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HomeMy WebLinkAboutFS 2010-05-18 Item 2A - Report - Investment ReportTO: BACKGROUND City of Tukwila INFORMATIONAL MEMORANDUM Mayor Haggerton Finance and Safety Committee FROM: Peggy McCarthy, Deputy Finance Director DATE: May 12, 2010 SUBJECT: March 31, 2010 Quarterly Cash Investment Report ISSUE Jim Haggerton, Mayor Finance Policy and Procedure 03 -17, Investment Policy, calls for quarterly investment reports to the Council Finance and Safety Committee. The report is to contain an inventory of investments on hand and a summary of performance. The last report covered investments held on December 31, 2009 and was presented at the March 2, 2010 Finance and Safety Committee meeting. The City invests its funds with the goal of maximizing return while preserving principal and ensuring sufficient liquidity to meet the City's operating needs. As of March 31, 2010, the city's cash and investment portfolio comprised an investment pool, a money market account, and certificate of deposits, a government agency note and a depository account. Since the last reporting period, a 2.3% agency note was called, a 2.08% agency note was purchased, the US Bank 1.44% compensating balance certificate of deposit was increased by $950,000 and two additional certificates of deposits (CD) were purchased an 18 -month 1.2% $250,000 CD and a 12 -month .99% $5,000,000 CD. The portfolio remains diversified in terms of both security type and financial institution. The Local Government Investment Pool (LGIP) operated by the Washington State Treasurer's office constitutes the highest concentration of both investment type and financial institution with 54% of the portfolio invested in the pool at the report date still well within the 75% allowed by the investment policy. Certificates of deposit at 36% of the portfolio represent the second largest concentration by security type. Sound Community Bank is the financial institution holding the second highest percentage of City funds, after the state treasurer, with $8 million or 20% of the portfolio. This concentration is also within the 50% limit imposed by the investment policy. All banks holding City funds are members of the Public Deposit Protection Commission (PDPC) and, pursuant to PDPC regulations, fully collateralize deposits of public funds. Cash and investments are held by most City funds and fund groups. A schedule showing the cash and investment balances held by each fund and fund group (i.e., general, special revenue, debt service, etc), at March 31, 2010 is included as an attachment to this memorandum to show the level of availability or restriction existing in the portfolio. Also included is 10 -year trend analysis showing the cash and investment balances at the end of each year, together with the investment income for that year and the computed yield derived from the two. This schedule clearly demonstrates the investment income decline experienced in 2009 and anticipated for 2010. The March 31, 2010 portfolio average yield was .76 very low historically, but an 11 basis point improvement over the December 31, 2009 average yield of .65 The 10 -year trend analysis also shows that cash and investment balances, at least at year -end, have not INFORMATIONAL MEMO Page 2 dropped below $28 million during this ten year period. The average life of the fixed term maturities is 21 months. DISCUSSION Interest rates are projected to remain at historic lows for an extended period. Although the federal government ended its purchasing of mortgage- backed securities on March 31, 2010 and some economists expected interest rates to climb sharply as a result, this has not occurred. According to the median forecast in a Bloomberg News survey of 47 economists early this month, "The Fed will keep rates near a record low until a quarter -point increase at the November meeting" of the Federal Open Market Committee. City investment earnings for 2009 were the lowest in ten years by a large margin. The 2009 earnings of $495,958 represent 35% of the 2008 earnings of $1,433,068, or a 65% reduction. The annualized return of the existing portfolio yields a little over $300,000 representing 62% of the 2009 earnings or a 38% decline. Additionally, budgeted investment earnings for the 2009 -2010 biennium total $3,149,000 or $1,574,500 per year. To mitigate this low interest rate environment, the following strategies are being considered: 1) Keep a high percentage of the portfolio in short maturities (1 to 2 year terms) until rates improve. 2) Invest up to $5 million of additional funds in short term, fixed rate instruments. 3) Explore alternative investment instruments. The investment policy permits investment in state and local general obligations. Taxable municipal bonds and the new Build America Bonds have been identified as a favorable investment options. However those with shorter maturities, bonds with terms of five years or less, are in demand and hard to come by according to Keith Peterson of Vining Sparks Investments. 4) Revise the City's investment policy allowing investment terms of up to ten years for 20% of the portfolio and up to five years for 80% of the portfolio. The ten -year trend analysis demonstrates that year -end cash and investment balances have not fallen below $28 million in 10 years. A portion of this core could be invested in longer term instruments taking advantage of better yields without compromising the City's liquidity requirements. RECOMMENDATION No recommendation, for Committee information only. ATTACHMENTS Cash and Investment Report as of March 31, 2010 Cash and Investment Balances by Fund and Fund Group at March 31, 2010 Cash and Investment Balances by Fund and Fund Group 2006, 2007, 2008, 2009 Ten -Year Trend Analysis Balances, Income Yields City Investment Policy with proposed revisions (see page 4) Glossary of Cash Management terms Public Deposit Protection Commission overview Local Government Investment Pool overview Yield curve at 5 -12 -10 and 4 -7 -10 W:IFIN Projects\Council Agenda ItemslInfoMemo Invstmnt Rprt 3- 31- 10.docx CITY OF TUKWILA CASH INVESTMENT REPORT March 31, 2010 Cash Investment Balances By Fund and Fund Group At December 31 2006, 2007, 2008, and 2009 Fund Group Fund 2006 2007 2008 2009 General General Total Special Revenue 000 7,873,515 7,319,814 7,759,376 3,708,200 7,873,515 7,319,814 7,759,376 3,708,200 101 838,549 665,090 718,184 941,474 103 95,907 104,538 362,539 634,793 104 5,095,486 8,016,689 9,788,250 5,037,698 105 813,237 399,059 878,381 885,462 107 592,416 60,185 425,015 802,279 109 222,824 Special Revenue Total 7,435,595 9,245,562 12,172,369 8,524,529 Debt Service 207 115,681 102,686 91,958 (55,311) 208 173,984 298,222 302,945 (22,268) 209 281,221 381,547 387,159 (70,737) 210 198,647 197,173 191,694 (51,394) 211 1,374 (39,683) Debt Service Total 769,534 979,629 975,129 (239,393) Capital Project 301 3,869,960 3,769,401 3,138,866 4,343,630 302 2,466,420 2,611,407 2,090,509 2,076,468 303 764,427 615,439 692,181 327,790 304 13,346 Capital Project Total 7,100,808 6,996,247 5,921,555 6,761,234 Enterprise 400 14,551 401 6,362,554 4,963,528 5,895,729 5,846,139 402 1,737,118 839,662 2,079,181 1,721,446 404 209,851 208,910 209,313 405 393,547 393,547 393,547 393,547 411 417,512 502,536 395,908 181,626 412 2,823,498 2,654,455 3,410,121 2,099,265 Enterprise Total 11,734,230. 9,563,579 12,383,395 10,465,887 Internal Service 501 3,276,236 3,069,015 3,513,780 3,159,879 502 961,457 1,499,731 2,786,419 4,548,635 503 708,810 721,652 1,053,348 1,347,955 Internal Service Total 4,946,503 5,290,398 7,353,547 9,056,469 Fiduciary 611 1,320,746 1,110,160 1,444,962 1,436,365 Fiduciary Total 1,320,746 1,110,160 1,444,962 1,436,365 Agency 640 104,628 Agency Tota .:v :m. 104,628 Grand Total 41,180,930 40,505,389 48,010,334 39,817,919 Agency Issuer CASH CASH EQUIVALENTS US Bank Depository Washington State Local Investment Pool Government Investment Pool Sound Community Bank LONG -TERM INVESTMENTS First Savings Bank Northwest Sound Community Bank Charter Bank Sound Community Bank US Bank Sterling Bank Sound Community Bank Federal Home Loan Bank Investment Type Money market Certificate of Deposit Certificate of Deposit Certificate of Deposit TOTAL CASH, CASH EQUIVALENTS INVESTMENTS CITY OF TUKWILA CASH INVESTMENT REPORT March 31, 2010 Purchase Deposit Date Various Various Various 05/01/2009 05/20/2009 05/26/2009 Maturity Call Date N/A (b) N/A lb) 05/01/2011 24 04/20/2011 23 05/26/2011 24 Certificate of Deposit 06/15/2009 06/15/2010 Certificate of Deposit, compensating balance Certificate of Deposit 02/16/2010 08/16/2011 18 02/15/2010 02/15/2013 36 Certificate of Deposit 03/04/2010 03/04/2011 US agency (a) To maturity or call date, whichever occurs first. (b) NIA. No maturity; funds may be withdrawn at par at any time. (c) Represents call date rather than maturity date. (d) Annualized return based on purchase price and yield to maturity. 03/23/2010 12/31/2010 6 21 21 (a) Term (months) N/A (b) N/A (b) N/A (b) 12 12 Average Life Investment Mix Depository State Investment Pool Money market Certificate of Deposit US Agency Purchase Price Book Yield to Annualized Balance Maturity Return Idl N/A (b) 2,312,107 2,312,107 0.00% N/A lb) 21,879,448 21,879,448 0.23% 50,323 500,000 502,704 0.40% 2,000 24,691,555 24,694,260 0.21% 52,323 2,000,000 2,030,860 2.50% 1,500,000 1,519,633 2.22% 1,500,000 1,517,678 1.98% 1,000,000 1,008,453 1.68% 3,450,000 3,450,000 1.44% 250,000 5,000,000 1,000,000 15,700,000 40,391,555 of Total 5.7% 54.2% 1.2% 36.4% 2.5% 100.0% 250,000 1.20% 3,000 5,000,000 0.99% 49,500 1,000,000 2.08% 20,800 15,776,623 1.61% 252,810 $40,470,883 0.76% $305,133 Blended Tukwila rate Benchmarks At 03 -31 -10 90 -day treasury rate 0.16% 6 -month treasury rate 0.26% State Pool rate 0.23% 50,000 33,330 29,700 16,800 49,680 Mar2010 2,312,107 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1,825,023 3,707,780 6,534,677 2,020,740 1,621,309 890,933 2,589,989 4,325,499 1,570,267 590,427 1,118,475 CITY OF TUKWILA CASH INVESTMENT REPORT March 31, 2010 Ten -Year Trend Analysis Balances, Income Yields $22382,153 $28,413,773 34,218,380 21,592,849 18,451,303 11,320,013 19,311,354 11,937,449 7,963,366 4,046,677 24,474,692 1 560 074 15, 776, 623 9,579,123 10, 084,174 12,377,863 20,708,887 22,036,333 16,971,875 18,159,063 22,508,750 29,266,530 6,507,305 25 600 000 40,470,883 39,817,919 48,010,334 40,505,389 41,180,930 34,977,655 37,174,161 32,686,500 34,797,615 34,883,474 31,572,425 28,278,549 art` Investment ;:Yield corn 2010 est 310,000 0.77% 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 495,958 1.25% 1,433,068 2.98% 2,252,129 5.56 1,750,263 4.25% 1,291,355 3.69% 934,753 2.51% 880,456 2.69% 1,269,253 3.65% 1,709,103 4.90% 1,086,311 3.84% Weighted Average Yield 3.71% 1,869,912' 5.92 City of Tukwila, Washington INVESTMENT POLICY Adopted by the Tukwila City Cotwcil On May 15, 2000 Ordinance No. 1916 Alan R Doerschel, Finance Director City of Tukwila Investment Policy 1.0 Policy It is the policy of the City of Tukwila to invest public funds in a manner that will provide maximum security with the highest investment return while meeting the daily cash flow demands of the City, while conforming to all state and local statutes governing the investment of public funds. 2,0 Scope This policy applies to the investment of all public funds in the custody of the Tukwila Finance Director. Funds covered by this policy include all city funds created by the Tukwila City Council, and are accounted for in the City's Comprehensive Annual Financial Report (CAFR). 2.1 Fund Types: General/Current Expense Funds Special Revenue Funds Debt Service Funds Capital Project Funds Enterprise Funds Internal Service Funds Trust Funds Agency Funds 2.2 Funds relating to debt service will be invested in accordance with appropriate bond documents. 3.0 Prudence Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. 1- City of Tukwila Investment Policy 4.0 Objectives The primary objectives, in priority order, of the City's investment activities shall be: Safety: Safety of the principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential Iosses on individual securities do not exceed the income generated from the remainder of the portfolio. Liquidity: The City's investment portfolio will remain suffidiently liquid to enable the City to meet all operating requirements that might be reasonably anticipated. Yield: The City's investment portfolio shall be designed with the-objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio. See 13.0. 5.0 Authority Management responsibility of the investment program is vested in the City of Tukwila Financial Director under the express authority granted in RCW 39.29.020. 5.1 The City Finance Director may appoint an Investment Officer whose responsibilities will include initiating daily transactions in the investment portfolio based on liquidity and cash flow requirements of the City. 5.2 Investments relating to bond proceeds shall be made consistent with 4.0, "Objectives." 6.0 Ethics and Conflict of Interest 6.1 Officers and employees involved in the investment process recognize that the investment portfolio is subject to public review and evaluation. The overall program will be designed and managed with a degree of professionalism that is worthy of the public trust. 6.2 Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any personal financiallinvestment positions that could be related to the performance of the City's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City, particularly with regards to the timing of purchases and sales. -2_ 1 City of Tukwila Investment Policy 7.0 Authorized Financial Dealers and Institutions 7.1 Selection of a primary bank to provide general banking services for Tukwila will be made by the Finance Director and approved by the City Council and Mayor, 7.2 Pursuant to state statutes (RCW 39.58), the deposit of public funds and the placement of "investment deposits" (i.e. time deposits, money market deposit accounts and savings deposits of public funds), will be placed only with institutions approved by the Washington Public Deposit Protection Commission (PDPC) as eligible for deposit of public funds. The maximum amount placed with any one depository will not exceed the net worth of the institution as determined by the PDPC. 7.3 In addition, the Finance Director will maintain a list of approved broker/ dealers that are authorized to provide investment services to the City. 7.3.1 Authorized broker /dealers must maintain an office inthe State of Washington. 