Loading...
HomeMy WebLinkAboutFS 2010-06-22 Item 2B - Policy - Investment Policy UpdateTO: City of Tukwila INFORMATIONAL MEMORANDUM Mayor Haggerton Finance and Safety Committee FROM: Peggy McCarthy, Deputy Finance Director DATE: June 16, 2010 SUBJECT: Investment Policy Revision ISSUE Tukwila Municipal Code Chapter 3.28, "Investing City Funds Section 3.28.020, "Maintaining and Changing Policy states, "The Finance Director is required to maintain the administrative investment policy. Changes to the policy require approval of the City Council Finance and Safety Committee." The investment policy was last updated in 2000. Changes in the investment environment warrant a review of the policy and possible revisions to tailor it to the current circumstances. BACKGROUND A historically low interest rate environment exists combined with a steep yield curve. The City's cash and investment year -end balances have remained at $28 million or more for the past ten years. 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. To take advantage of the higher yields available from investments with longer maturities and to lock in attractive rates for longer time periods, policy revisions to Section 11.0, Maturities, are being contemplated. Changes contemplated are as follow: 1) Section 11.2 which currently reads, "At the time of investment, no securities or investment instruments shall have a maturity exceeding four years, except when compatible with a specific fund's investment needs." would be changed to read, "At the time of investment, eighty percent (80 of the portfolio will be comprised of investments maturing or available within five years and no securities or investment instruments shall have a maturity exceeding ten years, except when compatible with a specific fund's investment needs." 2) Section 11.4, which currently reads, "The average maturity of the portfolio shall not exceed two (2) years." would be changed to read, "The average maturity of the portfolio shall not exceed three and one half years (3 or forty two (42) months." DISCUSSION Jim Haggerton, Mayor Using the investment portfolio make up as of March 31, 2010 as a starting point and the Treasury interest rates at June 14, 2010 as the basis for hypothetical new investment decisions made as existing investments mature three model biennial investment portfolios were developed. In Scenario 1, the hypothetical new investment decisions are made based on the INFORMATIONAL MEMO Page 2 guidelines of the existing investment policy. In Scenario 2, the hypothetical new investment decisions are made using the revised maximum maturity guidelines of section 11.2 but with the existing average maturity guidelines of section 11.4. In Scenario 3, the hypothetical new investments follow the revised maximum maturity guidelines proposed for section 11.2 and the revised average maturity guidelines proposed for section 11.4. The models demonstrate that incorporating the policy revisions into investment decisions results in progressively more investment income. The increase in the biennial investment income from Scenario 1 to Scenario 3 is $83,300 or 20 The increase in the investment income generated in the second half of 2011 between Scenario 1 and Scenario 3 is $133,000 or 36 The investment policy revisions will provide more flexibility in investment decisions allowing the City to take advantage of opportunities as they arise. As long as liquidity is not compromised, the advantages of revising the investment policy seem obvious. Since 50% of the portfolio (or $20 million in these models) is required to be invested in highly liquid (available within one year) investments and since year -end cash and investment balances have not fallen below $28 million in ten years, liquidity should remain adequate to meet City needs if these revisions are made to the investment policy. RECOMMENDATION No recommendation, for Committee information only. ATTACHMENTS Investment Policy draft with proposed revisions. Model Biennial Investment Portfolio Scenario 1, Existing Policy Model Biennial Investment Portfolio Scenario 2, Revised Maximum Maturities Model Biennial Investment Portfolio Scenario 3, Revised Maximum and Average Maturities Ordinance 1916 W:IFIN Projects\Council Agenda ItemsllnfoMemo Invstmnt Policy 6- 16- 10.docx City of Tukwila, Washington INVESTMENT POLICY Adopted by the Tukwila City Council 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 losses on individual securities do not exceed the income generated from the remainder of the portfolio. Liquidity: The City's investment portfolio will remain sufficiently 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 financial /investment 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- 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 in the 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). 