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HomeMy WebLinkAbout111621-05.5 5.5 ADMINISTRATIVE STAFF REPORT TO: Mayor and Town Council November 16, 2021 SUBJECT: Resolution No. 74-2021, re-approving the Town of Danville Investment Policy BACKGROUND The Town of Danville operates under an adopted Investment Policy (“Policy”) to ensure the prudent and safe investment of public funds. The Policy is guided by, and fully complies with, Section 53601 of the California Government Code (CGC) andis reviewed annually and updated as needed by the Town Council. The Policy was last updated, reviewed and approved by the Town Council on November 17, 2020. DISCUSSION The Investment Policy has been refined incrementally over the years to provide the most clearly defined and strongest policy applicable for the Town. TheTown’s Treasurer and independent investment advisor have reviewed the Investment Policy this year and are recommending no changes at this time. The priority of investment objectives is: 1) safety of principal; 2) required liquidity; and 3) a prudent yield. FISCAL IMPACT None. RECOMMENDATION Adopt Resolution No. 74-2021, re-approving the Town of Danville Investment Policy. Prepared by: Lani Ha Finance Director/Treasurer Reviewed by: Joseph A. Calabrigo Town Manager Attachments: A - Resolution No. 74-2021 B - Town of Danville Investment Policy RESOLUTION NO. 74-2021 RE-APPROVING THE TOWN OF DANVILLE INVESTMENT POLICY , the primary objective of the Investment Policy of the Town of Danville is the WHEREAS safety and security of Town funds; and investments can only be made in legal securities as described by the WHEREAS, Investment Policy and invested in a manner that assures adequate liquidity to meet forecasted disbursement requirements; and maximizing interest earned is a secondary objective once safety, liquidity WHEREAS, and legality have been assured; and the Town of Danville Investment Policy has been reviewed by the Town’s WHEREAS, Treasurer and independent investment advisor; and , the Investment Policy continues to meet all known regulations and serve the WHEREAS best interests of the Town; and , no changes are recommended to the Investment Policy; now therefore be it WHEREAS , by the Danville Town Council, that no changes be made to the Investment RESOLVED Policy andthat all investment control and reporting procedures outlined in the Town of Danville Investment Policy continue to be implemented by the Town Treasurer. by the Danville Town Council at a regular meeting on November 16, 2021, APPROVED by the following vote: AYES: NOES: ABSTAINED: ABSENT: ________________________________ MAYOR APPROVED AS TO FORM: ATTEST: ________________________________ ________________________________ CITY ATTORNEY CITY CLERK TOWN OF DANVILLE INVESTMENT POLICY November 1716, 202121 1.PURPOSE This Investment Policy (Policy) is established by the Town of Danville to develop a clear understanding for the Town Council, Town staff, citizens and third parties of the objectives, policies and guidelines for the investment of the Town's funds which are not required for immediate needs. The Investment Policy also offers guidance to investment staff and any external investment advisers on the investment of the Town's funds. 2.OBJECTIVE The Town of Danville's cash management system is designed to accurately monitor and forecast expenditures and revenues, enabling the Town to invest and manage funds to the fullest extent possible. The Town attempts to obtain the highest yield possible after the basic requirements of safety and liquidity have been met. The primary objective of the investment policy of the Town of Danville is Investments shall be placed only in securities described in this SAFETY. policy, authorized by federal, state and local laws and regulations, and managed in a manner that seeks to ensure the preservation of principal. An adequate percentage of the portfolio shall be maintained in liquid, short-term securities which can be converted to cash if necessary, to meet forecasted disbursement requirements. The portfolio shall also be appropriately diversified to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. Maximizing interest earned is a secondary objective once safety, liquidity and legality have been assured. The investment portfolio shall be designed with the objective of obtaining a total rate of return throughout economic cycles, commensurate with government codes, investment risk constraints and cash flow needs. 3.PRUDENCE Except as provided in California Government Code subdivision (a) of Section INVESTMENT POLICY TOWN OF DANVILLE 27000.3, all persons authorized to make investment decisions on behalf of The Town are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall Strategy, investments may be acquired as authorized by law. 