CC Resolution 10743
RESOLUTION NO.:
10743
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 meeting; 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 and related Administrative Policy
are approved as submitted.
PASSED AND ADOPTED the 20th day of March, 2007 by the following roll call
vote:
AYES: Councilmembers
Kennedy, Hernandez, Low, Burr, Furtado
NOES: Councilmembers
None
ABSENT: Councilmembers
None
APPROVED:
~~ )~~
Daniel E. Furtado, Mayor
ATTEST:
~
Anne Bybee, City Clerk
Attachment 2
Summary of Recommended Changes to the Investment
Policy of the City of Campbell
I. Purpose
. Minor wording revisions to the statement of purpose.
III. D (1.) Objectives
. Minor wording changes.
IV. B (1.) Policy Review
· Minor wording changes with reference to California Government Code
Section 53600 et. seq. requirements.
IV. C (1.) Responsibilities
· Replaced the Accounting Manager position title throughout the document
with the current position title of Finance Manager as approved by Council.
x. Diversification and Eligible Securities - page 11
. A graphics table outlining the approved levels of securities and their
respective portfolio limits has replaced the text. Included with the table
information are the credit rating requirements of the various debt
instruments approved for purchase.
Attachment 3
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
I. PURPOSE
It is the policy of the City of Campbell to invest public funds in a prudent manner which
conforms to all statutes qoverninq the investment of public funds will provide security while
providinq security and meeting the daily cash flow needs of the City. ::md conforming to all
statutes governing the investment of public funds.
The purpose of this document is to identify the policies guiding prudent investment of the City
and Redevelopment Agency'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.
II. SCOPE
A. This investment policy shall apply to all financial assets, investment activities, and
debt issues of the City of Campbell and the Campbell Redevelopment Agency
including the following fund types:
1. General Fund
2. Special Revenue Funds
3. Debt Service Funds
4. Capital Projects Funds
5. Internal Service Funds
6. Trust and Agency Funds
B. 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 and the Redevelopment Agency (RDA)
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 53600 et. seq.
B. The City and RDA adhere 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 anyone 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 and Redevelopment Agency 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
Subject: Investment Policy Date: March 20, 2007
1.
Safety:
Safety of principal is the foremost objective of the City 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 tRe---following these quidelines (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:
1. The City Council assumes direction over City and RDA 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
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City of Campbell, California
Subject: Investment Policy Date: March 20,2007
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, Le. California Arbitrage Management
Program (C.A.M.P.) or such other designated administrators approved by the
Finance Sub-Committee.
B. POLICY REVIEW:
1.
This Investment Policy shall be reviewed and approved annually~as required bv
California Government Code Section 53600 et. seq.
C. RESPONSIBILITIES:
1. 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 and the Campbell Redevelopment Agency.
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 Accounting Finance Manager. On an annual basis, this Sub-
Committee shall review necessary revisions to the established Investment
Policy of the City of Campbell and the Campbell Redevelopment Agency 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.
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.
3.
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 Officer. 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 and RDA funds, and
investment of those funds in accordance with principles of sound treasury
management and in accordance with applicable laws and policies. Refer to
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
"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
City Manager. The transaction shall be highlighted in the Monthly
Investment Report to Council.
5. Responsibilities of the Accounting Finance Manager: The Accounting
ManagerFinance Manaqer is appointed by the Finance Director and serves as
the Investment Manager for the City and RDA 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 and RDA. This includes the custody and investment of City and RDA
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 Accounting M~n3gerFinance
Manaqer shall present to the Finance Sub-Committee, recommended changes
to the City's Investment Policy. On a monthly basis, the Accounting
M3nagerFinance Manaqer 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 Accounting M::m3gerFinance Manaqer 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 highlighted on the Daily
Investment Transaction Form. The transaction must also be 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
Accounting M~nagerFinance Manaqer. The Accountant carries out the specific
instructions provided by the Accounting M3n3gerFinance Manaqer 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 $1,500,000 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
Accounting ManagerFinance Manaqer, and are reported both on the Daily
Investment Transaction Form and in the Monthly Investment Report to
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
Council.
D. Prudence:
1. 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.
2. The City's overall investment program shall be designed and managed with a
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 the RDA, and they shall
subordinate their personal investment transactions to those of the City and the RDA.
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
1. 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
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
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
followinqas follows:
1. United States Treasurv bills, notes, bonds, or strips with a final maturity not exceeding five
years from the date of purchase.
2. Federal Aqencv 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 Instrumentalitv (government sponsored enterprise) debentures, discount notes,
callable and step-up securities, with a final maturity not exceeding five years from the date
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 Aqreements 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 a short-
term credit rating of at least A-1 or the equivalent and a long-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.
5. 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. or sub-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
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
($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 anyone issuer, and the
aggregate investment in commercial paper shall not exceed 25% of the City's total
portfolio.
