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City of Kenmore
Investment Policy
June, 2001
Purpose
To establish the Official Investment Policy of the City of Kenmore for future operations and guidance.
Policy
It is the policy of the City of Kenmore to invest public funds in a manner consistent with the greatest safety and protection for the City's investments. This investing of funds will, while protecting the safety of the principal investment, produce the highest investment return for meeting cash flow requirements of the City and conform to all Washington State statutes, City ordinances and policies governing the investment of public funds.
Scope
This investment policy applies to all financial assets of the City of Kenmore. These funds are accounted for in the City's budget document and include:
Funds - General, Street Operating, Arterial Street, Municipal Capital, Capital Projects, Surface Water Management, Strategic Reserve, Equipment Replacement, any new funds created by the City Council, unless specifically exempted.
Prudence
The standard of prudence to be applied by the Investment Officer in managing the City's overall portfolio 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 investment, considering the probable safety of their capital as well as the probable income to be derived."
Investment officers acting in accordance with 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 manner and appropriate action is taken to control adverse developments.
Public Trust
All participants in the investment process will seek to act responsibly as custodians of the public trust. Investment officials shall recognize that the investment portfolio is subject to public scrutiny and evaluation. In addition, the overall investment program shall be designed and administered with a degree of professionalism worthy of the public trust. Investment officials shall also refrain from any transaction that might knowingly impair public confidence in the City's ability to govern effectively.
Objective
The funds of the City of Kenmore will be invested in accordance with the Constitution of the State of Washington, applicable statutes (Revised Code of Washington (RCW)), City ordinances, resolutions, and Council direction. The objectives are listed below in order of importance:
Safety
Safety of principal is the primary objective of the City's investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To achieve this objective, some diversification may be required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.
Liquidity
The City of Kenmore's investment portfolio will remain sufficiently liquid to enable the City of Kenmore to meet all operating requirements which might be reasonable anticipated.
Yield
The City of Kenmore's investment portfolio shall be designed with the objective of attaining a market rate of return (as it relates to the performance standards) throughout budgetary and economic cycles, taking into account the City of Kenmore's investment risk and the cash flow characteristics of the portfolio.
Delegation of Authority
The City Manager delegates management responsibility for the investment program to the Finance Director who will act as the City's Investment Officer. The Finance Director shall establish written procedures consistent with this investment policy. Procedures shall include reference to safekeeping, wire transfer agreements, custody agreements and investment related banking service contracts. Such procedures shall include explicit delegations of authority to persons responsible for investment transactions. 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.
Investment Committee
There is hereby created an Investment Committee consisting of the City Manager and Finance Director. The Investment Committee shall meet periodically to determine general strategies and monitor results.
Ethics and Conflicts of Interest
Officials and employees involved in the investment process shall refrain from personal business activity which could conflict with proper execution of the investment program, or which could impair their ability to make unbiased investment decisions. Employees and investment officials shall disclose to the City Council financial interests over $5,000 in financial institutions that conduct business for the City, and they shall further disclose personal financial/investment positions that could be related to the performance of the City's portfolio. Employees and officers shall subordinate their investment transactions to those of the City, particularly with regard to the timing of purchases and sales.
Authorized Institutions
Authorized financial institutions will be limited to those that meet one or more of the following:
· Financial institutions approved by the Washington Public Deposit Protection Commission; or
· Primary dealers recognized by the Federal Reserve Bank; or
· Non-primary dealers or institutions qualified under U.S. Securities and Exchange Commission Rule 15c3-1, the Uniform Net Capital Rule, and a certified member of the National Association of Securities Dealers.
The Finance Director will ensure each financial institution meets the above criteria.
Authorized and Suitable Investments
The City of Kenmore is empowered to invest in the following types of securities:
· U.S. Treasury securities maturing in less than ten years;
· Short-term obligations of U.S. government agencies and instruments approved for investment purposes by the Investment Committee;
· Fully insured or collateralized certificates of deposit at commercial banks that are approved by the Washington Public Deposit Protection Commission (WPDPC) committee;
· Banker's Acceptances, purchased in the secondary market and having received the highest rating on the accepting bank's short-term obligations and the two (2) highest ratings on long-term debt by at least two (2) Nationally Recognized Statistical Ratings Organizations;
· Bonds or warrants of the State of Washington
· General obligation or utility revenue bonds of counties/cities located within Washington State; or,
· The State of Washington Local Government Investment Pool.
