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HomeMy WebLinkAbout2009 Investment Policy amend draft INVESTMENT POLICY For the CITY OF ST. JOSEPH, MINNESOTA P.O. Box 668, St. Joseph, MN 56374-0668 Office: 320-363-7201 Fax: 320-363-0342 C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 1 Governing Authority: The investment program shall be operated in conformance with federal, state, and other legal requirements. Purpose: The purpose of this policy is to establish the specific guidelines for the investment of all public funds of the City of St. Joseph, Minnesota. This policy is designed to ensure the prudent management of public funds, the availability of operating the capital funds when needed, and an investment return commensurate with the City’s investment risk constraints and cash flow characteristics of the portfolio. It will be the responsibility of the City Council to appoint an Investment Committee to direct the Administrator and Finance Director to invest City funds in order to attain a market rate of return while preserving and protecting the capital of the overall portfolio. The Investment Committee shall serve as the Policy Committee to provide overall guidelines for investments, and the Administrator and Finance Director are responsible for the day to day activities. Investments will be made based on statutory constraints in safe, low risk instruments. Scope: This policy applies to all financial assets of the City of St. Joseph, Minnesota. While separate investment funds are created to accommodate reporting on certain bonded indebtedness, individual investments are purchased using a pooled approach for efficiency and maximum investment opportunity. The Administrator and Finance Director under the direction of the City Council Investment Committee are responsible for the investing of all funds in the custody of the City within the guidelines established by the Investment Committee. The City’s funds are defined in the City’s Audited Financial Statements and include the following funds: ?General fund ?Special Revenue funds ?Debt Service funds ?Capital Project funds ?Enterprise funds ?Any new funds created by the City, unless specifically exempted by the City Council through resolution. POOLING OF FUNDS : Except for cash in certain restricted and special funds, the City will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to the various funds based on their perspective participation and in accordance with U.S. generally accepted accounting principles (GAAP). Objectives: The objective of this policy is to establish standards for governing the investment of the funds of the City. These funds will be invested in accordance with this policy and Minnesota Statute §118A. The City has determined that its funds shall be invested based on the following three objectives: SAFETY OF PRINCIPAL ? – Safety of principal is the foremost objective of the City. Each investment transaction shall seek first to insure that capital losses are minimized. The objective will be to mitigate the following risks: Credit Risk ?: The risk of loss due to the failure of the security issuer or backer, by: C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 2 ?Limiting investments to the types of securities listed under this policy. ?Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which the City will do business as designated by Council and are qualified as stated under this policy. ?Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. The Investment Officers must disclose the credit quality ratings as of the date of the financial statements. If there is not credit rating, this fact must be disclosed in the audited financial statements. U.S. government obligations or obligations explicitly guaranteed by the U.S. government are exempt from this requirement. Custodial Credit Risk ?: The City will not hold deposits or investments that are uninsured or uncollateralized, are not registered in the name of the City and held either by the City’s broker/financial institution or trust department but not in the City’s name. The Finance Director will ensure proper insurance or collateral is maintained for all deposits and investments at all times. The Finance Director will obtain a broker acknowledgement form from all investment institutions in January of each year. Deposits ?– The City of St. Joseph will minimize deposit Custodial Credit Risk, which is the risk of loss due to a of failure of the depository bank or credit union, by obtaining collateral or bond for all uninsured amounts on deposit, and by obtaining necessary documentation to show compliance with state law and a perfected security interest under federal law. Investments ?– The City of St. Joseph will eliminate investment Custodial Credit Risk by permitting brokers that obtained investments for the City to hold them only to the extent there is SIPC and excess SIPC coverage available. Securities purchased that exceed available SIPC coverage shall be transferred to the City or approved custodian of the City under Minnesota Statute §118A.06. Further, a broker certification form must be signed by the broker annually prior to obtaining investments on behalf of the City. The following institutions may hold the securities of the City of St. Joseph in accordance with Minnesota Statute §118A.06: ? The Federal Reserve Bank ? Banks with corporate trust powers ? Primary Reporting Dealers, to the Federal Reserve Bank of New York ? Broker-dealers with principal executive offices in Minnesota, licensed under Minnesota Statute §80A and regulated by the Securities and Exchange Commission Concentration of Credit Risk: ? The City will keep the concentration of credit risk below 5% of the total investments when prudent to do so. If at anytime the concentration of credit risk exceeds 5%, this fact must be disclosed to the City Council with associated risk of loss of the public funds. This risk is the risk of loss attributed to the magnitude of the City’s investments in a single issuer. Interest Rate Risk ?: The City will minimize interest rate risk, which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rate. C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 3 The City will use the weighted average maturity to evaluate interest rate risk. The following considerations are made by the City: ?Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity. ?Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools. ?Investing capital funds in longer-term securities if the market rate is favorable to capitalize on interest earnings on the funds. Foreign Currency Risk ?: The City will not hold deposits and investments in foreign financial institutions or brokers. This risk refers to the risk that changes in exchange rates will adversely affect the fair value of an investment or deposit. MAINTENANCE OF ADEQUATE LIQUIDITY ? – The portfolio will remain sufficiently liquid to enable the City to meet all operating and capital requirements that might be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature static liquidity concurrent with cash needs to meet anticipated demands (). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets for all available funds that do not have an dynamic liquidity anticipated demand (). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools, which offer same-day liquidity. MAXIMIZATION OF RETURN ON INVESTMENT (YIELD) ? – The investment portfolio shall be designed with the objective of attaining a market-average rate of return through budgetary and economic cycles, taking into account the constraints on risk and cash flow characteristics of the investment portfolio and prudent investment principles. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be held until maturity with the following exceptions: ?A security with declining credit may be sold early to minimize loss of principal. ?A security swap would improve the quality, yield, or target duration in the portfolio. ?Liquidity needs of the portfolio require that the security be sold. Following the satisfaction of liquidity and maturity needs, the balance of the funds available for investment will be placed with institutions that offer the highest rate of return consistent with preservation of principal. LOCAL CONSIDERATION ? – Subject to requirements of the above objectives, it is the policy of the City of St. Joseph to offer financial institutions within the City of St. Joseph the opportunity to bid on investments; however, the City of St. Joseph will seek competitive investment yields. Standards of Care: C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 4 PRUDENCE - Investments shall be made with judgment and care, under circumstances then prevailing, with persons of prudence, discretion and intelligence. The standard of prudence to be used by investment officials shall be the “prudent person” and/or “prudent investor” standard and shall be applied in the context of managing an overall portfolio. Investment Officers acting in accordance with this policy and with Minnesota Statue §118A 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. ETHICS AND CONFLICTS OF INTEREST – Any City official (elected or appointed) or employee involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the City’s investment program, or that could impair their ability to make impartial decisions. Investment officials shall disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the City. DELEGATION OF AUTHORITY – The Administrator and Finance Director are designated by City Council under Minnesota Statutes as the Investment Officers of the City and are responsible for investment management activities. The responsibility for conducting investment transactions resides with the City Council of the City of St. Joseph. The Council shall appoint an Investment Committee to oversee the City’s investment program. The Administrator and Finance Director shall develop and maintain written administrative procedures and internal controls for the operations of the investment program, monitoring diversification and risk as well as a system of controls to regulate the activities of subordinate officials. Procedures should include references to: safekeeping, delivery versus payment, investment accounting, repurchase agreements, wire transfer agreements and collateral/depository agreements. No person may engage in an investment transaction except as provided under the terms of this policy and procedures established by the Investment Committee and City Council. Financial Institutions and Safekeeping: AUTHORIZED BROKERS/DEALERS AND FINANCIAL INSTITUTIONS – The Finance Director will maintain a list of financial institutions authorized to provide investment services. The Council shall authorize the Investment Committee to exercise the powers of the Council in designating a depository of the funds. In selecting depositories, the credit worthiness of the institutions under consideration shall be examined by the Administrator and Finance Director. All financial institutions selected as official depositories shall be in good standing with FDIC, NCUA, SIPC or collateralized at 110% for deposits not covered by FDIC, NCUA or SIPC. All City investments with such financial institutions shall be covered by SIPC. Only approved security broker/dealers selected by creditworthiness shall be utilized (minimum capital requirement of $7,500,000 and at least seven years in operation). They must be authorized to provide investment services in the State of Minnesota. These may include “primary” dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (Uniform Net Capital Rule.) C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 5 All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the Finance Director, upon request, with annual audited financial statements, proof of National Association of Security Dealers (NASD) certification (as applicable), proof of State of Minnesota registration, completed broker/dealer questionnaire for firms who are not major regional or national firms, and certification of having read the City’s investment policy. The City will give preference to local financial institutions. BROKER REPRESENTATIONS – Municipalities must obtain from their brokers certain representations regarding future investments. Minnesota Statutes §118.04, subd. 9 requires municipalities to provide each broker with information regarding the municipality’s investment restrictions. Annual completion of Notification of Broker and Certification by Broker (pursuant to Minnesota Statute §118A.04) must be completed in January. AUTHORIZED AND SUITABLE INVESTMENTS – From the governing body perspective, special care must be taken to ensure that the list of instruments includes only those allowed by law and those that local investment managers are trained and competent to handle. Minnesota Statute §118A lists all permissible investments for municipalities. The City of St. Joseph is authorized to invest in the instruments as permitted by Minnesota Statutes. Furthermore, no one type of instrument will exceed the maximum percentage allowed for the investment portfolio as dictated in Minnesota Statutes. INVESTMENT TYPES – Consistent with the GFOA Policy Statement on State and Local Laws Concerning Investment Practices, the following investments will be permitted by this policy and are those defined by state and local law where applicable: ?