R-04-11-09-10A1 - 11/9/2004 RESOLUTION NO. R-04-11-09-10A1
WHEREAS, pursuant to Chapter 2256, Texas Government Code ( "the
Act" ) the City Council desires to adopt a written investment policy
and investment strategy regarding the investment of City funds, and
WHEREAS, the City Council has reviewed the attached updated
policy and has determined same to be in compliance with the Act, Now
Therefore
BE IT RESOLVED BY THE COUNCIL OF THE CITY OF ROUND ROCK,
TEXAS,
That the updated Investment Policy and Investment Strategy for
the investment of City funds, attached hereto as Exhibit "A" and
incorporated herein, is hereby approved and adopted.
The City Council hereby finds and declares that written notice
of the date, hour, place and subject of the meeting at which this
Resolution was adopted was posted and that such meeting was open to
the public as required by law at all times during which this
Resolution and the subject matter hereof were discussed, considered
and formally acted upon, all as required by the Open Meetings Act,
Chapter 551, Texas Government Code, as amended.
RESOLVED this 9th day of November, 2004 .
WE L, Mayor
City of Round Rock, Texas
CHRISTINE R. MARTINEZ, City Secreta y
QPFDesktop\::ODMA/WORLDOX/O:/WDOX/RESOLUTI/R41109A1.WPD/sc
Proposed Changes to Investment Policy.
SECTION CHANGED: PAGE#
1. Addendum A Delete Bank of America Securities 17
Replace with new broker/dealer
2. Addendum A Add JP Morgan Securities Inc. 17
3. Addendum A Add Duncan-Williams, Inc 17
EXHIBIT
_A"
Pagel
City of Round Rock, Texas
Investment Policy
November 9, 2004
Invpol2004
City of Round Rock,Texas
Investment Policy
November 9, 2004
Section Page
I. Introduction................................................................................. 3
H. Scope and Legal Requirements................................................... 3
Scope
State Statute
Delegation of Authority
III. Investment Objectives ................................................................ 4
Safety of Principal
Maintenance of Adequate Liquidity
IV. Standard of Care ......................................................................... 5
V. Investment Strategy.................................................................... 5
VI. Authorized Investments .............................................................. 5
Authorized Investments
Unacceptable Investments
Protection of Principal
Diversification by Investment Type
Diversification by Investment Maturity
VII. Relationships With Financial Institutions and Firms .................. 8
Depositories
Selection and Compliance of Investment Providers
VIII. Custodial Safekeeping ................................................................ 9
IX. Depository and Contractual Trading Requirements ................... 10
Wire Transfer Authorizations
Collateralization Requirement
X. Portfolio Valuation and Reporting ............................................. 10
Reporting
Internal Controls
External Audit
XI. Quality and Capability of Investment Management ................... 12
Training
Limitation of Liability
Ethics
XII. Review and Amendment ............................................................ 12
XIII. Conclusion .................................................................................. 12
Appendix
Investment Strategy ............................................................................... 13
AddendumA ........................................................................................ 17
Page 2
City of Round Rock, Texas
Investment Policy
November 9, 2004
Ym not as concerned about the return on my principal as I am about the return of my
principal."
Will Rogers
I. Introduction
The Investment Policy of the City of Round Rock, Texas, is adopted in accordance with Chapter
2256, Texas Government Code, the Public Funds Investment Act. This Policy establishes
guidelines for the Investment Officers with regard to how City funds will be invested. This
Policy also establishes guidelines for periodic review and reporting of the investments.
II. Scope And Legal Requirements
A. Scope
This Investment Policy for the City of Round Rock, Texas applies to the financial assets of all
funds, including the following City funds:
1) General Fund
2) Special Revenue Funds
3) Debt Service Funds
4) Capital Project Funds
5) Enterprise Funds
6) Internal Service Funds
7) Trust and Agency Funds
8) Reserve Fund
9) Any new funds created by the City and any funds managed by the City of Round
Rock, Texas, as trustee or agency, unless exempted by law. In addition to this Policy, bond
Page 3
funds established by bond ordinances shall be managed by their governing ordinances and
all applicable State and Federal Law.
B. State Statute
All funds covered by this Investment Policy shall be invested in accordance with the Public
Funds Investment Act of 1987 as amended from time to time. (Texas Government Code, Ch.
