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HomeMy WebLinkAbout111522-06.5 ADMINISTRATIVE STAFF REPORT 6.5 TO: Mayor and Town Council November 15, 2022 SUBJECT: Resolution No. 94-2022, approving changes to 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) and is reviewed annually and updated as needed by the Town Council. The Policy was last updated, reviewed, and approved by the Town Council on November 16, 2021. DISCUSSION The primary goal of the Investment Policy is the safety of invested funds, followed by liquidity and yield. The Investment Policy has been refined incrementally over the years to provide the most clearly defined and strongest policy applicable for the Town. This year, the Town’s Independent Investment Advisors are recommending two language updates to mitigate call risk in the portfolio. 1. Page 5 – section 11, category b, item number 1, add: “No more than 20% of the portfolio may be invested in callable agencies” and remove: “There is no limitation to the percent of the portfolio which may be held in these Agency obligations.” 2. Page 5 – section 11, category b, add item number 2: “No more than 30% of the portfolio may be invested in any single agency issuer.” 3. Page 11- section 14, item number 2, after “Treasury obligations or Agency obligations” paragraph, remove: “where a 30% limit is imposed.” FISCAL IMPACT None. TOD Investment Policy 2 November 15, 2022 RECOMMENDATION Adopt Resolution No. 94-2022, approving changes to the Town of Danville Investment Policy. Prepared by: Lani Ha Finance Manager/Treasurer Reviewed by: Joseph A. Calabrigo Town Manager Attachments: A - Resolution No. 94-2022 B - Town of Danville Investment Policy RESOLUTION NO. 94-2022 APPROVING CHANGES TO THE TOWN OF DANVILLE INVESTMENT POLICY WHEREAS, the primary objective of the Investment Policy of the Town of Danville is the safety and security of Town funds; and WHEREAS, investments can only be made in legal securities as described by the Investment Policy and invested in a manner that assures adequate liquidity to meet forecasted disbursement requirements; and WHEREAS, maximizing interest earned is a secondary objective once safety, liquidity and legality have been assured; and WHEREAS, the Investment Policy continues to meet all known regulations and serve the best interests of the Town; and WHEREAS, the Town of Danville Investment Policy has been reviewed by the Town’s Treasurer and independent investment advisor who have recommended the following updates: 1- Section 11, category b, item number 1, add: “No more than 20% of the portfolio may be invested in callable agencies” and remove: “There is no limitation to the percent of the portfolio which may be held in these Agency obligations.” 2- Section 11, category b, add item number 2: “No more than 30% of the portfolio may be invested in any single agency issuer.” 3- Section 14, item number 2, after “Treasury obligations or Agency obligations”, remove: “where no limit is imposed.” WHEREAS, the Danville Town Council has duly reviewed and considered these updates and find them to be consistent with the intent of the Investment Policy; now therefore be it RESOLVED, by the Danville Town Council, that these updates be made to the Investment Policy and that all investment control and reporting procedures outlined in the Town of Danville Investment Policy continue to be implemented by the Town Treasurer. DocuSign Envelope ID: C0C23412-4B2C-4941-BB4C-395E95458B17 ATTACHMENT A PAGE 2 OF RESOLUTION NO. 94-2022 APPROVED by the Danville Town Council at a regular meeting on November 15, 2022, by the following vote: AYES: NOES: ABSTAINED: ABSENT: ________________________________ MAYOR APPROVED AS TO FORM: ATTEST: ________________________________ ________________________________ CITY ATTORNEY CITY CLERK DocuSign Envelope ID: C0C23412-4B2C-4941-BB4C-395E95458B17 TOWN OF DANVILLE INVESTMENT POLICY November 156, 20221 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 SAFETY. Investments shall be placed only in securities described in this 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 ATTACHMENT B TOWN OF DANVILLE INVESTMENT POLICY 2 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 TOWN OF DANVILLE INVESTMENT POLICY 3 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 TOWN OF DANVILLE INVESTMENT POLICY 4 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 or collateralized in accordance with the provisions of California Government Code, Sections 53630 et seq. TOWN OF DANVILLE INVESTMENT POLICY 5 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. a.Obligations of the U.S. Treasury, or securities guaranteed by the full faith and credit of the United States ("Treasury obligations") excluding securities which have been stripped of their coupon. 