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.DELEGATION OF AUTHORITY Ultimate responsibility to protect, preserve and maintain cash and investments resides with the Treasurer, who is designated by ordinance of the Town Council. The Town may delegate the investment of Town funds to a professional investment advisor registered under the provision of the Investment Advisors Act of 1940, subject to approval by the Town Council. No person may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Treasurer. The Treasurer shall develop and maintain written administrative procedures for the operation of the investment program, consistent with these policies and shall monitor the system of internal controls that regulates the activities of subordinate officials. Written administrative procedures and the system of internal controls shall be reviewed by an independent auditor and reviewed and approved by the Town Council. 5.ETHICS AND CONFLICTS OF INTEREST The Treasurer, members of the Town Council, employees involved in the 2 INVESTMENT POLICY TOWN OF DANVILLE investment process and their spouses shall comply with the requirements of the Fair Political Practices Commission, including the disclosure of financial interests in the Statement of Economic Interests. 6.SCOPE This Policy applies to all cash assets of the Town of Danville. All pooled funds are accounted for in the Town's Comprehensive Annual Financial Report and include: General Funds Special Revenue Funds Debt Service Funds Capital Project Funds Trust and Agency Funds Excluded funds are those held with a fiscal agent, which have their own specific "permitted investments" section in the bond covenants. These funds include funds required to be reserved for debt service, and pension and deferred compensation funds. 7.INTERNAL CONTROLS A system of internal controls shall be established and documented in writing by the Treasurer. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation of third parties, unanticipated changes in financial markets, or imprudent actions by employees and officers of the Town of Danville. Controls deemed most important include: clear delegation of authority to subordinate staff members, separation of transaction authority from accounting and recordkeeping, supervisory control of employee actions, written confirmation of all transactions, minimizing the number of authorized investment officials, documentation of transactions and strategies, custodial safekeeping, avoidance of bearer-form securities, specific limitations regarding securities losses and remedial actions, proper review and approval of brokerage accounts and investment transactions, and control of collusion. The Treasurer shall also establish a periodic process of independent review by external and internal auditors. This review will augment internal control 3 INVESTMENT POLICY TOWN OF DANVILLE systems and practices by assuring compliance with policies and procedures. 8.REPORTING The Treasurer shall generate and forward to the Town Manager, monthly reports for management purposes. Required elements of the report will include type of investment, issuer, date of maturity, rating, cost of the security, current market value and yield. These reports shall provide an appendix that discloses all transactions during the past month. Monthly reports on investment instruments being held, including maturities and market value, as well as any narrative necessary for clarification will be received by the Finance Committee and the Town Council by the first Town Council Meeting after the month following the reporting period. Variances from expectations shall be reported in a timely manner and shall include recommendations for appropriate action to control adverse developments. 9.REVIEW OF INVESTMENT PORTFOLIO The Treasurer shall periodically, but no less than quarterly, review the portfolio to identify investments that do not comply with this Policy and establish protocols for reporting major and critical incidences of noncompliance to the Governing Body. 10.PERFORMANCE EVALUATION The investment portfolio shall be designed to attain a market-average rate of return throughout budgetary and economic cycles, taking into account the Town's risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments. The Treasurer shall monitor and evaluate the portfolio's performance relative to market benchmark, which will be included in the Treasurer's quarterly report. The Treasurer shall select an appropriate, readily available index to use as a market benchmark for use by investment staff and any external investment advisor. 