2256.)
C. Delegation of Authority
The Director of Finance, the Financial Programs Manager, and the Treasury & Finance
Supervisor are hereby designated as the Investment Officers of the City of Round Rock,Texas,
and are responsible for investment decisions and activities consistent with this Investment
Policy.
The Investment Officers shall be responsible for all transactions and compliance with the
internal controls, insure all safekeeping, custodial, and collateral duties consistent with this
Investment Policy, as well as establishing and maintaining written procedures for cash
management. The Investment Officers shall maintain timely, accurate and systematic records of
all investments, maturities and earnings. Bonding of all staff with financial signatory authority
is required and such bonding requirements will also apply to those individuals authorized to
place, purchase or sell investment instruments. Bonding will protect the public against loss from
possible embezzlement and malfeasance.
III. Investment Objectives
A. Safety of Principal
The primary objective of all investment activity is the preservation of capital and the safety of
principal in the overall portfolio. Each investment transaction shall seek to ensure first that
capital losses are avoided, whether they have resulted from securities defaults or erosion of
market value.
With foremost emphasis on safety of principal (i.e. avoidance of capital losses), the Investment
Officers will ensure that preservation of capital and protection of principal in the overall
portfolio is maintained. Speculation is prohibited.
Page 4
B. Maintenance of Adequate Liquidity
The investment portfolio will remain sufficiently liquid to meet the cash flow requirements that
might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities
with anticipated cash flow requirements; investing in securities with active secondary markets;
and maintaining appropriate portfolio diversification.
IV. Standard of Care
Investments shall be made with judgment and care, under prevailing circumstances, that a
person of prudence, discretion and intelligence would exercise in the management of the
person's own affairs, not for speculation, but for investment, considering the probable safety of
capital and the probable income to be derived. The standard of care shall be applied to the
context of managing the overall portfolio.
V. Investment Strategy
In conjunction with the annual Policy review, the City Council shall review the separate written
investment strategy for each of the City's funds. The investment strategy must describe the
investment objectives for each particular fund according to the following priorities:
1) Investment suitability,
2) Preservation and safety of principal,
3) Liquidity,
4) Marketability prior to maturity of each investment,
5 Diversification and
6) Yield.
VI. Authorized Investments
A. Authorized Investments
The following is a list of authorized and legal investment options:
1) Obligations of the United States or its agencies and instrumentalities;
Page 5
2) Direct obligations of the State of Texas or its agencies and instrumentalities;
3) Other obligations the principal and interest of which are unconditionally guaranteed or
insured by, or backed by the full faith and credit of, the State of Texas or the United States or
their respective agencies and instrumentalities;
4) Obligations of states agencies, counties, cities and other political subdivisions of any state
rated as to investment quality by a nationally recognized investment rating firm not less than"A"
or its equivalent.
5) Certificates of Deposit as authorized under Section 2256.010 Public Funds Investment Act.
6) Repurchase Agreements which are fully collateralized and are as authorized under Section
2256.011 Public Funds Investment Act.
7) Commercial Paper as authorized under Section 2256.013 Public Funds Investment Act.
8) No-Load Money Market Mutual Funds as authorized under Section 2256.014 Public Funds
Investment Act.
9) Investment Pools as authorized under Section 2256.016 Public Funds Investment Act and,
provided the Investment Pools are in compliance with the requirements of the Public Funds
Investment Act and,provided objectives of the pool include a stable net asset value of$1.00.
B. Unacceptable Investments
This Policy bestows the authority upon the Investment Officer to determine certain investment
instruments as unsuitable for the City even though those investments may be authorized by this
Policy and/or the Public Funds Investment Act. Additionally, certain investments are expressly
prohibited by the Public Funds Investment Act.
An investment that requires a minimum rating under this Policy and/or the Public Funds
Investment Act does not qualify as an authorized investment during the period the investment
does not have the minimum rating. The City shall take all prudent measures that are consistent
with its Investment Policy to liquidate an investment that does not have the minimum rating.
C. Protection of Principal
The City shall seek to control the risk of loss due to the failure of a security issuer or grantor.
Such risk shall be controlled by investing only in the safest types of securities as defined in this
Policy; by qualifying the broker, dealer and financial institution with whom the City will
Page 6
transact; by collateralization as required by law; and through portfolio diversification by maturity
and type.