Authorized Investment Staff
_ The Finance Director will direct the city's investment operations and will obtain written approval from the City Manager prior to transacting any business.
Collateralization
_ Only securities authorized in statute for the investment of public funds will be accepted as collateral.
_ Collateral will be held by a third party with which the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the entity and retained.
_ The right of substitution is granted only upon approval of the entity.
Safekeeping and Custody
All securities transactions entered into by the City of Kenmore shall be conducted on a delivery-versus-payment (DVP) basis. Securities will be held by a financial institution designated by the Finance Director as primary agent to serve as a custodian acting on the City's behalf. The primary agent shall issue a safekeeping receipt to the City listing the specific instrument, rate, maturity, and all other pertinent information. All securities purchased by the City of Kenmore shall be properly designated as an asset of the city, and no withdrawal of such securities, in whole or in part, shall be made from safekeeping except by the Finance Director as authorized herein, or by the Director's designee.
The City of Kenmore will execute custodial agreements with its banks or other custodial agents, which are chartered by the United States government or the State of Washington. Such agreements will include letters of authority from the City, details as to responsibilities of each party, notification of security purchases, sales and delivery agreements.
Diversification by Financial Institution, Security Type and Maturity
The City of Kenmore will diversify its investments by security type, institution and maturity. Diversification will include the following limits:
|
Security Type |
Portfolio Max. With One Fin. Inst. |
Portfolio Max. |
Maturity Max. |
|
Banker's Accep. (BA) |
10% |
20% |
Five years |
|
Cert. Of Dep. (CD) |
35% |
90% |
Five years |
|
U.S. Treasuries |
100% |
90% |
Ten years |
|
U.S. Agencies |
100% |
90% |
Five years |
|
State of WA bonds |
30% |
20% |
Five years |
|
Local Govt. Bonds |
30% |
10% |
Five years |
|
State Pool (LGIP) |
100% |
100% |
N/A |
The average length of maturity will not exceed two years.
Internal Controls
The Finance Director shall establish an annual process of independent review by the State Auditor's Office or an external auditor. This review will provide internal control by assuring compliance with policies and procedures.
Performance Standards
The investment portfolio will be designed toward conservative and passive investments. The performance shall consider the City's investment risk constraints and cash flow needs. Maturities of investments shall be kept relatively shorter in periods of rising interest rates and relatively longer in periods of declining interest rates. Given this investment strategy, the City will use as investment yield benchmarks, the Federal Funds rate, the six-month U.S. Treasury bill rate, and the average rate of return from the Local Government Investment Pool (LGIP) of the State of Washington. The benchmarks will be the weighted-average of the following:
|
Portfolio Component |
Benchmark |
|
Certificates of Deposit |
LGIP |
|
LGIP |
Federal Funds rate |
|
Other securities |
6-Month T-Bill |
Reporting
The Finance Director is charged with the responsibility of including a quarterly market report on the investment activity. The report will include:
1. Recent market conditions;
2. Investment strategies employed in the most recent quarter;
3. Portfolio investment securities, maturities, and other features;
4. Investment return compared to the target rate of return and budgetary expectations.
Investment Policy Adoption
The City of Kenmore's investment policy shall be adopted by resolution of the City Council. Staff shall review the policy at least every two years and proposed changes will be submitted to the City Council.
GLOSSARY
BANKER'S ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.
BROKER: A broker brings buyers and sellers together for a commission.
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.
DELIVERY VERSUS PAYMENT (DVP): An exchange of money for the securities.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded (bank to bank.) This rate is currently pegged by the Federal Reserve throughout openmarket operations.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.
MATURITY: The date upon which the principal of an investment becomes due and payable.
PORTFOLIO: Collection of securities held by an investor.
PRUDENT PERSON RULE: An investment standard. This is a legal term that means the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence 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.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities of all types and descriptions are held in the bank's vaults for protection.
SAFETY: Protecting the principal amount of a security; ensuring the loss risk is very low.
SECURITIES & EXCHANGE COMMISSION: An agency created by Congress to protect investors in securities transactions by administering securities legislation.
SEC RULE 15c3-1: See Uniform Net Capital Rule.
TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued at three, six or twelve months.
TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to ten years.
UNIFORM NET CAPITAL RULE: Securities & 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 call net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities. Liquid capital includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage. Income yield is obtained by dividing the current dollar income by the current market price for the security. The yield to maturity is the current income yield minus any premium or plus any discount from par in the purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond.