HomeMy WebLinkAboutRES 95-255 RESOLUTION NO. e5-
BE IT RESOLVED BY THE CITY COUNCIL OF THE
01 -
CITY OF BEAUMONT:
THAT the Investment Policy of the City as amended, substantially in the form attached
hereto as Exhibit "A," is hereby in all things adopted.
PASSED BY THE CITY COUNCIL of the City of Beaumont this the 741L day
of Z'h , 1995.
L--V I Pq
- MAYOR -
City of
Beaumont, Texas
BEAUMONT. TEXAS
Investment Policy
City of
Beaumont, Texas
Investment Policy
Adopted by Resolution of
City Council
on September 26, 1995
City of Beaumont- Investment Policy
Table of Contents
I. Introduction..........................................................................................................1
H. Scope.....................................................................................................................1
M. Prudence...............................................................................................................1
IV. Objectives............................................................................................................. 1
A. Safety of Principal.................................................................................... 2
B. Liquidity................................................................................................... 2
C. Yield..........................................................................................................2
V. Delegation of Authority....................................................................................... 2
VI. Ethics and Conflicts of Interest........................................................................... 2
VII. Training................................................................................................................3
VIII. Selection of Financial Dealers, Institutions and Investment Pools.....................3
A. Broker/Dealers..........................................................................................3
B. Public Depositories................................................................................... 4
C. Investment Pools.......................................................................................4
IX. Authorized and Suitable Investments..................................................................4
X. Collateralization...................................................................................................5
XI. Safekeeping and Custody.....................................................................................6
XII. Diversification.......................................................................................................6
XM. Investment Strategies............................................................................................7
A. Pooled Fund Groups..................................................................................7
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Table of Contents
B. Debt Service Funds...................................................................................7
C. Debt Service Reserve Funds.....................................................................7
XIV. Internal Control....................................................................................................7
XV. Performance Standards........................................................................................8
XVI. Reporting..............................................................................................................8
XVH. Investment Policy Adoption.................................................................................8
Glossary............................................................................................................................9
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City of Beaumont
Investment Policy
L Introduction
It is the policy of the City of Beaumont to invest public funds in a manner which will
ensure that the investments are duly authorized, properly managed, adequately protected
and fully collateralized. The City shall seek the highest investment return with the
maximum security while meeting daily cash needs and conforming to the City Charter, the
Public Funds Investment Act (Chapter 2256, Government Code as amended) and all other
state and local statutes governing the investment of public funds.
H. Scope
This investment policy applies to all financial assets of the City as accounted for in the
City's Comprehensive Annual Financial Report. These include General, Special Revenue,
Debt Service, Capital Projects, Enterprise, Internal Service and Fiduciary Funds. All are
pooled for investment purposes except debt service and debt service reserve funds.
Interest is allocated monthly to each fund based on its individual cash balance.
M. Prudence
Investments shall be made with judgment and care, under prevailing circumstances, that a
person of prudence, discretion, and intelligence would exercise in the management of the
person's own affairs, not for speculation, but for investment, considering the probable
safety of capital and the probable income to be derived. The "prudent person" standard
shall be applied in the context of managing the total portfolio rather than a single
investment providing that the decision was consistent with this investment policy. (Section
2256.006, Government Code)
Investment officials acting in accordance with written procedures and the investment
policy and exercising due diligence shall be relieved of responsibility for an individual
security's credit risk or market price changes provided that deviations from exceptions are
reported in a timely fashion and appropriate action is taken to control adverse
developments.
IV. Objectives
The primary objectives, in priority order, of the City's investment activities shall be
preservation and safety of principal, liquidity and yield. (Section 2256.006, Government
Code)
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City of Beaumont- Investment Policy
A. Safety of principal
The City of Beaumont has as its foremost objective to ensure the safety of
principal. Investments of the City shall be undertaken in a manner that seek to
ensure the preservation of capital in the overall portfolio. To attain this objective
diversification is required in order to eliminate an over-concentration of assets in
one institution, maturity or type of securities.
B. Liquidity
The City's investment portfolio will remain sufficiently liquid to enable the City to
meet all operating requirements which might be reasonably anticipated. The
portfolio shall be constructed so that investment maturities are matched with
forecasted cash flow requirements and limited by investments in securities with an
active secondary market.
