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HomeMy WebLinkAbout11/19/2008 - STAFF REPORTS - 2.J. ;O�pALM Sp4 ti �Z c u /n � k e / C uuolxi/00 ,x 'F°RI'j CITY COUNCIL STAFF REPORT DATE: November 19, 2008 CONSENT CALENDAR SUBJECT: REAFFIRM THE CITY'S INVESTMENT POLICY GOVERNING THE INVESTMENT OF CITY FUNDS FROM: David H. Ready, City Manager BY: Department of Finance and Treasury SUMMARY The State Government Code requires a City to have an approved Investment Policy that is annually submitted by the City Treasurer to the City Council for their approval. The City has had an investment policy since 1985. There are no changes being recommended from the current policy. RECOMMENDATION: Reaffirm the City's Investment Policy governing the investment of City funds, as adopted by Resolution No. 21946, dated 6-20-2007. STAFF ANALYSIS: State law requires each city to have an investment policy that governs how surplus cash is to be invested and further requires that the policy be reviewed annually by the legislative body at a public meeting. The City of Palm Springs has had an investment policy since 1985. The policy being considered by Council is the same as the current policy. Its primary objectives, in order of importance, are Safety, Liquidity, and Return on Investments. It provides the necessary internal controls and investment constraints, prohibitions, and/or parameters to meet those objectives. The City of Palm Springs has had a perfect record on the safety of its investment. There has never been a cash flow or liquidity problem. The portfolio has very low turnover of investments, and earns a reasonable yield. If for some reason the portfolio needed to be made liquid, the current market value is virtually the same as cost. ITC, rh4 N0. City Council Staff Report November 19, 2008 -- Page 2 Reaffirm the City's Investment Policy The investment policy has provided the framework for meeting the City's goals of Safety, Liquidity and Return on Investment, and should continue to do so into the foreseeable future. The policy has been recently reviewed by the City Attorney's Office. FISCAL IMPACT: None Ceo rey S. Kiehl David H. Ready, City,Mnager Director of Finance and Treasurer Attachments: Resolution No. 21946 Investment Policy - 22 RESOLUTION NO. 21946 JA RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA, ADOPTING AN INVESTMENT POLICY GOVERNING THE INVESTMENT OF CITY FUNDS. 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 requirements 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 Attorney, and WHEREAS, the Investment Policy describes the City's commitment to safeguarding its funds; THE CITY COUNCIL OF THE CITY OF PALM SPRINGS DOES HEREBY r� RESOLVE AS FOLLOWS: {` SECTION 1. The Investment Policy attached to this resolution as Exhibit A is hereby adopted. ADOPTED THIS 20TH DAY OF JUNE, 2007. �r David H. Ready, it serf ATTEST: +� ?me-9 Thompson, City Clerk Resolution No.21946 Page 2 CERTIFICATION STATE OF CALIFORNIA ) COUNTY OF RIVERSIDE ) ss. CITY OF PALM SPRINGS ) I, JAMES THOMPSON, City Clerk of the City of Palm Springs, hereby certify that Resolution No. 21946 is a full, true and correct copy, and was duly adopted at a regular meeting of the City Council of the City of Palm Springs on June 20, 2007, by the following vote: AYES: Councilmember Foat, Councilmember McCulloch, Councilmember Mills, Mayor Pro Tern Pougnet and Mayor Oden. NOES: None. ABSENT: None. ABSTAIN: None. is Thompson, City Clerk City of Palm Springs, California LJ 171 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 et 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, its component units and government entities including without limitation, The Community Redevelopment Agency of Palm Springs and the Palm Springs Finance Authority. 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) ;n 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" 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 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. Z 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 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 shall include references to: wire transfer agreements, and 11 collateral/depository agreements, as appropriate. Such procedures shall L- 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. 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. 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 City of Palm Springs funds may only be invested in the following: A. Bonds issued by the City of Palm Springs - 917 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. F. 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. H. Negotiable Certificates of Deposit issued by federally or state chartered banks or associations. Not more than 30% of surplus funds can J 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 contract or 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 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 and/or a summary of considerations developed which will respond to the following concerns: - 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. 1 - A schedule for receiving statements and portfolio listings. t A determination of whether reserves, retained earnings, etc. are utilized by the pool/fund. - A fee schedule, and when and how is it assessed. A determination of whether the pool/fund is eligible for bond proceeds and/or will it accept such proceeds. 10. COLLATERAL,IZATION 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 I 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 1 the maturities noted shall be maintained: Maturity Range 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 City'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 City's investments. The Committee shall meet at least quarterly to review the City's investment activity. 15. REPORTING The 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. 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 e, a ,r must also include a certification that (1) all investment actions executed I 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. it EXHIBIT A j I 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. By 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. 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. F� DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. Security selling below l 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. 741 i L I FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. 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 FHLBs 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 1958. 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. I � 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. INTEREST RATE RISK: The risk of gain or loss 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. 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. . E SEC RULE 15C3-1: See Uniform Net Capital Rule. i l SECONDARY MARKET: A market for the repurchase and resale of ` J 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. S TRUCTURED 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 curve. r- TREASURY BILL: A non-interest bearing discount security issued by the j 1 U.S. Treasuryto finance the national debt. Most bills are issued to mature f 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. n EXHIBIT B GOVERNMENT CODE, SECTION 53601 J 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 term 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 irevenues 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. (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 Ll 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. (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 owned 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 1 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 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 banWs 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. Q) 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 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 agreement 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). L 1 (1) Notwithstanding anything to the contrary contained in this section, L j Section 53635, or any other provision of law, moneys held by a trustee or fiscal agent 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. 25 (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. �I 23