HomeMy WebLinkAboutRES NO 123-2024SUBJECT:
SECTION:
POLICY:
STATEMENT:
CITY OF BAKERSFIELD
COUNCIL POLICY STATEMENT
CP No. 4.4
INVESTMENT POLICY
CHAPTER FOUR
ADOPTION OF POLICY FOR THE INVESTMENT POLICY
Resolution of the Council of the City of Bakersfield adopting
the investment policy.
Agenda Item No./Date 7.d.1.; September 11, 2024
Approved by City Council
S:\Council\POLICIES\STATMENTTORM.CPS
Res. No. 123-2024
POLICY RESOLUTION NO, 1 3 ®2 0 2 4
A RESOLUTION OF THE COUNCIL OF THE
CITY OF BAKERSFIELD ADOPTING THE
INVESTMENT POLICY.
WHEREAS, Section 53646 of the California Government Code requires the
Treasurer or Chief Fiscal Officer to render an annual statement of Investment Policy to
the legislative body of the local agency; and
WHEREAS, the City of Bakersfield desires to adopt an Investment Policy in
conformance with the California Government Code.
NOW, THEREFORE, BE IT RESOLVED, by the Council of the City of
Bakersfield as follows:
The Council of the City of Bakersfield hereby adopts the Investment Policy as set
forth in Exhibit "A" attached hereto and made a part hereof.
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I HEREBY CERTIFY that the foregoing Resolution/Ordinance was passed
and adopted, by the Council of the City of Bakersfield at a regular meeting thereof.held
on SFP 1 1 2024 by the following vote:
YE D COUNCILMEMBER ARIAS, GONZALES,-WEER, SMITH, FREEMAN, GRAY,_"LR-
NOES:
COUNCILMEMBER
ABSTAIN:
COUNCILMEMBER
ABSENT:
COUNCILMEMBERWQXJL.,) 6CAA Q r_
J LIE DR MAKIS, MMC
CITY CLERK and.Ex Officio
Clerk of the Council of the City of Bakersfield
APPROVED: SEP 112024
,By
KAR N, O
Mayor
APPROVED AS TO FORM:
VIRGIVIA GENNARO, CITY ATTORNEY
y
J SHUA RUDNICK
eputy City Attorney II
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CITY OF BAKERSFIELD
INVESTMENT POLICY
I INTRODUCTION
This Investment Policy is intended to provide guidelines for the prudent investment of the City
of Bakersfield's temporary idle cash, and outline the policies for maximizing the efficiency of
the City's cash management system.
It is the policy of the City of Bakersfield to invest public funds in a manner which will provide
safety of principal and at least a market rate of return while meeting the daily cash flow demands
of the City. Investments will conform. to all statutes governing the investment of public funds.
The primary goals of this policy are:
• To assure compliance with all Federal, State and Local laws governing the investment of
public funds under the control of the City Treasurer.
• To maintain -the principal value of financial assets and ensure ample -liquidity to meet
operating expenditures.
• Within the constraints of safety and liquidity, and within the parameters of this
Investment Policy generate a market rate of return.
The ultimate goal is to enhance the economic status of the City of Bakersfield while protecting
the safety of its financial assets.
This investment policy was endorsed and adopted by the City of Bakersfield's City Council and
is effective as of the day of , 20XX, and replaces any previous versions.
II - SCOPE
This policy applies to the investment activities of the City of Bakersfield and related, entities.
Idle cash in all funds is pooled for investment purposes except tax exempt bond proceeds, which
are,separated for arbitrage record keeping as required by Federal tax law and the Firemen's
Disability and Retirement Fund which is administered separately under the City of Bakersfield.
Municipal Code Section 2.92. Other Post -Employment Benefits (OPEB) are administered by a
separate Investment Policy per Resolution 008-07.
Investments made on a pooled basis include monies of the City of Bakersfield, the
Redevelopment Successor Agency and the Public Financing Authority. The pooled funds are
accounted for in the City of Bakersfield's Annual Comprehensive Financial Report (ACFR) and
include: -
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OXX General Funds
1XX Special Revenue Funds
2XX Debt Service Funds
3XX Capital Project Funds
4XX Enterprise Funds
5XX Internal Service Funds
6XX Fiduciary -Agency Funds
Any new fund created, unless specifically exempted.
All debt issue proceeds will be invested in accordance with the associated trust indenture, and in
such a manner that facilitates arbitrage rebate calculations.
III PRUDENCE
Pursuant to California Government Code, Section 53600.3, all persons authorized to make
investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the
Prudent Investor Standard:
"...all governing bodies of local agencies or persons authorized to make investment
decisions on behalf of those local agencies investing public funds pursuant to this
chapter 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."
IV OBJECTIVE
Criteria for selecting investments and the order of priority are:
• Safe - Safety of principal is the foremost objective of the investment program. The
City only operates in those investments that are considered very safe. The City shall seek
to preserve principal by mitigating the two types of risk, credit risk and market risk.
Credit Risk - Potential loss due to the failure of an issuer of a security.
Market Risk - Potential decrease in the value of securities due to changes in the
general level of interest rates.
