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HomeMy WebLinkAbout2644 Resolution RESOLUTION NO. 2644 A RESOLUTION APPROVING AN INVESTMENT POLICY TO GOVERN INVESTMENT OF CITY FUNDS. WHEREAS, the City is responsible for handling significant amounts of funds generated by local taxes and fees for services as well as state and federal grant programs; and WHEREAS, the City has a fiduciary responsibility to safely maximize the income opportunity associated with holding those funds prior to their expenditure; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF PASCO, WASHINGTON, DO RESOLVE AS FOLLOWS: Section 1. That the attached "Investment Policy" shall govern the investment of all funds under the control of the City, except the Fire Pension Fund. Section 2. The City Manager is hereby authorized and directed to conformance to the investment policy. assure c P y PASSED by the City Council of the City of Pasco at a regular meeting this 19th day of February, 2002. Michael L. Garrison, Mayor ATTEST: TlLellaand D AS TO FO ebster U. Jackso , City Clerk Kerr, Ofty Attorney INVESTMENT POLICY AW • � � r i FOR THE CITY OF PASCO, WASHINGTON CITY OF PASCO, WASHINGTON INVESTMENT POLICY TABLE OF CONTENTS Section Page 1. POLICY STATEMENT 1 2. SCOPE 1 3. OBJECTIVE 1 4. DELEGATION OF AUTHORITY 2 Investment Committee Responsibility Reporting Requirements 5. ETHICS & CONFLICTS OF INTEREST 2 6. INVESTMENTS 3 Authorized Investments Unauthorized Investments 7. QUALIFIED INSTITUTIONS AND DEALERS 3 S. SAFEKEEPING AND CUSTODY 4 Diversification Delivery vs. Payment 9. INTEREST EARNINGS 5 10. AUDIT EXAMINATIONS 5 GLOSSARY 6 a CITY OF PASCO, WASHINGTON INVESTMENT POLICY 1.0 POLICY STATEMENT It shall be the general policy of the City of Pasco (City), to combine all cash available for investment into a common investment portfolio conforming to all state and local statutes governing the investment of public funds (as authorized by RCW 35.A.40.050), except for the Fire Pension Fund that is controlled separately by its own Pension Board. 2.0 SCOPE This investment policy, which was adopted on the date hereof by the Pasco City Council in Resolution # , supersedes any previous investment policy and applies to all financial assets of the City excluding the Fire Pension Fund. These funds are accounted for in the City's Comprehensive Annual Financial Report and include: General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, Internal Service Funds, and Trust and Agency Fund Types (excluding the Fire Pension Fund) and any new funds created by the City Council, unless specifically exempted by Council. 3.0 OBJECTIVE The primary objective of the City of Pasco's Investment Policy shall be to outline the criteria for maintaining the security of invested public funds. Criteria for managing the City's investment portfolio shall be: a to maintain liquidity to meet the City's cash needs; b) to minimize potential market risks; and, c) to maximize return on investments. As an optimum goal, the investment portfolio shall also be designed with the objective of attaining returns equalling or exceeding the average return on three month U.S. Treasury Bills, or the average rate on Federal Funds, whichever is higher. These indices are considered benchmarks for risk-free investment transactions, and therefore, comprise a minimum standard for the portfolio's rate of return, subject to prudent investment principles and the risk limitations identified herein. INVESTMENT POLICY Page 1 4.0 DELEGATION OF AUTHORITY Management responsibility for the investment program is hereby delegated to the Administrative and Community Services Director, who shall establish written procedures for the operation of the investment program consistent with this investment policy. Such procedures shall include the creation of an Investment Committee and contain explicit delegation of authority to those persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Administrative and Community Services Director. The Administrative and Community Services Director shall be resposible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 4.1 INVESTMENT COMMITTEE The members of the Investment Committee (Committee) shall be composed of the following: the Administrative and Community Services Director, the Public Works Director, and the Finance Manager. 4.2 RESPONSIBILITY Investments shall be made with judgement and care, under the circumstances prevailing at the time of the investment. The standard of prudence to be used shall be the "prudent person" standard. It shall be applied in the context of managing the overall portfolio. The members of the Investment Committee, who act in accordance with written procedures and exercise due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that: a) deviations from expectations are routinely evaluated by the Investment Committee; and, b) appropriate action is taken to control adverse developments. 