6. Elioible 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
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 anyone
issuer, and the aggregate investment in banker's acceptances shall not exceed 30% of
the City's total portfolio.
7. 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-neootiable 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 Section 53652. No more than $1 million may be invested in non-negotiable time
certificates of deposit of anyone issuer and the aggregate amount invested in non-
negotiable time certificates of deposit shall not exceed 25% of the City's total portfolio.
9. State of California's Local Aoencv Investment Fund (LAIF), pursuant to California
Government Code Section 16429.1.
10. 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 anyone issuer, and
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
the aggregate investment in mutual funds shall not exceed 15% of the City's total
portfolio.
11. Monev 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 AAAN1 + by Fitch. No
more than 10% of the City's total portfolio may be invested in money market funds of any
one issuer, and the aggregate investment in money market funds shall not exceed 15% of
the total portfolio.
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 Accounting ManagerFinance Manaqer'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)
);> I nterest Rate
);> Weighted Average Yield
);> Face Value or Purchase Cost
);> Market Value including source
);> Interest Earned During Month
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
~ 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
>- Schedule of Investments Beyond 5 (Five) Years
>- 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. Upon Council's approval of the Monthly Investment Report, a copy shall be distributed
to the "Elected" City Treasurer.
C. In accordance with California Government Code Section 53646, copies of the June
and December investment reports shall be provided to the California Debt and
Investment Advisory Commission (CDIAC) within 60 days of the close of those
months. Additionally, changes to this Investment Policy shall be provided to CDIAC
within 60 days of City Council approval.
Each time an investment transaction is made, an "Investment Transaction Record" form shall
I be prepared by the Accountant and approved by the Accounting M3nag-erFinance ManaQer.
Copies of the form are to be distributed to the City Manager, City Treasurer and Finance
Director.
VIII. SELECTION OF BROKERIDEALERS
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 COLLATERALlZATION
A. Safekeeping:
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
1. The City shall contract with a bank or banks for the safekeeping of securities
which are owned by the City and/or RDA 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
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:
1. Deposit-type securities (Le. 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 Invostment
Maximum Portfolio
Maturitv--Maximum
Federal Agency & Instrumentality Securities
Prime Commercial Paper
5 years----.--.. 75%
270 Days----2-&%
. -.-- 10% per issuer
180 Days 30%
1 0% per issuer
5 Years 10%
5 Years 25%
$1 million per iswer
n/a 15%*
1 0% per issuer
n/a 15%*
Eligible Bankers Acceptances
Medium Term Notes
Non Negotiable Certificates of Deposit
Mutual Funds
Money Market Mutual Funds
* Per state statute, the maximum combination of Mutual Funds and Money Market Mutual Funds is
20% of the portfolio.
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Subject: Investment Policy Date: March 20,2007
Authorized Securities and Transactions
CA. Gov't. Authorized Investment Maximum Authorized Investment Credit Rating Limit
Code Section Maturity Limits - % of Portfolio
5360Hb United States Treasuries 5 years None None
5360 1( e Federal Aqency Securities 5 years 75% None
5360He Federal Instrumentality 5 years 75% None
53691 (i) Repurchase Aqreements 1 year 10% A-1/A
53601 (g) Prime Commercial Paper 270 days 25% A1A-1 or higher
10% Per Issuer
53601 (f) Eligible Bankers 180 days 10% per issuer/30% A-1/P-1/F-1
Acceptances Aqqregate
53601 (i) Medium Term Notes 5 years 10% AA1Aa2/AA
53601 (n) Non-negotiable Certificates 5 years 25% -
of Deposit $1 million per issuer
16429.1 State of California LAIF 18 Months- None -
Avg
5360Hk *Mutual Funds None 15% AAAm/Aaa/AAAV1+
53601 (k) *Money Market Mutual None 15% AAAm/Aa a/AAAV 1 +
Funds
*Combined total not to 20%
exceed 20% per State
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City of Campbell, California
Subject: Investment Policy Date: March 20, 2007
EXHIBIT A
GLOSSARY OF ELIGIBLE INVESTMENTS
Local Aaencv 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 Aaencv 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 Banker's Acceptances.
Certificate of Deposit (CD's). - is a receipt for funds deposited in a bank or savings and loan
association for a specified period of time at a specified rate of interest. The first $100,000 of a
certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC). CD's with
a face value in excess of $100,000 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 first $100,000, or by first
mortgage loans which must be at least 150% of the face value of the CD balance in excess of the
first $100,000.
Repurchase Aareements (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.
06-30
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City of Campbell, California
Subject: Investment Policy Date: March 20,2007
Commercial Paper. - 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
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.
Monev Market Mutual Fund. - Mutual funds that invest solely in money market instruments (short-
term debt 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.
