HomeMy WebLinkAbout20807 - RESOLUTIONS - 12/17/2003 RESOLUTION NO. 20807 '
OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS,
CALIFORNIA, ADOPTING AN INVESTMENT POLICY
GOVERNING THE INVESTMENT OF CITY FUNDS.
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WHEREAS, Section 53646(a) of the State of California Government Code requires that an
investment policy is annually rendered to and considered by the City Council in a public
meeting; and
WHEREAS, the City Treasurer has prepared an investment policy which meets the
standards delineated in the California Debt Advisory Commission's report on Local Agency
Investment Guidelines; and
WHEREAS,the revised investment policy was reviewed by the City Manager, City Attorney,
and the City's outside Auditors, Conrad & Associates; and
WHEREAS, the comments and suggestions of these parties were incorporated into the
revised Investment Policy document before Council; and
WHEREAS, the revised Investment Policy describes the City's commitment to safeguarding
its funds;
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Palm Springs, that
the Investment Policy recommended is hereby adopted.
ADOPTED THIS 17th day of December 2003
AYES: Members Foat, McCulloch, Mills, Pougnet, and Mayor Oden
NOES: None
ABSENT: None
AT ST: CITY OF PALM SPRINGS, CALIFORNIA
i y erk City M"'ah aper'/
REVIEWED &APPROVED AS TO FORM
CITY OF PALM SPRINGS INVESTMENT POLICY
1.0 POLICY
WHEREAS; The Legislature of the State of California has declared that the deposit and
investment of public funds by local officials and local agencies is an issue of statewide
concern (California Government Code Sections 53600.6 (CGC §53600.6) and 53630.1);
and
WHEREAS; the legislative body of a local agency may invest surplus monies not
required for the immediate necessities of the local agency in accordance with the
provisions of California Government Code Sections 53601 at seq; and
WHEREAS; the treasurer of the City of Palm Springs shall annually prepare and submit
a statement of investment policy and such policy, and any changes thereto, shall be
considered by the legislative body at a public meeting; (CGC §53646 (a), now
THEREFORE; it shall be the policy of the City of Palm Springs to invest funds in a
manner which will provide the highest investment return with the maximum security while
meeting the daily cash flow demands of the entity and conforming to all statutes
governing the investment of City of Palm Springs funds.
' 2.0 SCOPE
This investment policy applies to all financial assets of the City of Palm Springs and its
component units. These funds are accounted for in the Comprehensive Annual
Financial Report and include, but are not limited to:
General Fund
Community Promotion Fund
Special Revenue Funds
Capital Projects Fund
Debt Service Fund
Enterprise Funds
Internal Service Funds
Trust and Agency Funds
Community Redevelopment Funds
Proceeds from Bond Issues (see 8.2)
Contributions made by or on behalf of employees to Deferred Compensation accounts
are not covered by this policy.
3.0 PRUDENCE
Investments shall be made with judgment and care, under circumstances then
prevailing, which persons of prudence, discretion and intelligence exercise in the
management of their own affairs; not for speculation, but for investment, considering the
probable safety of their capital as well as the probable income to be derived. The
standard of prudence to be used by investment officials shall be the "prudent investor"
a�ka-
standard (CGC §53600.3) and shall be applied in the context of managing an overall '
portfolio. Investment officers acting in accordance with written procedures and the
investment policy and exercising due diligence: shall be relieved of personal
responsibility for an individual security's credit risk or market price changes, provided
deviations from expectations are reported in a timely fashion and appropriate action is
taken to control adverse developments.
4.0 OBJECTIVES
As specified in CGC §53600.5, when investing, reinvesting, purchasing, acquiring,
exchanging, selling and managing public funds, the primary objectives, in priority order,
of the investment activities shall be:
1. Safety: Safety of principal is the foremost objective of the investment program.
Investments of the City of Palm Springs shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio. To attain this objective,
diversification is required in order that potential losses on individual securities do not
exceed the income generated from the remainder of the portfolio.
2. Liquidity: The investment portfolio will remain sufficiently liquid to enable the City of
Palm Springs to meet all operating requirements which might be reasonably anticipated.
3. Return on Investments: The investment portfolio shall be designed with the objective
of attaining a market rate of return throughout budgetary and economic cycles, taking
into account the investment risk constraints and the cash flow characteristics of the
portfolio.
5.0 DELEGATION OF AUTHORITY
Authority to manage the investment program is derived from California Government
Code Sections 53600 et. seq. Management responsibility for the investment program is
hereby delegated to the Treasurer, who shall establish written procedures for the
operation of the investment program consistent with this investment policy. Procedures
should include references to: wire transfer agreements, and collateral/depository
agreements, as appropriate. Such procedures shall include explicit delegation of
authority to persons responsible for investment transactions. No person may engage in
an investment transaction except as provided under the terms of this policy and the
procedures established by the Treasurer. The Treasurer shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the activities
of subordinate officials. Under the provisions of California Government: Code 53600.3,
the Treasurer is a trustee and a fiduciary subject to the prudent investor standard.