4.3 REPORTING REQUIREMENTS A report of the investment committee will be included in the regularly prepared quarterly and annual reports distibuted to the City Council and City Manager. These reports will summarize the activity of the investment portfolio, e.g. types of investments, yields, maturities and other related data. 5.0 ETHICS AND CONFLICTS OF INTEREST Each member of the Investment Committee shall refrain from personal business activity that could conflict with the proper execution of the investment program, or which could impair his/her ability to make impartial investment decisions. Each Investment Committee member shall disclose to the City Manager any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further diclose any large personal INVESTMENT POLICY Page 2 financial/investment positions that could be related to the performance of the City's portfolio. The Committee members shall subordinate their personal investment transactions to those of the City, particularly with regard to the time of purchase and sales. 6.0 INVESTMENTS As a guideline, the time to maturity of investments should be relatively short term in nature. Authorization for the Investment Committee is required from the City Manager for any proposed investment with a maturity exceeding one year. Bond/Loan/Note proceeds and/or Bond Reserves will be evaluated by the Investment Committee as to the respective arbitrage laws/regulations and invested accordingly. 6.1 AUTHORIZED INVESTMENTS Investment instruments shall be limited to those allowed in accordance with RCW 35.39.030. Funds of the City of Pasco may be invested as follows: 6.1.1 U.S. Treasury Obligations and Government Agency Securities Obligations of the U.S. Government, its agencies and instrumentalities, provided that the payment of the principal and interest is either guaranteed by the Federal Government, carries an outright government backing or carries an implicit guarantee. 6.1.2 Certificates of Deposit Certificates of deposit and other collateralized evidences of deposits from financial institutions that have been approved by the Investment Committee and are authorized participants in Washington State's Public Deposit Protection Commission (PDPC) listing of"Qualified Public Depositories". 6.1.3 Savings Accounts Savings or time accounts in banks, trusts companies and mutual savings banks which are conducting business in this state, up to the amount of the insurance afforded such accounts by the Federal Deposit Insurance Corporation. 6.1.4 Banker's Acceptances Banker's Acceptances from primary depositories that report their activities to the Federal Reserve Bank in New York. 6.1.5 Repurchase Agreements INVESTMENT POLICY Page 3 Repurchase agreements collateralized by the U.S. Treasury securities. Ideally, these repurchase agreements should yield at least an additional 1/4 percent over U.S. Treasury Bill rates. Master Repurchase Agreements are required. 6.1.5 Washington State Treasurer's Office Local Government Investment Pool As authorized by the City of Pasco, Washington, Resolution No. 1742, dated July 7, 1986. 6.2 UNAUTHORIZED INVESTMENTS Reverse Repurchase Agreements Under no circumstances shall the City borrow funds through reverse repurchasing agreements for the purposes of financing the acquisition of securities. 7.0 (QUALIFIED FINANCIAL INSTITUTIONS AND DEALERS All investments for the City shall be made through Qualified Public Depositories. As required by the State of Washington Public Deposit Commission, the Finance Manager shall maintain a list of financial institutions authorized to provide investment services (R.C.W. 39.58.080) and located within the State of Washington. First consideration shall be given to qualified Public Depositaries with a branch located in Pasco. In addition, a list will also be maintained of approved security broker/dealers who maintain an office in the State of Washington. These may include primary dealers or regional dealers that qualify under the Securities & Exchange Commission Rule 15C3-1 (uniform net capital rule). No public deposit shall be made except in a qualified public depository as established by state laws. 7.1 A current financial statement is required to be on file for each financial institution and broker/dealer through which the City invests. 7.2 If marketable securities are purchased through Security Dealers, such firms must be classified as "primary dealers", affiliated with the New York Federal Reserve Bank. Updated listings of the primary dealers are available through the Markets Reports Division of the Federal Reserve Bank of New York. 8.0 SAFEKEEPING AND CUSTODY The maximum amount to be placed with any one depositary shall not exceed the net worth of the insitution (at the time of investment) as determined by the State of Washington Public Deposit Protection Commission (PDPC). Deposit type securities (i.e., certificates of deposits) shall be properly collateralized as required by RCW for amounts exceeding FDIC and FSLIC coverage. INVESTMENT POLICY Page 4 8.1 DIVERSIFICATION It is the policy of the City to diversify its investment portfolio to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer or a specific class of securities. The City will diversify its investments by security type and institution. With the exception of U.S. Treasury securities and the State Treasurer's Local Government Invesment Pool (LGIP), no more than 20% of the City's total investment portfolio should be invested in a single security type and no more than 20% should be invested with a single financial insitution. 8.2 DELIVERY VERSUS PAYMENT Ideally, all wireable investments should be accomplished on a "delivery versus payment" basis (DVP). There are two methods of delivery of securities: delivery vs payment and delivery vs receipt. Delivery vs payment is the delivery of securities with an exchange of money for the securities. Delivery vs receipt is the delivery of securities with an exchange of a signed receipt for the securities. Securities should be held by a third party custodian designated by the City's Invesment Committee and evidenced by safekeeping receipts. 