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HomeMy WebLinkAboutItem 11- Investment Policy Review 7 /II j l'. ' II i.Vii, aC MEMO TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: BRUNO RUMBELOW, CITY MANAGER "'t MEETING DATE: FEBRUARY 17, 2009 SUBJECT: INVESTMENT POLICY REVIEW RECOMMENDATION: City Council to consider a motion to approve the City Investment Policy pursuant to the provisions of the Public Funds Investment Act, Chapter 2256, Texas Government Code. BACKGROUND: Chapter 2256 of the Texas Government Code, the Public Funds Investment Act, requires an annual City Council review of the City's Investment Policy. The Council initially adopted the policy in 1997 and has amended it several times. Staff has performed a review of the policy and the following change is noted. This change does not affect the fundamental nature of this policy which is for a stable and conservative investment policy to safeguard the City's funds. This change, which is bolded and underlined (on page 11), is provided below: Page 10 - 11 —Allowable Collateral and Policy To change the collateralization level of market value of principal and accrued interest on deposits and investments to more accurately reflect current market trends. This agenda item has been provided to allow Council the opportunity for statutory compliance with Chapter 2256 of the Texas Government Code. Staff recommends the draft policy with the proposed change to be approved. CITY OF GRAPEVINE INVESTMENT POLICY Adopted: May 6, 1997 Most Recent Revision/Review: February 17, 2009 PREFACE It is the policy of City of Grapevine that, giving due regard to the safety and risk of investment, all available funds shall be invested in conformance with State and Federal Regulations, applicable Bond Resolution requirements, adopted Investment Policy and adopted Investment Strategy. Effective cash management is recognized as essential to good fiscal management. Aggressive cash management and effective investment strategy development will be pursued to take advantage of interest earnings as viable and material revenue to all City funds. The portfolio of the City shall be designed and managed in a manner responsive to the public trust and consistent with this Policy. Investments shall be made with the primary objectives of: • Preservation of capital, • Safety of City funds, • Maintenance of sufficient liquidity, • Public Trust due to Prudent Investment Activities, • Maximization of return within acceptable risk constraints, and • Diversification of investments. INVESTMENT POLICY TABLE OF CONTENTS Page I PURPOSE 1 II. INVESTMENT OBJECTIVES 3 III. INVESTMENT POLICIES 5 A. Authorized Investments 5 B. Protection of Principal 8 C. Investment Advisors and Investment Providers 13 D. Responsibility and Controls 14 I. PURPOSE A. Formal Adoption This Investment Policy is authorized by the City of Grapevine in accordance with Chapter 2256, Texas Government Code, and the Public Funds Investment Act. B. Scope This Investment Policy applies to all of the investment activities of the City. These funds are accounted for in the City's Comprehensive Annual Financial Report (CAFR) and include: • General Fund • Special Revenue Funds • Capital Projects Funds • Enterprise Funds • Trust and Agency Funds,to the extent not required by law or existing contract to be kept segregated and managed separately • Debt Service Funds, including reserves and sinking funds,to the extent not required by law or existing contract to be kept segregated and managed separately • 4B Economic Development Corp. Sales Tax Fund • Crime Control District Sales Tax Fund • Community Quality of Life Fund • Any new fund created by the City, unless specifically exempted from this Policy by the City Council or by law This Policy establishes guidelines for: 1)who can invest City funds, 2)how City funds will be invested, and 3)when and how a periodic review of investments will be made. In addition to this Policy, bond funds (as defined by the Internal Revenue Service) shall be managed in accordance with their issuing documentation and all-applicable State and Federal Law. This Investment Policy shall apply to all transactions involving the financial assets and related activity for all the foregoing and future funds. However,this policy does not apply to the assets administered for the benefit of the City by outside agencies under deferred compensation programs. All investments made with City funds prior to the adoption of this Investment Policy shall be held or liquidated as determined by the Investment Officer to be in the best interest of the financial well being of the City. C. Review and Amendment This Policy shall be reviewed annually by the City Council. Amendments must be approved by the Investment Officer and adopted by the City Council. 1 D. Investment Strategy In conjunction with the annual Policy review, the City Council shall review the separate written investment strategy for each of the City funds. The investment strategy must describe the investment objectives for each particular fund according to the following priorities: 1) investment suitability, 2) preservation and safety of principal, 3) liquidity, 4) marketability prior to maturity of each investment, 5) diversification, and 6) yield. Monitoring of market prices for investments will be accomplished by utilizing the most recent issues of the Wall Street Journal or the Investor Business Daily. 