7.3.2 Authorized broker/dealers will be limited to primary dealers or other dealers that qualify under SEC Rule 15C3-1, the Uniform Net Capital Rule. 7.3,3 All approved firms and the individuals that represent.them are required to read this policy and certify that they understand and will comply with the City's investment objectives and constraints. 7.3.4 Broker /dealers that have been selected to provide investment services to the City are required to submit an audited financial statement annually to the Finance Director, if requested. 8.0 Authorized Investments State statutes and this investment policy limit the types of securities authorized for investment by the City. The principal governing statutes are RCW 39.59 and RCW 39.60. The Finance .Director may further restrict eligible investments by this policy at his/her discretion. Authorized investments include (but are not limited to): 8.1 U.S. Treasury Securities. 8.2 U.S. Agency Securities (i.e. obligations of any government sponsored corporation eligible for collateral purposes at the Federal Reserve), 83 Certificates of Deposit, Money Market Deposit Accounts and savings deposits with qualified depositories within statutory limits as promulgated by the PDPC at the time of investment. 8.4 Bankers Acceptances (BA's) purchased on the secondary market with a rating of A- I, P -1, its equivalent or better. City of Tukwila Investment Policy 8.5 General Obligation Bonds of a state or local government jwhich have at the time of the investment one of the three highest credit ratings of a nationally- recognized rating agency. 8.6 The Washington State Local Government Investment Pool'(LGlP). 9.0 Safekeeping and Custody 9.1 Securities purchased by the Finance Director are to be held in a custodial account in the safekeeping or trust department of a bank acting as third party custodian for the City of Tukwila. 9.2 All security transactions conducted by the custodian on behalf of the City of Tukwila are to be on a delivery- versus payment (DVP) basis. 9.3 Certificates of Deposit, transaction receipts for Money Market Deposit Accounts or savings deposit accounts will be held by the Finance Director. 10.0 Diversification The City of Tukwila will diversify its investments by security type and institution. 10.1 No more than fifty percent (50 of the City's portfolio, at the time of purchase, shall be in any single financial institution. 10.2 Except, that no more than seventy -five (75 of the City's portfolio, at the time of purchase, shall be invested in the Washington Local Government Investment Pool, and 10.3 No more than seventy -five percent (75 of the City's portfolio, at the time of purchase, shall be invested in U.S. Treasury or Agency securities. 10.4 The City's Finance Safety Committee can authorize a variance to 10.1, 10.2 or 10.3 prior to purchase, if it is deemed in the best overall benefit to the City, 11.0 Maturities To the extent possible, and to preclude the sale of securities that could result in a loss, investments will be made to coincide with anticipated cash flow requirements. 11.1 11.1 At the time of investment, a minimum of fifty percent (50 of the portfolio will be comprised of investments maturing or available within one year. 11,0 At the time of investment, no securities or investment instruments shall have a maturity exceeding years, except when compatible with a specific fund's investment needs. e-- i 11� To provide for ongoing market opportunity, investment maturities should be laddered or staggered to avoid the risk resulting from over- concen- tration of portfolio assets in a specific maturity. (t, the a--i )te oC e.1 pe ce,14 C80%) 0 +he po;+ too wit( be ccmp'i'ed oC ic‘a 1 ■,-13 available (zithin years City of Tukwila Investment Policy 11.4 The average maturity of the portfolio shall not exceed two (2) years. 11.5 Any variance to 11.1, 11.2, 11.3 or 11.4 can be approved by the Finance Safety Committee prior to occurrence, and if deemed in the City's best interest. 12.0 Internal Controls The Finance Director shall establish a system of internal controls, which are subject to review by the State Auditor. Such reviews may result in redommendations to change operation procedures to improve internal controls. Controls shall be designed to protect against loss of public funds due to fraud, error, misrepresentation or imprudent actions. 13.0 Performance Standards 1 Benchmarks The investment portfolio will be designed to obtain an average rate of return during budgetary and economic cycles which meets or exceeds the average 90 -day Treasury bill rates for the corresponding time period. This performance standard shall take into account the City's investment risk constraints and cash flow needs. 