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MEMORANDUM
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CITY OF CAMPBELL
To:
Finance Sub-Committee
Date: March 7, 2007
From:
Michael Wright, Finance Manager
Subject:
Investment Strategy for 2007
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 2 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 million. Therefore, we would retain a
minimum of $6 million in the Local Agency Investment Fund (LAIF) and use the remainder
to invest in a "Iaddered" portfolio of fixed income securities with maturities up to 5 years.
The interest rate environment improved somewhat during the first part of the year.
However, it has flattened out recently and current data does not clearly indicate a
preference for which direction rates will go. Absent any compelling data to indicate
significant change one way or another, staff will continue investing the portfolio primarily in
short-term investments (1.5 years and shorter) but also consider some longer term
maturities when there is an ability to lock in higher rates when the opportunity presents
itself. This would generally occur when an existing investment matures and money needs
to be reinvested. Additionally, this strategy continues to use a buy-and-hold approach,
which will maintain a more stable yield for the overall portfolio. However, this should not
preclude the City's ability to sell a security prior to maturity should it be advantageous to
do so.
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.
Investment Strategy 2007
Page 2
REVIEW OF PAST YEAR
The US economy continued to expand during the past year at a modest pace despite the
overall pullback in housing. Unemployment decreased to favorable levels and payroll
numbers point to sustained growth. Also a factor, oil prices declined significantly early in
the year, although they are once again creeping up. Inflation, while currently modest, is still
considered to be a possible problem that could quickly get out of control and is deserving
of continued scrutiny. The Federal Reserve Bank has been closely monitoring the
situation and has ceased its strategy of rate increases during the past year, after a series
of consecutive increases the previous two years.
Gross domestic product (GDP) averaged approximately 2.7% the past year, down from
3.5% in the prior year. Corporations reported both good and bad results during the year,
the stock market reached an all time high in February, 2007 only to give back a significant
amount of the gain in just one week. This volatility is expected to continue in the near
term. Manufacturing statistics indicate continued growth and consumer confidence
remained generally positive. With respect to the bond market, expectations toward inflation
have been largely muted and the yield curve has been inverted for the better part of the
past year with higher rates on the short end.
For the fiscal year ended June 30, 2006, the average portfolio balance was approximately
$49 million and the average yield for this same period was 3.7% compared to $51 million
and 2.81 %, respectively, for fiscal year ended June 30, 2005. The decrease in the
average balance was due primarily to spending down for City capital projects. The
average yield improved due to the higher interest rate environment experienced during the
year, especially for short-term investments. At June, 2006, LAIF was yielding 4.7%
compared to just 3.0% a year ago.
CURRENT MARKET CONDITIONS AND PORTFOLIO BALANCE
The national and State economies continue to grow modestly, and many experts are in
disagreement over whether inflation or employment will be the bigger risk for the near
future. It is anticipated that GDP will be around 2.5 to 3% for the next year.
Unemployment nationally and regionally has improved considerably compared to the prior
year and, locally, the numbers were very encouraging. It is expected employment growth
in the Bay Area, in particular Santa Clara County, will be positive, but it is difficult to predict
to what extent this will occur. Inflation is currently running around 3% and is at risk for
increasing further as the year progresses.
As of February, 2007, the City's investment portfolio was valued at approximately $53
million. This was comprised of approximately $25 million (47%) in LAIF and $25 million
(48%) in US Government Agency securities, and $3 million (5%) in money market
accounts. Of the total portfolio, approximately $50 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 $6 million
for cash flow, that leaves up to $44 million that can be invested in Agency and other
securities (limitation of 75% of portfolio per investment policy) of which $25 million is
currently invested. We will be looking to increase the portfolio of Agency securities toward
Investment Strategy 2007
Page 3
this maximum in 2007 in order to maximize 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 an attractive 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 $60 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 is
approximately 5.2% or 94 basis points higher than the same time last year. 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 5.09% and 4.54%, respectively. The 5 year
Treasury has a yield of 4.45%.
US Agency issues provide a slightly better rate of return and are still considered a safe
investment choice. With the current market conditions, there is some opportunity to pick
up a few basis points by utilizing these issues. 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 a combination of
discount notes and callable agencies during the past year to maximize its yields. Staff
Investment Strategy 2007
Page 4
contemplates continuing this strategy into next year. Currently, the rates on 2 year and 5
year callable Agencies with a one year call protection are averaging 5.5% and 5.4%,
respectively.
With respect to the upcoming year, it is anticipated that investments will be made primarily
in callable agency securities, and possibly some Treasuries, in addition to LAIF. It is not
expected that the other investment types authorized by the City's investment policy will be
utilized during the upcoming year. If the conditions warrant additional types of
investments, the Sub-Committee will be notified of this and consulted for direction.
Distribution:
Don Burr, Councilmember
Jane Kennedy, Councilmember
Dan Rich, City Manager
Jesse Takahashi, Finance Director
j:/inveslmenls/slralegy 2007