2 II. INVESTMENT OBJECTIVES A. Safety of Principal The City shall manage and invest its cash with four primary objectives,listed in order of priority: safety, liquidity, public trust, and yield, expressed as optimization of interest earnings. The safety of the principal invested always remains the primary objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit and interest rate risk. 1. Credit Risk—The City will minimize credit risk, the risk of loss due to the failure of the issuer or backer of the investment,by: a. Limiting investments to the safest types of investments. b. Pre-qualifying the financial institutions and broker/dealers with which the City will do business. c. Diversifying the investment portfolio so that potential losses on individual issuers will be minimized. 2. Interest Rate Risk—the City will minimize the risk that the interest earnings and the market value of investments in the portfolio will fall due to changes in general interest rates, by: a. Structuring the investment portfolio so that investments mature to meet cash requirements for ongoing operations, thereby avoiding the need to liquidate investments prior to maturity. b. Investing operating funds primarily in certificates of deposit, shorter-term securities, money market mutual funds, or local government investment pools functioning as money market mutual funds. c. Diversifying maturities and staggering purchase dates to minimize the impact of market movements over time. B. Maintenance of Adequate Liquidity The City's investment portfolio will remain sufficiently liquid to meet the cash flow requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements; investing in securities with 3 active secondary markets; and maintaining appropriate portfolio diversification. A portion of the portfolio will be invested in shares of money market mutual funds or local government investment pools that offer same-day liquidity. In addition, a portion of the portfolio will consist of securities with active secondary or resale markets. C. Public Trust All participants in the City's investment process shall seek to act responsibly as custodians of the public trust. Investment officers shall avoid any transaction that might impair public confidence in the City's ability to govern effectively. D. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. 4 III. INVESTMENT POLICIES A. Authorized Investments Investments described below are authorized by the Public Funds Investment Act as eligible securities for the City. The City's funds governed by this Policy may be invested in: 1. Obligations of Governmental Entities Except for the items listed in (h) below, the following are authorized investments for obligations of governmental agencies: a. Obligations of the United States or its agencies and instrumentalities; b. Direct obligations of the State of Texas or its agencies and instrumentalities; c. Other obligations, the principal and interest on which are unconditionally guaranteed,insured by,or backed by the full faith and credit of the State of Texas or the United States or their respective agencies and instrumentalities; d. Obligations of states, agencies, counties, cities, and other political subdivisions Alow of any State having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of not less than "A" or its equivalent; and e. Collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States. f. Guaranteed investment contracts will be authorized for bond proceeds if the guaranteed investment contract: (1) has a defined termination date, (2) is secured by obligations described by Section 2256.009(a)(1), excluding those obligations described by Section 2256.009(b),in an amount at least equal to the amount of bond proceeds invested under the contract; and (3) is pledged to the City and deposited with the City or with a third party selected and approved by the City. g. The average life of Governmental Obligations may not exceed 2 1/2 years and stated maturities may not exceed 2 1/2 years. 5 h. The following are not authorized investments for this City: (1) Obligations whose payments represent the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal (Interest Only CMO); (2) Obligations whose payments represent the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest (Principal Only CMO); (3) Collateralized mortgage obligations that have a stated final maturity date of greater than 2 1/2 years; and (4) Collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the changes in the market index (Inverse Floater CMO). The City of Grapevine expressly prohibits the acceptance of collateralized deposits interest-only and principal-only mortgage backed securities and collateralized mortgage obligations with stated final maturities in excess of five years or with coupon rates that float inversely to market index movements. 2. Certificates of Deposit Certificates of deposit issued by state and national banks and savings and loan associations that has its main office or branch office in Texas that are: a. Organized under Texas law,the laws of another state,or federal law,that has its main office or a branch office in Texas, or by a savings and loan association or a savings bank organized under Texas law, the laws of another state, or federal law, that has its main office or a branch office in Texas; b. Guaranteed or insured by the Federal Deposit Insurance Corporation or its successors; or c. Secured by obligations that are described by 1 above,which are intended to include all direct Federal agency or instrumentality issued mortgage backed securities, but excluding those mortgage backed securities of the nature described in 11 above,that have a market value of not less than the principal amount of the certificates; or d. Secured in any other manner and amount provided by law for deposits of the City of Grapevine; or e. Governed by a Depository Agreement, as described in B.4. of this section, that complies with Federal and State regulation to properly secure a pledged security interest. 6 Amok f. Certificates of Deposit may have stated maturities of no greater than one year. 3. Repurchase Agreements a. Fully collateralized repurchase agreements and reverse repurchase agreements as defined by the Public Funds Investment Act,with a defined termination date that are placed with a primary government securities dealer or financial institution doing business in the State of Texas, and which are secured by obligations of the United States or its agencies and instrumentalities and which are pledged in the City's name and deposited with a third party custodian bank selected and approved by the City. A Master Repurchase Agreement must be signed by the bank/dealer prior to investment in a repurchase agreement. All repurchase agreement transactions will be on a delivery vs. payment basis. Securities received for repurchase agreements must have a market value greater than or equal to 102 percent at the time funds are disbursed. Repurchase agreements should not exceed 120 days to stated maturity and reverse repurchase agreements should not exceed 90 days to stated maturity,provided an executed PSA Master Repurchase Agreement is on file with the City and the counter party bank or dealer. b. Sweep accounts are authorized for the City's excess collected balances, with such funds invested in a repurchase agreement as defined and authorized by this policy and oak collateralized as required by this policy for repurchase agreements. 4. Mutual Funds Money market mutual funds regulated by the Securities &Exchange Commission, with a dollar weighted average portfolio maturity of 90 days or less that fully invest dollar-for- dollar all City's funds without sales commissions or loads and, whose investment objectives include seeking to maintain a stable net asset value of$1 per share. Money Market Mutual funds that are 1)registered and regulated by the Securities and Exchange Commission, 2) have a dollar weighted average stated maturity of 90 days or less, 3) rated AAA by at least one nationally recognized rating service, and 4) seek to maintain a net asset value of$1.00 per share. The City may not invest funds under its control in an amount that exceeds 10%of the total assets of any individual money market mutual fund or exceeds 15% of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service in money market mutual funds; 5. Investment Pools Eligible investment pools organized and operating in compliance with the Public Funds Investment Act that have been authorized by the City Council; and local government investment pools, which 1) meet the requirements of Chapter 2256.016 of the Public Funds Investment Act and are rated no lower than AAA or an equivalent rating by at least one nationally recognized rating service, and 3) are authorized by resolution or ordinance by the Board, and whose investment philosophy and strategy are consistent 7 with this Policy and the City's ongoing investment strategy. In addition, a local government investment pool created to function as a money market mutual fund must mark its portfolio to the market daily and, to the extent reasonably possible, stabilize at $1.00 net asset value. All prudent measures will be taken to liquidate an investment that is downgraded to less than the required minimum rating. B. Protection of Principal The City shall seek to control the risk of loss due to the failure of a security issuer or grantor. Such risk shall be controlled by investing only in the safest types of securities as defined in the Policy; by collateralization as required by law; and through portfolio diversification by maturity and type. The purchase of individual securities shall be executed"delivery versus payment"(DVP) through the City's Safekeeping Agent. By so doing, City's funds are not released until the City has received, through the Safekeeping Agent, the securities purchased. 1. Diversification by Investment Type Diversification by investment type shall be maintained by ensuring an active and efficient secondary market in portfolio investments and by controlling the market and opportunity risks associated with specific investment types. Diversification by investment type shall be established by the following maximum percentages of investment type as compared to the total investment portfolio at the time of each investment transaction: a. U.S. Treasury Bills/Notes/Bonds 100% b. U. S. Agencies &Instrumentalities 100% c. States, Counties, Cities, & Other 50% d. Certificates of Deposit 50% e. Money Market Mutual Funds 20% f. Eligible Investment Pools 100% 2. Bond Proceeds Bond proceeds may be invested in a single security or investment if the City Manager determines that such an investment is necessary to comply with Federal arbitrage restrictions or to facilitate arbitrage record keeping and calculation. 