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HomeMy WebLinkAboutCity of Tamarac Resolution R-2001-262Temp. Reso. #9538 September 17, 2001 Page 1 CITY OF TAMARAC, FLORIDA RESOLUTION NO, R-2001-262 A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF TAMARAC, FLORIDA, AUTHORIZING CHANGES TO THE INVESTMENT POLICY OF THE CITY OF TAMARAC, TO COMPLY WITH FLORIDA STATUTE 218.415, SUBSECTIONS (1)-(16); PROVIDING FOR CONFLICTS; PROVIDING FOR SEVERABILITY; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, an investment policy provides the formal structure that governs the activities of investment official(s) and clarifies the City's investment objectives, standards, and activities; and WHEREAS, the City Commission of the City of Tamarac adopted an investment policy by Resolution R-96-67 on March 27, 1996; and WHEREAS, THE City Commission of the City of Tamarac adopted an revised investment policy by Resolution R-2000-117 attached hereto as Exhibit 1; and WHEREAS, the City of Tamarac Director of Finance recommends compliance with Florida Statute 218.415 (FS 218.415); and WHEREAS, the City of Tamarac Director of Finance recommends that City of Tamarac investment officials have at least eight (8) hours annually of continuing education related to investment practices and products, as specified in FS 218.415(14); and Temp. Reso. #9538 September 17, 2001 Page 2 WHEREAS, the City of Tamarac Director of Finance recommend using the Florida Local Government Surplus Funds Trust Fund (SBA) plus five (5) basis points as a specific benchmark for the City investment portfolio. Such specific benchmark is required per FS 218.415(3); and WHEREAS, the City of Tamarac Director of Finance recommends inclusion of Securities and Exchange Commission (SEC) registered money market funds with the highest credit quality rating from a nationally recognized rating agency, as an authorized investment of the City of Tamarac, as listed in Florida Statute 218.415(16)(b). WHEREAS, the City of Tamarac Director of Finance will specify that a maximum of twenty percent (20%) of the City portfolio can be invested in SEC registered money markets. WHEREAS, the City Commission of the City of Tamarac, Florida, has deemed it to be in the best interest of the citizens and residents of the City of Tamarac that the present Investment Policy be revised to include specifying eight (8) hours of continuing education for investment officials, a performance benchmark of the SBA plus five (5) basis points, and add as an authorized investment of the City a Securities and Exchange Commission registered money market as defined by the Investment Company Act of 1940, with a maximum of twenty percent (20%) of the City portfolio to be investment in SEC registered money market funds as outlined in Florida Statute 218.415 (1)-(16). 1 N 1 Temp. Reso. #9538 September 17, 2001 Page 3 NOW, THEREFORE, BE IT RESOLVED BY THE CITY COMMISSION OF THE CITY OF TAMARAC, FLORIDA: SECTION 1: The foregoing "WHEREAS" clauses are hereby ratified and confirmed as being true and correct and are hereby made a specific part of this Resolution. SECTION 2: The appropriate City Officials are hereby authorized to change the Investment Policy attached hereto as Exhibit 2 to include specifying eight (8) hours annually of continuing education for investment officials, a performance benchmark of the SBA plus five (5) basis points, and add as an authorized investment of the City a Securities and Exchange Commission registered money market as defined by the Investment Company Act of 1940, with a maximum of twenty percent (20%) of the City portfolio to be investment in SEC registered money market funds. SECTION 3: All resolutions or parts of resolutions in conflict herewith are hereby repealed to the extent of such conflict. SECTION 4: If any clause, section, other part or application of this Resolution is held by any court of competent jurisdiction to be unconstitutional or invalid, in part or application, it shall not affect the validity of the remaining portions or applications of this Resolution. Temp. Reso. #9538 September 17, 2001 Page 4 SECTION 5: This Resolution shall become effective immediately upon its passage and adoption. PASSED, ADOPTED, AND APPROVED this 26t" day of September, 2001. ATTEST: 'h t �- "') MARION S ENSON, CMC .CITY CLERK I HEREBY CERTIFY that I have approved this RESOLUTION as t 0 JOE SCHREIBER MAYOR RECORD OF COMMISSION VOTE: MAYOR SCHREIBER _A -ye, DIST 1: COMM. PORTNER_AM DIST 2: COMM. MISHKIN A-M DIST 3: V/M SULTANOF Alves DIST 4: COMM. ROBERTS Al e, n 1 1 Temp Reso #9538 Exhibit "1" 1 M CITY OF TAMARAC, FLORIDA RESOLUTION NO. R-2000-117 A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF TAMARAC, FLORIDA, AUTHORIZING A CHANGE TO THE INVESTMENT POLICY OF THE CITY OF TAMARAC, SECTION VII. AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS, TO INCLUDE "COMMERCIAL PAPER" AND "BANKERS' ACCEPTANCE" AS AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS FOR THE CITY OF TAMARAC; PROVIDING FOR CONFLICTS; PROVIDING FOR SEVERABILITY; AND PROVIDING FOR AN EFFECTIVE DATE. WHEREAS, an investment policy provides the formal structure that governs the activities of investment official(s) and clarifies the City's investment objectives, standards, and activities; and WHEREAS, the City Commission of the City of Tamarac adopted an investment policy by Resolution R-96-67 on March 27, 1996 (hereto attached as Exhibit C); and WHEREAS, the City of Tamarac Finance Department deems it to be in the Ibest interest of the City of Tamarac and it's residents to include "Commercial Paper" and "Bankers' Acceptance" as suitable investments for the investment I portfolio of the City of Tamarac; and WHEREAS, Commercial Paper is an unsecured short-term promissory .t note to repay a fixed amount on a certain future date backed solely by the credit rating of the issuer. Commercial Paper purchased by the City of Tamarac shall F have a favorable rating of A1/P1 or higher by no less than two of the rating agencies; and WHEREAS, Bankers' Acceptance are bearer time drafts for a specified amount payable on a specified date, drawn on a bank by an individual or business seeking to finance domestic or international trade and collateralized by commodity products. Bankers' Acceptance is a primary obligation of the accepting bank and a contingent obligation of the borrower. Bankers' Acceptance purchased by the City of Tamarac shall have a favorable rating of A1/P1 or higher by no less than two of the rating agencies; and WHEREAS, the Investment Advisory Committee, in a letter dated November 18, 1999 (attached as "Exhibit A") support expanding the current Investment Policy to include Bankers' Acceptance and Commercial Paper as authorized and suitable investment instruments; and WHEREAS, the City financial advisor, Public Financial Management, in a letter dated January 7, 2000 (attached as "Exhibit B") support considering the inclusion of Commercial Paper and Bankers' Acceptance as permitted investments; and WHEREAS, the Director of Finance, and the Investment Accountant recommend including Commercial Paper and Bankers' as permitted investments; and WHEREAS, the City Commission of the City of Tamarac, Florida, has deemed it to be in the best interest of the citizens and residents of the City of Tamarac that the present Investment Policy be expanded to include Bankers' Acceptance and Commercial Paper as authorized and suitable investment instruments for the City of Tamarac. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COMMISSION OF THE CITY OF TAMARAC, FLORIDA: SECTION 1: The foregoing "WHEREAS" clauses are hereby ratified and confirmed as being true and correct and are hereby made a specific part 6f this Resolution. SECTION 2: The appropriate City Officials are hereby authorized . to change the Investment Policy (attached hereto as Attachment 1) to include Commercial Paper and Bankers' Acceptance as authorized and suitable investment instruments for the City of Tamarac. SECTION 3: All resolutions or parts of resolutions in conflict herewith are hereby repealed to the extent of such conflict. SECTION 4: If any clause, section, other part or application of this Resolution is held by any court of competent jurisdiction to be unconstitutional or invalid, in part or application, it shall not affect the validity of the remaining portions or applications of this Resolution. SECTION 5: This Resolution shall become effective immediately upon its passage and adoption. PASSED, ADOPTED AND APPROVED this 10th day of May, 2000. ATTEST: MARION SWENSON. INTERIM CITY CLERK I HERE Y CERTIFY that I hav Approv d this RF�SOLUTIONS to form "- C . j " - `� r�� JOE CH E BER, AY HECM OR COMM"*" MAYOR SWREISEA .... DIST 1: COMM- pORTNER DIST x COMA MISS — pIST S: Comm Swm" OW •: VIM ROBERTS ..... t INVESTMENT POLICY REVISIONS ICHIP KCJV 1/yV1� Attachment 1 IX. INVESTMENT PARAMETERS A. Diversification It is the policy of the City of Tamarac to diversify its investment portfolios. Assets held shall be diversified to control the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer, a specific instrument, a class of instruments, and a dealer through whom these investments are bought and sold. Diversification strategies within the established guidelines shall be reviewed and revised periodically as necessary by the appropriate management staff and approved by the Director of Finance (See Table 1, page 19). Table I Investment Parameters Authorized Maturity Minimum Maximum Investments Range Percent (%) Percent (%) State Board of Administration (SBA) N/A 5% 90% Overnight Repurchase Agreement N/A N/A N/A U.S. Treasury Securities 15 years 10% 95% U.S. Government Obligations (e.g. GNMA, HUD,FMHA,SBA,GSA,FHA,TVA) 10 years 0% 85% U.S. Government Instrumentalities (e.g. FFCB, FHLMC, FHLB, FNMA) 1 0 years 0% 85% Certificate of Deposits 5 years 0% 85% Commercial Pa er 270 days 00/. 