6.0 ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal
business activity that could conflict with the proper execution of the investment program, '
or which could impair their ability to make impartial investment decisions.
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' 7.0 AUTHORIZED FINANCIAL INSTITUTIONS AND DEALERS
The Treasurer will maintain a list of financial institutions, selected on the basis of credit
worthiness, financial strength, experience and minimal capitalization, authorized to
provide investment services to the City of Palm Springs. No public deposit shall be
made except in a qualified public depository as established by state laws.
For broker/dealers of government securities and other investments, the City of Palm
Springs shall select only broker/dealers who are licensed and in good standing with the
California Department of Securities, the Securities and Exchange Commission, the
National Association of Securities Dealers or other applicable self-regulatory
organizations.
Before engaging in investment transactions with a broker/dealer, the Treasurer shall
have received from said firm a signed Certification Form. This form shall attest that the
individual responsible for the City of Palm Springs' account with that firm has reviewed
the City of Palm Springs' Investment Policy and that the firm understands the policy and
intends to present investment recommendations and transactions to the City of Palm
Springs that are appropriate under the terms and conditions of the Investment Policy.
8.0 AUTHORIZED AND SUITABLE INVESTMENTS
' The City of Palm Springs is empowered by California Government Code 53601 et seq
to invest in the following:
A. Bonds issued by the City of Palm Springs
B. United States Treasury Bills, Notes & Bonds
C. Registered state warrants or treasury notes or bonds issued by the State of
California.
D. Bonds, notes, warrants or other evidence of debt issued by a local agency within the
State of California, including pooled investment accounts sponsored by the State of
California, County Treasurers, other local agencies or Joint Powers Agencies,
E. Obligations issued by Agencies or sponsored enterprises of the U.S. Government
Not more than 50% of surplus funds may be invested in these obligations.
F. Bankers Acceptances with a term not to exceed 180 days. Not more than 40% of
surplus funds can be invested in Bankers Acceptances and no more than 20% of surplus
funds can be invested in the bankers' acceptances of any single commercial bank.
G. Prime Commercial Paper of U.S. Corporations with assets greater than $500 million
with a term not to exceed 270 days and the highest ranking issued by Moody's Investors
Service or Standard & Poor's Corp. Commercial paper cannot exceed 15% of total
' surplus funds.
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H. Negotiable Certificates of Deposit issued by federally or state chartered banks or ,
associations. Not more than 30% of surplus funds can be invested in negotiable
certificates of deposit.
I. Medium term notes (not to exceed 5 Years) of US corporations rated "A" or better by
Moody's or S&P. Not more than 20% of surplus funds can be invested in medium term
notes.
J. Shares of beneficial interest issued by diversified management companies (Money
Market Mutual Funds) investing in the securities and obligations authorized by Section
53601(K). Such Funds must carry the highest rating of at least two of the three largest
national rating agencies. Not more than 10% of surplus funds can be invested in Money
Market Mutual Funds.
K. Funds held under the terms of a Trust Indenture or other contractor agreement may
be invested according to the provisions of those indentures or agreements.
L. Collateralized bank deposits with a perfected security interest in accordance with the
Uniform Commercial Code (UCC) or applicable federal security regulations.
M. Any mortgage pass-through security, collateralized mortgage obligation, mortgaged
backed or other pay-through bond, equipment lease-backed certificate, consumer
receivable pass-through certificate or consumer receivable backed bond of a maximum '
maturity of five years. Securities in this category must be rated AA or better by a
nationally recognized rating service. Not more than 10% of surplus funds may be
invested in this category of securities.
N. The various limits on what percentage of surplus funds (the Percentage of Portfolio,
or POP limits) may be invested by type or maturity shall be calculated when the
investment or reinvestment is made.
Also, see CGC §53601 for a detailed summary of the limitations and special conditions
that apply to each of the above listed investment securities. . CGC §.53601 is attached
(Exhibit B) and included by reference in this investment policy.
8.1 PROHIBITED INVESTMENTS
Under the provisions of CGC §53601.6 and §53631.5, the City of Palm Springs shall not
invest any funds covered by this Investment Policy in inverse floaters, dual index,
stepped inverse derivatives, repurchase agreements, reverse repurchase agreements,
range notes, interest-only strips derived from mortgage pools or any investment that may
result in a zero interest accrual if held to maturity.
8.2 BOND PROCEEDS
In addition to the investment vehicles enumerated in Section 8, the proceeds of bond
issues (including reserve funds) may be invested in long term Guaranteed Investment ,
Contracts (GIC) or Investment Agreements (IA) that comply with the Permitted
Investment restrictions of the particular bond issue.
