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HomeMy WebLinkAbout2016-05-02-Resolutions 16-158_Financial Policy - InvestmentTHE CITY OF WAUKEE,IOWA RESOLUTION 16-158 APPROVING CITY OF WAUKKE FINANCIAL POLICY —INVESTMENT POLICY, OF THE STANDARD ADMINISTRATIVE POLICY AND PROCEDURES MANUAL IN THE NAME AND BY THE AUTHORITY OF THE CITY OF WA UKEE,108'A WHEREAS,the City of Waukee,Iowa is a duly organized municipality within Dallas County;AND, WHEREAS,the Waukee City Council shall approve operating policies and procedures; AND, WHEREAS,City staff has presented the City Council with an Investment Policy,attached hereto as Exhibit A,and recommends approval. NOW THEREFORE BE IT RESOLVED by the City of Waukee City Council in session this 2"day of May,2016,that the City of Waukee Financial Policy —Investment Policy,of the Standard Administrative Policy and Procedures Manual is hereby approv d. illiam F.Peard,Mayor Attest: Rebecca D.Schuett,City Clerk ROLL CALL VOTE Shane Blanchard Brian Harrison Shelly Hughes Larry R.Lyon Rick Peterson AYK X X X X NAY ABSENT ABSTAIN if'»9/CIUkee Standard Administrative Policy R.Procedures Manual Title:FINANCIAL POLICY Section:INVESTMENT POLICY Date of Version:April 11,2016 Resolution No.:¹16-??? SECTION 1 —Policy It is the policy of the City of Waukee to invest public funds in a manner that will provide the highest investment return while maintaining maximum security and meeting cash flow needs. This investment policy is intended to comply with Iowa Code Chapters 12B and 12C,which govern the investment of public funds.The investment of bond funds or sinking funds shall comply not only with this investment policy but also be consistent with any applicable bond resolution. The purpose of this investment policy is to set investment objectives,establish guidelines,and define responsibilities for the investment of funds.Each investment made pursuant to this policy must be authorized and invested in accordance with state law and this investment policy. SECTION 2 —Scope This investment policy applies to all funds and investment transactions of the City of Waukee. These funds are accounted for in the City's annual audit report,and include: a.General Fund b.Special Revenue Funds c.Debt Service Fund d.Capital Project Funds e.Enterprise Funds f.Trust and Agency Funds g.Internal Service Funds h.All new funds created by the City,unless specifically exempted Except for cash in certain restricted and special funds,the City may consolidate cash balances from funds to maximize investment earnings and to increase efficiencies with regard to investment pricing,safekeeping and administration.Investment income will be allocated annually to the various funds based on their respective participation and in accordance with generally accepted accounting principles. SECTION 3 —Delegation of Authority In accordance with Section 12B.10 (1)of the Code of iowa,the responsibility for conducting investment transactions resides with the Finance Director of the City of Waukee.For purposes of this Investment Policy the Finance Director is designated as the Finance Director.Only the Finance Director and those authorized by resolution may invest public funds.A copy of any empowering resolution shall be attached to this Investment Policy. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials and their procedures in the absence of the Finance Director.The designee shall act in accordance with the established policies and internal controls set forth in this Investment Policy. All contracts or agreements with outside persons investing public funds,advising on the investment of public funds,directing the deposit or investment of public funds or acting in a fiduciary capacity for the City shall require the outside person to notify in writing the Finance Director of the City within thirty (30)days of receipt of all communication from the Auditor of the outside person or any regulatory authority of the existence of a material weakness in the internal control structure of the outside person or regulatory orders or sanctions regarding the type of services being provided to the City by the outside person. The records of investment transactions made by or on behalf of the City are public records and are the property of the City whether in the custody of the City or in the custody of a fiduciary or other third party. The Finance Director shall establish a written system of internal controls and investment practices.The controls shall be designed to prevent the loss of public funds,to document those officers and employees of the City responsible for elements of the investment process and to address the capability of investment management.The controls shall provide for receipt and review of the audited financial statement and related report of internal control structure of all outside persons performing any of the following for the City. 1.Investment of public funds 2.Advising on the investment of public funds 3.Directing the deposit or investment of public funds 4.Acting in a fiduciary capacity for the City The Finance Director of the City shall be bonded in the amount of $500,000.The amount of this bond shall be reviewed annually to determine its appropriateness and will be amended by the City Council if deemed necessary. SECTION 4 —Objectives of Investment Policy The primary assets of the objectives in order of priority,of