4.1. ERMUSR 05-11-2010Phone: 763.44 ~.Z020
Fax: ~63,~4t.8099
May 6, 201 D
To: Elk River Municipal Utilities Commission
John Dietz
Jerry Gumphrey
Daryl Thompson
From: Troy Adams
Subject. Review and Consider the revised Investment Policy and the proposed Reserves Policy
0n March 9th, the Investment Committee met to review ERMU's current Investment Policy. A
number of issues with the current Investment Policy were identified. First, it was determined
that a stand alone policy was needed to set criteria for the financial reserves, Second, the policy
needed to be updated to establish formal delegation of authority and reporting requirements. The
revised Investment Policy is attached for review and consideration. Staff recommends adopting
the revised Investment Policy,
During the March 9th Commission meeting, the Investment Committee provided an update to the
Commission on the need for a financial reserves policy. At the April 13th Commission meeting,
the Utilities Commission took action on the reserve balance target level criteria
recommendations made by the Investment Committee and directed staff to draft a reserves policy
based on the adopted criteria, The proposed Financial Reserves Policy is attached for review and
consideration. Staff recommends adopting this policy,
Reserves Levels are presented for discussion:
Electric Water
Cash balances per audit 6,091,320 2,500,960
Restricted for Debt Service 724,500
Unrestricted Designated Reserve 3,315,181 1,194,758
Unrestricted Reserve 2,051,639 1,306,202
Total Reserves 6,091,320 2,500,960
Elk River~~
Municipal Utilities
.2~a N'ST ENT ~C
~.0 o~~cy
It is the policy of Elk River Municipal Utilities to invest public funds in a manner which will
provide the highest investment return with the maximum security while meeting the daily cash
flow demands of the entity while conforming to all state and local statutes governing the
investment of public funds,
2.0 c®pe
The investment policy applies to all financial assets of the utility. These funds are accounted far
in the utility's Annual Financial Report and include all of the water and Electric Funds.
~.0 .P~ude~ce
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,
nat for speculation, but for investment, considering the probable safety of their capital as v~rell as
the probable income to be derived.
The standard of prudence to be used by investment officials shall be the "prudent person"
standard, as defined by Minnesota Statute ~356A.Q4, Subd. Z, and shall be applied in the context
of managing an overall portfolio. Investment officers acting in accordance with written
procedures and the investment policy and exercising due diligence shall be relieved of personal
responsibility for an individual security's credit risk or market price changes, provided
deviations from expectations are reported in a timely fashion and appropriate action is taken to
control adverse developments.
4.0 bjecti~es
A11 investments shall be limited to those permitted by Minnesota Statute ~ 11 ~A. The primary
objectives, in priority order, of the Elk River Municipal Utilities' investment activities shall be;
4.1 Samar m Investments of the Eik River Municipal Utilities shall be undertaken in a
manner that seeks to ensure the preservation of capital in the overall portfolio. To
attain this objective, diversif cation is required in order that losses on individual
securities do not exceed the income generated from the remainder of the portfolio,
4.2 Li uidi~ -The Elk River Municipal Utilities' investment portfolio will remain
sufficiently liquid to enable the Elk River Municipal Utilities to meet all operating
requirements which might be reasonably anticipated.
4.3 Return on Investment ~ The Elk River Municipal Utilities' investment portfolio shall
be designed with the objective of attaining a market rate of return throughout
budgetary and economic cycles, The investment strategy will take into account the
constraints on risk and cash flow characteristics ofthe investment portfolio.
4.4 Maintaining the ~ublic's.Trust ~ All officials and employees who are part of the
investment process shall seek to act responsibly as custodians of the public trust.
Investment officials shall avoid any transaction that might impair public conf dance
in the municipality's ability to govern effectively.
~.0 e~e~~~~o~ o ~4~t~i®~i
Authority to manage the Elk River Municipal Utilities' investment program is derived from the
following: Minnesota Statutes § 11 SA. Management responsibility for the investrraent program
is hereby delegated to a utility committee comprised of the Finance Director, Director of
operations, and a member of the board. No person may engage in an investment transaction
except as provided under the terms of this policy and the procedures established by the
committee. The committee shall be responsible for all transactions undertaken and shall
establish a system of controls to regulate the activities of subordinate officials.
6.0 Ethics and Confldct of Interest
officers and employees involved in the investment process shall refrain from personal business
activity that could conflict with the investment program, or which could reasonably cause others
to question or doubt their ability to make impartial investment decisions. Employees and
investment officials shall disclose to the Finance Director any material financial interests in
financial institutions that conduct business within this jurisdiction, and they shall further disclose
any personal financiallinvestmentpnsitions that could be related to the performance of the Elk
River Municipal Utilities' portfolio.
7.4 ~4~~1i®~i~ed .~"ana~clal e~le~~ aid I~~~l~ions
The Finance Director will maintain a list of f nancial institutions authorized to provide
investment services. In addition, a list will be maintained of approved security brokerldealers
selected by credit worthiness, who maintain an off ce in the State of Minnesota. These may
include "primary dealers" or regional dealers that qualify under Securities ~ Exchange
Commission Rule 15c3 ~ 1 uniform net capital rule, All brokers doing business with the Utilities
shall have a broker Certification form on file with the Finance Director in accordance with
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Minnesota Statutes § 11 ~A.04, Subd 9. All investments must be placed with brokers whose
office is in the State of Minnesota. No investments may be made with aut of state brokers.