C. Yield
The City's investment portfolio shall be designed with the objective of attaining a
rate of return which is consistent with risk limitations and cash flow characteristics
of the City's investments.
V. Delegation of Authority
Authority to manage the City's investment program is derived from the City Charter
(article VII, section 1-2). The Charter designates the City Manager as Director of Finance
who shall have custody of all public funds, investments, bonds and notes of the City and
be responsible for their safekeeping. The City Manager shall establish written procedures
for the operation of the investment program consistent with this investment policy which
include explicit delegation of authority to persons responsible for investment transactions.
The City Manager shall be responsible for all transactions undertaken and shall establish a
system of controls to regulate the activities of subordinate officials.
Each "investment official" shall be approved by resolution of City Council to deposit,
withdraw, invest, transfer and manage the City of Beaumont's funds. Currently the City
Manager, the Finance Officer and the City Treasurer are approved as investment officials
of the City of Beaumont. Such approval of specific persons shall remain in effect until
rescinded by the City Council or until termination of the person's employment by the City
of Beaumont. (Section 2256.005 (f)-(h), Government Code)
VI. Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal
business activity that could conflict with proper execution of the investment program, or
which could impair their ability to make impartial investment decisions.
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City of Beaumont- Investment Policy
Investment officials and employees shall disclose any personal financial interests in
financial institutions that conduct business with the City of Beaumont. They shall also
disclose any specific individuals who seek to sell investments to the City and are related to
the employee within the second degree by affinity or consanguinity, as determined under
Chapter 573. Disclosure shall be filed with the Texas Ethics Commission and the City
Council of the City of Beaumont (Section 2256.005 (i), Government Code). Officers and
employees shall further disclose any large personal financial/investment positions that
could be related to the performance of the City, particularly with regard to the timing of
purchases and sales.
VII. Training
Each investment official of the City of Beaumont shall attend as least one training session
relating to investments within 12 months after assuming such duties. Training shall
include education in investment controls, security risks, strategy risks, market risks, and
compliance with state statutes governing the investment of public funds. (Section
2256.008, Government Code) Investment officials shall attend continuing education
classes on investment of public funds at least annually thereafter in an effort to remain
up-to-date on state statutes, security risks and strategies.
VIII. Selection of Financial Dealers, Institutions and Investment Pools
Authorized investments shall only be purchased from those institutions included on the
City's list of broker/dealers, financial institutions and investment pools as approved by the
City Council. An "approved list" shall be maintained by investment officials at all times.
Any business organization which seeks to execute investment transactions with the City of
Beaumont shall provide a written instrument certifying that they have received and
thoroughly reviewed the City's investment policy and have implemented reasonable
procedures and controls in a effort to preclude imprudent investment activities arising
from investment transactions. The certification must be signed by the primary
representative of the business organization. Investment officials shall not buy any
securities from a firm which has not filed this instrument. (Section 2256.005 (k)-(1),
Government Code)
A. Broker/Dealers
The City shall select only those broker/dealers reporting to the Market Reports
Division of the Federal Reserve Bank of New York, also known as the "Primary
Government Securities Dealers". Firms who desire to become approved bidders
for investment transactions must supply the City with audited financial statements,
a trading agreement and other information regarding their capabilities, experience,
general reputation, size and capitalization. Each firm will be reviewed by
investment officials and a recommendation made for approval by City Council.
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City of Beaumont- Investment Policy
B. Public Depositories
The City Council shall select a primary depository every two years. The primary
depository as authorized by the City Council shall meet all requirements of the
state law concerning depositories for municipal funds. (Chapter 105, Government
Code) The institution offering the most favorable terms and conditions for the
handling of City funds shall be selected as the depository.
The City Council may also establish agreements with financial institutions under
separate contract for additional services which are necessary in the administration,
collection, investment, and transfer of municipal funds. (Section 105.018,
Government Code) Financial institutions who desire to become approved bidders
for investment transactions shall submit information similar to that of a
broker/dealer as described above (section VIII-A). No deposit shall be made
except in a qualified public depository as established by State Law. The City of
Beaumont shall not place deposits or investments with Saving and Loan
Associations or Credit Unions.
C. Investment Pools
Investment officials may invest funds of the City of Beaumont through an eligible
investment pool with specific approval by resolution of City Council and execution
of a written agreement. To become eligible, investment pools must first meet all
requirements of State Law. They shall provide the City with an offering circular
which contains specific and detailed information and provide detailed monthly
transaction and performance reports. (Section 2256.016-2256.019, Government
Code) Before selection, pools shall be thoroughly reviewed and evaluated by
investment officials.
Annually, a review of the financial condition and registrations of approved bidders will be
conducted by investment officials. A current audited financial statement is required to be
on file for each financial institution, broker/dealer or investment pool in which the City of
Beaumont invests.
IX. Authorized and Suitable Investments
Authorized investments for municipal governments in the state of Texas are set forth in
the Public Funds Investment Act, as amended. (Section 2256.009-2256.019, Government
Code) Suitable investments for the City of Beaumont are limited to the following:
• Direct Obligations of the United States Treasury.
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City of Beaumont- Investment Policy
♦ Certificates of deposit issued by approved depository banks as described above
(section VIII-B) which are insured by the Federal Deposit Insurance Corporation,
or their successors; or secured by obligations that are described in Section
2256.009(a) of the Government Code.
• Fully collateralized direct repurchase agreements with a defined termination date
secured by obligations of the United States or its agencies and instrumentalities
and pledged with a third party other than an agent for the pledgor. Investment
officials may invest in repurchase agreements through an approved primary
government securities dealer or an approved depository bank as described above
(section VIII-A, B). Each issuer of repurchase agreements shall be required to
sign a master repurchase agreement.
♦ No load money market mutual funds regulated by the Securities and Exchange
Commission with a dollar weighted average stated maturity of 90 days or less
whose assets consist exclusively of direct obligations of the United States and
whose investment objectives include the maintenance of a stable net asset value of
$1 per share.
♦ Approved investment pools as described above (section VIII-C) which have
advisory boards composed of qualified members representing participants and
non-participants and are continuously rated no lower than AAA, AAA-m or an
equivalent rating by at least one nationally recognized rating agency.
X. Collateralization
Collateralization will be required on all deposits, certificates of deposit and repurchase
agreements. The collateralization level shall be equal to at least one hundred percent
(100%) of the aggregate market value of the deposit or investment including accrued
interest less an amount insured by the Federal Deposit Insurance Corporation. Evidence
of the pledged collateral shall be documented by a tri-party custodial or a master
repurchase agreement with the collateral pledged clearly listed in the agreement.
Collateral shall be reviewed monthly to assure that the market value of the securities
pledged equals or exceeds the related deposit or investment balance.
Collateral requirements shall be in accordance with Chapter 2256 and 2257 of the
Government Code. Collateral underlying repurchase agreements is limited to direct
obligations of the United States or its agencies and instrumentalities. The City of
Beaumont shall accept the following securities as collateral on deposits and certificates of
deposit:
♦ Direct obligations of the United States or its agencies and instrumentalities.
• Direct obligations of this state or its agencies and instrumentalities.
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City of Beaumont- Investment Policy
• Collateralized mortgage obligations directly issued by a federal agency or
instrumentality of the United States and excluding those mortgage backed
securities of the nature described by section 2256.009 (b) of the Government
Code.
• Other obligations which are guaranteed or backed by the full faith and credit of this
state or the United States or their respective agencies and instrumentalities.
• Obligations of states, agencies, counties, cities and other political subdivisions
rated not less than A or its equivalent.
XI. Safekeeping and Custody
Collateral shall be placed for safekeeping in a custodial account at the Federal Reserve
Bank or at an institution not affiliated with a firm pledging collateral. All safekeeping
arrangements shall be in accordance with a tri-party custodial agreement which clearly
defines the responsibilities of each party and outlines the steps to be taken in order for the
City to gain access to the collateral in the event of a "failure". The custodial agreement
shall be executed between the City, the firm pledging the collateral and the custodial
institution. All safekeeping receipts shall be delivered to the City and all collateral
(whether a pledge or substitution) shall be formally accepted and released by City Council.