9.0 INTEREST EARNINGS Interest generally follows principal and is credited to the fund from which it is derived, e.g.: if invested funds originate from the General Fund, the interest is credited to the General Fund. The distribution of interest income from the pooled investments shall be allocated to the individual funds proportionately, based on available cash balances in each fund at the time of investment. Interest earnings on investments in the Washington State Treasurer's Local Government Investment Pool may be allocated to the individual funds proportionately, based on the average yield on dollars invested over a specified period of time, or on a two-month average of ending cash balances, whichever is determined by the Committee to be the most equitable. 10.0 AUDIT EXAMINATIONS The Investment Committee, in conjuction with the State Auditor's Office, will evaluate conformance with the Investment Policy and audit internal controls annually. The purpose of these examinations shall be to audit the accountability of the City's Investment Portfolio and to verify that Investment Officials have acted in accordance with the investment policies and procedures. INVESTMENT POLICY Page 5 CITY OF PASCO, WASHINGTON INVESTMENT POLICY GLOSSARY ASSET - Defined as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions. An asset has three essential characteristics: a) it embodies a probable fixture benefit that involves a capacity, singly or in a combination with other assets to contribute directly or indirectly to future net cash flows; b) a particular enterprise can obtain the benefit and control others' access to it; and, c) the transaction or other event giving rise to the enterprise's right to or control of the benefit which has already occurred. A footnote points out that "probable" means that which can be reasonably expected or believed but is neither certain nor proved. May be tangible or intangible, short-terns (current) or long-term. BANKERS' ACCEPTANCES (BA's) - Bankers' Acceptances generally are created based on a letter of credit issued in a foreign trade transaction. They are used to finance the shipment of commodities between countries as well as the shipment of specific goods within the United States. BA's are short-term, non-interest-bearing notes sold at a discount and redeemed by the accepting bank at maturity for full face value. These notes trade at a rate equal to or slightly higher than Certificates of Deposits (CDs), depending on market supply and demand. BA's are sold in amounts that vary from $100,000 to 1,000,000 or more with maturities ranging from 30 - 270 days. They offer liquidity to the investor as it is possible to sell BA's prior to maturity at the current market price. While commercial banks are major investors in BA's, more than half of the volume outstanding is held by state and local governments, major corporations, insurance companies, savings and loan associations, pension funds, credit unions, foreign central banks and the Federal Reserve Bank. BA's are legal public sector investments in Washington State. The record shows that in 70 years of use in the United States, BA's have experienced no known principal loss to investors. BASIS POINT -A measure of interest rate, i.e., 1/100 of 1 percent, or .001. BOOK ENTRY SECURITIES - U.S. government and federal agency securities that do not exist in definitive (paper) form; they exist only in computerized files maintained by the Federal Reserve Bank. CARRYING AMOUNT - The amount at which assets and liabilities are reported in the financial statements. Carrying amount is also known as book value. CERTIFICATES OF DEPOSITS (CD's) - For more than a decade, CD's issued by commercial banks have been the mainstay of most local governments' investment programs. The bank CD's are available at all traditional government depositaries, are familiar instruments in governmental and banking circles and have been authorized for investment purposes by most legislative bodies. For professional investors, the CD offers money market rates of return for larger deposits, and allows the purchaser to choose a maturity date. In many INVESTMENT POLICY Page 6 � r instances, local jurisdictions' commercial bank depositaries compete aggressively with other money market instruments and offer reasonable returns. Saving and loan associations also issue CD's. Regulatory and insurance limits are similar to those governing commercial banks' CD's. Recent regulatory reduction of the minimum maturity from 30 to 14 days has made the commercial bank CD even more practical. Federal regulations and most financial institutions' policies provide for interest penalties upon premature redemption of a CD. Federal law constrains the rate of interest that banks can pay. Under current law banks are allowed to pay a rate higher than the one allowed on a time deposit if the depositor promises to leave the funds on deposit for several months or more. When the bank receives such funds, it issues a certificate of deposit. CD's may be issued in either negotiable or non-negotiable form. Only negotiable CD's are truly money market instruments. Local financial institutions generally issue the