Before soliciting bids from providers of GIC's or IA's, the Treasurer shall obtain approval
from the City Council to proceed.
9.0 INVESTMENT POOLS/MONEY MARKET MUTUAL FUNDS
A thorough investigation of the pool/fund is required prior to investing, and on a continual
basis. There shall be a questionnaire developed which will answer the following general
questions:
- A description of eligible investment securities, and a written statement of
investment policy and objectives.
- A description of interest calculations and how it is distributed, and how gains and
losses are treated.
- A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced and the program audited.
- A description of who may invest in the program, how often, what size deposit and
withdrawal are allowed.
- A schedule for receiving statements and portfolio listings.
- Are reserves, retained earnings, etc. utilized by the pool/fund?
- A fee schedule, and when and how is it assessed.
- Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
' 10. COLLATERALIZATION
All certificates of deposits must be collateralized by U.S. Treasury Obligations or U.S.
Government Agency Securities. In order to anticipate market changes and provide a
level of security for all funds, the collateralization level will be 102% of market value of
principal and accrued interest. Collateral must be held by a third party trustee and
valued on a monthly basis.
11. SAFEKEEPING AND CUSTODY
All security transactions entered into by the City of Palm Springs shall be conducted on a
delivery-versus-payment (DVP) basis. Securities will be held by a third party custodian
designated by the Treasurer and evidenced by safekeeping receipts
12. DIVERSIFICATION AND MAXIMUM MATURITIES
The City of Palm Springs will diversify its investments by security type and institution. It
is the policy of the City of Palm Springs to diversify its investment portfolio Assets shall
be diversified to eliminate the risk of loss resulting from over concentration of assets in a
specific maturity, a specific issuer or a specific class of securities. Diversification
strategies shall be determined and revised periodically. In establishing specific
diversification strategies, the following general policies and constraints shall apply.
(a) Portfolio maturities shall be matched versus liabilities to avoid undue
' concentration in a specific maturity sector.
(b) Maturities selected shall provide for stability of income and liquidity
(c) Disbursement and payroll. dates shall be covered through maturities '
investments, marketable U.S. Treasury bills or other cash equivalent instruments
such as money market mutual funds.
Specifically, the following amounts or percentages of the total portfolio for the maturities
noted shall be maintained:
Maturity Ranqe Minimum Maximum
1 days to 365 days $8,000,000 NA
1 year to 3 years 0% 50%
3 years to 5 years 0% 30%
Over 5 years Council Action Required
The weighted average maturity of the pooled portfolio shall not exceed three years
(1,095 days).
13. STRATEGY OF INVESTMENTS
It shall be the strategy of the City of Palm Springs to hold investments to maturity. If,
because of changing market conditions or the Ciity's cash flow needs, it becomes
necessary to sell an investment prior to maturity (either at a profit or loss), the Treasurer
shall first obtain written approval for the transaction from the City Manager. The City ,
Manager shall inform the Mayor and City Council of the transaction at the earliest
opportunity, but no later than the next regularly scheduled Council meeting or study
session.
14. OVERSIGHT COMMITTEE
A committee comprised of one Council member appointed by Council, the City Manager
and the Treasurer, shall provide oversight of the C:ity's investments The Committee
shall meet at least quarterly to review the City's investment activity.
15. REPORTING
In accordance with CGC §53646(b)(1), Treasurer shall submit to each member of the
City Council monthly investment reports within 30 days of the end of the quarter in which
the month falls. The report shall include a complete description of the portfolio, the type
of investments, the issuers, maturity dates, par values and the current market values of
each component of the portfolio, including funds managed for City of Palm Springs by
Fiscal Agents, Deferred Compensation Plan Provider (except Deferred Comp funds held
in trust) or third party contracted managers. The report will also include the source of
the portfolio valuation, and the changes in the value of each investment over the last
quarter. As specified in CGC §53646(e), if all funds are placed in LAIF, FDIC-insured
accounts and/or in a county investment pool, the foregoing report elements may be
replaced by copies of the latest statements from such institutions, including changes in
value over the last quarter. The report must also include a certification that (1) all ,
investment actions executed since the last report have been made in full compliance
with the Investment Policy and, (2) the City of Palm Springs will meet its expenditure
obligations for the next six months as required by CGC §53646(b)(2) and (3)
' respectively. The Treasurer shall maintain a complete and timely record of all
investment transactions.
16. INVESTMENT POLICY ADOPTION
The Investment Policy shall be adopted by resolution of the City of Palm Springs City
Council. The Policy shall be reviewed on an annual basis, and modifications approved
by the City Council.
17. GLOSSARY
Definition of investment-related terms are listed on Exhibit A.