8 3. Diversification by Investment Maturity In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not exceed the anticipated cash flow requirements of the funds. Maturity guidelines by fund are as follows (Investment transactions made prior to the adoption of this Policy are not subject to these guidelines): a. Limiting investments to avoid overconcentration in investments from a specific issuer or business sector(excluding obligations of governmental agencies under III(A) and certificates of deposit that are fully insured and collateralized in accordance with state and federal law, b. Limiting investment in investments that have higher credit risks (example: commercial paper), c. Investing in investments with varying maturities, and d. Continuously investing a portion of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. A A. Operating Funds The weighted average days to maturity for the operating fund portfolio shall be less than 270 days and the maximum allowable maturity shall be 2 1/2 years. B. Construction and Capital Improvement Funds The investment maturity of construction and capital improvement funds shall generally be limited to the anticipated cash flow requirement or the"temporary period," as defined by Federal tax law. During the temporary period bond proceeds may be invested at an unrestricted yield. After the expiration of the temporary period, bond proceeds subject to yield restriction shall be invested considering the anticipated cash flow requirements of the funds and market conditions to achieve compliance with the applicable regulations. The maximum maturity for construction or capital improvement funds investments shall generally be no longer than the construction time required for a particular project, with no single security instrument exceeding the life of authorized investments as described in 1 f. above. C. Debt Service Funds Debt Service Funds shall be invested to ensure adequate funding for each consecutive debt service payment. The Investment Officers shall invest in such a manner as not to exceed an"unfunded" debt service date with the maturity of 9 any investment. An unfunded debt service date is defined as a coupon or principal payment date that does not have cash or investment securities available to satisfy said payment. Funds that are considered "bond proceeds" for arbitrage purposes may be invested using a more conservative approach than the standard investment strategy when arbitrage rebate rules require rebating excess earnings. All earnings in excess of the allowable arbitrage earnings ("rebate liability")will be segregated and made available for any necessary payments to the U.S. Treasury. 4. Ensuring Liquidity Liquidity shall be achieved by anticipating cash flow requirements,by investing in securities with active secondary markets and by investing in eligible money market mutual funds and local government investment pools. A security may be liquidated to meet unanticipated cash requirements,to re-deploy cash into other investments expected to outperform current holdings, or otherwise to adjust the portfolio. 5. Depository Agreements Consistent with the requirements of State law,the City requires all bank and savings and loan association deposits to be federally insured or collateralized with eligible securities or approved letter of credit issued by Federal Home Loan Bank. Financial institutions serving as the City's Depositories will be required to sign a Depository Agreement with the City and the City's safekeeping agent. The safekeeping portion of the Agreement shall define the City's rights to the collateral in case of default,bankruptcy, or closing and shall establish a perfected security interest in compliance with Federal and State regulations, including: • the Agreement must be in writing; • the Agreement has to be executed by the Depository and the City of Grapevine contemporaneously with the acquisition of the asset; • the Agreement must be approved by the Board of Directors or the loan committee of the Depository and a copy of the meeting minutes must be delivered to the City of Grapevine; • the Agreement must be part of the Depository's "official record"continuously since its execution. a. Allowable Collateral and Policy Consistent with the requirements of the Public Funds Collateral Act, it is the policy of the City to require full collateralization of all City funds on deposit with a depository 10 bank, other than investments. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value of principal and accrued interest on the deposits or investments less an amount insured by the FDIC. At its discretion,the City may require a higher level of collateralization for certain investment securities. Securities pledged as collateral shall be held by an independent third party with which the City has a current custodial agreement. The Chief Financial Officer is responsible for entering into collateralization agreements with third party custodians in compliance with this Policy. The agreements are to specify the acceptable investment securities for collateral, including provisions relating to possession of the collateral, the substitution or release of investment securities, ownership of securities, and the method of valuation of securities. A clearly marked evidence of ownership (safekeeping receipt)must by supplied to the City and retained. Collateral shall be reviewed at least monthly to assure that the market value of the pledged securities is adequate. Collateral Defined The City shall accept only the following types of collateral: • Obligations of the United States or its agencies and instrumentalities, • Direct obligations of the state of Texas or its agencies and instrumentalities, • Collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States,the underlying security for which is guaranteed by an agency or instrumentality of the United States, • Obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized rating firm not less than A or its equivalent with a remaining maturity of five (5)years or less, • A surety bond issued by an insurance company rated as to investment quality by a nationally recognized rating firm not less than A, • A letter of credit issued to the City by the Federal Home Loan Bank. Eligible securities for collateralization of deposits are defined by the Public Funds Collateral Act, as amended, and meet the constraints of this Policy. b. Collateral Levels The market value of the principal portion of collateral pledged for certificates of deposit and bank balances on deposit must at all times be equal to or greater than the par value of the certificate of deposit plus accrued interest, less the applicable level of FDIC insurance. 