The purchase of individual securities shall be executed "delivery versus payment" through the
City's safekeeping agent. By so doing, City funds are not released until the City has received,
through the safekeeping agent, the securities purchased.
D. Diversification by Investment Type
Diversification by investment type is primarily intended to reduce the credit risk inherent to a
particular issuer or investment type. The City will diversify its investments by security type and
institution. With the exception of U.S. Treasury securities and authorized pools, and the
percentage limitations listed below, no more than 50% of the City's total investment portfolio
will be invested in a single security type or with a single financial institution.
Investment Tyne Portfolio Limitation
1) U.S. Government Agencies and Instrumentalities 50%
2) States and their Agencies, Counties, Cities and 35%
Other Political Subdivisions of a State.....
3) Commercial Paper .................................... 20%
Bond proceeds may be invested in a single security or investment if the Investment Officers
determine that such an investment is necessary to comply with Federal arbitrage restrictions or to
facilitate arbitrage recordkeeping and calculation.
E. Diversification by Investment Maturity
In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not
exceed the anticipated cash flow requirements of the funds. Maturity guidelines by fund are as
follows:
1) Operating Funds
Maturity Limitation: The weighted average days to maturity for the operating fund portfolio
shall be less than 300 days and the maximum allowable maturity shall be three years.
2) Capital Project Funds
Maturity Limitation: Funds used for construction programs have reasonably predictable draw
down schedules. Therefore, investment maturities shall generally follow the anticipated cash
flow requirements. Bond proceeds (excluding reserve and debt service funds) shall generally be
Page 7
limited to the cash flow requirements or the "temporary period" as defined by Federal tax law.
During the temporary period bond proceeds may be invested at an unrestricted yield. After the
expiration of the temporary period, bond proceeds subject to yield restriction shall be invested
considering the anticipated cash flow requirements of the funds and market conditions to
achieve compliance with the applicable regulations.
3) Debt Service Funds
Debt Service Funds shall be invested to ensure adequate funding for each consecutive debt
service payment.
Maturity Limitation: The Investment Officers shall invest in such a manner as not to exceed an
"unfunded" debt service date with the maturity of any investment. An unfunded debt service
date is defined as a coupon or principal payment date that does not have cash or investment
securities available to satisfy said payment.
4) Debt Service Reserve Funds
Market conditions, Bond Ordinance constraints and Arbitrage regulation compliance will be
considered when formulating Reserve Fund strategy.
Maturity Limitation: Maturities shall generally not exceed the call provisions of the Bond
Ordinance and shall not exceed the final maturity of the bond issue. All Debt Service Reserve
Fund investment maturities shall not exceed five years.
City funds that are considered "bond proceeds" for arbitrage purposes will be invested using a
more conservative approach than the standard investment strategy when arbitrage rebate rules
require refunding excess earnings. All earnings in excess of the allowable arbitrage earnings
will be made available for any necessary payments to the U.S. Treasury,
VII. Relationships With Financial Institutions and Firms
A. Depositories
Depositories shall be selected through the banking service procurement process, which shall
include a formal request for proposals no less than every five (5) years. In selecting the
depository, the creditworthiness of institutions shall be considered and the Investment Officers
shall conduct a comprehensive review of prospective depositories' credit characteristics and
financial history. The City depository contract and other financial relationships for banking
services are outside the scope of this Investment Policy.
Page 8
B. Selection And Compliance Of Investment Providers
An investment firm offering to engage in an investment transaction with the City must execute a
written instrument stating that the qualified representative has received and thoroughly reviewed
the Investment Policy of the City. The qualified representative also must acknowledge that the
firm has implemented reasonable procedures and controls to preclude transactions conducted
between the City and the firm that are not authorized by the City's investment policy, except to
the extent that this authorization is dependent on an analysis of the makeup of the City's entire
portfolio, or requires an interpretation of subjective investment standards.. The Investment
Officers may not acquire or otherwise obtain any authorized investment from a person who has
not delivered to the City an instrument in substantially the form described above. The following
institutions or firms may qualify under this section:
1) Security Dealers and Dealer Banks which are the approved and designated
Dealers of the Federal Reserve Bank of New York 'Primary Dealers".