® Li uidi -Liquidity refers to the "ability to easily sell" at any moment in time with a
minimal risk of losing some portion of principal and interest. Liquidity is an important
investment quality should the need for cash occur unexpectedly.
e 'Yield -Yield is the potential dollar' earnings an investment can provide and is sometimes
described as the rate of "return. The City's investment portfolio shall have the objective of
attaining a comparative performance measurement or an acceptable rate of return
throughout budgetary and economic cycles. These measurements should be
commensurate with the City's investment risk constraints identified in the Investment
Policy and the cash flow characteristics of the portfolio.
V DELEGATION OF AUTHORITY
In accordance with the City of Bakersfield Municipal Code, subsequent resolutions, and
California Government Code Section 53607, the City Council assigns the responsibility of
investing unexpended cash to the Finance Director. The duties prescribed by the City Charter
state that the Finance Director shall separate the custody of moneys from the accounting of
moneys. Therefore, the City Treasurer, who reports to the Finance Director, shall be responsible
for all investment transactions undertaken and shall establish a system of procedures and controls
to regulate the City's investment activities. In the absence of the City Treasurer, the authority to
execute investment transactions will be restricted to the Finance Director, Assistant Finance
Director and the Treasury Supervisor. No person may engage in an investment transaction except
as provided under the terms of this policy and the procedures established by the City Treasurer.
TheCity may engage the services of one or more external investment advisers, who are
registered under the Investment Advisers Act of 1940, to assist in the management of the City's
investmentportfolio in a manner consistent with the'City's objectives. External: investment -
advisers may be granted discretion -to purchase and sell investment securities in accordance with
this investment policy.
The-City's overall investment program shall be designed and managed with a degree of
professionalism that is worthy of the public trust. The City recognizes that in a diversified
portfolio, occasional measured losses may be inevitable and must be considered within the
context of the overall portfolio's return and the cash flow requirements of the City.
VI ETHICS AND CONFLICTS OF INTEREST
All officials involved with the City of Bakersfield's investment program shall exercise their
fiduciary responsibly as custodians of the public trust. The City Treasurer, or when appropriate
the Treasury Supervisor, shall -avoid any transactions that might impair public confidence in the
City's ability to manage the investment of public funds in aneffectivemanner: The City -
Treasurer, Treasury Supervisor, or any other official charged with the responsibility of making
investment decisions, shall have no vested interest in any investment being made involving
public funds of the City, and shall :gain no financial benefit from such investment decisions.
Employees and investment officials shall disclose to the City Treasurer any material interests in
financial institutions with which they conduct business, and they shall further disclose any large
personal financial/investment positions that could be related to the performance of the
investment portfolio. Employees and officers shall refrain from undertaking any -personal
investment transactions with the same individual with whom business is conducted on behalf of �� 6AK�
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the City.
VII AUTHORIZED FINANCIAL INSTITUTIONS; DEPOSITORIES, AND BROKER/
DEALERS
All financial institutions that desire to do business with the City shall be evaluated by the City
Treasurer to -determine if they are adequately capitalized, meet California Government Code
requirements and agree to abide by the conditions set forth'in the City of Bakersfield Investment
Policy.
The City Treasurer shall maintain procedures for establishing a list of authorized broker/dealers
and financial institutions which are approved for investment purposes that are selected through a
process of due diligence as determined by the City. Due inquiry shall determine whether such
authorized broker/dealers; and the individuals covering the City are reputable and trustworthy,
-knowledgeable and experienced in Public Agency investing and able to meet all of their financial
obligations. This includes an investigation to determine if there is pending legal action against the
Broker/Dealer or the individual broker who would be the City's contact and that the firm offers,
securities appropriate to the City's needs. All broker/dealers, which may, include "primary
dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15c3-1
(Uniform Net Capital Rule). In -'accordance with Section 53601.5, institutions eligible to transact_
investment business.with the City include:
• Institutions licensed by the state and proof of FINRA certification as a broker -
'dealer, as defined in Section 25004 of the Corporations Code.
• Institutions that are members of a federally regulated securities exchange.
• Primary government dealers as designated by the Federal Reserve Bank and non -
primary government dealers.
• Nationally or state -chartered banks.
• Savings association or federal. association (as defined in" Section 5102 of the
Financial Code).
• The Federal Reserve Bank.
• Direct issuers of securities eligible for purchase.
Selection of financial institutions and broker/dealers authorized to engage in transactions will be
at the -sole discretion of the City, except where the City utilizes an external investment adviser in
which case the City may rely on the adviser for selection:
All financial institutions which desire to become qualified bidders for investmenttransactions
(and which are not dealing only with the investment adviser) must supply the City Treasurer
with:
• Audited financial statements
• A copy of the latest FDIC call report
• Completed broker/dealer questionnaire
• Account authorization forms
• A statement certifying that the institution has reviewed the California Government
Code, Section 53600 et seq. and the City of Bakersfield's Investment Policy.
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The City Treasurer will conduct an annual review of the financial condition and registrations of
such qualified bidders.