non- negotiable certificates to governments and other investors who are not concerned about the resale in the secondary market. COLLATERAL - Value of securities pledged to a specific amount or investment as supplemental security to the credit of the issuer or the broker. Collateral can be of a specific nature and priced at par or market value. COLLATERAL, POOL - A group of securities pledged by various financial institutions to provide common collateral for their deposits of public funds. In a collateral pool, the total collateral pledged by all financial institutions holding public funds is usually at least equal to the largest deposit of public funds in a single financial institution. For purposes of the City's Investment Policy, collateral pools are considered depositary insurance to the extent they adequately insure public deposits. COMMERCIAL BANK - A financial institution licensed by the state and/or the federal government to receive deposits, allow demand accounts, lend money, and provide trust services and other related services. Generally, banks are allowed to engage in more varied lending activities than other financial institutions. They are owned by the stockholders and are operated for profit. COMMINGLE - A process by which cash is mixed together so that the identity of individual items is lost. Commingle is vastly different from combine or consolidate and is generally not legal or appropriate for public funds. COMPETITIVE BID PROCESS - A process by which three of more institutions are contacted via the telephone to obtain interest rates for specific securities. Concurrent with Policy limitations, the investment is awarded to the highest bidder. CONSOLIDATE - A process by which cash, or any other item, is combined while maintaining the identity of each item. Consolidating several cash amounts into one (for investment purposes) is normally accomplished by a continuation of separate book balances for each fund on the government unit's ledger. Consolidation is a legal and efficient way to gain economies of scale in cash management. Also referred to as pooling of funds. See POOLING. INVESTMENT POLICY Page 7 CREDIT RISK - The risk that another party to an investment transaction will not fulfill its obligations. Credit risk can be associated with the issuer of a security, a financial institution holding the entity's deposit, or a third party holding securities of collateral. Credit risk exposure can be affected by a concentration of deposits or investments in any one investment type or with any one party. CUSTODIAL AGREEMENT - A written contract establishing the custodial responsibilities of an independent third party holding collateral for deposits with financial institutions and securities underlying repurchase agreements. DELIVERY - The transfer of securities in an investment transaction, underlying a repurchase agreement, or collateralizing a deposit. Delivery of securities can be taken in two ways: a) By taking physical possession of the securities; or b) By having the securities delivered to an independent third party agent (custodian) of the governmental entity. This delivery can be made to the independent third party either physically or through book entry. (See BOOK ENTRY SECURITIES.) In either case, the entity should receive confirmation from the third party that those securities are being held in a safekeeping account in the name of the entity. The trust or safekeeping departments of the broker-dealers or financial institutions selling the investment or pledging the collateral or underlying securities, or their custodial agents, are not considered independent third parties for purposes of the City's Investment Policy. DEPOSITARY - See FINANCIAL INSTITUTION. DEPOSITARY BANK - A local bank used as the point of deposit for cash receipts. DEPOSITARY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF 1980 - An encompassing legislative act designed to improve the effectiveness of monetary policy by applying new reserve requirements set by the Federal Reserve Board to all depositary institutions. Also referred to as the Monetary Control Act (MCA) of 1980. DEPOSITARY INSURANCE - Insurance on deposits with financial institutions. For purposes of this policy statement, depositary insurance includes: a) Federal depositary insurance funds, such as those maintained by the Federal Deposit Insurance Corporation (FDIC) and Federal Savings and Loan Insurance Corporation (FSLIC); b) Public Deposit Protection Commission; and, c) Collateral pools to the extent they adequately insure public deposits. DIVERSIFICATION - Dividing available funds among a variety of securities and institutions so as to minimize market risk. ELECTRONIC FUNDS TRANSFER (EFT) - An electronic system for transferring funds from one bank to another for investment or disbursement, commonly referred to as wire transfers. INVESTMENT POLICY Page 8 FANNIE MAE'S - Mortgage securities issued and guaranteed, as to timely interest payments, by the Federal Administration. FNMA stock is publicly traded. See FEDERAL AGENCY SECURITIES. FEDERAL AGENCY SECURITIES - Several government-sponsored agencies, in recent years, have issued short- and long-term notes. Such notes typically are issued through dealers, mostly investment banking houses. These federal government-sponsored agencies were established by the U.S. Congress to undertake various types of financing without tapping the