2) Security Dealers, Dealer Banks and Savings and Loans which are not designated
as "Primary Dealers"but which are approved individually by the City Council.
3) Banks and Savings and Loans Associations domiciled in the State of Texas (for
the placement of insured and collateralized certificates of deposit).
Addendum A is the list of brokers/dealers who have qualified and are hereby approved to
conduct business with the City as required by Section 2256.025 of the Public Funds Investment
Act. The qualified broker/dealer list must be reviewed and approved at least annually.
VIII. Custodial Safekeeping
To protect against potential fraud and embezzlement, investments shall be secured through third
party custody and safekeeping procedures. All security purchases and trades conducted for the
City of Round Rock will be settled and protected by the City's third party custodial agent.
The City shall contract with a third party custodial agent for the safekeeping of securities either
owned by the City as part of its investment portfolio or held as collateral to secure deposits or
repurchase agreements. The use of the Delivery Versus Payment (DVP) procedure will be
continually used for investment securities transactions, purchases and sales. The City shall
authorize the release of DVP funds only after its safekeeping agent has received securities or
receipt for same into the City's safekeeping account.
Safekeeping procedures shall be reviewed annually by the independent auditor.
Page 9
IX. Depository and Contractual Trading Requirements
A. Wire Transfer Authorizations
Whenever possible, the City will use pre-formatted wire transfer to restrict the transfer of funds
to pre-authorized accounts only. Dual authorization forms shall be in continual use for all wire
transfers. Secondary authorization for all wires will be required by the City.
B. Collateralization Requirement
The City, in accordance with state statute, requires all City funds held by financial institutions
above the FDIC insurable limit to be collateralized with securities pledged to the City. Those
securities shall have a market value equaling at least 102% of the market value of City funds
held and shall be placed with a third party custodial agent. Collateral may be substituted or
released only with the written authorization of an Investment Officer. Allowable collateral may
consist of those securities or instruments permitted as suitable investments under the Public
Funds Collateral Act(Texas Government Code, Ch. 2257)
Financial institutions serving as City Depositories will be required to sign a Depository
Agreement with the City. The "Security for Deposits"portion of the Agreement shall define the
City's rights to the collateral in case of default, bankruptcy or closing and shall establish a
perfected security interest in compliance with Federal and State regulations, including:
1. the Agreement must be in writing
2. the Agreement has to be executed by the Depository and the City contemporaneously with the
acquisition of the asset;
3. the Agreement must be approved by the Board of Directors or the loan committee of the
Depository and a copy of the meeting minutes must be delivered to the City;
4. the Agreement must be part of the Depository's "official record" continuously since its
execution.
X. Portfolio Valuation And Reporting
A. Reporting
As required by law, the Investment Officers shall submit a written investment report,prepared in
accordance with GAAP, signed by each Investment Officer of the City within a reasonable time
after the end of each fiscal quarter to the City Council detailing the investment position for the
previous quarter. Quarterly market values will be obtained from the City's financial advisor, or
other source believed to be reliable, in order to monitor the portfolio's position.
Page 10
1.) For pooled investments-
a. the report must state the beginning book value and market value of the pool portfolio
for the reporting period,
b. changes to the book value and market value during the reporting period
c. the ending book value and market value of the portfolio and
d. the fully accrued interest for the reporting period.
2.) For separately invested assets-
a. the report must state the book value and market value for each investment at the
beginning and end of the reporting period
b. the report also must disclose the stated maturity date for each separate investment and
c. must show the specific fund from which moneys were received to purchase the
investment.
3.) The report must state compliance of the investment portfolio with the City's Investment
Strategy and relevant provisions of the Public Funds Investment Act.
B. Internal Controls
The Investment Officers shall establish a system of internal controls,which shall be documented
in writing and reviewed periodically by the City auditors. The controls shall be designed to
prevent and control losses of public funds arising from fraud, employee error, misrepresentation
by third parties, unanticipated changes in financial markets or imprudent actions. Dual controls
of all investment activities will consistently be maintained by the Investment Officers.
The Investment Officers shall develop and maintain written administrative procedures for the
operation of the investment and cash management program, consistent with this Investment
Policy.