Broker/dealer account authorizations and depository contracts will be, executed by the City of
Bakersfield Finance Director as required by City Charter. The City Treasurer will maintain a list
of authorized broker/dealers and banks that are approved to do business with the City. An
annual review of the financial condition of authorized financial institutions_ will be conducted by
the City Treasurer.
To the extent practicable, the City Treasurer shall endeavor to complete investment transactions,
using a competitive bid process whenever possible. The City Treasurer will determine which
financial institutions are authorized to provide investment services to the City. It shall -be the -
City's policy to purchase securities only from authorized institutions and firms.
VIII AUTHORIZED & SUITABLE INVESTMENTS
The City of Bakersfi'eld's investment program is governed by California Government Code `
Sections 53600 et seq. Within the context of these limitations, the following investments are
authorized „and are utilized by the City of Bakersfield"witli some limits being more restrictive'
than statute:
A. United States Treasury -Bills, Notes and Bonds
United State Treasury Bills, Notes and Bonds are securities which have the full
faith and credit of the United States pledged for payment of principal and interest.
Although there is no percentage limitation of the dollar amount that can be
invested in these categories, the "prudent investor" standard shall apply.
Maturities are limited to five years from settlement date.
B. United States Federal Agencies
US Federal Agencies or United States Government -Sponsored Enterprise
obligations, participations, or other instruments, including those issued by or fully -
guaranteed as to principal and interest by federal agencies or United States
government -sponsored enterprises. At the time of purchase no more than 20%*,*
of the total,portfolio may be invested in any single agency name. No more than
20% of the total portfolio may be invested in callable agency securities.
Maturities are limited to five years from settlement date.
C. Bankers Acceptance
Bankers Acceptance (BA) is a time draft or bill of exchange, issued from a letter
of credit, and is normally used to finance international trade. When the accepting
bank -stamps "accepted" on the draft the bank guarantees payment of the -draft at a
specified future date and thereby creates an acceptance. BA's are considered
extremely safe in that there has never been a default on a BA. BA's trade on a
discount basis and may not exceed 180 days to maturity. No more than 5% of the
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total portfolio may be invested in BA's issued by any one bank. No more than
40% of the total portfolio may be invested in this category.. Eligible`BA's are
those issued by banks with a short term rating of the highest letter and number
rating provided for by a Nationally Recognized Statistical -Rating Organization
(NRSRO).
D. Commercial Paper
Commercial Paper (CP) is a short-term promissory note. CP is sold on a discount
basis. CP is eligible provided that the securities are issued by an entity that meets
all the following conditions in either paragraph (a) or (b) and other requirements
specified below:
(i) SECURITIES. issued by corporations:
• A corporation organized and operating in the United States with assets
more than $500 million.
• The securities are rated "A- I" or its equivalent or better by at least one
NRSRO.
If the issuer:has other debt obligations, they must be rated in a rating
category of "A".or its equivalent or better by at least one NRSRO.
(i►) SECURITIES issued by other entities:
• The issuer is organized within the United States as a special purpose
corporation, trust,.or limited liability company.
• The securities must have program -wide credit enhancements including,
but not limited to, overcollateralization, letters of credit, or a surety- bond.
• The securities are rated "A-1" or its equivalent or better by at least one
NRSRO.
Purchases of eligible CP may not exceed 270 days to maturity. No more than 10%
of the total portfolio may be invested in CP and medium terms notes of any single
issuer. No more than 25% of the total portfolio may be invested in this category.
Under a provision sunsetting on January 1, 2026, no more than 40% of.the total
portfolio may be invested in Commercial Paper if the City's investment assets
under management are greater than $100,000,000.
_.E. - Repurchase Agreements
Repurchase Agreements, commonly called Repos, consist of two simultaneous
transactions. One is the purchase of securities by an investor (City of Bakersfield)
from a bank or dealer. The other is:the commitment by the bank or dealer to
repurchase the securities at the same price plus interest at some mutually agreed
future date. Normally the securities are U.S. Treasury notes or bonds and are held
by a Federal Reserve Bank. Repos can be done with banks or dealers with which
the City has entered into a master repurchase contract that specifies terms and
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-conditions of repurchase agreements. Repos are collateralized with securities at a
level of at least 102%of the market:value of the Repurchase Agreement. The
maturity of Repos shall not exceed 90 days. No more than 30%° of the total
portfolio may be invested in this category.
F. Local Agency Investment Fund
Local Agency Investment Fund (LAIF) is a State of California managed
investment pool for local agencies within the State. Investments may be- up to the
maximum permitted by LAIF or 40%°** of the total portfolio whichever is less.
Due diligence will be exercised in monitoring the performance of LAIF on a
continual basis.
G. _Negotiable Certificates of Deposit (NCDs),
NCDs are issued by a nationally or.state-chartered bank, a savings association or
a federal association, a state or federal credit union, or by a federally licensed or
state -licensed branch of a foreign bank, provided that:
(i) The amount of the NCD insured up to the FDIC limit does not require
any credit ratings.
(ii) Any amount above the FDIC insured limit must be issued by institutions
which have short-term debt obligations rated "A- I" or its equivalent or
better by at least one NRSRO; or long-term obligations rated in_ a rating
category of "A" or its equivalent or better by at least one NRSRO.
