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5.3. SR 02-05-2007 City of Elk River REQUEST FOR COUNCIL ACTION Agenda Section Meeting Date Administration Februa 5,2007 Item Description Consider Amendin Investment Polic Item Number 5.3. Prepared by Tim Simon, Finance Director Reviewed by Introduction The City adopted the investment policy on April 28, 1997. The City Council is asked to amend the attached resolution regarding the City investment policy based on staff recommendations. Discussion The current City investment policy generally follows the Government Finance Officers Association (GFOA) recommended practices in addition to all state and local statutes governing public investments. However, there have been some recommended additions/clarifications to the policy by both the GFOA and the Office of the State Auditor. Staff recommends the following amendments to the investment policy. 1) 8.0 (E) - Commercial paper is a short-term investment primarily used by corporations to finance receivables. State statutes require that commercial paper be rated in the highest quality category by at least two national recognized rating agencies and matures in 270 days or less. This amendment would provide clarity to our investment policy and the City's investment brokers. 2) 10 - Custodial credit risk is the risk ofloss associated with the counter-party's failure. Unlike deposits at local banks, which provide pledged collateral to eliminate custodial credit risk, brokers typically purchase the security to hold it. Unless the broker has Securities Investor Protection Corporation (SIPC) insurance, the investments will be susceptible to custodial credit risk. This amendment would require brokers to hold the investment only to the extent there is SIPC and excess SIPC coverage available. 3) 14.0 - Periodic reporting of investments provides for a "best management practice" of informing and providing information on City investments. Financial Impact None Attachments · Amended investment policy C: \Documents and Settings \tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update. doc Action Requested The City Council is asked to amend the investment policy as attached. Council Action Motion by _ Second by _ Vote Follow Up c: \Documents and Settings \tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update. doc City of Elk River Investment Policy 1.0 Policy I t is the policy of the City of Elk River 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 Scope The investment policy applies to all fmancial assets of the municipality. These funds are accounted for in the City's Annual Financial Report and include all City funds with the exception of the Water and Electric Funds which fall under the investment policy adopted by the Elk River Utilities Commission. 3.0 Prudence Investments shall be made with judgment and care under circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. 3.1 The standard of prudence to be used by investment officials shall be the "prudent person" 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 with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. 4.0 Objectives All investments shall be limited to those permitted by Minnesota Statute ~118A.. The primary objectives, in priority order, of the City of Elk River's investment activities shall be: C: \Documents and Settings \tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update.doc 4.1 Safety Investments of the City of Elk River shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that losses on individual securities do not exceed the income generated from the remainder of the portfolio. 4.2 Liquidity The City of Elk River's investment portfolio will remain sufficiently liquid to enable the City of Elk River to meet all operating requirements which might be reasonably anticipated. 4.3 Return on Investment The City of Elk River's 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 of the investment portfolio. 4.4 Maintaining the Public'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 confidence in the municipality's ability to govern effectively. 5.0 Delegation of Authority Authority to manage the City of Elk River's investment program is derived from the following: Minnesota Statutes 5118A. Management responsibility for the investment program is hereby delegated to the Finance Director. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Finance Director 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 Conflict 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 fmancial interests in financial institutions C:\Documents and Settings\tallard\Local Settings\Temporary Internet Files\OLKF\Investment Policy Update.doc that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City of Elk River's portfolio. 7.0 Authorized Financial Dealers and Institutions The 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 dealers" or regional dealers that qualify under Securities & Exchange Commission Rule 15c3-1 (uniform net capital rule). All brokers doing business with the City shall have a Broker Certification form on flie 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 Minnesota. No investments may be made with out of state brokers. 8.0 Authorized and Suitable Investments Investment instruments authorized and permitted by this policy are as follows: A. Repurchase Agreements Repurchase agreements consisting of collateral allowable in Section 118A.04. B. United States Securities Governmental bonds, notes, bills, mortgages (excluding high-risk 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 are as follows: 1.) interest-only or principal-only mortgage-backed securities; or, 2.) any mortgage derivative security that: a) has an expected average life greater than ten years; b) has an expected average life that: 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 C: \Documents and Settings \ tallard\Local Settings \ Temporary Internet Files \ OLKF\Investrnent Policy Update. doc 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 c) 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. C. Minnesota Joint Powers Investment Trust Agreements or Contracts for shares of a Minnesota joint powers investment trust whose investments are restricted to securities authorized for investment by the government entity and 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 financial instruments with a final maturity of no longer than 13 months. D. State and Local Securities State and local government obligations as follows: 1.) 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; 2.) 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, 3.) 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 rating service. E. Commercial Paper Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category (e.g.. A-I. P-I. F-I.or D-1 or higher) by at least two nationally recognized rating agencies and matures in 270 days or less. F. Time Deposits Time deposits that are fully insured by the Federal Deposit Insurance Corporation. Bankers acceptances of United States banks. C: \Documents and Settings \ tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update.doc 8.1 Speculative Investments The City 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 City. 8.2 Further Restrictions The City shall not invest in GICs or Reverse Repurchase Agreements. 9.0 Collateralization The City of Elk River 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 collateralization level will be at least ten percent more than the amount on 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 Bnancial 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 Bnancial institution that is not owned or controlled by the Bnancial institution furnishing the collateral. The selection shall be approved by the City of Elk River. Assignment Any collateral pledged shall be accompanied by a written assignment to the government entity from the Bnancial institution. The written assignment shall recite that, upon default, the fmancial 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 fmancial 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 fmancial institution, its assigns, or both. 10.0 Safekeeping and Custody Investments may be held in safekeeping with: 1.) Any Federal Reserve Bank; 2.) 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;e C: \Documents and Settings \ tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update.doc 3.) A primary reporting dealer in United States government securities to the Federal Reserve Bank of New York; or 4.) A securities broker/dealer having its principal executive office in IvIinnesota, licensed pursuant 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 by written acknowledgments identifying the securities by the names of the issuers, maturity dates, interest rates, CUSIP number, or other distinguishing marks. Custodial Credit Risk The City will minimize investment Custodial Credit Risk by permitting brokers that obtained investments for the City 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 City's custodian. 11.0 Diversification/Maturities The City of Elk River will diversify its investments by security type and institution. In establishing specific 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 broker-dealer or financial institution, or anyone type of instrument. The maturities selected shall provide for stability of income and reasonable liquidity. 12.0 Internal Control 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. 13.0 Performance Standards The investment portfolio will be designed to obtain a market average rate of return during budgetary and economic cycles, taking into account the City of Elk River's investment risk constraints and cash flow needs. C: \Documents and Settings \ tallard\Local Settings \ T ernporary Internet Files \ OLKF\Investment Policy Update.doc 14.0 Reporting 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. 15.0 Investment Policy Adoption The City of Elk River's investment policy shall be adopted by motion of Elk River's City Council. The policy shall be reviewed periodically as needed by the Finance Director and any modifications made thereto must be approved by Elk River's City Council. Adopted April 28, 1997 s :financej invs tpol.doc C: \Documents and Settings \ tallard\Local Settings \ Temporary Internet Files \ OLKF\Investment Policy Update. doc