C. External Audit
In accordance with the Public Funds Investment Act, in conjunction with the City's annual
financial audit, a compliance audit of management controls on investments and adherence to the
City's established investment policies shall be performed. An annual review of the City's
quarterly reports will also be performed by an independent auditor with the results being
presented to the City Council.
Page 11
XI. Quality and Capability of Investment Management
A. Training
It is the City's policy to provide training required by the Public Funds Investment Act Section
2256.008(a)(2) through courses and seminars offered in compliance with the Act in order to
insure the quality and capability of the Investment Officers in making investment decisions.
B. Limitation of Liability
The Investment Officers acting in accordance with this Policy and the City's Investment
Strategy and exercising due diligence shall be relieved of personal responsibility for an
individual security's performance provided that deviations from expectations are reported in a
timely fashion and appropriate action is taken to control adverse development.
C. Ethics
The Investment Officers involved in the investment process shall refrain from personal business
activity that could conflict with proper execution of the investment program, or which could
impair their ability to make impartial investment decisions. Furthermore, in accordance with the
Public Funds Investment Act, an Investment Officer who has a personal business relationship
with a firm or is related to individuals seeking to sell to the Investment Officer must disclose
such relationships in accordance with Section 2256.005 of the Public Funds Investment Act.
XII. Review and Amendment
This Policy shall be reviewed annually by the City Council. Amendments must be approved by
the Investment Officers and adopted by the City Council.
XIII. Conclusion
The Investment Officers will adhere to this Investment Policy in all investment decisions for the
City of Round Rock, Texas. The City will review the Investment Policy every year because of
the dynamic nature of the financial markets. If changes are necessary because of changes to the
financial markets and State law,the City Council will consider the changes recommended by the
Investment Officers.
Page 12
City of Round Rock, Texas
Investment Strategy
In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not
exceed the anticipated cash flow requirements of the funds. The investment strategy for all funds
is established according to the following priorities:
1) Investment suitability,
2) Preservation and safety of principal,
3) Liquidity,
4) Marketability prior to maturity of each investment,
5) Diversification and
6) Yield.
Investment guidelines by fund-type are as follows:
1. Operating Funds
The current operating funds are used for day-to-day operating activities and, accordingly,require
short-term liquidity.
Suitability - Any investment eligible in the Investment Policy is suitable for the Operating
Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will,however, occur. By managing the weighted average
days to maturity for the Operating Funds portfolio to less than 300 days and restricting the
maximum allowable to three years,the price volatility of the overall portfolio will be minimized.
Marketability- Securities with active and efficient secondary markets are necessary in the event
of an unanticipated cash requirement. An efficient market is generally defined as a s bid-asked
price relationship being no greater than 1/4 of 1 percent of principal value.
Liquidity - Short term investment pools and money market mutual funds shall provide daily
liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. .
Reserves established in accordance with the City's cash reserves policy or designated for
specific purposes and time frames may be invested for longer terms.
Page 13
Diversification-Diversified investment maturities shall provide monthly cash flow based on the
anticipated operating needs of the City. Short term investment pools, money market mutual
funds and staggered maturities of securities shall provide timely liquidity and may be utilized.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
2. Debt Service Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Debt Service
Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Debt Service
Fund's portfolio to not exceed the debt service payment schedule, the market risk of the overall
portfolio will be minimized.
Marketability - Securities with active and efficient secondary markets are not necessary as the
event of an unanticipated cash requirement is not probable.
Liquidity - Short term investment pools and money market mutual funds shall provide daily
liquidity and may be utilized as a competitive yield alternative to fixed maturity investments.
Diversification - Short term investment pools, money market mutual funds and staggered
maturities of securities shall provide timely liquidity and may be utilized.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
3. Capital Project Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Capital
Improvement Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Capital Project
Fund's portfolio to anticipate the construction and or acquisition cash flow requirements, the
market risk of the overall portfolio will be minimized.
Page 14
Marketability- Securities with active and efficient secondary markets are necessary in the event
of an unanticipated cash requirement.
Liquidity - Funds used for construction programs have reasonably predictable draw down
schedules. Therefore, investment maturities shall generally follow the anticipated cash flow
requirements. Because of the potential for variance from the anticipated draw down schedule
and actual expenditures most investment securities shall have active and efficient secondary
markets. Investment pools and money market mutual funds are suitable for providing readily
available funds.