(iii) No more than 30%* of the total portfolio may be invested in NCDs
(combined with Placement Service Deposits).
(iv) The maximum maturity does not exceed five (5)'years.
H. Federally Insured Time Deposits (Non -Negotiable Certificates of Deposit)
Federally Insured Time Deposits in state or federally chartered banks, savings and
loans, or credit unions, are eligible provided that the amount per institution is
limited to the maximum covered under federal insurance. No more than 20%-of
the total portfolio will be invested in a combination of federally insured and
collateralized time deposits. The maximum maturity does not exceed five (5) **
years..
I: " Collateralized Time Deposits (Non -Negotiable Certificates of Deposit)
Collateralized Time Deposits in state or federally chartered banks, savings and
loans, or credit unions in excess of insured amounts which are fully collateralized
with securities in accordance with California law, provided that no more than
20% of the total portfolio `will be invested in a combination`of federally insured
and collateralized time deposits. At the time of purchase, no more than 106/o of the
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total portfolio may be in LTD's of any one institution. Section 53652 of the'
California Government Code also specifies that the City will have a deposit
contract with each depository. Maturity is limited to five years.
Collateralized Bank- Deposits.
The City's Agency's`deposits with financial institutions will be collateralized with
pledged securities per California Government Code, Section 53651. There are no
limits on the dollar amount or percentage that the City may invest in collateralized
bank deposits. No. more than 30% o of the total portfolio may be invested in this
category. The maximum maturity does not exceed five (5) years.
Mutual Funds and Money. Market Funds
Mutual Funds and Money Market funds that are registered with the Securities and
Exchange Commission under the Investment Company Act of 1940.'No more
than 20%* of the total portfolio may be invested in this investment category.
Mutual funds that invest in 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 notless than two (2) 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 shares of
any one mutual fund.
Money market funds meeting criteria prescribed in California Government Code
Section 53601 and related legislation. Investment in this category is limited to
funds that invest in Government Money Market Funds that invest in U.S.
Government and Federal' Agency Securities that maintains a stable NAV. No
more than 20% of the total portfolio may be invested in the shares of any one
money market mutual fund.
Due diligence will be exercised in the selection and performance monitoring of
mutual funds on a continual basis.
L. Municipal Securities
Municipal Securities include obligations of the Agency, the State of California-, any
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local agency within the State of California, or the Registered Treasury Notes of
Bonds of the other 49 states provided that the securities are rated in a rating
category of "A" or its equivalent or better by at least one NRSRO. No more than
30% of the total portfolio may be in Municipal Securities. The maximum maturity
does not exceed five (5) years.
Placement Service Deposits
Private, placement service that allows °local Agencies to purchase more than
$250,000 in CDs from a single financial institution (must be a partic ipating
institution of CDARS) while still maintaining FDIC insurance coverage. No more
than 30% of the total portfolio may be invested in a combination of Certificates of
Deposit, including CDARS. Under a provision sunsetting on January1, 2026, no
more than 50% of the total portfolio may be invested in deposits through,a -
placement service, including Certificates of Deposit; if the Agency is a city, district
or local agency that does not;pool money with other local agencies. The maximum
maturity does not exceed five (5) years.
Local Government Investment Pools (LGIPs)
Investments may be up to 20% of the total portfolio.
O. Corporate Medium Term -Notes (MTNs)
MTNs are issued by a corporation organized and operating within the United States
or by depository institutions. licensed by the United States or.any state and
operating within the United States. The securities are rated in a rating category of
"A" or its equivalent or -better by at least one NRSRO. No more than 30% of the
total portfolio may be invested in MTNs. The maximum. maturity does not exceed
five (5) years.
P. Asset -Backed, Mortgage -Backed, Mortgage Pass -Through Securities, And
Collateralized Mortgage Obligations from Issuers Not Defined In Section
VIII(A) Or (B) Of The Authorized Investments Section Of ThisPolicy
Securities supported by pools of installment loans, leases, pools of revolving lines
of credit; securities participation of specific pool or mortgages; or classes of bonds
thatredistribute the cash flows of mortgage securities. The securities are rated in a
rating category of "AA" or its equivalent or better by a NRSRO. No more than
20% of the total portfolio may be invested in these securities. The maximum legal
final maturity does not exceed five (5) years.
Q. Supranationals
Supranational issues are US dollar denominated senior unsecured unsubordinated
obligations issued or unconditionally guaranteed by the. International Bank for
Reconstruction and Development, International Finance Corporation, or Inter -
American. Development Bank. The securities are rated in a rating category of "AA"
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or -its equivalent or better by a NRSRO. No more than 30% of the total portfolio
may be invested in these securities. No more than 10% of the total portfolio may be
invested in any single issuer. The maximum maturity does not exceed five (5)
years.
City of Bakersfield
Summary Of Maximum Percent and'Term Limitations
By Investment. Type:-,
(1) Short-term debt rating of the highest letter and number rating provided for by a nationally
recognized statistical -rating organization.
(2) .40% CP limit under a provision sunsetting on January 1, 2026.