11.PERMITTED INVESTMENTS AND LIMITATIONS ON INVESTMENT The investment of surplus funds is governed by California Government Code Section 53600 et seq. Funds on deposit in banks must be federally insured collateralized in accordance with the provisions of California Government or Code, Sections 53630 et seq. 4 INVESTMENT POLICY TOWN OF DANVILLE Funds not deposited in banks may be invested in the following securities. The maximum maturity of any securities purchased shall not exceed five (5) years from date of purchase unless specified as shorter than five years in sections a-1 to follow. Investment maturities shall be laddered and based upon cash flow forecasts. All investments shall be subject to limitations as described herein at the time of purchase. Obligations of the U.S. Treasury, or securities guaranteed by the full faith a. and credit of the United States ("Treasury obligations") excluding securities which have been stripped of their coupon. There is no limitation to the percent of the portfolio which may 1. be held in Treasury obligations. Obligations(otherthan CMOs described in paragraph “J” below)which b. guaranteed by the full faith and credit of agencies or instrumentalities are of the U.S. government ("Agency obligations"), including, but not limited to, FNMA, FFCB, FHLB and FHLMC. There is no limitation to the percent of the portfolio which may 1. be held in these Agency obligations. Municipal Securities include obligations of the Town, the state of c. California, and any local agency within the State of California, provided that: The securities are rated in a rating category of “A” or its equivalent or 1. better by at least one nationally recognized statistical rating organization (“NRSRO”). No more than 30% of the portfolio may be invested in Municipal 2. Securities. The maximum maturity does not exceed five years. 3. Municipal Securities (Registered Treasury Notes or Bonds) of any of the other d. 49 states in addition to California, including bonds payable solely out of the 5 INVESTMENT POLICY TOWN OF DANVILLE revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California, provided that: The securities are rated in a rating category of “A” or its equivalent or 1. better by at least one NRSRO. No more than 30% of the portfolio may be invested in Municipal 2. Securities. The maximum maturity does not exceed five years. 3. Negotiable certificates of deposit at banks with the short-term e. obligations that are rated "A-1" or higher, or the equivalent, by a NRSRO; and whose long-term obligations are rated in the "A" category or higher by a NRSRO. The maximum maturity of certificates of deposit may not exceed two 1. years No more than 30% of the portfolio may be invested in certificates of 2. deposit. Banker's acceptances issued by banks with the short-term obligations f. that are rated "A-1" or higher, or the equivalent, by a NRSRO; and with long-term obligations that are rated in the "A" category or higher by a NRSRO. The maximum maturity of banker's acceptances may not exceed 1. 180 days. No more than 40% of the portfolio may be invested in banker's 2. acceptances. Commercial paper issued by corporations with the short-term g. obligations that are rated "A-1" or higher, or the equivalent, by a NRSRO; and with long-term obligations, if any, that are rated in the category "A" or higher by a NRSRO. 6 INVESTMENT POLICY TOWN OF DANVILLE The maximum maturity of commercial paper may not exceed 270 1. days. Eligible paper is limited to notes issued by corporations 2. organized and operating within the U.S. and having total assets in excess of $500 million; or entities organized within the U.S. as a special purpose corporation, trust, or limited liability company, provided that it has program-wide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond. No more than 25% of the portfolio may be invested in commercial 3. paper. Repurchase agreements collateralized by any securities permitted h. under paragraphs a and b of this section of this Policy (Treasury Obligations or Agency Obligations). The term of a repurchase agreement may not exceed thirty days. 1. The market value of securities shall not be less than 102% of the 2. repurchase amount. No more than 15% of the portfolio may be invested in repurchase 3. agreements. The Repurchase agreements shall be subject to a master 4. Repurchase agreement between the Town and the provider of the Repurchase agreement. The master Repurchase agreement shall be substantially in the form developed by the Public Securities Association. Collateral underlying repurchase agreements shall be delivered 5. to the Town's custodial bank. Clearly marked evidence of ownership (safekeeping receipts) must be supplied to the bank. Corporate medium- term notes, rated in the "A" category or higher by i. a NRSRO. 7 INVESTMENT POLICY TOWN OF DANVILLE No more than 30% of the portfolio may be invested in corporate 1. medium term notes. Mortgage pass-through securities issuedby an agencyof theU.S. j. government. No more than 15% of the portfolio may be invested in mortgage 1. pass through securities. Collateralized Mortgage Obligations (“CMOs”) rated AAA by a NRSRO. k. No more than 15% of the portfolio may be invested in a combination 1. of CMOs and Asset-backed securities (see below). Asset-backedSecurities ("ABS") rated AAA by a NRSRO. l. No more than 15% of the portfolio may be invested in a combination 1. of ABS and CMOs (see above). Mutual Funds and Money market mutual funds that are registered with m. the Securities and Exchange Commission under the Investment Company Act of 1940, provided that: Mutual Funds that invest in the securities and obligations as authorized 1. under California Government Code, Section 53601 (a) to (k) and (m) to (q) inclusive and that meet either of the following criteria: i.Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs; or ii.Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations authorized by California Government Code, Section 53601 and with assets under management in excess of $500 million. iii.No more than 10% of the total portfolio may be invested in 8 INVESTMENT POLICY TOWN OF DANVILLE shares of any one mutual fund. Money Market Mutual Funds registered with the Securities and 2. Exchange Commission under the Investment Company Act of 1940 and issued by diversified management companies and meet either of the following criteria: i.Have attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs. ii.Have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of $500 million. iii.No more than 20% of the portfolio may be invested in Money Market Mutual Funds. No more than 20% of the total portfolio may be invested in these 3. securities. The Local AgencyInvestment Fund (“LAIF”). n. 1.No more than 30% of the portfolio, or $10 million, whichever is higher, maybe invested in LAIF. LAIF imposes a maximum deposit per agency, established by the State Treasurer. The amount invested in LAIF should be based upon the Town's cash flow needs and the difference in yield paid upon funds invested in LAIF compared to other investment options authorized by this policy. The Town of Danville also utilizes demand deposits from commercial o. banks for regular depository services including operating and payroll accounts. Utilization of "sweep" account services provides short-term interest on 9 INVESTMENT POLICY TOWN OF DANVILLE operating funds. Interest-bearing accounts may be maintained for certain individual Town funds. 1.Deposits in local banks or savings and loans must be consistent with the basic investment goals which stress safety and liquidity above yield. 2.All bank and savings and loan association deposits shall be insured by the FDIC or, to the extent not insured, collateralized with securities in accordance with California law. Supranational Securities p. 1.Issues that are U.S. dollar denominated senior unsecured unsubordinated obligations. 2.Rated in the "AA" category or higher by a NRSRO. 3.No more than 30% of the total portfolio may be invested in supranational securities. 12.PROHIBITED INVESTMENTS 1.State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to futures and options. 2.In accordance with Government Code, Section 53601.6, investment in inverse floaters, range notes, or mortgage derived interest-only strips is prohibited. 3.Investment in any security not issued or backed by the US government that could result in a zero interest accrual if held to maturity is prohibited. 4.Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. 10 INVESTMENT POLICY TOWN OF DANVILLE 5.Purchasing or selling securities on margin is prohibited. 6.The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited. 7.The purchase of foreign currency denominated securities is prohibited. 13.SCOPE OF AUTHORITY No funds may be invested except as are expressly authorized by this Policy. 14.DIVERSIFICATION REQUIREMENT No more than 5% of the portfolio may be invested in securities of any one issuer, with the following exceptions, or unless otherwise stated in this investment policy: 1.LAIF, which has a 30% limit or $10 million, whichever is higher. 2.Treasury obligations or Agency obligations, where no limit is imposed. 3.Money market mutual funds which are used to hold proceeds from investment sales or maturities for no more than 2 months until another appropriate investment can be purchased, under which case it is permitted to invest 20% of the portfolio in any one issuer. 15.RATING OF SECURITIES Only those securities which meet the ratings specified above may be purchased. If the rating of a security which the Town owns is downgraded below these rating standards, the Finance Committee will determine whether to retain or liquidate the security, based upon the new rating, the reason for the re-rating, the maturity date, the amount and the market value of the security. 16.CUSTODY OF SECURITIES Securities will be held in the Town's name in a bank custody account approved by the Town Council and evidenced by safekeeping receipts. All transactions will be conducted as delivery-vs.-payment settlements. 11 INVESTMENT POLICY TOWN OF DANVILLE 17.ADOPTION, ANNUAL REVIEW AND AMENDMENTS TO POLICY The Investment Policy shall be adopted by formal Resolution of the Town Council and shall be reviewed and re-approved annually by the Town Council. This Policy may not be altered, amended or changed in any particular except by formal Resolution of the Town Council. Revised annually, and most recently on November 17, 2020 20, Revised October 1999 12 INVESTMENT POLICY TOWN OF DANVILLE GLOSSARY OF TERMS a.