8.3 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. 3 i Deleted: #>Bankers Acceptances (BA's) purchased on the secondary market with a rating of A -1, P -1, I ts equivalent or better City of Tukwila Investment Policy 8.4 General Obligation Bonds of a state or local government which have at the time of the investment one of the three highest credit ratings of a nationally- recognized rating agency. 8.5 The Washington State Local Government Investment Pool (LGIP). 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 require ments. 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. 11.2 At the time of investment, eiehty percent (80 %1 of the portfolio will be comprised of investments maturine or available within five years and no securities or investment instruments shall have a maturity exceeding :ten vears, e xcept when compatible with a specific fund's investment needs. 11.3 To provide for ongoing market opportunity, investment maturities should be laddered or staggered to avoid the risk resulting from overconcentration of portfolio assets in a specific maturity. 4 Deleted: four City of Tukwila Investment Policy 11.4 The average maturity of the portfolio shall not exceed ,three and one half years or j DD leted: two (2) forty two (421 months. 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 recommendations 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 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 Council of the City of Tukwila this 5th day of May, 2000. Revisions approved and adopted by the City of Tukwila City' Council Finance and Safety Committee this of July, 2010. Formatted: Indent: First line: 0.06" 1 CITY OF TUKWILA MODEL BIENNIAL INVESTMENT PORTFOLIO / SCENARIO 1 CITY OF TUKWILA MODEL BIENNIAL INVESTMENT PORTFOLIO / SCENARIO 1 CITY OF TUKWILA MODEL BIENNIAL INVESTMENT PORTFOLIO / SCENARIO 1 ATTEST /AUTHENTICATED: z ine E. Cantu, CMC, City Clerk APPROVED JO FORM: By of the City Attorney FILED WITI I THE CITY CLERK: //PO PASSED BY THE CITY COUNCIL: s7e'e) PUBLISHED: EFFECTIVE DATE: 3P5'fcC ORDINANCE NO 1916 City of Tukwila Washington Ordinance No. AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, ADOPTING INVESTMENT POLICIES FOR THE CITY OF TUKWILA; SETTING RESPONSIBILITY FOR MAINTENANCE AND CHANGES; REPEALING ORDINANCE NO. 859 AS CODIFIED AT TUKWILA MUNICIPAL CODE 3.28; PROVIDING FOR SEVERABILITY; AND ESTABLISHING AN EFFECTIVE DATE. WHEREAS, the City of Tukwila established an "Investing City Funds" policy in 1974; and WHEREAS, the City desires to replace the original policy with an investment policy that meets state and national standards; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF TUKWILA, WASHINGTON, DO ORDAIN AS FOLLOWS: Section I. Adoption of investment policy. City Administrative Policy No. 31 7, "Investment Policy" (Attachment A), is hereby adopted and incorporated into this chapter by reference as if fully set forth herein. Section 2. Maintaining and changing policy. The Finance Director is required to maintain the administrative investment policy. Changes to the policy require approval of the City Council Finance and Safety Committee. Section 3. Repealer. Ordinance No. 859, as codified at Tv1C 3.28, is hereby repealed. Section 4. Severability. If any section, subsection, paragraph, sentence, clause or phrase of this ordinance or its application to any person or situation should be held to be invalid or unconstitutional for any reason by a court of competent jurisdiction, such invalidity or unconstitutionality shall not affect the validity or constitutionality of the remaining portions of this ordinance or its application to any other person or situation. Section 5. Effective Date. This ordinance or a summary thereof shall be published in the official newspaper of the City, and shall take effect and be in full force and effect five (5) days after passage and publication as provided by law. PASSED BY T 1 :1TY COUNCIL OF THE CFIY OF TUKWILA, WASHINGTON, at a Reguiar Meeting thereof this /J day of 2000. Steven M. Mullet, Mayor Inwestment Po!icy4 -2000 1.