10% Bankers' Acceptance 270 days 0% 10% Coding: Words are deletions from the Investment Policy Words underscored are additions to the Investment Policy Temp Reso #9013 Attachment 1 to INVESTMENT POLICY REVISIONS VII. AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS A. Investment Types The following are the authorities for investments and limits on secF Hance ity issues, issuersshall des and maturities as established within this Director instruments, to conform to then - have the option to further restrict investment in selected present market conditions. In accordance with Section 166.261, Florida Statutes, and section 6-26, Code, authorized investments include: Th e Florida Local Government Surplus Trust Fund (Administered by the State Board of Administration and commonly referred as the "S BA"). Direct obligations of the U.S. Government which include but are not limited to Treasury Bills, Treasury Notes, Treasury Bonds and Treasury guaranteed by the U.S. Government as to principal and interest which include a e Association (GNMA), but are not limited to Government National Mortgage General Services Home Administration (FmHA.), Small Business Association (SBA), Administration (GSA), Federal Housing Administration (FHA), Housing and Urban Development (HUD), Tennessee Valley Authority (TVA). er Time deposits and savings accounts in bank and savings and oant d h t5 fions, e,ll such e pbusiness in and laws it Florida and the as nited provided f or by Florida tatutes Chapter 280. deposits shall be collateralized onsored corporation which are backed Securities issued and guaranteed by a federally sp These securities carry by, or the entity is capable the U S Government ment and include the Federal Farm Credit the "implied guarantee o oration (FHLMC) (participation Banks (FFCB), Federal Home Loan Bank Mortgage Corp Federal Home Loan Bank certificates), Federal National Mortgage Association (FNMA), (FHLB) or its banks. provided such notes have a ratingof 1. 2 93 !1 01 0 7. Commercial Pa er of an United States co on A1/P1 or hi her b at least two of the five ratin s agencies. the Federal Reserve Banks and which City Accentance which have a Letter of Credit ratin t be urchaseo n f A 1 /P 1 or better. ra Z1 Coding: Words mare deletions from the Investment Policy nrP additions to the Investment Policy EXHIBIT (A) 11-18-99 MEMO FROM THE INVESTMENT ADVISORY COMMITTEE THE COMMITTEE IS OF THE OPINION THAT THE CITY SHOULD CONSIDER EXPANDING ITS INVESTMENT PARAMETER TO INCLUDE AS PERMISSIBLE THE INVESTMENTS OF PART OF OUR AVAILABLE FUNDS IN COMMERCIAL PAPER AND BANKERS ACCEPTANCES THAT ARE RATED A-1 AND P-1. THE INVESTMENT IN SUCH SECURITIES WILL IMPROVE THE YIELD CONSIDERABLY ON FUNDS HELD FOR SHORT TERM LIQUIDITY NEEDS . HANKERS ACCEPTANCES ARE SHORT TERM MONEY MARKET INSTRUMENTS USED TO FINANCE DOMESTIC TRANSACTIONS. "ACCEPTED" INSTRUMENTS ARE GUARANTEED BY DOMESTIC BANKS TO BE PAID AT MATURITY. COMMERCIAL PAPER REPRESENTS PROMISSORY NOTES ISSUED BY LARGE CORPORATIONS. THE YIELD IS USUALLY HIGHER THAN ON U•S•GOVERNMENT ISSUES OF SIMILAR MATURITIES. THE CITY OF TAKARAC'S INVESTMENT POLICY AT PRESENT REQUIRES FOR A MINIMUM OF 5% UP TO A MAXIMUM OF 90% TO BE INVESTED IN THE STATE BOARD ADMINISTRATION FUND (SBA).USUALLY BETWEEN 40--50% ARE BEING IN INVESTED BY SBA IN THE ABOVE NAMED SECURITIES. THE CITY BY INVESTING IN SBA FUNDS IS IN ACTUALITY INDIRECTLY AN INVESTOR IN THOSE SECURITIES. AN EXPANSION OF THE CITY'S INVESTMENT PARAMETER WOULD GIVE FINANCE GREATER FLEXIBILITY TO MAKE INVESTMENT DECISIONS WITH MAXIMUM RESULTS FOR THE CITY WHENEVER TiIE OPPORTUNITY PRESENTS ITSELF. IT IS THEREFORE THE RECOMENDATION OF THE COMMITTEE TO AMEND THE CURRENT INVESTMENT POLICY OF THE CITY TO INCLUDE BANKERS ACCEPTANCES AND COMMERCIAL PAPER AS AUTHORIZED INVESTMENT INSTRUMENTS. r-9.220:. EXHIBIT (B) - 543 1123 ., ,.. •. o Re so QI Ct i `j - .� PF�1 Public Financial Management �= January 7, 2000 Ms. Lee Ann Williams Assistant Treasurer City of Tamarac 7525 N. W. 88TH Avenue Tamarac, Florida 33321-2401 Dear Ms. Lee Ann: In response to your request for a discussion on the characteristics of commercial paper and bankers' acceptances, I have provided a review of both investment instruments from the prospective of issuers, credit risk, liquidity, and transaction terms. The characteristics discussion is followed by an outline of credit approval and review procedures that should be in place prior to any purchase of commercial paper or bankers' acceptances executed by the City. Commercial Paper Corporate bonds and notes are generally not considered to be money market investments, even when the passa,e of time reduces their remaining life to periods of less than one- year. However. a %Fide variety of corporations issue short-term securities known as commercial paper. Commercial paper is considered to be a money market investment. Commercial paper is simply unsecured, short -tern promissory notes issued by corporations for specific amounts and with specific maturity dates. Issuers 'cal is ue commercial More than amounts is o f anies in tile United short-term working capital and/or firms with flu ctuat nPg requirements fosucrs arc 'rins that sho short- term large- amounts of s term funds. Two types of firms traditionally issue almost all commercial paper. More than 500 major industrial corporations and some public utilities issue commercial paper. These • firms issue commercial paper to finance working capital (accounts receivable and inventory) on a seasonal or permanent basis, to fund operating expenses. and to provide temporary finance for construction projects. These issuers find that they can usually meet their short-term financing needs more economically or more conveniently with commercial paper than through traditional bank lines of credit. Paper from these issuers typically comprises about 20 to 25 percent of outstanding commercial paper. • Financial companies issue most of the outstanding commercial paper. Paper from these issuers typically comprises about 75 to 80 percent of outstanding commercial paper. Firms engaged in leasing, factoring, and mortgage banking usually issue Financial Company paper. The finance Ms. Lee Ann Williams January 7. 2000 Page 2 subsidiaries of major industrial firms compromise the bulk of this market. Firms like General Electric Capital, a subsidiary of General Electric, General Motors Acceptance Corporation (GMAC), a subsidiary of General Motors, and Ford Motor Credit are the largest commercial paper issuers. All together, nonbank finance company issuers comprise about 60 to 65 percent of all outstanding commercial paper. Bank holding companies, utilities, and insurance companies also issue commercial paper but their paper comprises less than 10 percent of the total outstandings_ Issuers may be U.S. of foreign companies. The majority of foreign issuers are foreign financial firms. Transaction Terms Commercial paper may be -sold at a discount or may be interest bearing, however by far the most commercial paper is issued at a discount. Terms can be as short as one day and usually do not exceed 270 days. (Instruments issued with maturities longer than 270 days must comply with Securities and Exchange Commission registration requirements and are therefore avoided by issuers.) Most commercial paper is issued for terms between five and forty-five days. The average maturity of newly issued paper tends to be thirty to thirty -Five days or shorter. Each issuer determines minimum sizes. Minimum sizes are often $100,000 but may be -smaller. Issuance and Liquidity Commercial paper is either marketed directly by the issuer or to dealers who resell the paper in the market. Direct issuers typically include finance companies and bank holding companies that are frequent and sizable borrowers. Only about a third of all commercial paper is sold by direct issuers. Most dealers are subsidiaries of investment banks or commercial bank holding companies. There are approximately 125 major dealers. Dealer placed paper is typically issued by smaller finance companies and by nonfinance issuers. The secondary market for commercial paper is eery small. Since issuers can closely match the maturity of the paper to the investor's needs, and since the typical maturities of newly issued commercial paper are quite short; there is only a limited secondary market. However, if an investor in paper sold through dealers needs cash, the dealer will usually buy back the paper prior to maturity. Credit Risk Commercial paper is relatively safe but clearly not the same quality as U.S. Treasury or agency obligations. (For this reason, commercial paper yields are higher than yields available from U.S. T-bills.) Historical default rates for commercial paper are very low. Only two major defaults occurred in the twenty years between 1969 and 1988. however, seven major defaults occurred in the three-year period from 1989 through 1991. Thus in exchange for the higher yields, investors must be more careful about the higher risks. Major credit rating agencies provide published credit ratings for commercial paper issues. Ratings are reviewed frequently and are primarily based upon the issuer's historical and projected operating results with an emphasis on profitability and leverage. Other influences on credit quality include size, industry characteristics, and the quality of management. htj. Lee Ann Williams January 7. 