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6.3 ERMUSR 09-13-2005 �i 1/0 Elk River I Municipal Utilities 13069 Orono Parkway phone: 763.441.2020 Elk River,MN 55330 Fax 763.441.8099 August 30, 2005 To: Elk River Municipal Utilities commission ' Jerry Takle Jim Tralle John Dietz ' From: Theresa Slominski Subject: Investment Policy The Elk River Municipal Utilities does not currently have an Investment Policy in place. ' When our auditors were out here this spring, it was mentioned that we could expand our investments to include more than just CDs and not limit ourselves to one investment type. As funds would be invested conservatively, the investment opportunities would still be limited but could be expanded upon. I contacted Lori Johnson at the City and requested a copy of their Investment Policy and related forms. I have modified the City's policy to reflect Elk River Municipal Utilities' name where appropriate and would like to adopt this policy as our own. Later this year, ' when we have excess funds to invest I would like to be able to move forward with this new policy. ‘10 1 IElk River Municipal Utilities ‘11, Investment Policy I 1.0 Policy IIt 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 Iflow demands of the entity while conforming to all state and local statutes governing the investment of public funds. 2.0 Scope IThe investment policy applies to all financial assets of the utility. These funds are accounted for in the utility's Annual Financial Report and include all of the Water and Electric Funds. 3.0 Prudence IInvestments 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, 10 not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. I 3.1 The standard of prudence to be used by investment officials shall be the "prudent Iperson" standard, as defined by Minnesota Statute §356A.04, Subd. 2, and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance Iwith 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 Ichanges, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. I 4.0 Objectives All investments shall be limited to those permitted by Minnesota Statute §118A. The primary objectives, in priority order, of the Elk River Municipal Utilities' investment activities shall be: III I I1 I I. 4.1 Safety Investments of the Elk River Municipal Utilities shall be undertaken in a manner that I seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that losses on individual securities do not exceed the I income generated from the remainder of the portfolio. 4.2 Liquidity I The Elk River Municipal Utilities' investment portfolio will remain sufficiently liquid to I enable the Elk River Municipal Utilities to meet all operating requirements which might be reasonably anticipated. I4.3 Return on Investment The Elk River Municipal Utilities' investment portfolio shall be designed with the objective I 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 Icharacteristics of the investment portfolio. IP4.4 Maintaining the Public's Trust All officials and employees who are part of the investment process shall seek to act Iresponsibly as custodians of the public trust. Investment officials shall avoid any transaction that might impair public confidence in the municipality's ability to govern Ieffectively. I5.0 Delegation of Authority Authority to manage the Elk River Municipal Utilities' investment program is derived from the Ifollowing: Minnesota Statutes §118A. Management responsibility for the investment program is hereby delegated to a utility committee comprised of the Finance Director, General Manager, and Ia 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 tshall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. I/4111 I I2 I 6.0 Ethics and Conflict of Interest 16 Officers and employees involved in the investment process shall refrain from personal business I 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 Iofficials 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 financiallinvestment positions that could be related to the performance of the Elk River IMunicipal Utilities' portfolio. 7.0 Authorized Financial Dealers and Institutions IThe Finance Director will maintain a list of financial institutions authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by credit worthiness, who maintain an office in the State of Minnesota. These may include "primary Idealers" 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 ICertification form on file with the Finance Director in accordance with Minnesota Statutes §118A.04, Subd 9. All investments must be placed with brokers whose office is in the State of IIIMinnesota. No investments may be made with out of state brokers. I8.0 Authorized and Suitable Investments Investment instruments authorized and permitted by this policy are as follows: I A. Repurchase Agreements IRepurchase agreements consisting of collateral allowable in Section 118A.04. IB. United States Securities Governmental bonds, notes, bills, mortgages (excluding high-risk mortgage-backed Isecurities), 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 Ian act of Congress. 1110 High risk mortgage-backed securities (which are excluded from investment options for the utility) are defined as follows: I1.) interest-only or principal-only mortgage-backed securities; and, I3 I2.) any mortgage derivative security that: lip a) has an expected average life greater than ten years; b) has an expected average life that: I i) 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 ii) will shorten by more than six years as the result of an immediate and sustained parallel shift in the yield curve of minus 300 basis points; or Ic) 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 I minus 300 basis points. IC. Minnesota Joint Powers Investment Trust Agreements or Contracts for 1) shares of a Minnesota joint powers investment trust whose Iinvestments are restricted to securities authorized for investment by the government entity, or 2) shares of an investment company registered under the Federal Investment ICompany 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 IIIone of the two highest risk rating categories by at least one nationally recognized statistical rating organization and is invested in financial instruments with a final maturity of no Ilonger than 13 months. D. State and Local Securities State and local government obligations as follows: I1.) 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; I2.) 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, I3.) a general obligation of the Minnesota housing finance agency which is a moral obligation of the State of Minnesota and is rated "A" or better by a national bond Irating agency. 16 I I4 1 E. Commercial Paper le Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category by at least two nationally recognized rating agencies tand matures in 270 days or less. Time Deposits IF. Time deposits that are fully insured by the Federal Deposit Insurance Corporation or bankers acceptances of United States banks. 8.1 Speculative Investments I 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 shall not be construed to restrict the sale of investments prior to maturity which may be in the best interest of the Utilities. 8.2 Further Restrictions IThe Utilities shall not invest in Guaranteed Investment Contracts or Reverse Repurchase Agreements. II. 9.0 Collateralization 1 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, Ithe collateralization level 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 Iavailable 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 Bank, or in an account at a trust department of a commercial bank or other financial institution that is not Iowned or controlled by the financial institution furnishing the collateral. The selection shall be approved by Elk River Municipal Utilities. I Assignment 1111) Any collateral pledged shall be accompanied by a written assignment to the government entity from the financial institution. The written assignment shall recite that, upon default, the Ifinancial institution shall release to the government entity on demand, free of exchange or any 5 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 due. Any surplus from the sale of collateral shall be payable to the financial I institution, its assigns, or both. 10.0 Safekeeping and Custody IInvestments shall be held in safekeeping with: 1.) Any Federal Reserve Bank; I2.) 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 Ipurchased; 3.) A primary reporting dealer in United States government securities to the Federal Reserve IBank of New York; or 4.) A securities broker/dealer having its principal executive office in Minnesota, licensed Ipursuant to chapter 80A, or an affiliate of it, regulated by the Securities and Exchange Commission; provided that the government entity's ownership of all securities is evidenced Iby written acknowledgments identifying the securities by the names of the issuers, maturity dates, interest rates, CUSIP number, or other distinguishing marks. IP 11.0 Diversification/Maturities I Elk River Municipal Utilities will diversify its investments by security type and institution. In Iestablishing specific diversification strategies, the following general policies and constraints shall apply: I Portfolio maturities shall be staggered to avoid undue concentration of assets at a specific Imaturity sector, with one broker-dealer or financial institution, or any one type of instrument. The maturities selected shall provide for stability of income and reasonable I liquidity. 1 12.0 Internal Control The Finance Director shall establish an annual process of independent review by an external ill auditor. This review will provide internal control by assuring compliance with policies and procedures. I I6 I13.0 Performance Standards gill The investment portfolio 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 I constraints and cash flow needs. I 14.0 Investment Policy Adoption The Elk River Municipal Utilities investment policy shall be adopted by motion of Elk River I Municipal Utilities' Commission. The policy shall be reviewed periodically as needed by the General Manager and Finance Director, and any modifications made thereto must be approved by I Elk River Municipal Utilities' Commission. I I I Pi I I I I I IAdopted , 2005 lid I I7