(3) Highest letter and number rating provided for by a nationally recognized statistical -rating
organization.
(4) 50% limit under a provision sunsetting on January 1, 2026.
(5) No more than 20% of the total. portfolio will be invested in a combination of federally
insured and collateralized time deposits.
(6) No more than 30% of total portfolio will be invested in a combination of NCDs and
Placement Service Deposits.
Should any investment percentage and portfolio limitation be exceeded due to, the unexpected
fluctuation in portfolio size, the affected securities may be held to avoid losses. When market
values are such that no loss is indicated, the City Treasurer shall consider restructuring the
portfolio basing the decision in part on the expected length of time the portfolio will'be
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imbalanced.
Any State of California legislative action that further restricts allowable maturities, investment
type or percentage allocations, will be incorporated into this Investment Policy and supersede
any and all previous applicable language.
IX PROHIBITED INVESTMENT VEHICLES AND PRACTICES
State law notwithstanding, any investments not specifically described herein .are prohibited,
including, but not limited to futures and options.
• In accordance with Government Code, Section 53601.6, investment in inverse
floaters, range notes, or mortgage derived interest -only strips is prohibited.
• Investment in any security that could result in a zero -interest accrual if held to
maturity is prohibited. Under a provision sunsetting on January 1, 2026 securities
backed by the U.S. Government that could result in a zero- or negative -interest
accrual if held to maturity are permitted.
Trading securities for the, sole purpose of speculating on the future direction of
interest rates is prohibited. .
• Purchasing or selling securities on margin is prohibited.
•: The use of reverse repurchase agreements, securities lending or any other form of
borrowing or leverage is prohibited.
The purchase of foreign currency denominated securities is prohibited.
• The purchase of a security with a forward settlement date exceeding 45-days from
the time -of the investment- is prohibited.
X INVESTMENT PORTFOLIO REVIEW
The securities held by the City must be in compliance with Section VIII Authorized & Suitable
Investments at the time of purchase. The City.Treasurer shall review the portfolio quarterly to
identify any securities that are no longer in compliance. The City Treasurer shall establish
procedures to report to the Finance Director and City Council; should one exist, any major and
critical incidence of noncompliance identified through the review of the portfolio.
XI INVESTMENT POOLS / MUTUAL FUNDS
A thorough -investigation of the pool/fund is required prior to investing, and on a continual
basis. Annually, the City Treasurer shall seek responses to the following questions from any
investment pool or,mutual fund in which the Agency invests:
1. A description of eligible investment securities, and a written statement of
investment policy and objectives.
2. A description of interest calculations and how it is distributed, and how gains
and losses are treated.
3. A description of how the securities are safeguarded (including the settlement
processes), and how often the securities are priced and the program audited.
4. A description of who may invest in the program, how often, what size
deposit and withdrawals are allowed.
5. A schedule of when statements and portfolio listings will -be provided.
6. A description of how the pool/fund utilizes reserves, retained earnings, etc.
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7. A fee schedule, including when and how -fees are assessed.
8. The eligibility of the pool/fund to invest in bond proceeds and a description of its
practices.
XII COLLATERALIZATION
Collateralization will be required on three types of investments: certificates. of deposit; bank
deposits, and repurchase agreements.
CERTIFICATES OF DEPOSITS. Investment in certificates of deposit shall be insured up
to$250;000 by the Federal Deposit Insurance Corporation (FDIC). Investments in time
certificates of deposit in excess of $250,000 shall be properly collateralized. When a depository
pledges=government securities as collateral, section 53652 of the.California Government Code
requires the securities to have a market value of at least 10% in excess of the. City's -deposit or
50% in excess of the City's deposit when mortgages are pledged as collateral.
COLLATERALIZATION OF BANK DEPOSITS. This is the process by which a bank or
financial institution pledges securities, or other deposits for the purpose of securing repayment
of deposited funds. The Agency shall -require any bank or financial institution to comply with
the collateralization criteria defined in California Government Code, Section 53651.
REPURCHASE AGREEMENTS. Repo collateral ization will be at least 102%of market
value of principal and accrued interest. Investments held with Third Parties holding collateral
for the investment shall be properly collateralized in accordance with collateralization
requirements of the California Government Code. Financial institutions shall mark the value of
the collateral to market at leastmonthly and increase or decrease the collateral to satisfy the
ratio requirement described above. The City shall receive monthly statements of collateral:
XIII DELIVERY, SAFEKEEPING AND CUSTODY
All securities owned by the City shall be held in safekeeping by a third party custodian_
designated by the City Treasurer and evidenced by safekeeping receipts. All security
transactions entered into by the City of Bakersfield shall be conducted on a delivery -versus -
payment (DVP) basis. Securities shall be delivered to the City by book entry; physical delivery
or by third party custodial agreement.
Upon purchase or maturity of investment securities, standing settlement instructions are provided
to the servicing banks and broker/dealers involved in the transactions. Adherence to those
standing settlement instructions ensures accurate and timely settlement of investment security
transactions. Standing. settlement instructions are restricted in nature, ensuring investment
settlements, are within established guidelines.