public treasury. In order to do so, the agencies have been given the power to borrow money by issuing securities, generally under the authority of an act of Congress. These securities are highly acceptable and marketable for several reasons, mainly because they are exempt from state, municipal and local income taxes. Furthermore, agency securities must offer a higher yield than direct treasury debt of the same maturity to find investors, partly because these securities are not direct obligations of the Treasury. The main agency borrowing institutions are the Federal National Mortgage Association (FNMA), the Federal Home Loan Bank System (FHLB), and the Federal Farm Credit System(FFCS). FNMA - Federal National Mortgage Association - issues notes tailored to the maturity needs of the investor. Maturities range from 30 days up to 10 years. These notes are made attractive by their denominations from $5,000 to $1 million. See Federal National Mortgage Association. FHLB - Federal Home Loan Bank System - consists of twelve Federal Home Loan Banks, issues, in addition to long-term bonds, coupon notes with maturities of up to one year. Their attractiveness stems from their investment denominations of$10,000 to $1 million. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) - A federal institution that insures bank deposits. The current limit is up to $100,000 per deposit. FEDERAL FUNDS RATE - The rate of interest at which Fed Funds are traded between banks. Fed Funds are excess reserves held by banks that desire to invest or lend them to banks needing reserves. The particular rate is heavily influenced through the open market operations of the Federal Reserve Board. Also referred to as "Fed Funds rate". FEDERAL HOME LOAN BANKS (FHLB) - The institutions that regulate and lend to savings and loan associations. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC OR Freddie Mac's) FHLMC was created by Congress in 1970. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development,H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporations purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA's securities are also highly liquid INVESTMENT POLICY Page 9 and are widely accepted. FNMA assumes and guartantees that all security holders will receive timely payment of principal and interest. See FEDERAL AGENCY SECURITIES, FNMA, FANNIE MAE'S. FEDERAL RESERVE SYSTEM - The central banking system of the United States created by Congress and consisting of a seven-member Board of Governors (Federal Reserve Board), 12 regional Reserve banks and 25 Reserve branch banks. All national banks are members. The principal responsibility of the Federal Reserve Board is to establish and implement monetary policy. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION (FSLIC) - A federal institution that insures savings and loan deposits. The current limit is up to $100,000 per deposit. FINANCIAL INSTITUTION - Any of the following which are located in this state and are lawfully engaged in business: Bank Depositaries - Any branch of a bank engaged in the banking business in Washington State in accordance with State RCW's, and any State bank or trust company or national banking association. Thrift Depositaries - Any state chartered mutual savings bank or stock savings bank, any state or federally chartered savings and loan association (including federally chartered savings banks). FLOAT - The time interval between when a check is prepared and when it is subsequently paid by the bank on which it is drawn. FLOAT ANALYSIS - An analysis of an organization's disbursements to determine the approximate number of days between issuance of a check and presentation of the check for payment at the organization's bank. Performing a float analysis allows an organization to use funds in the demand deposit during the disbursement float period. FREDDIE MAC'S - Mortgage securities issued and guaranteed, as to timely interest payments and eventual principal payments, by the Federal Home Loan Mortgage Corp. FHLMC stock is owned by savings institutions. There are two types of Freddie Mac's: 1) Standard Program: introduced in 197 --- --Participation Certificates (PCs)/--Freddie Mac buys mortgages and sells undivided ownership interests in pools or mortgages. 2) Guarantor Program: introduced in 1981 to provide liquidity for Savings & Loans caught in the interest rate vise. Mortgage originators swap pooled mortgages for PC's representing ownership interests in those same mortgages. These PC's can be held, sold, or used as collateral. Freddie Mac like his cousins, Ginnie Mae and Fannie Mae, is highly liquid and is widely accepted. Freddie Mac also guarantees timely payment of principal and interest. See FEDERAL NATIONAL MORTGAGE ASSOCIATION. INVESTMENT POLICY Page 10 FULL SERVICE BANK - A commercial bank that provides normal functions, such as receiving funds,transferring money, lending and other related activities. FUNDS - For the purposes of this policy, these are public funds under the control of or in the custody of any local government official by virtue of the official's authority that are not immediately required to meet current demands. GINNIE MAES - Mortgage securities issued and guaranteed, as to timely interest and principal payments, by the Government National Mortgage Association, an agency within the Department of H.U.D. See GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - The Government National Mortgage Association was chartered under the Federal National Mortgage Association Act in 1938 and became an independent entity on September 1, 1968. GNMA's (Ginnie Maes) are collateralized with government securities backed by mortgages insured by the Federal Housing Authority or guaranteed by the Veterans Administration. The purpose of the GNMA is to support the government's housing objective where conventional financing is not readily available. There are two types of GNMA's: 1) Mortgage-backed securities (pass through Securities). These securities are issued by mortgage lenders which are backed by FHA, VA and FMHA mortgages and are guaranteed by GNMA. 2) Mortgage Purchase Programs. Purchases subsidized and unsubsidized multi-family project loans, insured by FHA, they are sold by GNMA (on a discounted basis) to private investors. The attractiveness of GNMA pass-through is the government guaranteed payment of interest and principal on a monthly basis, The full faith and credit of the United States are pledged under this guarantee. See GINNIE MAE'S. INTEREST - The charge or cost for using money: expressed as a rate per period, usually one year, called the interest rate. INVESTMENT DEPOSITS - The term "investment deposit" shall mean time deposits and savings deposits of public funds available for investment. INVESTMENTS - Assets held for the production of revenues in the form of interest, dividends, rentals, or lease payments. The term does not include fixed assets used in governmental operations. LINE OF CREDIT -A pre-approved amount of credit extended to an organization. LIQUIDITY - Refers to the ease and speed with which an asset can be converted into cash without a substantial loss in value. INVESTMENT POLICY Page 11 LOCAL GOVERNMENT INVESTMENT POOL (LGIP) - The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. LOCAL GOVERNMENT OFFICIAL - Any officer or employee of a political subdivision who has been designated by statue or by local charter, ordinance, or resolution as the officer having the authority to invest the funds of the political subdivision. MARGIN - The excess of the market value of the securities underlying a repurchase--reverse repurchase agreement over the cash given for the agreement. It is common practice for a margin to be built into the agreement to protect against declines in the market value of the underlying securities. MARKETABILITY - Ability to sell large blocks of money market instruments quickly and at competitive prices. MARKET VALUE - The price at which a security is traded and could presumably be sold. MARKET RISK - The risk that the market value of an investment, collateral protecting a deposit, or securities underlying a repurchase agreement will decline. Market risk is affected by the length to maturity of a security, the need to liquidate a security before maturity, the extent that collateral exceeds the amount invested, and the frequency at which the amount of collateral is adjusted for changing market values. MASTER 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. MONEY MARKET - An informal telephone network of a small number of large banks and brokers who deal in money market instruments. Money market instruments are short-term, high quality investments. These instruments include Treasury bills and notes, CD's, commercial paper, BA's and Eurodollar instruments. NEGOTIABLE CERTIFICATE OF DEPOSIT - A large denomination CD (usually$1 million or more) that can be sold in the secondary market, and are currently not authorized investments for governmental entities within the State of Washington. NET WORTH - "Net Worth" of a qualified public depositary means: For a Bank Depositary- the aggregate of capital, surplus, undivided profits and all capital notes and debentures which are subordinate to the interest of depositors; and For a Local Thrift Depositary- the aggregate of such capital stock, guaranty fund, general reserves, surplus, undivided profits, and all capital notes and debentures which are subordinate to the interest of depositors, and are eligible for inclusion in otherwise determining the net worth of a mutual saving bank, stock savings bank, or savings and INVESTMENT POLICY Page 12 loan association, excluding appraised equity capital and income capital and net worth certificates. PERFECTED SECURITY INTEREST - An interest in property, including securities, that is superior to the interests of the general creditors. Delivery of the securities is generally needed to create a perfected security interest. In addition, a perfected security interest can be created without taking possession of the security if the transferor of the security interest has signed a security agreement that contains a description of the collateral and the secured party pays for the investment. Such a security interest is perfected for a period of 21 days. However, the secured party risks loss or impairment of its security interest during the 21 day period, as there are provisions for a holder in due course of a negotiable instrument or a bona fide purchaser of the instrument to take priority over the secured party. After 21 days, the security interest becomes unperfected unless delivery to the secured party takes place. POOLING - See CONSOLIDATION; also connotes combining of assets of different entities (i.e., two or more cities) for investment purposes while maintaining separate