~, 0 A~~a~~ze ~~d ~'~i~~b~e Ives~~ne~~~
Investment instruments authorized and permitted by this policy are as follows;
~.1 Repurchase A egr ements -Repurchase agreements consisting of collateral allowable
in Section 11 ~A.04.
S.2 United States Securities -Governmental bonds, notes, bills, mortgages excluding
high~risl~ mortgage~backed securities}, and other securities, which are direct
obligations or are guaranteed or insured issues of the United States, its agencies, its
instrumentalities, or organizations created by an act of Congress.
High risk mortgage~backed securities which are excluded from investment options
for the utility) are deftned as follows:
A. Interestmonly or principal~only mortgage~backed securities; and,
~. Any mortgage derivative security that:
1.} Has an expected average life greater than ten years;
2.} Has an expected average life that:
C. will extend by more than four years as the result of an immediate and
sustained parallel shift in the yield curve of plus 300 basis points; or
I). will shorten by mare than six years as the result of an immediate and
sustained parallel shift in the yield curve of minus 30o basis points; or
E. will have an estimated change in price of more than 17 percent as the result of
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
s.3 Minnesota Joint Powers Investment Trust ~-Agreements or Contracts for 1 }shares of
a Minnesota point powers Investment trust whose investments are restricted to
securities authorized for investment by the government entity, and 2} shares of an
investment company registered under the Federal Investment Company Act of 1940,
whose shares are registered under the Federal Securities Act of 1933, as long as the
investment company's fund receives the highest credit rating and is rated in one of the
two highest risk rating categories by at least one nationally recognized statistical
rating organization and is Invested in f nancial instruments with a final maturity of no
longer than 13 months.
$.4 Mate and Local Securities--Mate and local government obligations as follows:
A. Any security which is a general obligation of any state or local government
with taxing powers which is rated "A" or better by a national bond rating
service;
B. Any security which is a revenue obligation of any state or local government
with taxing powers which is rated "AA" or better by a national bond rating
service; and,
C, A general obligation of the Minnesota I~ousing Finance Agency which is a
moral obligation of the Mate of Minnesota and is rated "A" or better by a
national band rating agency,
~.5 Commercial Paper ~-Commercial paper issued by United States corporations or their
Canadian subsidiaries that is rated in the highest quality category (e.g., A~1, P~1, F~l,
or D~ 1 or higher by at least two nationally recognized rating agencies and matures in
Z70 days or less,
s.6 Time Deposits -Time deposits that are fully insured by the Federal Deposit
Insurance Corporation or bankers acceptances of United States banks.
~.7 Speculative Investments -The Utilities shall not purchase investments that, at the
time of purchase, can not be held to maturity, All investments shall be purchased
with the intent to hold until maturity. This section sha11 not be construed to restrict
the sale of investments prior to maturity which may be in the best interest of the
Utilities.
~.~ Further Restrictions -The Utilities shall not invest in Guaranteed Investment
Contracts or Reverse Repurchase Agreements.
9a0 C'ol~~~e~r~l~~ao~
Elk River Municipal Utilities will follow Minnesota statutes regarding the use of collateral
requirements. In order to anticipate market changes and provide a level of security for all funds,
the collateralizationievel will be at least ten percent more than the amount of deposit plus
accrued interest at the close of the business day. To the extent that funds deposited are in excess
of available federal deposit insurance, the government entity shall require the financial institution
to furnish collateral security. All collateral shall be placed in safekeeping in a restricted account
at a Federal Reserve dank, or in an account at a trust department of a commercial bank or other
financial institution that is not owned or controlled by the fnancial institution furnishing the
collateral. The selection shall be approved by Elk River Municipal Utilities.
9.1 Assignment -^Any collateral pledged shall be accompanied by a ~rrltten assignment
to the government entity from the financial institution. The written assignment shall
recite that, upon default, the financial institution shall release to the government entity
on demand, free of exchange or any other charges, the collateral pledged. Interest
earned on assigned collateral will be remitted to the financial institution so long as it
is not in default. The government entity may sell the collateral to recover the amount
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due. A-ny surplus from the sale of collateral shall be payable to the financial
institution, its assigns, or both.