14.0 Reporting The Finance Director will submit a quarterly report to the City's Finance Safety Committee that summarizes the current portfolio position and performance. 15.0 Investment Policy Adoption Adoption of this policy is made pursuant to the provisions of RCW 36.48.070. Approved and adopted by the City Coun of the City of Tukwila this day of 2000. Glossary of Cash Management Terms The following is a glossary of key investing terms, many of which appear in GFOA's Sample Investment Policy. This glossary has been adapted from an article, entitled "Investment terms for everyday use," that appeared in the April 5, 1996, issue of Public Investor, GFOA's subscription investment newsletter. Accrued Interest The accumulated interest due on a bond as of the last interest payment made by the issuer. Agency A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each particular agency with a market perception that there is an implicit government guarantee. An example of federal agency is the Government National Mortgage Association (GNMA). An example of a FSA is the Federal National Mortgage Association (FNMA). Amortization The systematic reduction of the amount owed on a debt issue through periodic payments of principal. Average Life The average length of time that an issue of serial bonds and /or term bonds with a mandatory sinking fund feature is expected to be outstanding. Basis Point A unit of measurement used in the valuation of fixed income securities equal to 1/100 of 1 percent of yield, e.g., "1/4" of 1 percent is equal to 25 basis points. Bid The indicated price at which a buyer is willing to purchase a security or commodity. Book Value The value at which a security is carried on the inventory lists or other financial records of an investor. The book value may differ significantly from the security's current value in the market. Callable Bond A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions. Call Price The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight premium to the bond's original issue price to compensate the holder for loss of income and ownership. Call Risk The risk to a bondholder that a bond may be redeemed prior to maturity. Cash Sale /Purchase A transaction which calls for delivery and payment of securities on the same day that the transaction is initiated. Collateralization Process by which a borrower pledges securities, property, or other deposits for the purpose of securing the repayment of a loan and/or security. Commercial Paper An unsecured short -term promissory note issued by corporations, with maturities ranging from 2 to 270 days. Convexity A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond's price to interest rate changes. Coupon Rate The annual rate of interest received by an investor from the issuer of certain types of fixed income securities. Also known as the "interest rate." 3/7/2003 Credit Quality The measurement of the financial strength of a bond issuer. This measurement helps an investor to understand an issuer's ability to make timely interest payments and repay the loan principal upon maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. Credit Risk The risk to an investor that an issuer will default in the payment of interest and/or principal on a security. Current Yield (Current Return) A yield calculation determined by dividing the annual interest received on a security by the current market price of that security. Delivery Versus Payment (DVP) A type of securities transaction in which the purchaser pays for the securities when they are delivered either to the purchaser or his /her custodian. Derivative Security Financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values. Discount The amount by which the par value of a security exceeds the price paid for the security. Diversification A process of investing assets among a range of security types by sector, maturity, and quality rating. Duration A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. Fair Value The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Federal Funds (Fed Funds) Funds placed in Federal Reserve banks by depository institutions in excess of current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a longer basis. They may also transfer funds among each other on a same -day basis through the Federal Reserve banking system. Fed funds are considered to be immediately available funds. Federal Funds Rate Interest rate charged by one institution lending federal funds to the other. Government Securities An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, and Bonds." Interest Rate See "Coupon Rate." Interest Rate Risk The risk associated with declines or rises in interest rates which cause an investment in a fixed income security to increase or decrease in value. Internal Controls An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and judgments by management. Internal controls should address the following points: lbttr'• //arum! afna nra/ cPrvi [:PC /Cn P.ciA1 s /1nvrilcv_shtml 3/7/2003 1. Control of collusion Collusion is a situation where two or more employees are working in conjunction to defraud their employer. 