11 c. Monitoring Collateral Adequacy The City shall require monthly reports with market values of pledged securities from all financial institutions with which the City has collateralized deposits. The Investment Officers will monitor adequacy of collateralization levels to verify market values and total collateral positions. d. Additional Collateral If the collateral pledged for a deposit falls below the par value of the deposit, plus accrued interest and less FDIC insurance,the institution holding the deposit will notify the City and must pledge additional securities no later than the end of the next succeeding business day. e. Collateral Maturity Collateral pledged for a deposit may not exceed five years as stated maturity. f. Security Substitution Collateralized deposits often require substitution of securities. Any financial institution requesting substitution must contact the Investment Officers for approval and settlement. The substituted security's value will be calculated and substitution approved if the substitution maintains a pledged value equal to or greater than the required security level. An Investment Officer must provide written notification of the decision to the bank or the safekeeping agent holding the security prior to any security release. Substitution is allowable for all transactions, but should be limited, if possible, to minimize potential administrative problems and transfer expense. The Investment Officers may limit substitution and assess appropriate fees if substitution becomes excessive or abusive. 6. Safekeeping a. Safekeeping Agreement The City shall contract with a bank or banks for the safekeeping of securities either owned by the City as part of its investment portfolio or held as collateral to secure demand or time deposits. Securities owned by the City shall be held in the City's name as evidenced by safekeeping receipts of the institution holding the securities. b. Safekeeping of Deposit Collateral All collateral securing bank and savings and loan deposits must be held by a third party banking institution acceptable to and under contract with the City of Grapevine, or by the Federal Reserve Bank. 12 c. Subject to Audit All collateral shall be subject to inspection and audit by the Chief Financial Officer or the City's independent auditors. C. Investment Advisors and Investment Providers Investment Advisors shall adhere to the spirit, philosophy and specific term of this Policy and shall invest within the same"Standard of Care." Investment Providers shall adhere to the spirit and philosophy of this Policy and shall avoid recommending or suggesting transactions outside that"Standard of Care." Selection of Investment Advisors and Investment Providers will be performed by the Investment Committee. The Investment Committee will establish criteria to evaluate Investment Advisors and Investment Providers, including: a. Adherence to the City's policies and strategies, b. Investment performance and transaction pricing within accepted risk constraints, c. Responsiveness to the City's request for services, information and open communication, d. Understanding of the inherent fiduciary responsibility of investing public funds, and e. Similarity in philosophy and strategy with the City of Grapevine's objectives. Selected Investment Advisors and Investment Providers shall provide timely transaction confirmations and monthly activity reports. Business organizations eligible to transact investment business with the City shall be presented a written copy of this Investment Policy. Additionally, the registered principal of the business organization seeking to transact investment business shall execute a written instrument substantially to the effect that the registered principal has: 1) received and thoroughly reviewed this Investment Policy, and 2) (a) Acknowledged that the business organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the City and the organization that are not authorized by the City's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the City's entire portfolio or requires an interpretation of subjective investment standards. (b) Such instrument must be accepted by a qualified representative of the business. Such qualified representative must meet the following criteria: 13 (1) "Qualified representative" means a person who holds a position with a business organization, who is authorized to act on behalf of the business organization, and who is one of the following: (2) for a business organization doing business that is regulated by or registered with a securities commission, a person who is registered under the rules of the National Association of Securities Dealers; (3) for a state or federal bank, a savings bank, or a state or federal credit union, a member of the loan committee for the bank or branch of the bank or a person authorized by corporate resolution to act on behalf of and bind the banking institution; or (4) for an investment pool,the person authorized by the elected official or board with authority to administer the activities of the investment pool to sign the written instrument on behalf of the investment pool. The City shall not enter into an investment transaction with a business organization prior to receiving the written instrument described above. 