Diversification- Diversified investment maturities shall provide monthly cash flow based on the
anticipated operating needs of the City. Short term investment pools, money market mutual
funds and staggered maturities of securities shall provide timely liquidity and may be utilized.
Bond proceeds may be invested in a single security or investment if the Investment Officers
determine that such an investment is necessary to comply with Federal arbitrage restrictions or to
facilitate arbitrage recordkeeping and calculation.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
4. Debt Service Reserve Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Debt Service
Funds. Bond ordinance constraints and insurance company restrictions may create issue-specific
considerations in addition to the Investment Policy.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Debt Service
Reserve fund's portfolio to not exceed five years or maturity provisions or, generally, the call
provisions of the bond issue,the market risk of the overall portfolio will be minimized.
Marketability- Securities with active and efficient secondary markets are not necessary for Debt
Service Reserve funds.
Liquidity - Debt Service Reserve funds have no anticipated expenditures. Therefore, liquidity
up to the maturity date or call date is of minor importance.
Diversification - Market conditions and the arbitrage regulations influence the attractiveness of
staggering the maturity of fixed rate investments for Debt Service Reserve funds. At no time
shall the final debt service payment date of the bond issue be exceeded in an attempt to bolster
yield.
Page 15
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective. Arbitrage regulations should be heeded in investing for yield.
Page 16
Addendum A
CITY OF ROUND ROCK, TEXAS
AUTHORIZED LIST OF BROKER/DEALERS
1. First Southwest Company* *Financial Advisor
1700 Pacific Avenue, Suite 1300
Dallas, TX 75201-4652
800-575-3792
2. Citigroup Global Markets, Inc Primary Dealer
221 W. 6`h Street, Suite 1400
Austin, TX 78701
512-481-3735
3. Merrill Lynch, Inc. Primary Dealer
2121 San Jacinto, 11th Floor
Dallas, TX 75201
800-574-1610
4. JP Morgan Securities, Inc Primary Dealer
1717 Main Street, Floor LL-1
Dallas, TX 75201
800-926-0762
5. Coastal Securities
5555 San Felipe, Suite 2200
Houston, TX 77056
800-681-4121
6. Wells Fargo Brokerage Services
111 Congress Avenue, 3rd Floor
Austin, TX 78701
512-344-7415
7. Duncan-Williams, Inc.
9801 Westheimer#302
Houston, TX 77042
800-266-5652
Page 17
DATE: November 4, 2004
SUBJECT: City Council Meeting - November 9, 2004
ITEM: 10.A.1. Consider a resolution adopting an updated Investment Policy
for the investment of City funds.
Department: Finance Department
Staff Person: Cindy Demers, Finance Director
Justification: From time to time, it becomes necessary to make changes to the
City Investment Policy for legal compliance, efficiencies or
personnel authorizations. This is precisely what we are trying to
accomplish with this resolution. We are recommending changes in
brokers for the purpose of getting more competitive bids for our
investments. We hope to receive more income from the City's
investments while maintaining safety and liquidity. The Public
Funds Investment Act requires us to notify the City Council of our
proposed actions.
Funding•
Cost: N/A
Source of funds: N/A
Outside Resources: N/A
Background Information: N/A
Public Comment: N/A
EXECUTED
DOCUMENT
FOLLOWS
City of Round Rock, Texas
Investment Policy
November 9, 2004
Invpol2004
City of Round Rock, Texas
Investment Policy
November 9, 2004
Section Page
I. Introduction................................................................................. 3
II. Scope and Legal Requirements................................................... 3
Scope
State Statute
Delegation of Authority
III. Investment Objectives ................................................................ 4
Safety of Principal
Maintenance of Adequate Liquidity
IV. Standard of Care ......................................................................... 5
V. Investment Strategy .................................................................... 5
VI. Authorized Investments .............................................................. 5
Authorized Investments
Unacceptable Investments
Protection of Principal
Diversification by Investment Type
Diversification by Investment Maturity
VII. Relationships With Financial Institutions and Firms .................. 8
Depositories
Selection and Compliance of Investment Providers
VIII. Custodial Safekeeping ................................................................ 9
IX. Depository and Contractual Trading Requirements ................... 10
Wire Transfer Authorizations
Collateralization Requirement
X. Portfolio Valuation and Reporting ............................................. 10
Reporting
Internal Controls
External Audit
XI. Quality and Capability of Investment Management ................... 12
Training
Limitation of Liability
Ethics
XII. Review and Amendment ............................................................ 12
XIII. Conclusion .................................................................................. 12
Appendix
InvestmentStrategy ............................................................................... 13
AddendumA ........................................................................................ 17
Page 2
City of Round Rock, Texas
Investment Policy
November 9, 2004
"I'm not as concerned about the return on my principal as I am about the return of my
principal."