Submitted by:
Name:
Thomas M. Kanarr
Title: Director of Finance & Treasurer
' Date: December 17, 2003
Adopted and Approved by:
City Council Resolution #
Date:
c A 0
EXHIBIT B '
GOVERNMENT CODE SECTION 53601
53601. The legislative body of a local agency having money in a sinking fund of,
or surplus money in, its treasury not required for the immediate needs of the local
agency may invest any portion of the money that it deems wise or expedient in
those investments set forth below. A local agency (purchasing or obtaining any
securities prescribed in this section, in a negotiable, bearer, registered, or
nonregistered format, shall require delivery of the securities to the local agency,
including those purchased for the agency by financial advisers, consultants, or
managers using the agency's funds, by book entry, physical delivery, or by third-
party custodial agreement. The transfer of securities to the counterparty bank's
customer book entry account may be used for book entry delivery. For purposes
of this section "counterparty" means the other party to the transaction. A
counterparty bank's trust department or separate safekeeping department may
be used for the physical delivery of the security if the security is held in the name
of the local agency. Where this section specifies a percentage limitation for a
particular category of investment, that percentage is applicable only at the date of
purchase. Where this section does not specify a limitation on the term or
remaining maturity at the time of the investment, no investment shall be made in
any security, other than a security underlying a repurchase or reverse ,
repurchase agreement or securities lending agreement authorized by this
section, that at the time of the investment has a team remaining to maturity in
excess of five years, unless the legislative body has granted express authority to
make that investment either specifically or as a'part of an investment program
approved by the legislative body no less than three months prior to the
investment:
(a) Bonds issued by the local agency, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or operated by
the local agency or by a department, board, agency, or authority of the local
agency.
(b) United States Treasury notes, bonds, bills, or certificates of indebtedness,
or those for which the faith and credit of the United States are pledged for the
payment of principal and interest.
(c) Registered state warrants or treasury notes or bonds of this state, including
bonds payable solely out of the revenues from a revenue-producing property
owned, controlled, or operated by the state or by a department, board, agency, or
authority of the state.
(d) Bonds, notes, warrants, or other evidences of indebtedness of any local
agency within this state, including bonds payable solely out of the revenues from
a revenue-producing property owned, controlled, or operated by the local '
agency, or by a department, board, agency, or authority of the local agency.
' EXHIBIT B — GOVERNMENT CODE SECTION 53601
(e) Obligations issued by banks for cooperatives, federal land banks, federal
intermediate credit banks, federal home loan banks, the Federal Home Loan
Bank Board, the Tennessee Valley Authority, or in obligations, participations, or
other instruments of, or issued by, or fully guaranteed as to principal and interest
by, the Federal National Mortgage Association; or in guaranteed portions of
Small Business Administration notes; or in obligations, participations, or other
instruments of, or issued by, a federal agency or a United States government-
sponsored enterprise.
(f) Bills of exchange or time drafts drawn on and accepted by a commercial
bank, otherwise known as bankers acceptances. Purchases of bankers'
acceptances may not exceed 180 days maturity or 40 percent of the agency's
surplus money that may be invested pursuant to this section. However, no more
than 30 percent of the agency's surplus funds may be invested in the bankers'
acceptances of any one commercial bank pursuant to this section.
This subdivision does not preclude a municipal utility district from investing any
surplus money in its treasury in any manner authorized by the Municipal Utility
District Act (Division 6 (commencing with Section 11501) of the Public Utilities
Code).
' (g) Commercial paper of"prime" quality of the highest ranking or of the highest
letter and numerical rating as provided for by Moody's Investors Service, Inc., or
Standard and Poor's Corporation. Eligible paper is further limited to issuing
corporations that are organized and operating within the United States and
having total assets in excess of five hundred million dollars ($500,000,000) and
having an "A" or higher rating for the issuer's debt, other than commercial paper,
if any, as provided for by Moody's Investors Service, Inc., or Standard and Poor's
Corporation. Purchases of eligible commercial paper may not exceed 270 days
maturity nor represent more than 10 percent of the outstanding paper of an
issuing corporation. Purchases of commercial paper may not exceed 15 percent
of the agency's surplus money that may be invested pursuant to this section. An
additional 15 percent, or a total of 30 percent of the agency's surplus money,
may be invested pursuant to this subdivision. The additional 15 percent may be
so invested only if the dollar-weighted average maturity of the entire amount
does not exceed 31 days. "Dollar-weighted average maturity" means the sum of
the amount of each outstanding commercial paper investment multiplied by the
number of days to maturity, divided by the total amount of outstanding
commercial paper.
(h) Negotiable certificates of deposits issued by a nationally or state-chartered
bank or a state or federal association (as defined by Section 5102 of the
Financial Code) or by a state-licensed branch of a foreign bank. Purchases of
' negotiable certificates of deposit may not exceed 30 percent of the agency's
surplus money which may be invested pursuant to this section. For purposes of
this section, negotiable certificates of deposits do not come within Article 2
(commencing with Section 53630), except that the amount so invested shall be
subject to the limitations of Section 53638.