3) The list of approved brokers to be utilized for the purchase of allowed securities is to be selected by the investment committee with such list of selected brokers to be provided to the City Council on an annual basis or at anytime the list is modified. All such brokers so selected will meet the criteria set forth in the other provisions of this Investment Policy. D. Responsibility and Controls 1. Delegation of Authority to Invest The City Council hereby designates the "Investment Officers"to be the City Manager, with overall responsibilities to see that investment objectives are accomplished and that the, Assistant City Manager, Director of Administrative Services, or his designee, Managing Director of Financial Services are vested and authorized with specific day-to-day performance of managing and investment of the funds of the City of Grapevine. Per Ordinance 98-127 the City Council has established an Investment Committee consisting of the City Council representative to the audit committee, City Manager or Assistant City Manager,the Director of Administrative Services and Managing Director of Financial Services of the City of Grapevine. The committee shall perform the following duties: (a) Establish and modify from time to time a list of approved brokers for the purchase of allowed securities. The list of approved brokers to be utilized for the purchase of allowed securities is to be selected by the Investment Officers, with such list of selected brokers to be provided to the City Council on an annual basis or at anytime the list is modified. All such brokers so selected will meet the criteria set forth in the other provisions of the City's Investment Policy. 14 (b) Review the City's investment portfolio on a regular basis and determine appropriate ''" portfolio adjustments, oversee the City's investment advisor, monitor compliance with the City's Investment Policy and Strategy statements and perform other duties as necessary to maintain the City's investment program. 2.Training (a) All Investment Officers of the City of Grapevine shall have a minimum of 10 classroom hours of Investment Training during each consecutive 24 month period following the effective date of this Ordinance. (b) Training as required in 2.(a) above is authorized to be provided from one or more of the following sources: The Texas Municipal League(TML) The North Central Texas Council of Governments (NCTCOG) Courses sponsored by the Government Finance Officers Association Area Universities and Colleges Qualified training institutions not affiliated with any financial institution with which the City does business. 3. Prudent Investment Management The designated Investment Officers shall perform their duties in accordance with the adopted Investment Policy and internal procedures. In determining whether an Investment Officer has exercised prudence with respect to an investment decision, the investment of all funds over which the Investment Officer had responsibility;rather that the prudence of a single investment shall be considered. Investment Officers acting in good faith and in accordance with these policies and procedures shall be relieved of personal liability. 4. Standard of Care The standard of care used by the City shall be the"prudent investor rule" and shall be applied in the context of managing the overall portfolio within the applicable legal constraints. The Public Funds Investment Act states: "Investments shall be made with judgment and care, under circumstances then prevailing,that a person of prudence, discretion and intelligence would exercise in the management of the person's own affairs, not for speculation,but for investment, considering the probable safety A of capital and the probable income to be derived." 15 5. Standards of Ethics The designated Investment Officers shall act as custodians of the public trust avoiding any transaction which might involve a conflict of interest,the appearance of a conflict of interest, or any activity which might otherwise discourage public confidence. Investment Officers 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. Additionally, all Investment Officers shall file with the Texas Ethics Commission and the City a statement disclosing any personal business relationship with an entity seeking to sell investments to the City. Each City Investment Officer shall disclose if he has a personal business relationship with any investment firm doing business with the City, if the extent of business relationship meets any of the following conditions: (a) the Investment Officer owns 10% or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization; (b) funds received by the Investment Officers from the business organization exceed 10%of the Investment Officer's gross income for the previous year; or (c) the Investment Officer has acquired from the business organization during the previous year investments with a book value of$2,500 or more for the personal account of the Investment Officer. (d) If the Investment Officer is related within the second degree by affinity or consanguinity, as determined under the Government Code,to an individual seeking to sell an investment to the City. 6. Establishment of Internal Controls The City of