2. Separation of transaction authority from accounting and record keeping By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. 3. Custodial safekeeping Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping. 4. Avoidance of physical delivery securities Book -entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. 5. Clear delegation of authority to subordinate staff members Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6. Written confirmation of transactions for investments and wire transfers Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures. 7. Development of a wire transfer agreement with the lead bank and third -party custodian The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers. Inverted Yield Curve A chart formation that illustrates long -term securities having lower yields than short -term securities. This configuration usually occurs during periods of high inflation coupled with low levels of confidence in the economy and a restrictive monetary policy. Investment Company Act of 1940- Federal legislation which sets the standards by which investment companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting requirements, and securities valuations. Investment Policy A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities. Investment -grade Obligations An investment instrument suitable for purchase by institutional investors under the prudent person rule. Investment -grade is restricted to those obligations rated BBB or higher by a rating agency. Liquidity An asset that can be converted easily and quickly into cash. Local Government Investment Pool (LGIP) An investment by local governments in which their money is pooled as a method for managing local funds. Mark -to- market The process whereby the book value or collateral value of a security is adjusted to reflect its current market value. Market Risk The risk that the value of a security will rise or decline as a result of changes in market conditions. Market Value Current market price of a security. Maturity The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bonathold er ct'tvtit See ��"1�.i.�,h1.sa ra,sM V L.a�... ..r.....P /oor% nue 1e1.0ari 1e /incmirvChtm1 3/7/2003 Money Market Mutual Fund Mutual funds that invest solely in money market instruments (short -term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds). Mutual Fund An investment company that pools money and can invest in a variety of securities, including fixed income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by the following Securities and Exchange Commission (SEC) disclosure guidelines: 1. Report standardized performance calculations. 2. Disseminate timely and accurate information regarding the fund's holdings, performance, management and general investment policy. 3. Have the fund's investment policies and activities supervised by a board of trustees, which are independent of the adviser, administrator or other vendor of the fund. 4. Maintain the daily liquidity of the fund's shares. 5. Value their portfolios on a daily basis. 6. Have all individuals who sells SEC registered products licensed with a self regulating organization (SRO) such as the National Association of Securities Dealers (NASD). 7. Have an investment policy governed by a prospectus which is updated and filed by the SEC annually. Mutual Fund Statistical Services Companies that track and rate mutual funds, e.g., IBC /Donoghue, Lipper Analytical Services, and Morningstar. National Association of Securities Dealers (NASD) A self regulatory organization (SRO) of brokers and dealers in the over -the- counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities. Net Asset Value The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings, subtracting this from the fund's liabilities and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund's portfolio. (See below.) [(Total assets) (Liabilities)] /(Number of shares outstanding) No Load Fund A mutual fund which does not levy a sales charge on the purchase of its shares. Nominal Yield The stated rate of interest that a bond pays its current owner, based on par value of the security. It is also known as the "coupon," "coupon rate," or "interest rate." Offer An indicated price at which market participants are willing to sell a security or commodity. Also referred to as the "Ask