all investment activities involving the financial City of yyaukee shall be the following: 1.SAFETY —Safety and preservation of principal in the overall portfolio is the foremost investment objective.The objective will be to mitigate credit risk and interest rate risk by following the guidelines listed below. a.Credit risk is the risk to an investor that an issuer will default in the payment of interest and/or principal on a security.The City will mitigate credit risk by: Limiting investment purchases to those in Section 6 of this policy. Pre-qualifying the financial institutions,brokers,dealers,and advisors with whom the City will do business. Diversifying the investment portfolio by agency and issuer so that potential losses on individual securities can be minimized. b.Interest rate risk is the risk that the market value of securities in the portfolio will fall due to the changes in market interest rates.The City will mitigate interest rate risk by: Structuring the investment portfolio so that securities mature to meet cash requirements for operations,thereby avoiding the need to sell securities in the open market prior to maturity. Purchasing investments with the intent to hold until maturity. Investing operating funds primarily in shorter-term securities, money market mutual funds,or similar investment pools and limiting the average maturity of the portfolio. 2.LIQUIDITY —Maintaining the necessary liquidity to match expected liabilities is the second investment objective.This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity).Furthermore,since all possible cash demands cannot be anticipated,the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity).Alternatively,a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds. 3.YIELD —Obtaining a reasonable rate of return is the third investment objective. The portfolio shall be designed with the objective of attaining a reasonable rate of return through budgetary and economic cycles.The return on investments is to be accorded secondary importance compared to the safety and liquidity objectives described above.The core of investments will focus on relatively low risk securities with an expectation of earning a reasonable return relative to the risk being assumed.Securities shall not be sold prior to maturity,with the following exceptions: a.A security with declining value may be sold early to minimize loss of principal. b.A security may be exchanged to improve the quality,yield,or target duration in the portfolio c.A security may be sold to satisfy cash flow demands. SECTION 5 —Prudence The Finance Director of the City of Waukee,when investing or depositing public funds,shall exercise the care,skill,prudence and diligence under the circumstances then prevailing that a person acting in a like capacity and familiar with such matters would use to attain the Section 4 investment objectives.This standard requires that when making investment decisions,the Finance Director shall consider the role that the investment or deposit plays within the portfolio of the assets of the City and the investment objectives stated in Section 4. When investing assets of the City for a period longer than six (6)months or in an amount greater than 5300,000 per investment,the Finance Director shall request competitive investment proposals for comparable credit and term investments from a minimum of three (3)investment providers. SECTION 6 —Authorized and Suitable Investments The City of Waukee is empowered by Section 12B.10(S),Code of iowa,to invest in the following types of securities: 1.U.S.Treasury obligations which carry the full faith and credit guarantee of the United States Government and are considered to be the most secure instruments available. 2.U.S.Government agency and instrumentality obligations that have a liquid market with a readily determinable market value. 3.Certificates of deposit and other evidences of deposit at federally insured depository institutions approved pursuant to Chapter 12C,Code of iowa. 4.Money market funds registered under the Federal Investment Company Act of 1940,whose shares are registered under the Federal Securities Act of 1933,and having a rating by Standard 5 Poor of AAAm-G,AAA-m,or AA-m,and if rated by Moody's,rated Aaa,Aa1,or Aa2. 5.Savings accounts,deposit accounts or money market deposit accounts which are insured by the FDIC and protected from losses by the State Sinking Fund. a.Section 12C.25 of the Code of iowa created the state sinking fund to protect public funds on deposit in Iowa banks,savings associations,and credit unions.This is in addition to iowa Code,Chapter 12C.22(2)which requires Iowa banks to pledge collateral for public deposits equal to or in excess of the total amount by which the public funds deposits in the bank exceeds the total capital of the bank. b.Section 12C.23A of the Code of Iowa describes the procedures that the State Treasurer of Iowa would implement if a bank were closed. 6.Repurchase agreements,provided that underlying collateral consists of obligations of the United States Government,its agencies and instrumentalities and the City takes delivery of the collateral either directly or through an authorized custodian. 7.An open-end management investment company registered with the Securities gt Exchange Commission under Federal Investment Company Act of 1940,15 U.S.C. Section 80(a)and operated in accordance with 17 C.F.R.Section 270.2a-7,whose portfolio investments are limited to those instruments authorized in Section 5 of this investment policy. The Finance Director is not required to invest in all of the investment options authorized in this policy.Selection will be based on cash flow characteristics,exposure to market risk,rate of return,the technical ability of the staff responsible for administering the program,and the availability of time and tools for staff to engage in conservative but effective management. Each financial institution shall be properly declared as a depository by the governing body of the City.Deposits in any financial institution shall not exceed the depository resolution maximum amount,approved by the City Council of the City of Waukee. SECTION 7 —Prohibited Investments and Investment Practices Prohibited investments for the City of Waukee,according to the Code of Iowa,Section 128.10(5)include reverse repurchase agreements,futures,and options contracts. City prohibited investment practices include: Trading of securities strictly for speculation of the realization of short-term trading gains. 2.Pursuant to a contract providing for the compensation of an agent of fiduciary based upon the performance of the invested assets. 3.If a fiduciary or other third party with custody of public investment transaction records of the City fails to produce records within a reasonable time requested by the City,the City shall make no new investment with or through the fiduciary or third party,and shall not renew maturing investments with or through the fiduciary or third party. SECTION 8 —Investment Maturity Limitations Investments of the City of Waukee must have maturities that are consistent with the needs and use of the City.To the extent possible the City will attempt to match its investments with anticipated cash flow requirements. 1.Operating funds are those funds that can be reasonably expended during a current budget year or within fifteen (1S)months of receipt.These funds may only be invested in instruments that mature within three hundred ninety-seven (397)days or less and are authorized by this investment policy.Operating funds must be identified and distinguished from all other funds available for investment.(Section 12B.10A,Code of Iowa). 2.Non-operating funds are those funds that are not required for operations,such as bond proceeds or reserves.These funds may be invested for longer than three hundred ninety-seven (397)days (Section 12B.10A(3),Code of iowa). These maturities shall coincide as nearly as possible with the expected use of the funds.The City of Waukee will keep these investments to a duration not to exceed seven (7)years. SECTION 9 —Diversification The purpose of diversification is to reduce overall portfolio risks while attaining benchmark average rates of return.Where possible,it is the policy of the City of Waukee to diversify its investment portfolio.Assets shall be diversified to eliminate the risk of loss resulting from over concentration of assets in a specific maturity,a specific issuer,or a specific class of securities.In establishing specific diversification strategies,the following general policies and constraints shall apply: 1.Portfolio maturities shall be staggered in a way that avoids undue concentration of assets in specific maturity sector.Maturities shall be selected which provide stability of income and reasonable liquidity. 2.Liquidity practices to ensure that the next disbursement date and payroll date are covered through maturing investments,marketable U.S.Treasury bill or cash on hand shall be used at all times. 3.Risks of market price volatility shall be controlled through maturity diversification so that aggregate prices losses on instruments with maturities approaching one (1)year shall not be greater than coupon interest and investment income received from the balance of the portfolio. SECTION 10-Safekee in and Custod All invested assets of the City of Waukee involving the use of public funds custodial agreement,as defined in Section 128.10C,Code of iowa.All custodial agreements shall be in writing and shall contain a provision that all custodial services be provided in accordance with the laws of the State of iowa. All trades of marketable securities,including collateral for repurchase agreements,will be executed by delivery-versus-payment (DVP)to ensure that securities are deposited in an eligible financial institution prior to the release of funds.A third party custodian will hold securities,with evidence being safekeeping receipts.The Finance Director is responsible for confirmation of transactions for investments and wire transfers.All investment officials shall be bonded to protect loss of public funds against possible embezzlement and/or malfeasance. SECTION 11 —Internal Control The Finance Director is responsible for establishing and maintaining an internal control structure to ensure that the assets of the City of Waukee are protected from loss,theft,or misuse.An annual and independent review by an external auditor will be conducted to assure compliance with policies and procedures. SECTION 12-Ethics and Conflict of Interest The Finance Director and all officers and employees of the City of Waukee involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program,or which could impair their ability to make impartial investment