EXHIBIT B — GOVERNMENT CODE SECTION 53601
(i) (1) Investments in repurchase agreements or reverse repurchase
agreements or securities lending agreements of any securities authorized by this
section, as long as the agreements are subject to this subdivision, including, the
delivery requirements specified in this section.
(2) Investments in repurchase agreements may be made, on any investment
authorized in this section, when the term of the agreement does not exceed one
year. The market value of securities that underlay a repurchase agreement shall
be valued at 102 percent or greater of the funds borrowed against those
securities and the value shall be adjusted no less; than quarterly. Since the
market value of the underlying securities is subject to daily market fluctuations,
the investments in repurchase agreements shall be in compliance if the value of
the underlying securities is brought back up to 102 percent no later than the next
business day.
(3) Reverse repurchase agreements or securities lending agreements may be
utilized only when either of the following conditions are met:
(A) The security was owned or specifically committed to purchase, by the local
agency, prior to December 31, 1994, and was sold using a reverse repurchase
agreement or securities lending agreement on December 31, 1994. '
(B) The security to be sold on reverse repurchase agreement or securities
lending agreement has been owned and fully paid for by the local agency for a
minimum of 30 days prior to sale; the total of all reverse repurchase agreements
and securities lending agreements on investments ovvned by the local agency not
purchased or committed to purchase, prior to December 31, 1994, does not
exceed 20 percent of the base value of the portfolio; and the agreement does not
exceed a term of 92 days, unless the agreement includes a written codicil
guaranteeing a minimum earning or spread for the entire period between the sale
of a security using a reverse repurchase agreement or securities lending
agreement and the final maturity date of the same security.
(4) After December 31, 1994, a reverse repurchase agreement or securities
lending agreement may not be entered into with securities not sold on a reverse
repurchase agreement or securities lending agreement and purchased, or
committed to purchase, prior to that date, as a means of financing or paying for
the security sold on a reverse repurchase agreement or securities lending
agreement, but may only be entered into with securities owned and previously
paid for a minimum of 30 days prior to the settlement of the reverse repurchase
agreement or securities lending agreement, in order to supplement the yield on
securities owned and previously paid for or to provide funds for the immediate
payment of a local agency obligation. Funds obtained or funds within the pool of
an equivalent amount to that obtained from selling a security to a counterparty by
way of a reverse repurchase agreement or securities lending agreement, on
securities originally purchased subsequent to December 31, 1994, shall not be
used to purchase another security with a maturity longer than 92 days From the ,
initial settlement date of the reverse repurchase agreement or securities lending
agreement, unless the reverse repurchase agreement or securities lending
' EXHIBIT B— GOVERNMENT CODE SECTION 53601
agreement includes a written codicil guaranteeing a minimum earning or spread
for the entire period between the sale of a security using a reverse repurchase
agreement or securities lending agreement and the final maturity date of the
same security. Reverse repurchase agreements or securities lending
agreements specified in subparagraph (B) of paragraph (3) may not be entered
into unless the percentage restrictions specified in that subparagraph are met,
including the total of any reverse repurchase agreements or securities lending
agreements specified in subparagraph (A) of paragraph (3).
(5) Investments in reverse repurchase agreements, securities lending
agreements, or similar investments in which the local agency sells securities prior
to purchase with a simultaneous agreement to repurchase the security, may only
be made upon prior approval of the governing body of the local agency and shall
only be made with primary dealers of the Federal Reserve Bank of New York.
(6) (A) "Repurchase agreement" means a purchase of securities by the local
agency pursuant to an agreement by which the counterparty seller will
repurchase the securities on or before a specified date and for a specified
amount and the counterparty will deliver the underlying securities to the local
agency by book entry, physical delivery, or by third-party custodial agreement.
The transfer of underlying securities to the counterparty bank's customer book-
entry account may be used for book-entry delivery.
' (B) "Securities," for purpose of repurchase under this subdivision, means
securities of the same issuer, description, issue date, and maturity.
(C) "Reverse repurchase agreement" means a sale of securities by the local
agency pursuant to an agreement by which the local agency will repurchase the
securities on or before a specified date and includes other comparable
agreements.
(D) "Securities lending agreement" means an agreement under which a local
agency agrees to transfer securities to a borrower who, in turn, agrees to provide
collateral to the local agency. During the term of the agreement, both the
securities and the collateral are held by a third party. At the conclusion of the
agreement, the securities are transferred back to the local agency in return for
the collateral.
(E) For purposes of this section, the base value of the local agency's pool
portfolio shall be that dollar amount obtained by totaling all cash balances placed
in the pool by all pool participants, excluding any amounts obtained through
selling securities by way of reverse repurchase agreements, securities lending
agreements, or other similar borrowing methods.