1.There is no limitation to the percent of the portfolio which may be held in Treasury obligations. b.Obligations (other than CMOs described in paragraph “J” below) which are guaranteed by the full faith and credit of agencies or instrumentalities of the U.S. government ("Agency obligations"), including, but not limited to, FNMA, FFCB, FHLB and FHLMC. 1.No more than 20% of the portfolio may be invested in callable agencies.There is no limitation to the percent of the portfolio which may be held in these Agency obligations. 1.2. No more than 30% of the portfolio may be invested in any single agency issuer. c.Municipal Securities include obligations of the Town, the state of California, and any local agency within the State of California, provided that: 1.The securities are rated in a rating category of “A” or its equivalent or better by at least one nationally recognized statistical rating organization (“NRSRO”). 2.No more than 30% of the portfolio may be invested in Municipal Securities. TOWN OF DANVILLE INVESTMENT POLICY 6 3.The maximum maturity does not exceed five years. d.Municipal Securities (Registered Treasury Notes or Bonds) of any of the other 49 states in addition to California, including bonds payable solely out of the 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: 1.The securities are rated in a rating category of “A” or its equivalent or better by at least one NRSRO. 2.No more than 30% of the portfolio may be invested in Municipal Securities. 3.The maximum maturity does not exceed five years. e.Negotiable certificates of deposit at banks with the short-term 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. 1.The maximum maturity of certificates of deposit may not exceed two years 2.No more than 30% of the portfolio may be invested in certificates of deposit. f.Banker's acceptances issued by banks with the short-term obligations 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. 1.The maximum maturity of banker's acceptances may not exceed 180 days. 2.No more than 40% of the portfolio may be invested in banker's acceptances. TOWN OF DANVILLE INVESTMENT POLICY 7 g.Commercial paper issued by corporations with the short-term 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. 1.The maximum maturity of commercial paper may not exceed 270 days. 2.Eligible paper is limited to notes issued by corporations 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. 3.No more than 25% of the portfolio may be invested in commercial paper. h.Repurchase agreements collateralized by any securities permitted under paragraphs a and b of this section of this Policy (Treasury Obligations or Agency Obligations). 1.The term of a repurchase agreement may not exceed thirty days. 2.The market value of securities shall not be less than 102% of the repurchase amount. 3.No more than 15% of the portfolio may be invested in repurchase agreements. 4.The Repurchase agreements shall be subject to a master 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. 5.Collateral underlying repurchase agreements shall be delivered TOWN OF DANVILLE INVESTMENT POLICY 8 to the Town's custodial bank. Clearly marked evidence of ownership (safekeeping receipts) must be supplied to the bank. i. Corporate medium- term notes, rated in the "A" category or higher by a NRSRO. 1. No more than 30% of the portfolio may be invested in corporate medium term notes. j. Mortgage pass-through securities issued by an agency of the U.S. government. 1. No more than 15% of the portfolio may be invested in mortgage pass through securities. k. Collateralized Mortgage Obligations (“CMOs”) rated AAA by a NRSRO. 1. No more than 15% of the portfolio may be invested in a combination of CMOs and Asset-backed securities (see below). l. Asset-backed Securities ("ABS") rated AAA by a NRSRO. 1. No more than 15% of the portfolio may be invested in a combination of ABS and CMOs (see above). m. Mutual Funds and Money market mutual funds that are registered with the Securities and Exchange Commission under the Investment Company Act of 1940, provided that: 1. Mutual Funds that invest in the securities and obligations as authorized 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 TOWN OF DANVILLE INVESTMENT POLICY 9 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 shares of any one mutual fund. 2. Money Market Mutual Funds registered with the Securities and 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. 