accounting trails. POOL PARTICIPANT - Any county, city, town, municipal corporation, or special purpose taxing district that invests with the Washington State Local Government Investment Pool. PRIMARY DEALERS - A group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers, banks, and a few unregulated firms. PRIME RATE - The rate for loans charged by commercial banks to their most preferred risks. The Federal Reserve Bulletin is considered the authoritative source of information about historical prime rates. PRINCIPAL- An invested amount on which interest is charged or earned. PRUDENT PERSON STANDARD - For purposes of this policy, this standard is defined as a person capable of exercising sound judgment, caution and discretion when making investment decisions through utilization and evaluation of the information and known facts available at the time. QUALIFIED PUBLIC DEPOSITARY - 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. REGISTERED SECURITY - A security that has the name of the owner written on its face. A registered security cannot be negotiated except by the endorsement of the owner. REPRICING- The revaluation of the market price of securities. INVESTMENT POLICY Page 13 C Y REPURCHASE AGREEMENTS (Repo's) - range in maturity from overnight to fixed time to open end. Repo's involve a simultaneous sale of securities (generally secure treasuries or agencies) by a bank or government securities dealer to a city with an agreement for the bank to repurchase the securities at a fixed date at a specified rate of interest. This investment vehicle is mutually beneficial to both the City and the bank. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate the "buyer" for this. RESERVE REQUIREMENTS - The percentages of different types of deposits that member banks are required to hold on deposit at the Federal Reserve. These requirements are determined by the Federal Reserve Board and function as a tool to control monetary policy. REVERSE REPO'S - The opposite of the transaction undertaken through a regular repurchase agreement. In a "reverse" the city initially owns securities and the bank or dealer temporarily exchanges cash for this collateral. This in effect is temporarily borrowing cash at a high interest rate. Most typically a Repo is initiated by the lender of funds. Reverses are used by dealers to borrow securities they have shorted. Such investments are not authorized in the City of Pasco's Investment Policy. RISK -Degree of uncertainty of the return on an asset. SAFEKEEPING - An arrangement under which an organization's securities are kept in a bank vault. Evidence of this arrangement is a safekeeping receipt. SALLIE MAE'S - Pooling of student loans guaranteed by the Student Loan Mortgage Association (SLMA) to increase the availability of education loans. The SLMA purchases the loans after buying them on the secondary market from lenders. SLMA stock is publicly traded. SAVINGS AND LOAN ASSOCIATION - A national- or state-chartered institution that accepts deposits and lends them out generally as mortgages. These associations generally are owned by the depositors, not by stockholders as in the case of banks. SEC-REGISTERED SECURITIES BROKER-DEALER - A securities broker-dealer regulated b the Securities and Exchange Commission. Y g SECONDARY MARKET - The market which exists for the purchase and sale of securities after the initial offerings. SECURITIES - Bonds, notes, mortgages, or other forms of negotiable or non-negotiable instruments. See INVESTMENTS. SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) - A nonprofit corporation that protects customers accounts in the event of the financial failure of a member SEC-registered securities broker-dealer by distributing customer assets and then providing funds for all remaining claims of each customer up to a maximum of$500,000, including up to $100,000 on claims for cash. SIPC does not consider repurchase INVESTMENT POLICY Page 14 agreement participants to be customers of its member broker-dealers and does not extend insurance to repurchase agreements. STUDENT LOAN MORTGAGE ASSOCIATION (SLMA) - See SALLIE MAE'S. STRIPPED TREASURIES - U.S. Treasury debt obligations in which coupons are removed by brokerage houses, creating zero-coupon bonds. THRIFT DEPOSITARIES - See FINANCIAL INSTITUTION. TIME DEPOSIT - Interest-bearing deposit at a savings institution that has a specific maturity. TREASURY BILLS - Treasury bills are short-term debt obligations of the U.S. Government. They offer maximum safety of principal since they are backed by the full faith and credit of the United States Government. Treasury bills, commonly called "T-Bills", account for the bulk of government financing, and are the major vehicle used by the Federal Reserve System in the money market to implement national monetary policy. T-Bills are sold in three, six, nine, and twelve month bills. Because treasury bills are considered "risk free", these instruments generally yield the lowest returns in the major money market instruments. TREASURY NOTES AND BONDS - While T-Bills are sold at a discount rate that establishes the yield to maturity, all other marketable treasury obligations are coupon issued. These include Treasury Notes with maturities from one to ten years and Treasury Bonds with maturities of 10 - 30 years. The instruments are typically held by banks and savings and loans associations. Since