2000 Page 3 The rating, and of course the credit quality, of any commercial paper, may be enhanced by supporting bank lines of credit. Rating agencies require minimum liquidity levels that issuers often supply in the form of bank lines of credit. For the highest rated issuers, backup liquidity is generally equivalent to 100 percent of the issuer's outstanding commercial paper. These lines not only protect investors from the potential illiquidity of issuers but also protect investors in the event that a completely unrelated default may cause a sudden deterioration of market conditions that in turn makes it difficult to offer otherwise solvent issuers to roll over their maturing paper. Such a market collapse actually occurred in 1970 when Penn Central, a major issuer, defaulted. Additional credit quality, and credit rating, enhancements can be achieved with credit enhancements. Credit enhancements may take the form of guarantees from an issuer's parent company, bank letters of credit, and indemnity bonds issued by insurance companies. (Do not confuse a parent company's cruarantee with so-called "keep well" agreements and "comfort letters" that are not legally binding.) Unlike backup lines of credit, credit enhancements provide a guarantee of financial support that cannot be �vl(hdrawn or canceled. Smaller, riskier, and/or non -rated commercial paper issuers use credit enhancements to give them access to this source of low cost funding. Asset -Backed Commercial Paper Since 1933, smaller riskier Firms willing to take more risks have been able to gain access to commercial paper funding through a type of paper called asset -backed commercial paper. �A company, called a special purpose entity, that purchases receivables from one firm, issues asset -backed commercial paper and then finances the purchase using funds raised by selling secuy those receivables. With asset -backed paper, the credit risk is directly rrelated tomercialpth perre q d btv of the financial asset collateral rather than to the general financial condition of the issuing company. Banker's Acceptances Banker's acceptances (BAs) are yet another form of money market instruments issued b% bank;. BAs arise from transactions involving the import, export, transit, or storage of Rood,,. (This includes domestic as well as international transit.) The underlying transaction that Ri rrelevantves rise to a B is almost completely th ito the credit quality or the liquidity of the instrument, the actual BA is created at a late stage in e underlying transaction when a bank accepts its obligation to pay the holder, or the drawer, of they accepted draft. In other %,vords, when the transaction becomes a B.A, it becomes an unconditional obligation of the accepting bank. Credit Risk From an investor's point of view, a BA is a bank obligation that has at least the same credit strength as any CD issued by the same bank. In fact, BAs are typically stronger than the uninsured portions of CDs because, in addition to the credit strength of the accepting a drawer; an endorsing bank, they are backed by the credit strength of bank, if one is involved in the transaction; and usually by the pledge of documents representing ownership of the trade goods and insurance on the goods. (Legally, BAs are an example of two -name paper, since two parties, the drawer and the accepting"' ccepting bank, are obligated to pay. When an endorsing bank is included in the transaction, the BA is three -name paper.) BAs do not, however, carry federal deposit insurance. Ms. Lee Ann Williams January 7, 2000 Page 4 Liquidity Many BAs are very liquid investments. About a dozen large investment firms maintain an active dealer market for large BAs that are obligations of the more well known, credit worthy U.S. and foreign banks. In addition, there is a large and active over-the-counter market for BAs comprised of domestic and foreign accepting banks, Edge Act corporations, and other financial institutions. Data from a few years ago showed that commercial banks held 21 percent of outstanding BAs, mainly their own. Money market mutual funds held 13 percent, dealers held 3 percent, and foreign banks held 3 percent. The remaining 60 percent was held by a variety of investors, of which some of the largest were state and local governments, pension funds, and insurance companies. Corporate investors may also be comfortable buying less liquid BAs from smaller regional banks located in their communities. While BAs from less well-known banks may not trade in the secondary market. often because the size of the BAs is too small, they can still be safe, very short-term investments. Transaction Terms BAs can be a bit more cumbersome for investors than CDs, however. The size, the maturities, and the pricing of BAs are all unlike the terms for CDs. Individual BA amounts are rarely in even hundreds or tens of thousands of dollars. Instead, the amount is the amount of one or the sum of a group of product orders or trade transactions. Often, BAs are in odd amounts. Similarly, the term of a BA may be for an even thirty, sixty, ninety, 180 or 270 days when it is created but is often for an odd number of days by the time an investor purchases it. (BAs meeting certain Federal Reserve regulations are called "eligible" BAs. Eligible BAs cannot exceed 180 days and are not subject to reserve requirements.) Like T-bills, BAs do not pay, interest. Instead, they are bought and sold on a discount basis. Discount rates for acceptances traded in the secondary market are tiered. The acceptances of banks with high credit rating trade at lower rates of discount than the acceptances of banks with lower credit ratings. Ms. Lee Ann Williams January 7, 2000 Page 5 Credit Approval & Review Procedures I. Market Analysis: Approval of a Corporate Issuer should begin with an analysis of the relative size and frequency of the company's issuance, as well as the relative attractiveness of the available paper. A corporate issuer should provide frequent offerings available at competitive rates of interest. If this market analysis reveals sporadic offerings, limited product or typically below market rates, the issuer should not qualify for consideration. Market analysis helps to limit the number of approved names and increase the quality of the approved list. A sufficiently large number of approved issuers will decrease the effectiveness of the credit review process as it becomes unmanageable. II. Credit Analvsis: A review of corporate issuers is an important step in ensuring that funds are invested safely. In addition to a review of financial statements and ratios, investors should have an understanding for each issuer's strengths and weaknesses. Understanding the potential risks for each issuer can lead to a proactive response when fundamentals deteriorate. A. Financial Statements: Obtain current financials from the company or from other sources such as Bloomberg. Review financials looking for positive/negative trends and industry comparisons. Industry Specific Guidelines Banking & Finance: look for adequate Capital Ratios (Tier I Capital = 5 c min., Total Capital = 10% min.), appropriate earrings trends given market conditions, trend in percentage of Non -Performing Assets. and discount the level of risk assumed on its balance sheet (i.e., low credit loans vs. high credit loans). Industrial: look for Debt -to -Equity Ratio (typically no more than 15017c), adequate short-term liquidity as measured by the Current Ratio (1.00 or higher), and positive revenue & net income trends. ` B. Rating Agency Reports: Review ratings and obtain recently issued reports, if possible. Again, look for trends and potential risks. Purchases of commercial paper and bankersacceptances should be limited to A UPI (or higher) ratings as provided by Standard and Poors and Moody's rating agencies. C. Current News: Search for reports and articles that may provide insight on changes in the company fundamentals. Common events that can lead to a rapid deterioration of fundamentals include but are not limited to lawsuits, loss of key customers, earnings warnings and exposure to regional -specific economic distress. Ms. Lee Ann Williams January 7, 2000 Page 6 D. Management Quality: Look for signs of a management that is concerned with the credit quality of the company. Management should provide timely information. Management teams that aggressively pursue growth strategies with little concern for balance sheet quality should be avoided. For example, a management team that expresses the desire to increase market share through either, (1) major debt -financed acquisitions, or (2) substantial capital expenditure programs, or (3) a material increase in the risk of the balance sheet, is less likely to protect the credit quality of the company thereby placing existing credit ratings at risk. III. r?, 22roval: Corporate issuers that meet ratings requirements and the in-house credit approval should be added to a list of approved issuers. Approved issuers should then be reviewed annually