(F) For purposes of this section, the spread is the difference between the cost
of funds obtained using the reverse repurchase agreement and the earnings
obtained on the reinvestment of the funds.
(j) Medium-term notes, defined as all corporate and depository institution debt
securities with a maximum remaining maturity of five years or less, 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. Notes eligible for investment under this subdivision shall be rated
"A" or better by a nationally recognized rating service. Purchases of medium-
term notes shall not include other instruments authorized by this section and may
D I ,�-
EXHIBIT B —GOVERNMENT CODE SECTION 53601 ,
not exceed 30 percent of the agency's surplus money which may be invested
pursuant to this section.
(k) (1) Shares of beneficial interest issued by diversified management
companies that invest in the securities and obligations as authorized by
subdivisions (a) to 0), inclusive, or subdivisions (m) or (n) and that comply with
the investment restrictions of this article and Article :2 (commencing with Section
53630). However, notwithstanding these restrictions, a counterparty to a reverse
repurchase agreement or securities lending agree.rent is not required to be a
primary dealer of the Federal Reserve Bank of New York if the company's board
of directors finds that the counterparty presents a minimal risk of default, and the
value of the securities underlying a repurchase agreement or securities lending
agreement may be 100 percent of the sales price if the securities are marked to
market daily.
(2) Shares of beneficial interest issued by diversified management companies
that are money market funds registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1
and following).
(3) If investment is in shares issued pursuant to (paragraph (1), the company
shall have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating
provided by not less than two nationally recognized statistical rating
organizations.
(B) Retained an investment adviser registered or exempt from registration with
the Securities and Exchange Commission with not less than five years'
experience investing in the securities and obligations authorized by subdivisions
(a) to 0), inclusive, or subdivisions (m) or (n) and with assets under management
in excess of five hundred million dollars ($500,000,000).
(4) If investment is in shares issued pursuant to ,paragraph (2), the company
shall have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating
provided by not less than two nationally recognized statistical rating
organizations.
(B) Retained an investment adviser registered or exempt from registration with
the Securities and Exchange Commission with not less than five years'
experience managing money market mutual funds with assets under
management in excess of five hundred million dollars ($500,000,000).
(5) The purchase price of shares of beneficial interest purchased pursuant to
this subdivision shall not include any commission that the companies may charge
and shall not exceed 20 percent of the agency's surplus money that may be
invested pursuant to this section. However, no more than 10 percent of the
agency's surplus funds may be invested in shares of beneficial interest of any
one mutual fund pursuant to paragraph (1).
(1) Notwithstanding anything to the contrary contained in this section, Section '
53635, or any other provision of law, moneys held by a trustee or fiscal agent
' EXHIBIT B—GOVERNMENT CODE SECTION 53601
and pledged to the payment or security of bonds or other indebtedness, or
obligations under a lease, installment sale, or other agreement of a local agency,
or certificates of participation in those bonds, indebtedness, or lease installment
sale, or other agreements, may be invested in accordance with the statutory
provisions governing the issuance of those bonds, indebtedness, or lease
installment sale, or other agreement, or to the extent not inconsistent therewith or
if there are no specific statutory provisions, in accordance with the ordinance,
resolution, indenture, or agreement of the local agency providing for the
issuance.
(m) Notes, bonds, or other obligations that are at all times secured by a valid
first priority security interest in securities of the types listed by Section 53651 as
eligible securities for the purpose of securing local agency deposits having a
market value at least equal to that required by Section 53652 for the purpose of
securing local agency deposits. The securities serving as collateral shall be
placed by delivery or book entry into the custody of a trust company or the trust
department of a bank which is not affiliated with the issuer of the secured
obligation, and the security interest shall be perfected in accordance with the
requirements of the Uniform Commercial Code or federal regulations applicable
to the types of securities in which the security interest is granted.
(n) Any mortgage passthrough security, collateralized mortgage obligation,
mortgage-backed or other pay-through bond, equipment lease-backed certificate,
consumer receivable passthrough certificate, or consumer receivable-backed
bond of a maximum of five years maturity. Securities eligible for investment
under this subdivision shall be issued by an issuer having an "A" or higher rating
for the issuer's debt as provided by a nationally recognized rating service and
rated in a rating category of "AA" or its equivalent or better by a nationally
recognized rating service. Purchase of securities authorized by this subdivision
may not exceed 20 percent of the agency's surplus money that may be invested
pursuant to this section.
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EXHIBIT A ,
GLOSSARY
AGENCIES: Federal agency securities and/or Government-sponsored
enterprises.
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a
bank or trust company. The accepting institution guarantees payment of the bill,
as well as the issuer.