Bills, Notes and Bonds are general obligations of the U.S. Government, and since the Federal Government has the lowest credit risk of all participants in the money market, its obligations generally offer a lower yield to the investor than do other securities of comparable maturities. UNDERLYING SECURITIES - Securities transferred in accordance with a repurchase--reverse repurchase agreement. See REPURCHASE AGREEMENTS and REVERSE REPO'S. U.S. GOVERNEMENT AGENCY SECURITIES - A variety of securities issued by several U.S. agencies. Some are issued on a discount basis and some are issued with coupons. Some are backed by the full faith and credit guarantee of the U.S. Government, while others are not. See FEDERAL AGEN— SECURITIES. WIRE TRANSFER- See ELECTRONIC FUNDS TRANSFER. YIELD - The rate of annual income returned on an investment, expressed as a percentage. ZERO-COUPON BONDS - Securities that do not pay interest but are instead sold at a deep discount from face value. They rise in price as the maturity date nears and are redeemed at face value upon maturity. INVESTMENT POLICY Page 15 CITY OF PASCO, WASHINGTON INVESTMENT PROCEDURES INTRODUCTION This set of Administrative Procedures is intended to compliment the Investment Policy of the City by providing specific guidelines for the management of the City's Investment Portfolio. INVESTMENT COMMITTEE As stated in the Investment Policy, there is hereby formed an Investment Committee consisting of the Administrative and Community Services Director, the Public Works Director and the Finance Manager. Any two of the above mentioned members of this committee shall constitute a quorum and have the power to transact business. AUTHORITY Chairman of the Investment Committee The Administrative and Community Services Director and the Public Works Director shall serve as Co-Chairman of the Investment Committee. These persons shall have the highest degree of authority regarding investment of City funds including, but not limited to, the award of investments and approval of investment policies and procedures. The Chairman may delegate responsibility for investment decisions as required. Finance Manner The Finance Manager is responsible for supervision of the day-to-day operations of the Investment Program in accordance with the Investment Policy. The duties include appropriate designations of authority to the person responsible for the investment transactions and for monitoring investment activities. The Finance Manager shall exercise due diligence in the training of subordinates regarding investment policies and procedures. Accounting Supervisor Under the direction of the Investment Committee, the Accounting Supervisor shall be responsible for treasury functions and shall coordinate the day-to-day operations of the investment portfolio. The duties shall include maintaining sufficient cash levels in the checking and savings accounts to cover outstanding checks, obtaining investment quotes and purchasing investments of less than one year in maturity, maintaining daily cash control procedures, and preparing periodic reports as required. The Accounting Supervisor is also responsible for the monitoring of the City's cash position,with the goal of ensuring that idle funds are invested to produce maximum investment returns. INVESTMENT PROCEDURES Page 1 r MEETING REQUIREMENTS The Investment Committee shall meet at least quarterly and as needed to review investment strategies,activities, and deviations from expectations,reports,policies, and procedures. INVESTMENTS As a guideline, the time from purchase to maturity of investments should be kept relatively short. Prior approval of the City Manager shall be required for maturities exceeding one year in length. DIVERSIFICATION No more than 20% of the City's total investment portfolio will be invested in a single security type or with a single financial institution, with the exception of the State Treasurer's Office Local Government Investment Pool (LGIP). Financial institutions must meet the requirements of the State of Washington Public Deposit Protection Commission. No more than 30% of the City's investment portfolio will be invested with the maturities exceeding one year. Any variation from these guidelines will require the approval of the City Manager. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS Before the investment of any surplus funds, a competitive bid process should be conducted. Bids should be secured from at least two institutions meeting the City's diversification requirements. Competitive bids need not be used when placing investments with the LGIP or in any savings accounts for short-term cash flow. REPORTING REQUIREMENTS Under the direction of the Investment Committee, the Accounting Supervisor shall prepare quarterly and annual investment reports as required. Quarterly Reports A quarterly investment summary shall be provided to the City Manager on Wednesday for inclusion in the Council agenda packet distributed on the Friday before the second regular City Council business meeting following the end of each calendar quarter. Annual Reports An annual investment report describing the previous year's investment activity shall be provided to the City Manager on Wednesday for inclusion in the Council agenda packet distributed on the Friday before the second regular City Council business meeting in January of each year. INVESTMENT PROCEDURES Page 2