The only exceptions to the foregoing shall be depository accounts and securities purchases made
with:`(i) local government investment pools; (ii) time certificates of deposit, and, (iii) mutual
funds -and money market mutual funds, since these securities are not deliverable:
XIV RISK MANAGEMENT AND DIVERSIFICATION
A. Mitigating Credit Risk in the Portfolio
Credit risk is the risk that a security or a.portfolio will lose some or`all its value -
due to a real or perceived change in the ability of the issuer to repay its debt. The
Agency will mitigate credit risk by adopting the 'following -strategies;
• The diversification requirements included in the "Authorized Investments"
section of this policy are designed to mitigate credit risk in the portfolio.
• No more than 5% of the total portfolio may be deposited with or invested in
securities issued by any single issuer unless otherwise specified in this
policy.
• The Agency may elect to sell a security prior to'its maturity and record a .
capital gain or loss in order to manage the quality, liquidity; or yield of the
portfolio in response to market conditions or the Agency's risk preferences.
• If a security owned by the Agency is downgraded to a level below the
requirements of this policy, making the security ineligible for additional'
purchases, the following steps will be taken:
• Any actions taken related to the downgrade by the investment manager
will be communicated to the Designated Official in a timely manner.
• If a decision is made to -retain the security, the credit situation will be
monitored and reported to the Governing Body.
B. Mitigating Market Risk in the Portfolio
Market risk is the risk that the portfolio value will fluctuate due to changes in the
general level of interest rates. The Agency recognizes that, over time, longer -
term portfolios have the potential to achieve higher returns. On the other hand,
longer -term portfolios have higher volatility of return. The Agency will mitigate
market risk by providing adequate liquidity -for short-term cash needs, and by
making longer=term investments only with funds that are not needed for current
cash flow purposes.
The Agency further recognizes that certain types of securities, including variable
rate securities, securities with principal paydowns prior to maturity, and
securities with embedded options, will affect the market risk profile of the
portfolio differently in different interest rate environments. The Agency,
therefore, adopts the following strategies to control and mitigate its exposure to
market risk:
• The Agency will maintain a minimum of six months of budgeted operating
expenditures in short-term- investments to provide sufficient liquidity for
expected disbursements.
• The maximum stated final maturity of individual securities in the portfolio
will be five (5) years, except -as otherwise stated in this policy.
• The duration of the portfolio will generally be approximately equal to the. .
duration (typically, plus or,minus.20%o) of a Market Benchmark, an index
• l�
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selected by the City based -on the City's investment objectives, constraints
and risk tolerances. Because the investment portfolio is designed to operate,
on a "hold -to -maturity" premise (or passive investment style) and because
of the, safety, liquidity, and yield priorities, the benchmark that will be used
by the City Treasurer shall be the yield on the U.S. Treasury Bill or Note
maturing closest to the weighted average maturity of the City's overall
portfolio. Because the investment portfolio is designed to operate on a
"hold -to -maturity" premise (or passive investment style) and because of the
safety, liquidity, and yield priorities, the benchmark shall be the yield on
the U.S. Treasury Bill or Note maturing closest to the weighted average
maturity of the City's overall portfolio.
XV. MAXIMUM MATURITIES
To the extent possible, and within the five year maximum maturity required by California
Government Code, the City of Bakersfield will attempt to match investment maturities with.
anticipated cash flow requirements.
As required by California Government Code Section 53601, any investment term longer than
five years requires express authority by the City Council to make that investment. This
authority must be'granted no less than three months prior to making the investment.
Investments with terms longer than five years will be limited to the lesser of $10 million or-
t0% of the portfolio at the time the investment is made.
XVI INTERNAL CONTROL
Investment transactions are reviewed by the- City's external auditor as part of the annual audit.
This review verifies compliance with the City of Bakersfield Investment Policy and the
California Government Code.
The City Treasurer shall periodically, but no less than quarterly, review the portfolio to identify
investments that do not comply with this investment policy and establish protocols for reporting
major and critical incidences of noncompliance to the City Council.
XVII PERFORMANCE STANDARDS
The'cash management system is designed to accurately monitor and forecast: expenditures and
revenues, thus ensuring the investment of monies to the fullest extent possible, including the
:estimated float for the Active Account and the Payroll Account. The investment portfolio shall
be designed to attain a market -average rate of return throughout budgetary and economic
cycles, taking into account the City-'s risk constraints, the cash flow characteristics of the
portfolio, and state and local laws, ordinances or resolutions that restrict investments.
The City Treasurer shall monitor and evaluate the portfolio's performance relative to the chosen
market benchmark(s). The City Treasurer shall select an appropriate, readily available index to
use as a market benchmark. Benchmarks may change over time based on changes in market
1416N.4-4
e
conditions or cash flow requirements.