All security transactions, including collateral for repurchase agreements, entered into by
the City shall be conducted on a delivery-versus-payment (DVP) basis. That is, funds shall
not be wired or paid until verification has been made that the correct security was received
by the safekeeping institution. The security shall be held in the name of the City or on
behalf of the City.
XII. Diversification
The City of Beaumont will diversify its investments to eliminate an over-concentration of
assets in any one security type or institution.
• Up to ninety percent (90%) par of the portfolio may be invested in direct
obligations of the U.S. Treasury.
• No more than fifty percent (50%) par of the portfolio may be invested in
certificates of deposit or repurchase agreements.
• No more than eighty percent (80%) par of the portfolio may be invested in
investment pools or money market mutual funds.
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City of Beaumont- Investment Policy
No more than twenty five percent (25%) par of the portfolio may be invested with
any one institution in certificates of deposit and/or repurchase agreements.
Additionally, these investments shall not exceed ten percent (10%) of the
capitalization of the financial institution.
XM. Investment Strategies
The City of Beaumont shall maintain a separate investment strategy for each of the three
fund types represented in the portfolio. (Section 2256.005,(d), Government Code)
A. Pooled Fund Groups
Investment strategies for pooled fund groups containing operating funds have as
their primary objective to ensure that anticipated cash flows are matched with
adequate investment liquidity. Securities purchased shall not have a final stated
maturity date which exceeds two (2) years from the date of purchase without
specific approval by the City Council. The dollar weighted average maturity of the
portfolio shall not exceed 365 days as calculated using the stated final maturity
dates of each security.
E. Debt Service Funds
Investment strategies for debt service funds shall have as their primary objective to
ensure that investments mature as necessary to cover the debt service obligation on
the required payment date. The stated final maturity date on securities purchased
shall not exceed the debt service payment date unless excess funds are available.
In that case, maximum maturities shall not exceed two (2) years from the date of
purchase and the dollar weighted average maturity of the portfolio shall not exceed
365 days as is consistent with investment strategies for operating funds.
C. Debt Service Reserve Funds
Investment strategies for debt service reserve funds shall have as their primary
objective to seek the highest investment return with maximum security in order to
produce a dependable revenue stream to the appropriate fund. Securities shall be
invested in accordance with specific bond ordinances and shall not have a stated
maturity date which exceeds the final maturity date of the bonds. At no time shall
maximum maturities exceed five (5)years from the date of purchase.
XIV. Internal Control
The City of Beaumont, in conjunction with its annual financial audit shall perform a
compliance audit of management controls on investments and adherence to the City's
investment policy. (Section 2256.005(m), Government Code)
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City of Beaumont- Investment Policy
XV. Performance Standards
The City intends to pursue an active versus a passive portfolio management philosophy.
That is, securities may be sold before they mature if market conditions present an
opportunity for the City to benefit from the trade.
The investment portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles which is consistent with risk limitations and
cash flow needs of the City . Given this strategy, the basis used by investment officials to
determine whether market yields are being achieved shall be the average return on 90 day
U.S. Treasury Bills.
XVI. Reporting
Investment officials shall submit a monthly report to City Council summarizing the results
of the City's investment activity. This report shall include the status of the current
portfolio position, performance, trading activity, interest earnings and collateral.
A quarterly report shall be submitted to City Council detailing investment transactions and
performance for the reporting period in accordance with state law. (Section 2256.023,
Government Code) The report shall be jointly prepared and signed by all investment
officials. It shall include a summary statement for each fund type and a detailed listing that
states the beginning market value, changes to the market value and ending market value
for the period. In addition, investment officials shall report on adherence to the City's
investment strategies as expressed in this policy.
XVII. Investment Policy Adoption
The City's investment policy is hereby adopted by resolution of the City Council on
September 26, 1995. The City Council shall review and approve any modifications to the
policy on an annual basis. This policy serves to satisfy the statutory requirement to define
and adopt a formal investment policy as set forth in Section 2256.005 of the Government
Code.
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Glossary
Accretion: Adjustment of the difference between the price of a bond bought at a discount and
the par value of the bond.
Accrued Interest: Interest due from the last interest payment to the present day.
Amortization: The reduction of principal (of debt) at regular intervals.
Basis Point: 11100th of 1% or .O1%.