3. No more than 20% of the total portfolio may be invested in these securities. n. The Local Agency Investment Fund (“LAIF”). 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. TOWN OF DANVILLE INVESTMENT POLICY 10 o. The Town of Danville also utilizes demand deposits from commercial banks for regular depository services including operating and payroll accounts. Utilization of "sweep" account services provides short-term interest on 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. p. Supranational Securities 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. TOWN OF DANVILLE INVESTMENT POLICY 11 4. Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. 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 TOWN OF DANVILLE INVESTMENT POLICY 12 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. 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 167, 20210 Revised October 20, 1999 TOWN OF DANVILLE INVESTMENT POLICY 13 GLOSSARY OF TERMS a. Obligations of the U.S. Treasury - Debt obligations backed by the full faith and credit of the U.S. Government. They are issued with initial maturities from three months to 30 years. b. Agency Obligations - Obligations guaranteed by the full faith and credit of agencies and instrumentalities of the U.S. Government, such as FNMA, FFCB, FHLB, and GNMA. c. Municipal Securities - Securities issued by state and local agencies to finance capital and operation expenses. d. Nationally Recognized Statistical Rating Organization (NRSRO) – A credit 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. Negotiable certificates of deposit - A bank deposit issued in negotiable form (i.e., one that can be bought or sold in the open market). f. Banker's Acceptance - A draft that is drawn and accepted by banks. 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. Commercial Paper - Unsecured promissory notes issued by corporations to fund short term cash requirements. h. Repurchase Agreement - An agreement in which an investor buys 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. Corporate Medium-Term Note - An obligation of a corporation issued with an initial term to maturity of nine months to 15 years. TOWN OF DANVILLE INVESTMENT POLICY 14 j. Mortgage Pass Through Certificates - Bonds backed by an undivided interest in a pool of mortgages or trust deeds. Income and principal from the underlying mortgages are used to pay off the securities. k. Collateralized Mortgage Obligations (CMOs) - Corporate bonds 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. Asset-backed Securities - A bond which is collateralized with assets 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. Money Market Mutual Funds - Mutual funds which invest in short term securities and strive to maintain a share price of $1. n. Mutual Fund – An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund’s prospectus. o. Local Agency Investment Fund (LAIF) - An investment pool managed 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. Demand Deposits - A deposit of monies where the monies are payable by the bank upon demand of the depositor. q. Supranationals - Supranationals are multi-national organizations 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. Supranational Securities - Obligations unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation or Inter-American Development Bank. TOWN OF DANVILLE INVESTMENT POLICY 15 PERMITTED INVESTMENTS AND LIMITATIONS ON INVESTMENT Investment Type Percent of Portfolio Maximum Life Other Requirements a. US Treasury No limit 5 years No Strips b. Agencies of US Government No limit 5 years c. Municipal Securities 30% 5 years Rated A category or higher e. Certificates of Deposit 30% 2 years Rated A-1/P-1 f. Banker’s Acceptances 40% 180 days Rated A-1/P-1 g. Commercial Paper 25% 270 days Rated A-1/P-1 US Corporations Assets>$500 M LT rated A if any h. Repurchase Agreements 15% 30 days Collateralized Market>102% i. Corporate Medium-Term Notes 30% 5 years Rated A category or higher j. Mortgage Pass-throughs 15% 5 years US Government only k. Collateralized Mortgage Obligations 15% of CMOs plus Obligations Asset- Backed Securities 5 years Rated AAA category or higher l. Asset-Backed Securities 15% of CMOs plus Obligations Asset- Backed Securities 5 years Rated AAA category or higher m. Money Market Funds/ Mutual Funds 20% 10% N/A Assets>$500 M; Invests only in a-h above Highest rating possible; Registered advisor n. LAIF 30% or $10 M N/A o. Demand Deposits No limit N/A FDIC or collateralized p. Supranationals </=30% 5 years Rated AA category or higher TOWN OF DANVILLE INVESTMENT POLICY 16