-Debt obligations backed by the full Obligations of the U.S. Treasury faith and credit of the U.S. Government. They are issued with initial maturities from three months to 30 years. b.- Obligations guaranteed by the full faith and Agency Obligations credit of agencies and instrumentalities of the U.S. Government, such as FNMA, FFCB, FHLB, and GNMA. c.- Securities issued by state and local agencies to Municipal Securities finance capital and operation expenses. d. – A credit Nationally Recognized Statistical Rating Organization (NRSRO) rating agency that provides assessments of an investment’s risk. The issuers of investments, especially debt securities, typically pay credit rating agencies to provide them with ratings. The three most prominent NRSROs are Moody’s, Standard & Poor’s, and Fitch Ratings. e.- A bank deposit issued in negotiable Negotiable certificates of deposit form (i.e., one that can be bought or sold in the open market). f.- A draft that is drawn and accepted by banks. Banker's Acceptance Because the accepting institution is obligated to pay the draft without regard to whether it is paid or not, banker acceptances are considered to be high quality money market instruments. g.- Unsecured promissory notes issued by Commercial Paper corporations to fund short term cash requirements. h.- An agreement in which an investor buys Repurchase Agreement securities from a contra-party with the provision that the buyer must sell the securities back to the contra-party at a specific date at a pre- agreed upon price. The repurchase amount is expressed as principal plus interest at an agreed upon rate. i.-An obligation of a corporation issued Corporate Medium-Term Note with an initial term to maturity of nine months to 15 years. 13 INVESTMENT POLICY TOWN OF DANVILLE j.- Bonds backed by an undivided Mortgage Pass Through Certificates interest in a pool of mortgages or trust deeds. Income and principal from the underlying mortgages are used to pay off the securities. k.- Corporate bonds Collateralized Mortgage Obligations (CMOs) backed by a pool of mortgages or mortgage certificates in which the principal cash flows of the underlying pools are channeled, usually sequentially, into two or more series of bonds (tranches). l.- A bond which is collateralized with assets Asset-backed Securities such as automobile loans, credit card receivables, home equity loans, etc., which are owned by the issuer and placed with a trustee for the benefit of the investor. m.- Mutual funds which invest in short Money Market Mutual Funds term securities and strive to maintain a share price of $1. n. – An entity which pools the funds of investors and invests those MutualFund funds in a set of securities which is specifically defined in the fund’s prospectus. o.- An investment pool managed Local Agency Investment Fund (LAIF) by the California State Treasurer's Office to provide a safe, low cost, and highly liquid investment alternative for California's local governmental agencies. p.- A deposit of monies where the monies are payable Demand Deposits by the bank upon demand of the depositor. q.- Supranationals are multi-national organizations Supranationals whereby member states transcend national boundaries or interests to share in the decision making to promote economic development in the member countries, financing their activities by issuing debt. r.- Obligations unconditionally guaranteed by Supranational Securities the International Bank for Reconstruction and Development, International Finance Corporation or Inter-American Development Bank. 14 INVESTMENT POLICY TOWN OF DANVILLE PERMITTED INVESTMENTS AND LIMITATIONS ON INVESTMENT Percent of Maximum Investment Type Portfolio Life Other Requirements a.US TreasuryNo limit 5 years No Strips b.Agencies of US No limit 5 years Government Rated A category or c.Municipal Securities30% 5 years higher e.Certificates of Deposit30% 2 years Rated A-1/P-1 f.Banker’s Acceptances40% 180 days Rated A-1/P-1 Rated A-1/P-1 US Corporations g.Commercial Paper25% 270 days Assets>$500 M LT rated A if any Collateralized h.Repurchase Agreements15% 30 days Market>102% i.Corporate Medium-TermRated A category or 30% 5 years Noteshigher j.Mortgage Pass-throughs15% 5 years US Government only 15% of CMOs plus k.Collateralized Mortgage Rated AAA category Obligations Asset-5 years Obligationsor higher Backed Securities 15% of CMOs plus Rated AAA category l.Asset-Backed SecuritiesObligations Asset-5 years or higher Backed Securities Assets>$500 M; Invests only in a-h m.Money Market Funds/20% N/A above Highest rating Mutual Funds10% possible; Registered advisor n.LAIF30% or $10 M N/A o.Demand DepositsNo limit N/A FDIC or collateralized Rated AA category or p.Supranationals</=30% 5 years higher 15