to ensure stability of credit fundamentals. Industry and issuer -specific news should be monitored on an on -going basis. Any material decline in credit fundamentals or a material deterioration of the issuer's competitive position should result in the removal of the issuer from the approved list. The liquidation of existing holdings should be considered on an individual basis. The City should consider the addition of commercial paper and bankers' acceptance as permitted investments, as long the City understands the inherent investment risk associated with these instruments. And the credit approval and review procedures are abopted as standard investment procedures performed by the City's investment staff on a routine basis. In order to amend the investment policy. the City Council will have to approve to the addition of these instruments. I am happy to answer any additional questions you may have. Sincerely, Public financial Manage ent Steven Alexande , CCM Senior Managing Consultant CITY COMMISSION TAMARAC, FLORIDA JOE SCHREIBER MAYOR KAREN L. ROBERTS VICE -MAYOR LARRY MISHKIN COMMISSIONER EDWARD C. PORTNER COMMISSIONER MARC L. SULTANOF COMMISSIONER JEFFREY L. MILLER CITY MANAGER MITCHELL KRAFT CITY ATTORNEY WILLIAM L. NEALON, JR., CPA TIM HEMSTREET LEANNE WILLIAMS, CPA CONTROLLER INTERIM DIRECTOR OF INVESTMENT FINANCE ACCOUNTANT Table of Contents PURPOSE............................................................................................................ 3 II. SCOPE.........................................................................................................3 III. DEFINITIONS.......................................................................................................4 IV. OBJECTIVES....................................................................................................... 4 A. Safety...........................................................................................................4 B. Liquidity........................................................................................................4 C. Yield............................................................................................................. 4 V. STANDARD OF CARE........................................................................................... 5 A. Prudence................................................................................................... 5 B. Ethics and Conflicts of Interest............................................................................ 5 C. Delegation of Authority........................................................................................ 5 VI. SAFEKEEPING AND CUSTODY ............................................. I............................ 7 A. Authorized Financial Dealers and Institutions ............................................ 7 B. Internal Controls........................................................................................ 8 C. Third -Party Custodial Agreements........................................................... 10 VII. AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS ....................... 12 A. Investment Types.................................................................................... 12 B. Collateralization....................................................................................... 13 C. Repurchase Agreement........................................................................... 13 D. Compliance with City's Bond Covenants ................................................. 13 E. Purchase of City's Utility Bonds............................................................... 13 VIII. INVESTMENT INSTRUMENTS NOT AUTHORIZED ............................................ 14 A. High Grade Corporate Debt.......................................................................... 14 B. Repurchase Agreements.............................................................................. 14 C. Derivative Investment Products.................................................................... 14 IX. INVESTMENT PARAMETERS ................................................... I ................... ... 15 A. Diversification.........................................................................................15 B. Maximum Maturities................................................................................. 15 C. Duration................................................................................................... 16 D. Security Selection.................................................................................... 16 E. Policies to Enhance Return on Investment .............................................. 17 TABLE 1 Investment Parameters................................................................................. 19 X. REPORTING...................................................................................................... 20 A. Method..................................................................................................... 20 B. Performance Standards...........................................................................20 C. Marking to Market.................................................................................... 20 XI. POLICY................................................................................................................ 20 A. Exemption................................................................................................ 20 B. Amendment............................................................................................. 20 C. Effective Date.......................................................................................... 20 APPENDIXA - GLOSSARY.......................................................................................... 21 APPENDIX B - RESOLUTIONS.................................................................................... 26 Investment Poli City of Tamarac, Florida Investment Policy I. PURPOSE The intent of this policy is to provide the Director of Finance and designated staff with sufficient latitude to effectively manage the City of Tamarac's (City) financial assets so as to: 1) Ensure the preservation of principal, 2) Maintain sufficient cash flow to enable the City to meet its obligations, and 3) Maximize the return on assets with an acceptably low exposure to risk. II. SCOPE This Investment Policy shall apply to all the funds held by the City on behalf of the residents of the City of Tamarac with the exception of Pension Fund assets and Funds whose uses are restricted by debt covenants; prior contracts; or legal, regulatory or other constraints. All financial assets held or controlled by the City, not otherwise classified as restricted assets requiring separate investing, shall be identified as "general operating funds" of the City for the purpose of this policy, and shall be invested under the guidelines as herein set forth. The guidelines, provided herein, are the general operating procedures. General operating funds include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Enterprise Funds Internal Service Funds Trust and Agency Funds and any new funds created by the governing body, unless specifically exempt. 9 Investment Policy III. DEFINITIONS See Glossary Section: Appendix A (Page 21) IV. OBJECTIVES The following investment objectives will be applied in the management of City funds: A. Safety Ensuring the preservation of principal is the primary objective of the City's investment activities. All other objectives are secondary to the preservation of principal. Each investment transaction shall be executed to insure that capital losses are avoided, whether from market value fluctuations or credit erosion. This objective includes mitigation of credit risk and interest rate risk. B. Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This will be accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. Furthermore, since all possible cash demands cannot be anticipated, the portfolio will consist largely of securities with active secondary markets. C. Yield 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 liquidity needs. Return on investment shall not have as much weight in comparison to safety and liquidity objectives. The core of investments will be limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity with the following exceptions: a declining credit security could be sold early to minimize loss of principal; a security swap that would improve the quality, yield, or target duration in the portfolio; or liquidity needs of the portfolio require that the security be sold. No transactions of this kind will be executed without the approval of the City Manager. 4 Investment Pol V. STANDARD OF CARE A. Prudence The standard of prudence to be applied by the Director of Finance or designee shall be the "Prudent Person Rule" which states: "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 investments, considering the probable safety of their capital as well as the probable income derived." The "Prudent Person Rule" shall be applied in the context of managing the overall portfolio. B. