv Investment Fund (L.A.I.F.). The L.A.I.F. was established by the state of California to
enable treasurers to place funds in a pool for investments. There currently is a limitation of $40
million per agency subject to a maximum of 15 total transactions per month. The City of Campbell
uses this fund when interest rates are declining as well as for short-term investments and liquidity.
U.S. Treasury Bills. Commonly referred to as T-Bills, these are short-term marketable securities
sold as obligations of the U.S. Government. T-Bills do not accrue interest but are sold at a discount
to pay face value at maturity.
U.S. Treasury Notes. These are marketable, interest-bearing securities sold as obligations of the
U.S. Government with original maturities of one to ten years. Interest is paid semi-annually.
U.S. Treasury Bonds. These are the same as U.S. Treasury Notes except they have original
maturities of ten years or longer.
U.S. Government Agencv Issues. Are securities that are unconditionally backed by the full faith
and credit of the United States, including: Government National Mortgage Association (GNMA),
Farmers Home Administration (FmHA),Small Business Administration (SBA), General Services
Administration (GSA), Federal Housing Administration (FHA) and Housing and Urban Development
(HUD).
U.S. Government Instrumentality Issues. Are government sponsored enterprises that are backed
by the creditworthiness of the issuing agency, not the full faith and credit of the U.S. government.
They do carry an implied guarantee of government assistance to the organization should it encounter
financial difficulties. Issuers include: Federal National Mortgage Association (FNMA), Federal Home
Loan Bank (FHLB), Federal Farm Credit Banks (FFCB) and Federal Home Loan Mortgage
Corporation (FHLMC).
Banker's Acceptance. This is a negotiable time draft (bill of exchange) with a maturity of six months
or less drawn on and accepted by a commercial bank. Banker's Acceptances are usually created to
finance the import and export of goods, the shipment of goods within the United States and storage
of readily marketable commodities. Per State Law, cities may not invest more than 30% of idle cash
in Bankers Acceptances.
Certificate of Deaosit ICD's). - is a receipt for funds deposited in a bank or savings and' loan
association for a specified period of time at a specifed rate of interest. The first $250,000 of a
certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC). CD's with
a face value in excess of $250,000 can be collateralized by Treasury Department Securities, which
must be at least 110% of the face value of the CD's, in excess of the frst $250,000, or by first
mortgage loans which must be at least 150% of the face value of the CD balance in excess of the
first $250,000.
Repurchase Agreements (REPOS). - is a contractual arrangement between a financial institution,
or dealer, and an investor. This agreement normally can run for one or more days. The investor puts
up his funds for a certain number of days at a stated yield.. In return, he takes a given block of
securities as collateral. At maturity, the securities are repurchased and the funds repaid plus
interest.
Commercial Paaer. - Notes are unsecured promissory notes of industrial corporations, utilities and
bank holding companies. State law limits a city to investments in United States corporations having
126
,~'"-~~A City of Campbell, California
' Investment Policy Date: May 6, 201 ^'~-'?'moo
assets in excess of five hundred million dollars with an "A" or higher rating. Per State law, cities may
not invest more than 25% of idle cash in commercial paper.
Medium Term Notes. -are corporate or depository institution debt securities meeting certain
minimum quality standards (as specified in the California Government Code)_with a remaining
maturity of five years or less.
Money Market Mutual Fund. -Mutual funds that invest solely in money market instruments (short-
termdebt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and
federal funds).
Mutual Fund. - An investment company that pools money and can invest in a variety of securities,
including fixed-income securities and money market instruments. Mutual funds are regulated by the
Investment Company Act of 1940 and must abide by strict Securities and Exchange Commission
(SEC) disclosure guidelines.
127
Attars Z 1'
~~ OF CA.ynec^
MEMORANDUM ;,
i
~~
~4CNI. R~•
CITY OF CAMPBELL
To: Finance Sub-Committee Dater. April 16,.2014
From: Sharif Etman, Finance Manager Jb'~
Jesse Takahashi, Finance Director/
Subject: Investment Strategy for FY2014-15
BACKGROUND
The investment policy establishes procedures and guidelines by,which the City's surplus
funds can be managed in a prudent and fiscally sound manner. The policy encompasses
those funds over which the City exercises fiscal control and prioritizes the objectives of
public funds management as safety, liquidity and yield. It also stipulates allowable and
unallowable investment alternatives as well as establishes parameters for selecting
broker/dealers and institutions with which the City may do business.