price." Par Face value or principal value of a bond, typically $1,000 per bond. Positive Yield Curve A chart formation that illustrates short -term securities having lower yields than long -term securities. Premium The amount by which the price paid for a security exceeds the security's par value. Prime Rate A preferred interest rate charged by commercial banks to their most creditworthy customers. Many interest rates are keyed to this rate. V/712001 Principal The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security. Prospectus A legal document that must be provided to any prospective purchaser of a new securities offering registered with the SEC. This can include information on the issuer, the issuer's business, the proposed use of proceeds, the experience of the issuer's management, and certain certified financial statements. Prudent Person Rule An investment standard outlining the fiduciary responsibilities of public funds investors relating to investment practices. Regular Way Delivery Securities settlement that calls for delivery and payment on the third business day following the trade date (T +3); payment on a T +1 basis is currently under consideration. Mutual funds are settled on a same day basis; government securities are settled on the next business day. Reinvestment Risk The risk that a fixed income investor will be unable to reinvest income proceeds from a security holding at the same rate of return currently generated by that holding. Repurchase Agreement (repo or RP) An agreement of one party to sell securities at a specified price to a second party and a simultaneous agreement of the first party to repurchase the securities at a specified price or at a specified later date. Reverse Repurchase Agreement (Reverse Repo) An agreement of one party to purchase securities at a specified price from a second party and a simultaneous agreement by the first party to resell the securities at a specified price to the second party on demand or at a specified date. Rule 2a -7 of the Investment Company Act Applies to all money market mutual funds and mandates such funds to maintain certain standards, including a 13- month maturity limit and a 90 -day average maturity on investments, to help maintain a constant net asset value of one dollar ($1.00). Safekeeping Holding of assets (e.g., securities) by a financial institution. Serial Bond A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals until the entire issue is retired. Sinking Fund Money accumulated on a regular basis in a separate custodial account that is used to redeem debt securities or preferred stock issues. Swap Trading one asset for another. Term Bond Bonds comprising a large part or all of a particular issue which come due in a single maturity. The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term bonds before maturity. Total Return The sum of all investment income plus changes in the capital value of the portfolio. For mutual funds, return on an investment is composed of share price appreciation plus any realized dividends or capital gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) (Dividends paid) (Capital gains) Total Return Treasury Bills Short -term U.S. government non interest bearing debt securities with maturities of no longer than one year and issued in minimum denominations of $10,000. Auctions of three- and six -month bills are weekly, while auctions of one -year bills are monthly. The yields on these bills are monitored closely in the money markets for signs of interest rate trends. t,ttn- tummy vfna nra/ cervi /snecials /invnlcv.shtml 3/7/2003 r reasury Notes intermeaiate u.a. government aeot securities witn maturities or one to 10 years and issued in denominations ranging from $1,000 to $1 million or more. Treasury Bonds Long -term U.S. government debt securities with maturities of ten years or longer and issued in minimum denominations of $1,000. Currently, the longest outstanding maturity for such securities is 30 years. Uniform Net Capital Rule SEC Rule 15C3 -1 outlining capital requirements for broker /dealers. Volatility A degree of fluctuation in the price and valuation of securities. "Volatility Risk" Rating A rating system to clearly indicate the level of volatility and other non credit risks associated with securities and certain bond funds. The ratings for bond funds range from those that have extremely low sensitivity to changing market conditions and offer the greatest stability of the returns "aaa" by S "V -1" by Fitch) to those that are highly sensitive with currently identifiable market volatility risk "ccc by S &P, "V -10" by Fitch). Weighted Average Maturity (WAM) The average maturity of all the securities that comprise a portfolio. According to SEC rule 2a -7, the WAM for SEC registered money market