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall refrain from personal business activity that could conflict or appear to conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Officers and employees shall be prohibited from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of their entity. C. Delegation of Authority The authority to manage the City's investment program is granted to the City Manager as set forth in City of Tamarac Resolution R-94-167 (see Appendix B, page 26). Responsibility for the operation of the investment program is hereby delegated to the Director of Finance, who shall carry out established written procedures and internal controls for the operation of the investment program consistent with this investment policy. Procedures include: Safekeeping Delivery vs. Payment Investment Accounting Wire Transfer Agreements Collateral/Depository Agreements Banking Services Contracts No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Director of Finance. The Director of Finance shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. These include but are not limited to: 5 Investment Policy C. Delegation of Authority, continued 1. The Director of Finance, and/or other staff as may be designated by the Director of Finance, shall have the authority to execute trades and to otherwise conduct business within the scope of the City's Investment Policy. 2. The Director of Finance shall have the authority to further restrict the authority delegated to any staff member. 3. The Director of Finance shall prepare or cause to be prepared month -end reports which, at a minimum, include: a. Investment Holdings Reports which at a minimum detail shall include: (1) holdings by class of security; (2) income earned; (3) book value; and (4) market value b. Performance Measurement Reports for the City's Aggregate Investment Portfolio, as well as for each separate portfolio and respective third -party manager. 4. The reports which are required under Item 3 above, as well as any others deemed appropriate by the Director of Finance, shall be provided to the members of the Investment Committee no less frequently than monthly. G Investment Poli VI SAFEKEEPING AND CUSTODY A. Authorized Financial Dealers and Institutions The Director of Finance or designee shall maintain a list of financial institutions authorized to provide investment services. In addition, a list will be maintained of approved security brokers/dealers selected by credit worthiness who are authorized to provide investment services in the State of Florida. These may include "primary" dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3-1 (Uniform Net Capital Rule). No public deposits shall be made except in a qualified public depository as established by the laws and regulations of the State of Florida. A current audited financial statement is required to be on file for each financial institution and broker/dealer in which the City invests. Certificates of Deposit shall be placed. only with financial institutions which qualify under Florida Law. Other securities shall be purchased only: 1) through the financial institutions which provide the services of a securities dealer, (who qualify as public depositories), with an office convenient to the City of Tamarac, 2) through the "primary government securities dealer" as designated by the Federal Reserve Bank. These institutions, dealers and issuers must meet capital adequacy guidelines as determined by their respective regulatory agencies and certify that no material adverse events have occurred since the issue of their most recent financial statements. They must also agree to notify the City in a timely manner in the event of material adverse events affecting their capital adequacy. All securities purchased shall be only those securities of authorized issuers of the various security types. Lists of these authorized institutions, dealers and issuers of the various security types will be maintained by the Director of Finance or his designee. Criteria for addition to or deletion from the lists will be based on the following: 1) in accordance with State Law, City Ordinance or Resolution, or investment policy requirements; 2) financial condition; 3) consistent lack of competitiveness; 4) experience or familiarity of the account representative in providing service to large institutional accounts; and/or 5) when deemed in the best interest of the City. F Investment Poli A. Authorized Financial Dealers and Institutions, continued Before engaging in investment transactions with an institution, the Director of Finance shall receive a signed certification form (as illustrated in Exhibit A, page 29) attesting that the individual responsible for the City's account with that firm has reviewed the City's investment policy and that they agree to undertake necessary and appropriate efforts to preclude imprudent transactions involving City funds. B. Internal Controls The Director of Finance or designee is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived (2) the valuation of costs and benefits requires estimates and judgments by management. 1. Establishment of Internal Controls The internal controls shall address the following points: a. Control of collusion Collusion is a situation where two or more employees are working in conjunction to defraud. b. Separation of functions By separating key functions and having different people perform each function, each person can perform a "check and balance" review of the other people in the same area. c. Separation of transaction authority from accounting and record kee in By separating the person who authorized or performs the transaction, from the people who record or otherwise account for the transaction, a good separation of duties is achieved. d. Custodial Safekeeping Securities purchased collateral, should be safekeeping. from any bank or dealer, including appropriate placed into a third party bank for custodial 8 Investment Policy B. Internal Controls, continued e. Prohibition of bearer -form securities Bearer -form securities are much easier to convert to personal use, than are securities registered in the name of the City of Tamarac. f. Avoidance of physical deliverV securities Book entry securities are much easier to transfer and account for, since actual delivery is never taken. Physical delivery securities must be properly safeguarded as are any valuable documents. The potential for fraud and loss increases with physical delivery securities. g. Clear delegation of authority to subordinate staff members Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid any improper actions. Clear delegations of authority also preserves the internal control structure that is built around the various staff positions and their respective responsibilities. h. Specific limitations regarding securities losses and remedial action Securities losses may be necessary to adhere to the Investment Policy. These losses should be restricted to specified purposes and proper documentation, and the required approval should be clearly defined for each staff person and further requires the approval of the City Manager. Written confirmation of telephone transactions for investments and wire transfers Due to the potential for error and improprieties arising from the lack of written confirmations, all transactions must be supported by written communications and approved by the appropriate person. Documentation of transactions and strategies All transactions and the strategies that may have been used to develop the transactions must be documented in writing and approved by the appropriate person. 0 Investment Policy B. Internal Controls, continued k. Development of a wire transfer agreement with the concentration bank This agreement must outline the various controls and security provisions for making and receiving wire transfers. 2. Training and Education It is the policy of the City to provide periodic training in investments for the investment officials through courses and seminars offered by the Government Finance Officers Association, Municipal Treasurers Association and/or other qualified and pertinent organizations. C. Third -Party Custodial Agreements The City will execute a Third Party Custodial Safekeeping Agreement with a commercial bank's trust department which is separately chartered by the United States Government and the State of Florida. All securities purchased and/or collateral obtained by the City shall be properly designated as an asset of the City and held in safekeeping by the trust department and no withdrawal of such securities in whole or in part, shall be made from safekeeping except by an authorized City staff member. The Third -Party Custodial Safekeeping Agreement shall include letters of authority from the City, details as to responsibilities of each party, notification of security purchases, sales, delivery, repurchase agreements, wire transfers, safekeeping and transactions costs, procedures in case of wire failure of other unforeseen mishaps including liability of each party. Internal controls shall include details of delivery vs. payment procedures and trust receipt documentation. Such controls and procedures shall be reviewed annually by the External Auditor. 