Book Value: The face or par value of an investment plus accrued interest or minus amortization
or accretion.
Broker: A broker brings buyers and sellers together for a commission.
Cash Forecasting: Longer-term (one month or longer) prediction of cash flows, typically
focusing on the aggregate cash position. In contrast, cash scheduling focuses on shorter-term
predictions, emphasizing cash position management.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate.
Collateral: Assets pledged to secure deposits, investments or loans.
Collateral Mortgage Obligation (CMO): Multi-class security collateralized by whole loans or
regular mortgage securities whose cash flows are paid through to meet debt service on the CMO
bond.
Comprehensive Annual Financial Report (CAFR): The official annual report for the City of
Beaumont.
Credit Risk: The risk that a counterparty to an investment transaction will not fulfill its
obligations. Credit risk can be associated with the issuer of a security, with a financial institution
holding deposits or with parties holding securities or collateral. Credit risk exposure can be
affected by a concentration of deposits or investments in any one investment type or with any one
counterparty.
Dealer: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling
for his own account.
Delivery Versus Payment (DVP): 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 a delivery of securities with an
exchange of a signed receipt for the securities.
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Glossary
Discount: The difference between the cost price of a security and its maturity value when quoted
at lower than face value.
Diversification: Dividing investment funds among a variety of securities offering independent
returns.
Dollar Weighted Average Maturity: Represents the average number of days remaining until the
final maturity date, appropriately weighted by the dollar amount of each security in the portfolio.
Federal Agency Securities (agencies): Discount and coupon obligations of the federal agencies
that were established by Congress to provide credit to specific sectors of the economy.
Federal Deposit Insurance Corporation (FDIC): A federal institution that insures deposits of
federally chartered banks, currently up to $100,000 per deposit.
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.
Investment Pool: An entity created to invest public funds jointly on behalf of the entities that
participate in the pool.
Li uidi : A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value.
Market Risk: The risk that the market value of an investment, collateral protecting a deposit or
securities underlying a repurchase agreement will decline. Market risk is affected by the length to
maturity of a security, the need to liquidate a security before maturity, the extent to which
collateral exceeds the amount invested and how often the amount of collateral is adjusted for
changing market values.
Market Value: The price at which a security is trading and could presumably be purchased or
sold.
Master Repurchase Agreement: A written contract covering all future transactions between the
parties to repurchase reverse repurchase agreements that establishes each party's rights in the
transactions.
Maturity: The date upon which the principal or stated value of an investment becomes due and
payable.
Par Value: Face amount or 100% of the principal amount of a security at original issue.
Pooled Fund Group: An internally created fund of an investing entity in which one or more
institutional accounts of the investing entity are invested.
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Glossary
Portfolio: Collection of securities held by an investor.
Premium: The difference between the price of a bond and its value at maturity when the price is
higher than the maturity value.
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.
Principal: The amount of debt remaining on a loan. On the date a loan is originated, or issued,
the total amount equals the initial principal balance.
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 custody 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.
Oualified 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.
Rate of Return: The yield obtainable on a security based on its purchase price or its current
market price. See yield.
Repurchase Agreement (RP or REPO): A holder of securities sells these securities to an
investor with an agreement to repurchase them at a fixed price on a fixed date. The security
"buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the
agreement are structured to compensate him for this. Dealers use RP extensively to finance their
positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing
bank reserves.
Safekeeping: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank's vaults for protection.
Secondary Market: A market made for the purchase and sale of outstanding issues following
the initial distribution.
Securities & Exchange Commission (SEC): Agency created by Congress to protect investors
in securities transactions by administering securities legislation.
Sec Rule 15C3-1: See Uniform Net Capital Rule.
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Glossary
Settlement Date: The date agreed upon by the parties to a transaction for the payment of funds
and the delivery of securities.
Stated Maturity: A predetermined final maturity date that cannot be altered by prepayments.
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 Notes: A non-interest bearing discount security issued by the U.S. Treasury to finance
the national debt. Most notes are issued to mature in one to ten years.
Treasury Securities: "Full faith and credit" obligations of the U.S. Government issued by sale at
periodic auctions, delivered and cleared electronically.
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 rate of 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.
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