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 ?U.S. government agency and instrumentality obligations that have a liquid market with a readily determinable market value (excluding high-risk mortgage-backed securities) ?Certificates of deposit and other evidences of deposit at financial institutions ?CDARS ?Bankers’ acceptances ?Commercial paper, rated in the highest tier by a nationally recognized rating agency ?Investment-grade obligations of state, provincial and local governments and public authorities ?Repurchase agreements whose underlying purchased securities consist of the aforementioned instruments ?Money market mutual funds regulated by the Securities and Exchanges Commission and whose portfolios consist only of dollar-denominated securities ?Local government investment pools either state-administered or developed through joint powers statutes and other intergovernmental agreement legislation Investment in derivatives of the above instruments shall require authorization by the Council. Investments in FDIC-guaranteed bank bonds are not “direct obligations” or “issues of” the United States or one if its subsidiary organizations; therefore, are not lawful investments for public entities. DELIVERY VS. PAYMENT – All trades of marketable securities 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. Not applicable to St. Joseph C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 6 SAFEKEEPING – Securities will be held by the City itself or an independent third-party custodian as evidenced by safekeeping receipts in the City’s name. Securities purchased will be retained at the institution where the securities are purchased in the City’s name. Securities will be held at the City or at the financial institution in the City’s name. All securities should be a risk category one according to the Governmental Accounting Standard No. 3. When a Broker/Dealer holds investments purchased by the City of St. Joseph, Minnesota in safekeeping, the Broker/Dealer must provide asset protection of $500,000 through the Securities Investor Protector Corporation (SIPC). Deposits shall be insured through the Federal Depository Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NCUSIF) and pledged collateral in an amount of 110% over the FDIC/NCUSIF/SIPC insurance. INTERNAL CONTROLS – The Investment Officers are responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. Details of the internal control system shall be documented in an investment procedures manual and shall be reviewed and updated annually. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance (1)(2) recognizes that the cost of a control should not exceed the benefits likely to be derived, and the valuation of cost and benefits requires estimates and judgments by management. Accordingly, the Investment Officers shall establish a process for an annual independent audit by an external auditor to assure compliance with policies and procedures. The internal controls shall address: ?Control of collusion ?Separation of transaction authority from accounting and record-keeping ?Custodial safekeeping ?Avoidance of physical delivery securities ?Clear delegation of authority to subordinate staff members ?Written confirmation of transactions for investments and wire transfers ?Development of a wire transfer agreement with the lead bank and third-party custodian ?Dual authorizations of wire transfers Investment Parameters: DIVERSIFICATION – It is the policy of the City to diversify its investment portfolios. To eliminate risk of loss resulting from the over-concentration of assets in a specific maturity, issuer, or class of securities, all deposits and investments in all City funds shall be diversified by maturity, issuer, and class of security. Diversification strategies shall be determined and revised periodically by the Investment Officers for all funds. In establishing specific diversification strategies, the following general policies and constraints shall apply: Portfolio maturities shall be staggered to avoid undue concentration of assets in a specific maturity sector. Maturities selected shall provide for stability of income and reasonable liquidity. For cash management funds: ?Liquidity shall be assured through practices ensuring that the next disbursement date and payroll date are covered through maturing investments or deposits. C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 7 ?Positions in securities having potential default risk (e.g. commercial paper) shall be limited in size so that in case of default, the portfolio’s annual investment income will not exceed a loss on a single issuer’s securities. ?Risks of market price volatility shall be controlled through maturity diversification such that aggregate price losses on instruments with maturities exceeding one year shall not be greater than coupon interest and investment income received from the balance of the portfolio. ?The Investment Officers shall establish strategies and guidelines for the percentage of the total portfolio that may be invested in securities other than repurchase agreements, Treasury bills or collateralized certificates of deposit. The officer shall conduct a quarterly review of these guidelines and evaluate the probability of market and default risk in various investment sectors as part of its considerations. The following diversification limitations shall be imposed on the portfolio: Maturity: ? No more than 20 40% of the portfolio may be invested beyond 60 months, and the weighted average maturity of the portfolio shall never exceed five years. Default risk: ? No more than 10% of the overall portfolio may be invested in the securities of a single issuer, except for securities of the U.S. Treasury. No more than 25% of the portfolio may be invested in each of the following categories of securities: ?Commercial paper ?Negotiable certificates of deposit ?Bankers’ acceptances ?Any other