decisions. SECTION 13 —Re ortin The Finance Director shall prepare monthly bank reconciliation and investment reports that summarize City of Waukee investments for the fiscal year.The investment report shall set out the current portfolio in terms of maturity,rates of return and other features and summarize all investment transactions that have occurred during the reporting period and compare the investment results with the budgetary expectations. SECTION 14-Investment Polic Ado tion and Deliver Th City fid 1 ' I t tyliyi qi dbyy ti 11B1tlB Cd ft d pp dbyCityC il.Th p liy h lib I d Itybyth Pi Pi t d any modifications made thereto must be approved by the City Council. This policy shall be delivered to all of the following: 1.The City Council and City of Waukee investment staff 2.All depository institutions or fiduciaries for public funds of the City 3.External auditors for the City 4.Brokers/dealers who conduct trades with the City 5.Financial advisors of the City GLOSSARY BENCHMARK —A comparative base for measuring the performance of risk tolerance of the investment portfolio.A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio's investment. 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 CDs 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. COUPON —(a)The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value.(b)A certificate attached to a bond evidencing interest due on a payment date. CREDIT RISK —The risk to an investor that an issuer will default on the payment of interest and/or principal on a security. CURRENT YIELD (CURRENT RETURN)—A yield calculation determined by dividing the annual interest received on a security by the current market price of that security. DELIVERY VERSUS PAYMENT-There are two methods of delivery of securities:delivery versus payment and delivery versus receipt.Delivery versus payment is delivery of securities with an exchange of money for the securities.Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DIVERSIFICATION —Dividing investment funds among a variety of securities offering independent returns. DURATION —A measure of the timing of the cash flows,such as the interest payments and the principal repayment,to be received from a given fixed-income security.This calculation is based on three variables;term to maturity,coupon rate,and yield to maturity.The duration of a security is a useful indicator of its price volatility for given changes in interest rates. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)—A federal agency that insures bank deposits,currently up to 5250,000 per deposit. FIDUCIARY-Person,company or association holding assets in trust of a beneficiary. INVESTMENT POLICY —A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities. LIQUIDITY-A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.In the money market,a security is said to be liquid if the spread between bid and ask prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNIVIENT INVESTIYIENT POOL (LGIP)—The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. IVIARKET RISK-The risk that the value of a security will rise or decline as a result of changes in market conditions. MARKET VALUE-The price at which a security is trading and could presumably be purchased or sold. MATURITY —The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET-The market in which short-term debt instruments (bills,commercial paper, bankers'acceptances,etc.)are issued and traded. OPEN MARKET OPERATIONS —Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMS in order to influence the volume of money and credit in the economy.Purchases inject reserves into the bank system and stimulate growth of money and credit;sales have the opposite effect.Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. OPTION —Right to buy or sell property that is granted in exchange for an agreed upon sum.If the right is not exercised after a specified period,the option expires and the option buyer forfeits the money. PORTFOLIO —Collection of securities held by an investor. 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. REPURCHASE AGREEMENT (RP or REPO)—A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.The security "buyer"in effect lends the "seller"money for the period of the agreement,and the terms of the agreement are structured to compensate for this.Dealers use RP extensively to finance their positions.Exception,when the Fed is said to be doing RP,it is lending money that is increasing bank reserves. SAFEKEEPING —A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET —A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES &EXCHANGE COMMISSION -Agency created by Congress to protect investors in securities transactions by administering securities legislation. SPECULATION —Assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. TREASURY BILLS —A non-interest bearing discount security issued by the U.S.Treasury to finance the national debt.Most bills are issued to mature in three (3)months,six (6)months, or one (1)year. VOLATILITY —A degree of fluctuation in the price and valuation of securities. YIELD-The rate of annual income return on an investment,expressed as a percentage.(a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security.(b)NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price,with the adjustment spread over the period from the date of purchase to the date of maturity of the bond.