XVIII REPORTING
The City Treasurer shall provide the City Council monthly investment reports which provide a
clear picture of the status of the current investment portfolio. The Monthly Investment, Report
shall include the following:
A listing of individual securities held at the end of the reporting'period by
authorized investment category
• Final, maturity of all investments listed
• Coupon, discount or earnings rate
• Par value and market value
• - Transactions completed during the. month
• Percentage of the portfolio represented by each investment category
• A statement of compliance with the Investment Policy
• A statement denoting the ability to meet the pool's expenditure requirements for
the next six months, or an explanation as to why sufficient money shall, or may,
,
not be available
XIX INVESTMENT POLICY ADOPTION
This Investment Policy shall be reviewed annually by the City Council to ensure its consistency
with the -overall` objectives of Safety, Liquidity and Yield, -its relevance to current financial and
economic trends, and ability to meet the cash flow operational needs of the City. As part of the
City Council's annual review of the City's Investment Policy, and in accordance with the
requirement of the California Government Code, the City Council shall adopt the City's
Investment Policy by Resolution on an annual basis.
XX INDEMNIFICATION OF INVESTMENT OFFICIALS
The. standard of care to be used by investment officials shall be the "prudent investor" standard
and shall be applied in the context of managing the overall portfolio. The City Treasurer and his
designees' acting,in accordance with established procedures and the City of Bakersfield _
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.
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XXI GLOSSARY
ACCRUED INTEREST: Interest earned but not yet received.
AGENCIES: Shorthand market terminology for any obligation issued byy-a government -sponsored
entity (GSE), or.a federally related institution. Most obligations of GSEs are not guaranteed by the
full faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural
industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market.
FHLB issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and
liquidity in the housing market. FHLMC, also called "FreddieMac" issues discount notes,
bonds and mortgage pass -through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was
established to provide credit and liquidity in the housing market. -FNMA, also known as
"FannieMae," issues discount notes, bonds and mortgage pass -through securities.
GNMA. The Government National Mortgage Association, known as "GinnieMae," issues
mortgage pass -through securities, which are guaranteed by the full -faith and credit of the US
Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations -of PEFCO
are not guaranteed by.the full faith and credit of the US government.
TVA. The Tennessee Valley Authority provides flood control and power and promotes
development in portions of the Tennessee, Ohio, and Mississippi ,River valleys.- TVA
currently issues discount notes and bonds.
ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report
of the (entity).' It -includesfive combined `statements for each individual fund and account group
prepared in -conformity with GAAP. It also includes supporting schedules necessary to demonstrate
compliance with finance -related legal and -contractual provisions, extensive introductory material,
and a detailed Statistical Section:
ASKED: The price at.which securities are offered.
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or
by pools of revolving lines of credit.
AUTHORIZED INVESTMENTS: A list of permitted investments by investment type
in as a component to aninvestment policy. Allowable investment listings will generally
include descriptions or parameters for investment .diversification ratios, terms of maturity, and
quality ratings.
BANKERS' 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. .
BENCHMARK: A comparative base for measuring the performance or 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 investments.
BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a
bid.) See Offer.
BOND: A financial obligation for which the issuer promises• to pay the bondholder a specified
stream of future cash flows, including periodic interest payments and a principal repayment.
BROKER: A broker brings buyers and sellers together for a commission. .
CALLABLE. A callable security gives the issuer the option to call it from the investor prior to itt�®��F�4,
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maturity. The main cause of a call is a decline in interest rates. If interest rates decline, the issuer
will likely call its. current securities and reissue them at a lower rate of interest.
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.
COLLATERALIZED BANK DEPOSIT. A'bank'deposit that is collateralized at least 100%
(principal plus interest to maturity). The deposit is collateralized usingassets' sef aside -by `the
issuer such as Treasury securities or other qualified collateral to secure the deposit in excess of the
limit covered by the Federal Deposit Insurance Corporation. -
COLLATERALIZED MORTGAGE .OBLIGATIONS (CMO). Classes of bonds that
redistribute the cash flows of mortgage securities (and whole loans) to create securities_ that have
different levels of prepayment risk, as compared to the underlying mortgage securities.
COLLATERALIZED TIME DEPOSIT. Time deposits that are collateralized at least 1'00%0 `
(principalplus interest to maturity). These, instruments are collateralized using assets'set aside -by
the issuer such as Treasury securities or other qualified` collateral to secure the deposit in excess of
the limit covered by the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER. The short-term unsecured debt of corporations.
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 that principal and/or interest on an investment will not be paid in a
timely manner due to changes in the condition of the issuer.
CUSTODY:. A banking service that provides safekeeping for the individual securities in a
customer's .investment portfolio under, a writtenagreement which also calls for the bank ;to >collect
and pay out.income to buy, sell, receive and deliver securities when ordered to do so by, the
principal.
DEALER; A :dealer, as opposed to a broker, acts as a.principal in all transactions., buying and
selling for -his own account.
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.
DISCOUNT: The difference -between the cost price of a security and its maturity when quoted at
lower than face value. A security- selling below original offering price shortly after sale also is
considered to be at.a discount.
DISCOUNT SECURITIES: Non -interest bearing money market instruments that are issued a
discount and redeemed.at maturity for full face value (e.g., U.S. Treasury Bills.)
DIVERSIFICATION: Dividing investment funds among a variety of securities offering
independent returns.