California Government Code Section 53646 (a) (2) requires that on an annual basis, the
City Investment Policy be submitted to its legislative body and any oversight committee for
consideration at a public meeting. The Finance sub-Committee is the oversight committee
responsible for review of the Investment Policy. In addition to review of any proposed
revisions to the Investment Policy, staff has prepared a report summarizing the past year's
economic conditions and the recommended strategy for managing the City's available
invested funds.
SUMMARY OF CURRENT STRATEGY AND RECOMMENDATIONS
It is recommended that the City maintain sufficient liquidity to cover daily operating cash
flows for a minimum of 3 months that will provide a reasonable cushion for fluctuations in
the portfolio balance and for unforeseen emergencies. Average monthly disbursements
during the past several years have approximated $3.5 million. Therefore, we would retain
a minimum of $10.5 million in the Local Agency Investment Fund (LAIF) and use the
remainder to invest in a portfolio of fixed income securities with individual maturities up to
5 years while not exceeding a weighted average maturity of 3 years.
Interest rates have declined considerably over the .past five years and have remained at
historically low levels during 2013 and 2014 as the Federal Reserve continues to maintain
a policy of keeping rates low. As a result, and given the likelihood that interest rates are
expected to remain low for the next 9-12 months, staff will continue to achieve a prudent
balance between investing the portfolio in investments that will provide a reasonable return
for a duration that will not severely penalize us should interest rates rise significantly.
Investment Strategy FY2014-15
Page 2
INVESTMENT OBJECTIVES AND OVERVIEW
The City's policy is to invest public funds in a prudent manner, provide for maximum
security while meeting daily cash flow needs and comply with applicable statutes. Chief
among the objectives outlined in the policy are safety, liquidity and yield, in that specific
order. Within this framework a number of investment choices are provided to allow
flexibility in meeting these objectives. The City continues to take a conservative approach
with its investments that is reflected in the current investment policy.
As a means to implement the policy, it is important to develop a strategy for achieving the
stated objectives. Likewise, the strategy should be reviewed periodically to determine
whether it needs to be modified in light of changing economic and financial conditions.'
This document will serve as the City's investment strategy for the next year and will be
reviewed annually in conjunction with the review of the City's investment policy or sooner if
conditions warrant.
REVIEW OF PAST YEAR
The US economy has experienced modest growth since the latter part of 2009. Real
gross domestic product (GDP) increased at a modest annual rate of 1.9% in 2013, down
from a 2.2% annual rate in 2012. Corporations generally reported improved results during
the year and the stock market (DJIA) has reflected this, rising nearly 11% from 14,600 in
April 2013 to a current level of 16,173 on April 14, 2014. The DJIA is now 15% above its
high of 14,100 in October, 2007. The housing market continues to show great
improvement, spurred`by low interest rates, but demand has now improved to the point
that low inventory in and around Silicon Valley remains a key factor and is driving up
prices once again due, in large part, to the job growth in this area.
Unemployment has been trending downward. In California, the unemployment rate
dropped from 9.6% in February, 2013 to 8.0% in February, 2014. Locally, the County
unemployment rate has dropped from 7.4% in February, 2013 to 6.1 % in February, 2014.
The City of Campbell unemployment rate also declined from 6.3% in February, 2013 to
5.2% by February, 2014. Job creation around Silicon Valley has grown during the past
year, led by large technology organizations such as Apple, Google, Facebook, to name
just a few.
For the fiscal year ended June 30, 2013, the City's .average portfolio balance was
approximately $34.3 million and the average yield for this same period was 1.1%
compared to $39.3 million and 1%, respectively, for fiscal year ended June 30, 2012. The
average yield was essentially flat for the year.
CURRENT MARKET CONDITIONS AND PORTFOLIO BALANCE
The national and state economies have been in a steady recovery mode from the
,recession since the third quarter of 2009. Inflation in the San Francisco Bay Area is
currently running at an annual rate (Feb 2013 to Feb 2014) of about 2% and is expected to
remain relatively low for the balance of 2014 but is expected to begin increasing in
subsequent years.