BASIS POINT: One-hundredth of one percent (i.e., 0.01
BID: The price offered by a buyer of securities. (When you are selling
securities, you ask for a bid). See Offer.
BROKER: A broker acts as an intermediary between a buyer and seller for a
commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity
evidenced by a certificate. Large-denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a
borrower pledges to secure repayment of a loan. Also refers to securities
pledged by a bank to secure deposits of public monies.
COMMERCIAL PAPER: Short-term, unsecured, negotiable promissory note
with a fixed maturity of no more than 270 days. IBy statute, these issues are
exempt from registration with the U.S. Securities and Exchange Commission.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official
annual financial report for the City. It includes combined statements and basic
financial statements for each individual fund and account group prepared in
conformity with Generally Accepted Accounting Principles (GAAP).
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay
the bondholder on the bond's face value. (b) A certificate attached to a bond
evidencing interest due on a payment date.
CREDIT RISK: The risk that an obligation will not be paid and a loss will result.
DEALER: A dealer, as opposed to a broker, acts as a principal in all
transactions, buying and selling for his own risk and account or inventory
' EXHIBIT A— GLOSSARY
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of
securities: delivery versus payment and delivery versus receipt. Delivery versus
payment is delivery of securities with an exchange of money for the securities.
Delivery versus receipt is delivery of securities with an exchange of a signed
receipt for the securities.
DERIVATIVES: (1) financial instruments whose return profile is linked to, or
derived from, the movement of one or more underlying index or security, and
may include a leveraging factor, or (2) financial contracts based upon notional
amounts whose value is derived from an underlying index or security (interest
rates, foreign exchange rates, equities or commodities).
DIRECT ISSUER: Issuer markets its own paper directly to the investor without
use of an intermediary.
DISCOUNT: The difference between the cost price of a security and its maturity
when quoted at lower than face value. Security selling below original offering
' price shortly after sale also is considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that
are issued at a discount and redeemed at maturity for full face value, e.g , U.S
Treasury Bills.
DIVERSIFICATION: Dividing investment funds among a variety of securities
offering independent returns.
FACE VALUE: The principal amount owed on a debt instrument. It is the
amount on which interest is computed and represents the amount that the issuer
promises to pay at maturity.
FAIR VALUE: The amount at which a security could be exchanged between
willing parties, other than in a forced or liquidation sale. If a market price is
available, the fair value is equal to the market value.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to
supply credit to various classes of institutions and individuals, e.g., S&L's, small
business firms, students, farmers, farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency
that insures bank deposits, currently up to $100,000 per deposit.
EXHIBIT A— GLOSSARY '
FEDERAL FARM CREDIT BANK (FFCB): Government-sponsored institution
that consolidates the financing activities of the Federal Land Banks, the Federal
Intermediate Credit Banks and the Banks for Cooperatives. Its securities do not
carry direct U.S. government guarantees.
FEDERAL FUNDS RATE: The rate of interest at which Federal funds are
traded. This rate is considered to be the most sensitive indicator of the direction
of interest rates, as it is currently pegged by the Federal Reserve through open-
market operations.
FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale
banks (currently 12 regional banks) which lend funds and provide correspondent
banking services to member commercial banks, thrift institutions, credit unions
and insurance companies. The mission of the FHL-Bs is to liquefy the housing
related assets of its members who must purchase stock in their district Bank.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC or Freddie
Mac): Established in 1970 to help maintain the availability of mortgage credit for
residential housing. FHLMC finances these operations by marketing guaranteed
mortgage certificates and mortgage participation certificates. Its discount notes '
and bonds do not carry direct U.S. government guarantees.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae):
FNMA was chartered under the Federal National Mortgage Association Act in
1938. FNMA is a Federal corporation working under the auspices of the
Department of Housing and Urban Development (HUD). It is the largest single
provider of residential mortgage funds in the United States. FNMA is a private
stockholder-owned corporation. The corporation's purchases include a variety of
adjustable mortgages and second loans, in addition to fixed-rate mortgages.
FNMA's securities are also highly liquid and are: widely accepted. FNMA
assumes and guarantees that all security holders will receive timely payment of
principal and interest. FNMA securities do not carry direct U.S. Government
guarantees.
FEDERAL RESERVE SYSTEM: The central bank of the United States created
by Congress and consisting of a seven member Board of Governors in
Washington, D.C., 12 regional banks and about 5,700 commercial banks that are
members of the system.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie
Mae): Securities influencing the volume of bank credit guaranteed by GNMA and
issued by mortgage bankers, commercial banks, savings and loan associations,
and other institutions. Security holder is protected by full faith and credit of the
U.S. Government. GNMA securities are backed by the FHA, VA or FMHA ,
mortgages. The term "pass-throughs" is often used to describe GNMAs.
rEXHIBIT A—GLOSSARY
INTEREST RATE RISK: The risk of gain or Boss in market values of securities
due to changes in interest rate levels. For example, rising interest rates will
cause the market value of portfolio securities to decline.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into
cash with minimum risk of principal.