1. Delivery Versus Payment All securities purchased or sold will be transferred when possible only under the "delivery versus payment" (D.V.P.) method or "payment versus delivery" method to insure that funds or securities are not released until all criteria relating to the specific transactions are met. 10 Investment Pol C. Third -Party Custodial Agreements, continued 2. Trust Receipt and Confirmation The Director of Finance or designee is authorized to accept, on the behalf of and in the name of the City of Tamarac, bank trust receipts or confirmations in return for investment of temporarily idle funds as evidence of actual delivery of the obligations or securities. Any such trust receipt or confirmation shall fully describe the various obligations or securities held, together with the specific identification number of each obligation or security held, and that they are held for the City of Tamarac. The actual obligations or securities, whether in book -entry or physical form, on which trust receipts or confirmations are issued may be held by a third party custodial bank and/or institution or a designated corresponding bank or custodian institution which has a correspondent relationship to the City's third party custodian or its correspondent institution, who is acting on behalf of and under the obligation as the City's third party custodian. The above shall apply to all investments with the exception of securities underlying overnight repurchase agreements, the custodial relationship for these instruments is described in Third -Party Custodial Agreements. 11 Investment Policy VII. AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS A. Investment Types The following are the authorities for investments and limits on security issues, issuers, and maturities as established within this policy. The Director of Finance or designee shall have the option to further restrict investment in selected instruments, to conform to then -present market conditions. In accordance with Section 166.261, Florida Statutes, and section 6-26, City Code, authorized investments include: 1. The Florida Local Government Surplus Trust Fund (Administered by the State Board of Administration and commonly referred as the "SBA"). 2. Direct obligations of the U.S. Government which include but are not limited to Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Strips. 3. Obligations guaranteed by the U.S. Government as to principal and interest which include but are not limited to Government National Mortgage Association (GNMA), Farmers Home Administration (FmHA), Small Business Association (SBA), General Services Administration (GSA), Federal Housing Administration (FHA), Housing and Urban Development (HUD), Tennessee Valley Authority (TVA). 4. Time deposits and savings accounts in bank and savings and loan associations, under the laws of Florida and the United States, doing business in and situated in- state. All such deposits shall be collateralized as provided for by Florida Statutes Chapter 280. 5. Securities issued and guaranteed by a federally sponsored corporation which are backed by, or the entity is capable of borrowing from, the U.S. Treasury. These securities carry the "implied guarantee" of the U.S. Government and include the Federal Farm Credit Banks (FFCB), Federal Home Loan Bank Mortgage Corporation (FHLMC) (participation certificates), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) or its banks. 6. Commercial Paper of any United States corporation provided such notes have a rating of A1/P1 by at least two of the five rating agencies. 7. Bankers Acceptance eligible for purchase by the Federal Reserve System issued by banks having a Moody's or Standard and Poor's commercial paper rating of at least Al/Pl. IWA — _ Investment Policy B. Collateralization Collateralization will be required on two types of investments: certificates of deposit and overnight repurchase agreements (as described in the City Code, section 6-26). In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 100.0% at a minimum with up to 102.0% being desired. C. Repurchase Agreement Overnight Repurchase Agreements are the only repurchase agreements authorized as stated in the City Code, section 6-26. D. Compliance with City's Bond Covenants Certain surplus funds available for investment represent capital project funds generated through the issuance of long term bonded indebtedness, or represent debt service funds created for the repayment of outstanding principal and interest on such bonded indebtedness. Whenever ordinances and/or resolutions adopted by the City Commission which authorize the issuance of such bonded indebtedness contain specific provisions relative to the investment of funds, the investment of such funds shall comply with the provision of the applicable bond ordinance and/or resolution, the requirement contained in this policy, and applicable statutory or administrative law. E. Purchase of City's Utility Bonds The City may use funds on hand to purchase in the open market outstanding utility system bonds. Pursuant to Resolution R-85-436, section 512(b), monies held in the General Reserve Fund under the Bond Resolution may be used to "purchase or redeem bonds." Under Section 208, sub section (a), Director of Finance is authorized to purchase any outstanding Term Bonds "on the most advantageous term obtainable with reasonable diligence, such as price not to exceed the principal of such Term Bonds plus the amount of the redemption premium, if any, which might on the next redemption date be paid to the holder of such Term Bonds ... if such Term Bonds should be called for redemption on such date from monies in the Sinking Fund." 13 Investment Policy Vill. INVESTMENT INSTRUMENTS NOT AUTHORIZED Types of securities that are Non -Authorized and not suitable for investment (and in accordance with Section VII of this policy) include the following as examples: A. High Grade Corporate Debt U.S. dollar denominated debt obligations of domestic or foreign corporations, or foreign sovereignties issued in the United States or in foreign markets. This shall include, but not be limited to, corporate notes, bonds, medium term notes, Eurodollar notes and bonds, Yankee notes and bonds. B. Repurchase Agreements Transaction in which securities are purchased from an institution with an agreement to re -sell the same securities on a specified future date with the exception of overnight repos. C. Derivative Investment Products This includes but is not limited to collateralized mortgage obligations (CMOs), interest - only (IOs) and principal only (POs), forwards, futures, currency and interest rate swaps, options, floaters/inverse floaters, and caps/floors/collars. 14 Investment Poli IX. INVESTMENT PARAMETERS A. Diversification It is the policy of the City of Tamarac to diversify its investment portfolios. Assets held shall be diversified to control the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer, a specific instrument, a class of instruments, and a dealer through whom these investments are bought and sold. Diversification strategies within the established guidelines shall be reviewed and revised periodically as necessary by the appropriate management staff and approved by the Director of Finance (See Table 1, page 1 9). B. Maximum Maturities To the extent possible, the City will attempt to match its investments with overall anticipated cash flow requirements. The City will not invest in long term securities unless matched to a specific cash flow requirement. Investments do not necessarily have to be made for the same length of time that funds are available. The basic criteria for consideration for investments are listed below: • Keep maturities short in a period of constantly rising interest rates based on treasury bill auctions or the daily Fed Funds rate. • Keep maturities short in a period of an inverted treasury yield curve (short term rates are higher than long term rates). • Maturities should be lengthened when the treasury yield curve is normal and expected to remain that way based on economic reports taken as a whole. The yield curve is normal when short term rates are lower than long term rates. • Maturities should be lengthened when interest rates are expected to fall based on economic reports taken as a whole. • The yield curves of the market should be analyzed for significant breaks in yields over various maturity dates. The points at which the yield curve breaks are the points at which there are significant marginal declines in yields for incremental changes in the maturity dates. Investments should be made at the breaks in the yield curve so that yields will be maximized. Investment Policy C. Duration The duration of each investment should not exceed the stated maturity. D. Security Selection When purchasing or selling securities, the Director of Finance or designee shall select the security which provides the highest rate of return within the parameters of this policy (see Investment Objectives) and given the current objectives and needs of the City's portfolio. These selections shall be made utilizing one of the following methods: • Competitive bids, wherein the City solicits quotes from a minimum of three firms. • Comparison to the current market price as indicated by one of the market pricing resources available to the City (such as the City's financial advisors, the Wall Street Journal, or a comparable nationally recognized financial publication providing daily market pricing) In most situations, the City shall utilize the competitive bid process to select the securities to be purchased or sold. Selection by comparison to current market prices, as indicated above, shall be utilized when, in the judgement of two members of the investment staff, competitive bidding would inhibit the selection process. Examples of when this might occur are: • When time constraints due to unusual circumstances preclude use of the competitive bidding process. • When the transaction involves new issues or issues in the "when issued" market. When using the competitive bid process, all bids shall become part of the record of the specific security involved. When the selection is made based on comparison to current market price, the following information shall become part of the record of the security involved: • Reason for use of this method. • Source of the current market value used. • Price and/or interest rate quoted by said source. I, Investment Poli E. Policies to Enhance Return on Investment The City's investment strategy is active. Given this strategy, the basis used by the Director of Finance to determine whether market yields are being achieved is the State Board of Administration (State Pool). The following specific policies are set forth below to provide additional guidance in implementing Return on Investment objectives. 