Grapevine's Investment Officer will maintain a system of internal controls over the investment activities of the City. 7. Reporting Investment performance will be monitored and evaluated by the Investment Officer. The Investment Officers will provide a quarterly comprehensive report signed by all Investment Officers to the City Council. This investment report shall: (a) describe in detail the investment position of the City, (b) state the reporting period beginning book and market value, additions or changes to the book and market value during the period and ending book and market value for the period of each pooled fund group, 16 (c) state the reporting period beginning book and market value and reporting period ending book and market value for each investment security by asset type and fund type, (d) state the maturity date of each investment security, (e) accrued interest for reporting period, (f) state the percentage of total portfolio that each type of investment represents, and (g) state the compliance of the investment portfolio with the City's Investment Policy and strategy and the Public Funds Investment Act. The City of Grapevine, in conjunction with its Annual Financial Audit, shall perform a compliance audit of management controls on investments and adherence to the City's Investment Policy and Investment Strategy Statement. The City's independent auditor is required to review the Quarterly Investment Reports during the annual audit of the City's Financial System. 8. Performance Standards The City's investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio shall be designed with the objective of obtaining a rate of return through budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow requirements of the City. 17 CITY OF GRAPEVINE, TEXAS BROKER/DEALER LIST The following is a list of approved and authorized broker/dealers used for the City of Grapevine, Texas. Each of the firms used from this list will provide compliance materials and a complete file of those materials will be maintained by the City. In accordance with Section 2256.025 of the Public Funds Investment Act,the list below is approved by the Investment Committee. Primary Broker/Dealers J.P. Morgan Securities, Inc. Daiwa Securities America Inc. Deutsche Bank Securities Inc. Salomon Smith Barney Inc. Zions First National Bank Regional/Local Brokers Vining-Sparks First Southwest Company First Tennessee Capital Markets Coastal Securities Gifford Securities Duncan Williams Wells Fargo Samco Capital Markets Southwest Securities Cantor-Fitzgerald RBC Dain Rauscher Stanford Group Company CITY OF GRAPEVINE INVESTMENT STRATEGY STATEMENT Adopted: May 6, 1997 Last Revised: February 17, 2009 PREFACE It is the policy of the City of Grapevine that, giving due regard to the safety and risk of investment, all available funds shall be invested in conformance with State and Federal Regulations, applicable Bond Resolution requirements, adopted Investment Policy and adopted Investment Strategy. In accordance with the Public Funds Investment Act, the City of Grapevine's investment strategies shall address the following priorities (in order of importance): • Understanding the suitability of the investment to the financial requirements of the City, • Preservation and safety of principal, • Liquidity, • Marketability of the investment prior to maturity, • Diversification of the investment portfolio, and • Yield. Effective investment strategy development coordinates the primary objectives of the City of Grapevine's Investment Policy and cash management procedures to enhance interest earnings and reduce investment risk. Aggressive cash management will increase the available "investment period" and subsequently interest earnings. Maturity selections shall be based on cash flow and market conditions to take advantage of various interest rate cycles. The City's investment portfolio shall be designed and managed in a manner responsive to the public trust and consistent with the Investment Policy. Each major fund type has varying cash flow requirements and liquidity needs. Therefore specific strategies shall be implemented considering the fund's unique requirements. The City's funds shall be analyzed and invested according to the following major fund types: a. Operating Funds b. Construction and Capital Improvement Funds c. Debt Service Funds Amok INVESTMENT STRATEGY In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not exceed the anticipated cash flow requirements of the funds. Investment guidelines by fund-type are as follows: a. Operating Funds The City of Grapevine's Operating Funds are as follows: General Fund Heritage Foundation Fund Water and Sewer Fund Occupancy Tax Fund TIF 1 & 2 Operating Fund Grant Fund Lake Enterprise Fund Trust and Agency Fund 4B Economic Development Corp. Sales Tax Fund Special Revenue Fund Crime Control District Sales Tax Fund Capital Project Fund Community Quality of Life Fund Suitability - Any investment eligible in the Investment Policy is suitable for the Operating Funds. Safety of Principal-All investments shall be of high quality securities with no perceived default risk. Market price fluctuations will occur. By managing the weighted average days to maturity for the Operating Fund portfolio to less than 270 days and restricting the maximum allowable maturity to 2 1/2 years, the price volatility of the overall portfolio will be minimized. Marketability- Securities with active and efficient secondary markets are necessary in the event of an unanticipated cash requirement. Historical market "spreads"between the bid