LOCAL AGENCY INVESTMENT FUND (LAIF): An investment pool managed
by the California State Treasurer. Local government units, with the consent of
the governing body of that agency, may voluntarily deposit surplus funds for the
purpose of investment. Interest earned is distributed to the participating
governmental agencies on a quarterly basis.
MARK TO MARKET: Current value of securities at today's market price.
MARKET RISK: Systematic risk of a security that is common to all securities of
the same general class (stocks, bonds, notes, money market instruments) and
cannot be eliminated by diversification (which may be used to eliminate non-
systematic risk).
' MARKET VALUE: The price at which a security is trading and could presumably
be purchased or sold.
MATURITY: The date upon which the principal or stated value of an investment
becomes due and payable.
MEDIUM-TERM NOTES (MTNs): Continuously offered notes having any or all
of the features of corporate bonds and ranging in maturity from nine months out
to thirty years. The difference between corporate bonds and MTNs is that
corporate bonds are underwritten.
MONEY MARKET: The market in which short-term debt instruments (bills,
commercial paper, bankers' acceptances, etc.) are issued and traded.
OFFER: The price asked by a seller of securities. (When you are buying
securities, you ask for an offer.) See Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and sales of government and
certain other securities in the open market by the New York Federal Reserve
Bank as directed by the FOMC in order to influence the volume of money and
credit in the economy. Purchases inject reserves into the bank system and
stimulate growth of money and credit; sales have the opposite effect. Open
' market operations are the Federal Reserve's most important and most flexible
monetary policy tool.
EXHIBIT A— GLOSSARY r
PORTFOLIO: The collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the
Federal Reserve Bank of New York and are subject to its informal oversight.
Primary dealers include Securities and Exchange Commission (SEC)-registered
securities broker-dealers, banks, and a few unregulated firms.
PRUDENT PERSON RULE: An investment standard: The way a prudent
person of discretion and intelligence would be expected to manage the
investment program in seeking a reasonable income and preservation of capital.
RATE OF RETURN: (1) The yield obtainable on a security based on its
purchase price or its current market price. (2) Income earned on an investment,
expressed as a percentage of the cost of the investment.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells
these securities to an investor with an agreement to repurchase them at a fixed
price on a fixed date. The security "buyer' in effect lends the "seller' money for
the period of the agreement, and the terms of the agreement are structured to
compensate him for this. Dealers use RP extensively to finance their positions.
Exception: When the Fed is said to be doing RP, it is lending money, that is,
increasing bank reserves.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults
for protection.
SECONDARY MARKET: A market made for the purchase and sale of
outstanding issues following the initial distribution.
SECURITIES & EXCHANGE COMMISSION (SEC): Agency created by
Congress to protect investors in securities transactions by administering
securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
SECONDARY MARKET: A market for the repurchase and resale of outstanding
issues following the initial distribution.
SECURITIES: Investment instruments such as notes, bonds, stocks, money
market instruments and other instruments of indebtedness or equity.
SPREAD: The difference between two figures or percentages. It may be the ,
difference between the bid (price at which a prospective buyer offers to pay) and
asked (price at which an owner offers to sell) prices of a quote, or between the
amount paid when bought and the amount received when sold.
' EXHIBIT A— GLOSSARY
STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises
(FHLB, FNMA, SLMA, etc.) and corporations which have imbedded options (e.g.,
call features, step-up coupons, floating rate coupons, derivative-based returns)
into their debt structure. Their market performance is impacted by the fluctuation
of interest rates, the volatility of the imbedded options and shifts in the shape of
the yield cure.
TREASURY BILL: A non-interest bearing discount security issued by the U.S.
Treasury to finance the national debt. Most bills are issued to mature in three
months, six months, or one year.
TREASURY BOND: A long-term coupon-bearing U.S. Treasury security issued
as a direct obligation of the U.S. Government and having an initial maturity of
more than ten years.
TREASURY NOTE: A medium-term coupon-bearing U.S. Treasury security
issued as a direct obligation of the U.S. Government and having an initial
maturity from two to ten years.
' UNIFORM NET CAPITAL RULE: Securities and Exchange Commission
requirement that member firms, as well as nonmember broker/dealers in
securities, maintain a maximum ratio of indebtedness to liquid capital of 15 to 1;
also called net capital rule and net capital ratio. Indebtedness covers all money
owed to a firm, including margin loans and commitments to purchase securities,
one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: The annual rate of return on an investment expressed as a percentage
of the investment. Income yield is obtained by dividing the current dollar income
by the current market price for the security.
YIELD CURVE: Yield calculations of various maturities of instruments of the
same quality at a given time to observe spread differences.
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