obligation that does not bear the full faith and credit of the United States government or which is not fully collateralized or insured ?No more than 5% of the portfolio shall be invested in overnight instruments or in marketable securities which can be sold to raise cash in one day’s notice. MAXIMUM MATURITIES – To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than 5 years from the date of purchase or in accordance with state and local statutes and ordinances. The City shall adopt weighted average maturity limitations consistent with the investment objectives. Extended maturities may be utilized to take advantage of higher yields; however, no more than 20% of the total cash and investments should extend beyond 5 years. Unless prior Council approval is received, no investment with a maturity exceeding 5 years will be purchased. Reserve funds and other funds with longer-term investment horizons may be invested in securities exceeding 5 years if the maturities of such investments are made to coincide as nearly as practicable with the expected use of funds. The intent to invest in securities with longer maturities shall be disclosed in writing to the City Council. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as local government investment pools, money market funds, or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations. C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 8 COMPETITIVE BIDS – The Investment Officers shall obtain competitive bids from at least two brokers or financial institutions on all purchases of investment instruments. COLLATERALIZATION – Where allowed by state law and in accordance with the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization and perfection will be required on all demand and time deposit accounts, including checking accounts and non-negotiable certificates of deposit. Further, the written assignment shall recite that, upon default, the financial institution shall release to the government entity on demand, free of exchange or any other charges, the collateral pledged. There are two types of federal securities that are allowed as collateral under Minnesota law: (1) U.S. Government Treasury bills, Treasury notes, Treasury bonds; and (2)Issues of U.S. government agencies and instrumentalities as quoted by a recognized industry quotation service available to the City. REPURCHASE AGREEMENTS – Repurchase agreements shall be consistent with GFOA Recommended Practices on Repurchase Agreements. Investment Reporting: Periodic required investment reports to elected officials provide necessary written communication regarding investment performance, risk analysis, adherence to policy provisions, as well as other information. The Finance Director shall provide the City Council quarterly investment reports, which provide a clear picture of the status of the current investment portfolio. The management report should include a summary of securities held at the end of the reporting period by authorized investment category, percentage of portfolio represented by each investment category, percentage of portfolio represented by each financial institution, realized and unrealized gains/losses resulting from appreciation or depreciation by listing the cost and market value of securities, and overall portfolio values. Each quarterly report shall indicate any areas of policy concern and suggested or planned revision of investment strategies. Copies shall be available to the independent auditor. A monthly Treasurer’s Report shall be given by the Finance Director to the City Council stating the overall financial health of the City. Within 40 days of the end of the calendar year, the Investment Officers shall present an annual report on the investment program and investment activity. The annual report shall include 12-month and separate quarterly comparisons of return and shall suggest policies and improvements that might be made in the investment program. Alternatively, this report may be included within the City’s annual audited financial statements. PERFORMANCE STANDARDS – The investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. The City will use the current market condition as a benchmark in which the portfolio performance shall be compared on a regular basis. This benchmark shall be reflective of the actual securities being purchased and risks undertaken, and the benchmark shall have a similar weighted average maturity as the portfolio. C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 9 MARKING TO MARKET – The market value of the portfolio shall be calculated and posted at least monthly and a statement of the market value of the portfolio shall be issued at least monthly. The will ensure the review of the investment portfolio, in terms of value and price volatility, has been performed consistent with the GFOA Recommended Practice on “Mark-to-Market Practices for State and Local Government Investment Portfolios and Investment Pools.” In defining market value, considerations should be given to the GASB Statement 31 pronouncement. Policy Considerations: Any investment currently held that does not meet the guidelines of this policy shall be temporarily exempted from the requirements of this policy. Investments must come in conformance with the policy within twelve months of the policy’s adoption or the governing body must be presented with a plan through which investments will come into conformance. Amendments – This policy shall be reviewed on an annual basis. Any changes must be approved by the Investment Committee and the City Council, as well as the individuals charged with maintaining internal controls. Approval of Investment Policy: The City’s investment policy and any amendments shall be adopted by motion by the City Council. Statute Authority : Specific investment parameters for the investment of public funds by the City are found in Minnesota Statutes §118A. Conclusion: The intent of this policy is to ensure the safety of all City funds. The main goal of the City will be to maintain the safety of its principal while earning the market rate of return. Amended policy adopted by the City Council on this ______ day of January, 2009. __________________________ _____________________________ Alan Rassier Judy Weyens Mayor Administrator C:\Documents and Settings\sbialke\Local Settings\Temporary Internet Files\Content.Outlook\J454UJD9\2009 Investment Policy amend draft.doc 2/4/2009 10