and offer prices of a particular security-type of less than a quarter of a percentage point shall define an efficient secondary market. Liquidity - The Operating Funds require the greatest short-term liquidity of any of the fund types. Short-term investment pools and money market mutual funds shall provide daily liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. Diversification-Investment maturities shall be staggered throughout the budget cycle to provide cash flow based on the anticipated operating needs of the City. Market cycle risk will be reduced by diversifying the appropriate maturity structure out through two years. Yield - Attaining a competitive market yield for comparable security-types and portfolio restrictions is the desired objective. The yield of an equally weighted, rolling three month Treasury bill portfolio shall be the minimum yield objective. b. Construction and Capital Improvement Funds The City of Grapevine's Construction and Capital Improvement funds are as follows: Capital Projects - Streets Capital Projects - General Facilities and Equipment Capital Projects -Recreation Capital Projects - Street Maintenance and Capital Replacement Capital Projects - Tax Increment Financing Districts#1 and#2 Capital Projects—Community Quality of Life Fund Suitability - Any investment listed as eligible in the Investment Policy is suitable for Construction and Capital Improvement Funds. Safety of Principal-All investments shall be of high quality securities with no perceived default risk. Market price fluctuations will,however,occur. By managing the Construction and Capital Improvement Fund's portfolio to exceed the anticipated expenditure schedule the market risk of the overall portfolio will be minimized. Marketability- Securities with active and efficient secondary markets are necessary in the event of an unanticipated cash requirement. Historical market "spreads"between the bid and offer prices of a particular security-type of less than a quarter of a percentage point shall define an efficient secondary market. Liquidity - The City's funds used for construction and capital improvement programs have reasonably predictable draw down schedules. Therefore, investment maturities shall generally follow the anticipated cash flow requirements. Investment pools and money market mutual funds shall provide readily available funds generally equal to one month's anticipated cash flow needs, or a competitive yield alternative for short term fixed maturity investments. A singular repurchase agreement may be utilized if disbursements are allowed in the amount necessary to satisfy any expenditure request. This investment structure is commonly referred to as a Flexible Repurchase Agreement. Diversification - Market conditions and arbitrage regulations influence the attractiveness of staggering the maturity of fixed rate investments for bond proceeds and other construction and capital improvement funds. With bond proceeds, if investment rates exceed the applicable arbitrage yield, the City is best served by locking in most investments. If the arbitrage yield cannot be exceeded, then concurrent market conditions will determine the attractiveness of diversifying maturities or investing in shorter and larger amounts. At no time shall the anticipated expenditure schedule be exceeded in an attempt to bolster yield with any City funds. Yield-Achieving a positive spread to the applicable arbitrage yield is the desired objective for bond proceeds. Non-bond proceed construction and capital project funds will target a rolling portfolio of six month Treasury bills. r c. Debt Service Funds The City's Debt Service Fund includes: Debt Service Fund - General Obligations Debt Service Fund—Tax Increment Financing Districts#1 and#2 Suitability-Any investment listed as eligible in the Investment Policy is suitable for the Debt Service Fund. Safety of Principal-All investments shall be of high quality securities with no perceived default risk. Market price fluctuations will however occur. By managing the Debt Service Fund's portfolio to not exceed the debt service payment schedule the market risk of the overall portfolio will be minimized. Marketability- Securities with active and efficient secondary markets are not necessary, as the event of an unanticipated cash requirement is not probable. Liquidity - Debt service funds have predictable payment schedules. Therefore, investment maturities shall not exceed the anticipated cash flow requirements. Investment pools and money market mutual funds may provide a competitive yield alternative for short term fixed maturity investments. A singular repurchase agreement may be utilized if disbursements are allowed in the amount necessary to satisfy any debt service payment,this investment structure is commonly referred to as a Flexible Repurchase Agreement. Diversification -Market conditions influence the attractiveness of fully extending maturity to the next"unfunded"payment date. Generally if investment rates are trending down, the City is best served by locking in most investments. If interest rates are flat or trending up, then concurrent market conditions will determine the attractiveness of extending maturity or investing in shorter- term alternatives. At no time shall the debt service schedule be exceeded in an attempt to bolster yield. Yield - Attaining a competitive market yield for comparable security-types and portfolio restrictions is the desired objective. The yield of an equally weighted, rolling three month Treasury bill portfolio shall be the minimum yield objective.