IO4 4 ,~~ekeep~n aid ~`us~oy
10,1 Investments shall be held in safekeeping with
.A. Any Federal Reserve Bank;
B, Any bank authorized under the laws of the United States or any state to
exercise corporate trust powers, including, but not limited to, the bank from
which the investment is purchased;
C. A primary reporting dealer in United States government securities to the
Federal Reserve Bank of New York; or
D. A securities brokerldealer having its principal executive office in Minnesota,
licensed pursuant to chapter ~oA, or an affiliate of it, regulated by the
Securities and Exchange Commission; provided that the government entity's
ownership of all securities is evidenced by written acknowledgments
identifying the securities by the names of the issuers, maturity dates, interest
rates, CUSIP number, or other distinguishing marks.
l o.~ Custodial Credit Risk -The Utility will minimize the investment Custodial Risk by
permitting brokers that obtained investment for the Utility to hold them only to the
extent there is SIPC and excess SIPC coverage available. Securities purchased that
exceed available SIPC coverages shall be transferred to the Utility's custodian.
l.~0 0 .i~e~sicati®n ~~u~r~~'e~
Elk .River Municipal Utilities will diversify its investments by security type and institution. ~n
establishing specif c diversification strategies, the following general policies and constraints
shall apply:
Portfolio maturities shall be staggered to avoid undue concentration of assets at a specific
maturity sector, with one brokermdealer or financial institution, or any one type of
instrument. The maturities selected shall provide for stability of income and reasonable
liquidity.
1 Za 0 I~te~~~1 C"o~t~o~
The Finance Director shall establish an annual process of independent review by an external
auditor. This review will provide internal control by assuring compliance with policies and
procedures.
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13.0 Pe~for~aance Stanrdca~ds
The investment portfalio will be designed to obtain a market average rate of return during
budgetary and economic cycles, taking into account Elk River Municipal Utilities investment
risk constraints and cash flow needs.
14.0 .ep0~~~~~
The Finance Director shall prepare an investment report on a periodic basis and include:
1. Listing of individual securities held at the end of the reporting period.
2. Listing of investments by maturity date.
3. Percentage of the total portfolio which each type of investment represents.
4. Market to Market analysis.
5. Rate of return for the quarter.
15, 0 I~~es~e~ .Policy AOp~~®~
The Elk River Municipal Utilities investment policy shall be adopted by motion of Elk River
Municipal Utilities' Commission. The policy shall be reviewed periodically as needed by the
Director of Operations and Finance Director, and any modifications made thereto must be
approved by Elk River Municipal Utilities' Commission.
Adopted September 13, 205
Proposed Revision May 1 ~, 2~1 D
6
Elk River
Municipal
i/~-~~
Utlilt]eS
.Zb FZAI~IL SE vE~ LIC'
I. ~ r~rp®~e ~~ 5~~ry
In order to maintain stable rates and provide reliable services, Elk River ~/Iunicipal Utilities
~ERIVIU~ requires financial buffers in the form of reserves to mitigate changes in costs or
operational performance. For ERMU there are two utility funds, the Electric Utility and the
dater Utility. These funds shall have separate reserves. Their reserve balances shall be
classified as either restricted for Debt Service or Unrestricted Designated Reserve.
The target levels for these reserves shall be determined by the criteria herein. These target levels
and target criteria will be reviewed annually, madified by Utilities Commission to support the
longterm goals of ERI~IU, and adapted with the annual budget. Unless otherwise specified by
bond covenants, these reserve balances shall be invested cansistent with ERiUIU's Investment
Policy policy number ~.~Oa},
2.0 Elec~~°ic Uti~i~r .Reserve C'iass~ Ica'®~s
Restricted For Debt Service: This reserve is established to maintain compliance with bond
covenants,
The target level for this reserve shall be set at the level specified by bond covenants.
Unrestricted I~esi ng~ated Reserve: This reserve is established to address the short-term financial
variability inherent in operating an Electric Utility. Potential sources of this variability include
but are not limited to: risks associated with natural disasters, reduction in overall customer usage,
changes in total system load resulting from the actions of large customers, failure to achieve
budgeted levels of net income, changes in cost of purchased power, changes in interest income,
and general operational exposures.
The target level for this reserve shall be set at the sum of b months operating expenditures less
depreciation and less purchase power costs plus the sum of next year's total principal and interest
payments. The balance above this target level shall be unrestricted.
~~ a ate ~T~~~~~ es~~°ve C'~ass~ca~~o~t~
Restricted For Debt Service: This reserve is established to maintain compliance with bond
covenants.
The target level for this reserve shall be set at the level specified by bond covenants,
Unrestricted designated Reserve: This reserve is established to address the shortbterm financial
variability inherent in operating a water Utility, Potential sources of this variability include but
are not limited to: risks associated with natural disasters, reduction in overall customer usage,
changes in total system usage resulting from the actions of large customers, failure to achieve
budgeted levels of net income, changes in interest income, and general operational exposures.
The target level for this reserve shall be set at the sum of 6 months operating expenditures less
depreciation plus the sum of next year's total principal and interest payments. The balance
above this target level sha11 be unrestricted.
.0 Yea~~end deserve ala~ce~
If the year-end reserve balances are above their target levels after the completion of the year-end
audit, these balances shall be unrestricted with a defaulting designation as working capital. The
Utilities Commission sha11 then consider optimal uses of these unrestricted reserves through any
of the following but not limited to: working capital, designated for power costs electric fund
only}, debt reduction, retention for reserve fund growth for future needs, or use for rate
stabilization or reduction.
If the year-end reserve balances are below their target levels aver the completion of the yearend
audit, the Utilities Commission shall consider the balances and plan for their replenishment to
target levels in a timely manner.
Proposed May 11, 2010
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