1. Active Portfolio Management It is the policy of the City to actively manage the investment portfolio within the constraints outlined in these investment policies. By using an active portfolio management philosophy, portfolio yield will be enhanced without an appreciable increase in risk. 2. Portfolio Maturity Management When structuring the maturity composition of the investment portfolio, it is the policy of the City to evaluate current economic conditions, relative interest rate levels and general direction of interest rates. During periods where economic conditions demonstrate considerable potential for interest rate increases in the near future, the City will consider appropriate actions to shorten maturities. Similarly, during periods where economic conditions demonstrate potential for interest rate decreases in the near future, the City will consider appropriate actions to lengthen maturities. 3. Bond Swaps It shall be the policy of the City to pursue bond swaps as they may present themselves over the term of any investment. All swaps shall adequately compensate the City for administrative costs, reinvestment risk, and quality considerations. The following categories of bond swaps are considered appropriate for the City: a. Swaps to Increase Yield: Market aberrations are often caused by supply and demand conditions for particular securities. For example, if a short supply exists for a particular security or maturity range, then it may be advantageous to swap out of a security in short supply and into another similar security. 17 Investment Pol E. Policies to Enhance Return on Investment, continued b. Swaps Between Different Issuers: Interest rate differentials commonly exist between U.S. Treasury and agency securities. Periodically, these relationships may become distorted and thereby present advantageous swap opportunities. At times it may be difficult to isolate the swap opportunities that are attributable to this factor or (1) above. C. Swaps to Reduce Maturity: Market aberrations occasionally create a situation where longer maturity securities are yielding the same or less than securities with a shorter maturity. Portfolio quality can be improved by switching from the longer maturity security to the shorter maturity security with little or no interest penalty. d. Overall Loss vs. Initial Accounting Loss: It is the City's policy to avoid all swaps that result in a loss over the accounting period of the applicable securities. Other swap transactions may result in initial accounting losses for the owned security but offer a gain over the maturity period of the applicable securities. The City is generally reluctant to enter into this latter form of swap but reserves the discretion to incur such initial accounting losses in the event the transaction offers sufficient enhancements to yield, maturity or credit risk with the approval of the Director of Finance. 18 Investmen Table 1 investment rarameters Authorized Investments Maturity Range Minimum Percent Maximum Percent (%) State Board of Administration (SBA) N/A 5% 90% Overnight Repurchase Agreement N/A N/A N/A U.S. Treasury Securities 15 years 10% 95% U.S. Government Obligations (e.g. GNMA, HUD, FMHA, SBA, GSA, FHA, TVA) 10 years 0% 85% U.S. Government Instrumentalities (e.g. FFCB, FHLMC, FHLB, FNMA) 10 years 0% 85% Certificate of Deposits 5 years 0% 85% Commercial Paper 270 days 0% 10% Bankers' Acceptance 270 days 0% 10% 19 Investment Pol X. REPORTING A. Method The Director of Finance shall generate monthly reports for the City Manager and for the City Commission. The report shall summarize the investment strategies employed and describe the portfolio in terms of investment securities, maturities, risk characteristic and other features. The Director of Finance or Designee shall provide other such reports and information as deemed reasonable, upon request from other internal and external sources. B. Performance Standards The investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. Portfolio performance should be compared to appropriate benchmarks on a regular basis. C. Marking to Market A statement of the market value of the portfolio shall be issued at least monthly. This will ensure that the minimal amount of review has been performed on the investment portfolio in terms of value and subsequent price volatility. XI. POLICY A. Exemption Any investments currently held that do not meet the guidelines of the policy shall be exempted from the requirements of this policy. At maturity or liquidation, such monies so invested shall be reinvested only as provided for in this policy. The Director of Finance or designee may take a sufficient period of time to adjust the existing portfolio to the provisions of the policy so as not to require the premature liquidation of any investment. B. Amendment This policy shall be reviewed on a timely basis. Any material changes to the Investment Policy should be recommended by the Director of Finance and the City Manager and approved by the City Commission. C. Effective Date This policy shall become effective immediately upon its adoption by the City Commission. 20 Investment Policy APPENDIX A GLOSSARY BANKERS ACCEPTANCE: A bearer time draft for a specified amount payable on a specified date, quoted in terms of a discount yield. BANKING SERVICES AGREEMENT: The purpose of the all -encompassing banking services agreement is to combine all facets of the total banking relationship into a single document. Depending on the nature and scope of the requesting banking services, the banking services agreement may include any member of provisions. CAPITAL ADEQUACY GUIDELINES: One test of a dealer's financial solvency is the relationship between the firm's capital position and its risk exposure, known as capital adequacy. Losses that result from trading and credit risk reduce the capital of the firm. After capital is exhausted, further losses may fall on the firm's customers if the Broker/Dealer is holding the securities. Capital adequacy guidelines measure trading and credit risk to the available liquid capital. CAPITAL PROJECTS FUNDS: Accounts for financial resources to be used for the acquisition or construction of major capital facilities. 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: A short term, generally unsecured promissory note issued either at a discount or on a fixed rate interest -bearing basis. CREDIT RISK: Credit Risk is the risk of loss due to the failure of the security issuer or backer. Credit risk may be mitigated by: limiting investments to the safest types of securities; prequalifying the financial institutions, brokers/dealers, intermediaries, and advisors with which the City will do business; and diversifying the investment portfolio so that potential losses on individual securities will be minimized. DEBT SERVICE FUNDS: Accounts for the accumulation of resources for, and the payment of, general long-term principal and interest. 21 Investment Polite DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). 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. ENTERPRISE FUNDS: Accounts for operations (a) that are financed and operated in a manner similar to private business enterprises --where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided the periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, and other purposes. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insure bank deposits, currently up to $100,000 per deposit. FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Bank vis-a- vis member commercial banks. .FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called is a private stockholder -owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL RESERVE BANK: 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. GENERAL FUND: Accounts for all financial resources except those required to be accounted for in another fund. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR GINNIE MAE): Securities guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by FHA, VA or FMHM mortgages. The term passthroughs is often used to describe Ginnie Maes. 22 Investment Policy INTEREST RATE RISK: Interest rate risk is the risk that the market value of securities in the portfolio will fall due to changes in the general interest rates. Interest rate risk may be mitigated by: structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity; and by investing operating funds primarily in shorter -term securities or by cash flow projections. INTERNAL SERVICE FUNDS: Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental units, on a cost reimbursement basis. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. PORTFOLIO: Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset by an individual or institutional investor. The purpose of a portfolio is to reduce risk by diversification. PRIMARY LEADER: A group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker -dealers, banks, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state--the-so-called legal list. In other states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. (MARKET) RATE OF RETURN: The yield obtainable on a security basis on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return. 23 Investment Poli 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 protections. SAFETY: Relates to the volatility of the principal of the investment. Complete safety meads no increase or decrease in nominal value. The original sum invested is returnable to the investor either at the investor's option or at the end of some short contractual period. SECONDARY MARKET: Exchanges and over-the-counter markets where securities are bought and sold subsequent to original issuance, which took place in the PRIMARY MARKET. Proceeds of secondary market sales accrue to the selling dealers and investors, not to the companies that originally issued the securities. Market in which money-market instruments are traded among investors. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SPECIAL REVENUE FUNDS: Accounts for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes. THIRD PARTY CUSTODIAL AGREEMENTS: A safekeeping contract with a trust custodian not involved in the investment transaction. TREASURY BILLS: 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 BONDS: Long-term U.S. Treasury securities having maturities of more than ten years. TREASURY NOTES: Intermediate term coupon bearing U.S. Treasury securities having initial maturities of from one to ten years. TRUST AND AGENCY FUNDS: Accounts for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other trust funds. 24 I nvestment UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember 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. WIRE TRANSFER AGREEMENTS: Many banks require an executed Wire Transfer Agreement from their commercial customers - those who utilize the Fedwire system as a means for transferring large amounts of funds on a regular basis. YIELD: The rate if annual income return on an investment, expressed as a percentage. (A) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (B) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. 25 EXHIBIT 2 TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 2 OF 6 INVESTMENT POLICY REVISIONS VII. AUTHORIZED AND SUITABLE INVESTMENT INSTRUMENTS A. Investment Types The following are the authorities for investments and limits on security issues, issuers, and maturities as established within this policy. The Director of Finance or designee shall have the option to further restrict investment in selected instruments, to conform to then -present market conditions. In accordance with Section 166.261, 218.415 Florida Statutes, and section 6-26, City Code, authorized investments include: 1. The Florida Local Government Surplus Trust Fund (Administered by the State Board of Administration and commonly referred as the "SBA"). 2. Direct obligations of the U.S. Government which include but are not limited to Treasury Bills, Treasury Notes, Treasury Bonds and Treasury Strips, 3. Obligations guaranteed by the U.S. Government as to principal and interest which include but are not limited to Government National Mortgage Association (GNMA), Farmers Home Administration (FmHA), Small Business Association (SBA), General Services Administration (GSA), Federal Housing Administration (FHA), Housing and Urban Development (HUD), Tennessee Valley Authority (TVA). 4. Time deposits and savings accounts in bank and savings and loan associations, under the laws of Florida and the United States, doing business in and situated in- state. All such deposits shall be collateralized as provided for by Florida Statutes Chapter 280. 5. Securities issued and guaranteed by a federally sponsored corporation which are backed by, or the entity is capable of borrowing from, the U.S. Treasury. These securities carry the "implied guarantee" of the U.S. Government and include the Federal Farm Credit Banks (FFCB), Federal Home Loan Bank Mortgage Corporation (FHLMC) (participation certificates), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) or its banks. 6. Commercial Paper of any United States corporation provided such notes have a rating of A1/P1 by at least two of the five rating agencies. 7. Bankers Acceptance eligible for purchase by the Federal Reserve System issued by banks having a Moody's or Standard and Poor's commercial paper rating of at least Al/P1. 8. Securities and Exchange Commission re istered money market funds shares that are open-ended, no-load funds registered under the Federal Investment Company Act of 1940 Rule 2a-7 -- Money Market Funds. Coding: Words stmek threttgh are deletions from the Investment Policy. Words underlined are additions to the Investment Policy. EXHIBIT 2 INVESTMENT POLICY REVISIONS B. Internal Controls TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 1 OF 6 2. Training and Education It is the policy of the City to provide periodic training in investments for the investment officials through courses and seminars offered by the Government Finance Officers Association, Municipal Treasurers Association and/or other qualified and pertinent organizations. Such training shall be at least eight (8) hours annually of continuing education in subjects or courses of study related to investment practices and products. Coding; Words are deletions from the Investment Policy. Words underlined are additions to the Investment Policy. EXHIBIT 2 TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 3 OF 6 INVESTMENT POLICY REVISIONS Table 1 Investment Parameters Authorized Investments Maturity Range Minimum Percent (%) Maximum Percent (%) State Board of Administration (SBA) N/A 5% 90% Overnight Repurchase Agreement N/A N/A N/A U.S. Treasury Securities 15 years 10% 95% U.S. Government Obligations (e.g. GNMA, HUD, FMHA, SBA, GSA, FHA, TVA) 10 years 0% 85% U.S. Government Instrumentalities (e.g. FFCB, FHLMC, FHLB, FNMA) 10 years 0% 85% Certificate of Deposits 5 years 0% 85% Commercial Paper 270 days 0% 10% Bankers Acceptance 270 days 0% 10% Money Market Funds N/A 0% 20% Coding: Words stfuek thr-ougk are deletions from the Investment Policy. Words underlined are additions to the Investment Policy. EXHIBIT 2 INVESTMENT POLICY REVISIONS X. REPORTING TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 4 OF 6 A. Method The Director of Finance shall generate monthly reports for the City Manager and for the City Commission. The report shall summarize the investment strategies employed and describe the portfolio in terms of investment securities, maturities, risk characteristic and other features. The Director of Finance or Designee shall provide other such reports and information as deemed reasonable, upon request from other internal and external sources. B. Performance Standards The investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. Portfolio performance should be compared to appropriate benchmarks on a regular basis. The City shall use the Florida Local Government Surplus Funds Trust Fund SBAplus five 5 basis points as a specific benchmark for the City investment portfolio. Coding: Words stfuek through are deletions from the Investment Policy. Words underlined are additions to the Investment Policy. EXHIBIT 2 TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 5 OF 6 APPENDIX A GLOSSARY BANKERS ACCEPTANCE: Time draft drawn on and accepted by a bank the customary mans of effectin payment for merchandise sold in import-export transactions and a source of financing used extensively in international trade. COMMERCIAL PAPER: Short-term obligations with maturities ranging from 2 to 270 days issued by banks corporations, and other borrowers to investors with temporarily idle cash. Such instruments are unsecured and usually discounted. MONEY MARKET FUND: Open-ended mutual funds that invests in commercial paper, banker's acceptance, repurchase agreements, government securities certificates of de osit and other highly liquid and safe securities. The funds net asset value remains a constant 1 a share -- only the interest rate goes up or down. Coding: Words stmel�h are deletions from the Investment Policy. Words underlined are additions to the Investment Policy. EXHIBIT 2 TEMP. RESO. #9538 SEPTEMBER 17, 2001 PAGE 6 OF 6 X. REPORTING C. Method The Director of Finance shall generate monthly reports for the City Manager and for the City Commission. The report shall summarize the investment strategies employed and describe the portfolio in terms of investment securities, maturities, risk characteristic, and E)theFfeetu tee y class or type__, book value, income earned and market value as of the report date. Such reports shall be available to the public. The Director of Finance or Designee shall provide other such reports and information as deemed reasonable, upon request from other internal and external sources. Coding: Words str-uek thfougk are deletions from the Investment Policy. Words underlined are additions to the Investment Policy.