Investment Strategy FY2014-15
Page 3
As of February, 2014, the City's investment portfolio was valued at approximately $36.5
million. This was comprised of approximately $20.4 million (56%) in LAIF and $13.0
million (36%) in US Government Agency securities, and $3.1 million (8%) in corporate
bonds and money market accounts. Of the total portfolio, approximately $31.1 million can
be considered "discretionary" investments meaning that the City can invest this amount as
it sees fit within the guidelines of the investment policy. With a holdback of approximately
$10.5 million for cash flow, that leaves up to $20.6 million that can be invested in Agency
and other securities (limitation of 75% of portfolio per investment policy) of which $10
million is currently invested outside of LAIF. We will be looking to increase the portfolio of
Agency securities for the remainder of FY 2014 and into FY 2015 in order to increase
aggregate interest income while maintaining sufficient liquidity for unforeseen occurrences.
DISCUSSION OF ALLOWABLE INVESTMENTS
The City's investment policy contains a listing of allowable investment instruments along
with specified limits and maturities. These include:
- State of California Local Agency Investment Fund (LAIF)
- US Treasury Bills, Notes & Bonds
- US Government Agency Issues (e.g., FNMA & GNMA)
- Corporate Medium Term Notes
- Banker's Acceptances
- Certificates of Deposit with banks or savings & loan associations
- Repurchase Agreements
- Commercial Paper ~
- Mutual Funds (allowed by Calif. Gov't Code Sec: 53601(a)-(m))
It is the City's experience that LAIF provides a safe short-term investment vehicle, and the
City has utilized it for its primary source of investment earnings for many years. This fund
is generally viewed as a conservative and safe investment choice. In fact, the City is not
aware of any municipality that has ever experienced a loss of principal in LAIF. One
characteristic of LAIF is that, due to its size (combined State Investment Pool assets
valued at over $64 billion) the rate of return will typically lag the current market. Thus, in
periods of rising interest rates, LAIF may have a lower return. Conversely, in a declining
market, LAIF will provide investors with an above-market return. The current daily yield as
of April 11, 2014, is approximately .24% compared to .28% one year ago. A benefit of
using LAIF is that it offers a high liquidity whereby funds can generally be requested and
received in. the same day. Another benefit is that a minimum of staff administrative effort
is required, enabling the time to be spent on other departmental priorities.
US Treasuries are considered to be one of the safest investment choices available to
municipalities due to their being backed by the full faith and credit of the United States
Government. However; because of their popularity and under current market .conditions,
the rate of return tends to be lower than other types of securities. Currently, the 6-month
and 2-year term Treasuries are yielding 0.06% and 0.37%, respectively. The 5 year
Treasury has a yield of 1.58%. These rates have increased (except for the 6 month which
Investment Strategy FY2014-15
Page 4
decreased) compared to the same period last year. A year ago, the 5-year Treasury was
much less at .74%.
US Agency issues provide a slightly better rate of return and, are still considered a safe
investment choice (AAA rated). During the past year, this is where most of the new
investments have been made. Agencies can be "callable' meaning they can be redeemed
by the issuer prior to maturity or "non-callable (bullet)" meaning they cannot be redeemed
prior to maturity. Agencies also issue "discount notes" which have are shorter term issues,
generally less than 18 months, in which the note is bought at a deep discount and
redeemed for face value at maturity. The City has been purchasing primarily callable
structured rate agencies during the past year to maximize its yields and minimize interest
rate risk in the future. Currently, the rates on 2-year and 5-year callable Agencies with a 3
month call protection are available at 0.55% and 1.9%, respectively.
With respect to the upcoming year, it is anticipated that investments outside of IAIF will be
made primarily in callable agency securities with some rate protection and a short term of
two to three years. "Step" issues which generally have afive-year maturity but start at
short term market rates of interest (0.75% to 1.00%) then automatically "step up" to rates
as high as 2.5% in the fifth year are also contemplated. Much of the turnover in the
portfolio this past year was in this type of "structured rate" bond which provides
significantly higher rates of return in the short run when compared to LAIF. Most of these
bonds were five year terms with interest rate protection in the later years, but the
expectation when they are purchased is that they will be called early. Many of these bonds
have afive-year yield to maturity now in the 1.75-2.0% range. Staff will also evaluate other
types of investments allowed by policy that may have yields in excess of LAIF and agency
issues, such as short term commercial paper and corporate notes rated AA or higher.
RECOMMENDATION
It is recommended that the Finance sub-Committee approve the proposed strategy
Distribution:
Rich Waterman, Mayor
Mike Kotowski, Council Member
Mark Linder, City Manager