mutual funds may not exceed 90 days and no one security may have a maturity that exceeds 397 days. When Issued (WI) A conditional transaction in which an authorized new security has not been issued. All "when issued" transactions are settled when the actual security is issued. Yield The current rate of return on an investment security generally expressed as a percentage of the security's current price. Yield -to -call (YTC) The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date. Yield Curve A graphic representation that depicts the relationship at a given point in time between yields and maturity for bonds that are identical in every way except maturity. A normal yield curve may be alternatively referred to as a positive yield curve. Yield -to- maturity The rate of return yielded by a debt security held to maturity when both interest payments and the investor's potential capital gain or loss are included in the calculation of return. Zero coupon Securities Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable_at par upon maturity. I I. __I -La -1 Public Deposit Protection Commission (PDPC) The Public Deposit Protection Commission (PDPC) is comprised of the State Treasurer, Governor, and Lieutenant Governor. The PDPC makes and enforces regulations and administers a program to ensure public funds deposited in banks and thrifts are protected if a financial institution becomes insolvent. The PDPC approves which banks and thrifts can hold state and local government deposits and monitors collateral pledged to secure uninsured public deposits. This secures public treasurers' deposits when they exceed the amount insured by the FDIC by requiring banks and thrifts to pledge securities as collateral. It also minimizes participating depositaries' liability for defaulting institutions. No public funds on deposit in public depositaries have been lost since the Public Deposit Protection Act was created in 1969. Under state law, the Commission can request a public depositary to furnish information on its financial condition, public deposits, and on the exact status of its net worth. The Commission is empowered to take any action deemed advisable for the protection of public funds and to establish procedures for collection or settlement of claims arising from the failure of a public depositary. Each depositary reports monthly and quarterly to the Commission on the amount of its insured and uninsured public deposits, the amount of securities pledged, as well as other financial information. Those depositaries with excess deposits or that do not meet minimum financial standards set by the Commission must monitor public deposits on a daily basis and maintain adequate collateral accordingly. Under the Act, all public treasurers and other custodians of public funds are relieved of the responsibility of executing tri -party agreements, reviewing pledged securities, and authorizing additions, withdrawals, and exchanges of collateral. Similarly, financial institutions no longer need to review the status of each public fund balance and the collateral pledged under numerous tri -party agreements. Local Government Investment Pool (LGIP) Overview The Local Government Investment Pool (LGIP) is a voluntary investment vehicle operated by the State Treasurer. Over 450 local governments have participated in the pool since it was started in 1986 to provide safe, liquid, and competitive investment options for local government pursuant to RCW 43.250. The LGIP lets local governments use the State Treasurer's resources to safely invest their funds while enjoying the economies of scale available from a $5 -8 billion pooled fund investment portfolio. LGIP's investment objectives are, in priority order: 1) safety of principal, 2) maintaining adequate liquidity to meet cash flows, and 3) providing a competitive interest rate relative to other comparable investment alternatives. LGIP offers 100% liquidity to its participants. LGIP is comparable to an SEC regulated Rule 2a -7 money market fund. LGIP investment guidelines are spelled out in the LGIP Investment Policy. For more information on the LGIP please take a look at our operations manual or please feel free to contact us if you have any questions. Local governments that are eligible to join are: cities and towns, counties, special taxing districts, municipal corporations, community and technical colleges, and four -year universities. The LGIP was originally created for smaller entities but today LGIP Participants include: All 39 counties All cities above a population of 10,000 232 cities and towns 154 special taxing districts 30 community colleges and universities Today's Yield C 0 4/7/2010 Today Page 1of1 htto: //82.165.243.198/docs/eb /larger. asp? title Today's %20Yield &file =http: //82.165.243 05/12/2010