DURATION. Theweightedaverage time to maturity of a bond where the weights :are the present
values of the future, cash flows. Duration measures the price sensitivity of a security to changes
interest rates.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that
insures bank deposits, currently up to $250,000 per entity.
FEDERALLY INSURED TIME DEPOSIT. A -time deposit is an -interest -bearing bank deposit
e C7
`ORIGINAL
account that has a specified date of maturity, such as a certificate of deposit (CD). These deposits
are limited to funds insured in accordance with FDIC insurance deposit limits.
FIDUCIARY: A person or organization that acts on behalf of another person(s) or organization
that puts their"clients' interest ahead of their own as they are bound both legally, and ethically to
act in the other's best interests.
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 asked prices is narrow and reasonable size can be done at those quotes. LOCAL LOCAL
AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government
entities and certain non-profit organizations in California that is managed by the State Treasurer's
Office.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): Investment pools that range from
the State Treasurer's Office Local Agency Investment- Fund (LAIF) to county pools, to Joint
Powers -Authorities (JPAs). These funds are not subject to the same SEC rules applicable to money
market mutual funds.
MARGIN. The difference between the market value of a security and the loan a broker makes
using that -security as collateral.
MARKET -RISK. The risk that the value of securities will fluctuate with changes in overall market
conditions or interest rates.
MARKET VALUE: The price at which a security is trading and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: -A written contract covering all future transactions
between the parties to repurchase —reverse repurchase agreements that establishes- each -party's
rights in the transactions. A master agreement will often specify, among other things, the right of
the buyer -lender to liquidate the underlying securities in the event of default by the seller borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due
and payable. The investment's term or remaining maturity is measured from the settlement date to
final maturity.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial 'paper,
bankers' acceptances, etc.) are issued and traded.
MONEY MARKET MUTUAL FUND. A mutual fund that invests exclusively in short-term
securities.' Examples of investments in money market funds are certificates of deposit and U.S.,,
Treasury securities. Money market funds attempt to keep their net asset values at $1 "per share.
MORTGAGE PASS -THROUGH SECURITIES. A securitized participation in the interest and
principal cash flows from a specified pool of mortgages. Principal and interest payments made on'
the mortgages are passed through to the holder of the security.
MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and
operating expenses.
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. Mutual funds can be invested in
various types of domestic and/or international stocks, bonds, and'money market instruments, asset
forth in the individual fund's prospectus. For most large, institutional investors; the costs associated
with investing in mutual funds are higher than the investor can obtain through an individually
managed portfolio.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO). A
credit rating agency that the Securities and Exchange Commission in the United States uses for
regulatory purposes. Credit rating agencies provide assessments of an investment's risk. The issuers
of investments, especially debt -securities, pay credit rating agencies to provide them with rate.,^
o-- eD
The three most prominent NRSROs are Fitch, S&P, and Moody's.
NEGOTIABLE CERTIFICATE OF DEPOSIT (CD). A short-term debt instrument that pays
interest and is issued by a bank, savings or federal association, 'stateor federal credit union, or state -
licensed branch of a- foreign bank. Negotiable CDs are traded in a secondary market.
PAYDOWN. A reduction in theprincipal amount owed on a bond, loan, or other debt.
PLACEMENT SERVICE DEPOSITS. A private service that allows local agencies to invest in
FDIC -insured deposits with one or more banks, savings and loans, and credit unions located in the
Unite&States: IntraFi (formerly known as CDARS) is an example of an entity that provides this
service.
PORTFOLIO: Collection of securities held by an investor.
PRUDENT INVESTOR RULE: An investment standard. In some states the law requires -that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody
state -the so-called legal list. In other states the trustee -may invest in a security if it is one which',
would be bought by a prudent investor of discretion and intelligence who is 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 the current income return.
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 (SEC): Agency created by Congress to protect
investors in securities transactions by administeringsecurities legislation.
SEC RULE 15(C)3-1: See Uniform Net Capital Rule.
SUPRANATIONAL. A Supranational, is a multi -national organization whereby -member states
transcend national boundaries or interests to share -in the decision making to promote economic
development in the member countries:
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S.- Treasury and -backed by the full
faith and credit of the United States. Treasuries are considered to have no credit risk and are the
benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both
discounted securities and fixed coupon notes and bonds.
TREASURY BILLS (T-BILLS). All securities issued with initial maturities of one year or
less are issued as discounted instruments and are called Treasury bills. The Treasury currently
issues three- and six-month T-bills at regular weekly auctions. It also issues "cash
management" bills as needed to smooth out cash flows. T-Bills are considered to have
virtually no credit risk and to be the most liquid. short-term fixed income instrument.
TREASURY NOTE (T=NOTES). All securities issued with initial maturities of two to ten
years are called Treasury notes and pay interest semi-annually.
TREASURY BONDS (T-BONDS) . All securities issued with initial maturities greater than
ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember broker -dealers in securities maintain a maximum ratio of
19
OARIGINAL
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among members of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
WEIGHTED AVERAGE MATURITY (WAM): The average maturity of all the securities
that comprise a portfolio that is typically expressed in days or years.
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.
` 0RIGINA,C