Will Rogers
I. Introduction
The Investment Policy of the City of Round Rock, Texas, is adopted in accordance with Chapter
2256, Texas Government Code, the Public Funds Investment Act. This Policy establishes
guidelines for the Investment Officers with regard to how City funds will be invested. This
Policy also establishes guidelines for periodic review and reporting of the investments.
II. Scope And Leal Requirements
A. Scope
This Investment Policy for the City of Round Rock, Texas applies to the financial assets of all
funds, including the following City funds:
1) General Fund
2) Special Revenue Funds
3) Debt Service Funds
4) Capital Project Funds
5) Enterprise Funds
6) Internal Service Funds
7) Trust and Agency Funds
8) Reserve Fund
9) Any new funds created by the City and any funds managed by the City of Round
Rock, Texas, as trustee or agency, unless exempted by law. In addition to this Policy, bond
Page 3
funds established by bond ordinances shall be managed by their governing ordinances and
all applicable State and Federal Law.
B. State Statute
All funds covered by this Investment Policy shall be invested in accordance with the Public
Funds Investment Act of 1987 as amended from time to time. (Texas Government Code, Ch.
2256.)
C. Delegation of Authority
The Director of Finance, the Financial Programs Manager, and the Treasury & Finance
Supervisor are hereby designated as the Investment Officers of the City of Round Rock, Texas,
and are responsible for investment decisions and activities consistent with this Investment
Policy.
The Investment Officers shall be responsible for all transactions and compliance with the
internal controls, insure all safekeeping, custodial, and collateral duties consistent with this
Investment Policy, as well as establishing and maintaining written procedures for cash
management. The Investment Officers shall maintain timely, accurate and systematic records of
all investments, maturities and earnings. Bonding of all staff with financial signatory authority
is required and such bonding requirements will also apply to those individuals authorized to
place,purchase or sell investment instruments. Bonding will protect the public against loss from
possible embezzlement and malfeasance.
III. Investment Objectives
A. Safety of Principal
The primary objective of all investment activity is the preservation of capital and the safety of
principal in the overall portfolio. Each investment transaction shall seek to ensure first that
capital losses are avoided, whether they have resulted from securities defaults or erosion of
market value.
With foremost emphasis on safety of principal (i.e. avoidance of capital losses), the Investment
Officers will ensure that preservation of capital and protection of principal in the overall
portfolio is maintained. Speculation is prohibited.
Page 4
B. Maintenance of Adequate Liquidity
The investment portfolio will remain sufficiently liquid to meet the cash flow requirements that
might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities
with anticipated cash flow requirements; investing in securities with active secondary markets;
and maintaining appropriate portfolio diversification.
IV. Standard of Care
Investments shall be made with judgment and care, under prevailing circumstances, that a
person of prudence, discretion and intelligence would exercise in the management of the
person's own affairs, not for speculation, but for investment, considering the probable safety of
capital and the probable income to be derived. The standard of care shall be applied to the
context of managing the overall portfolio.
V. Investment Strategy
In conjunction with the annual Policy review, the City Council shall review the separate written
investment strategy for each of the City's funds. The investment strategy must describe the
investment objectives for each particular fund according to the following priorities:
1) Investment suitability,
2) Preservation and safety of principal,
3) Liquidity,
4) Marketability prior to maturity of each investment,
5 Diversification and
6) Yield.
VI. Authorized Investments
A. Authorized Investments
The following is a list of authorized and legal investment options:
1) Obligations of the United States or its agencies and instrumentalities;
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2) Direct obligations of the State of Texas or its agencies and instrumentalities;
3) Other obligations the principal and interest of which are unconditionally guaranteed or
insured by, or backed by the full faith and credit of, the State of Texas or the United States or
their respective agencies and instrumentalities;
4) Obligations of states agencies, counties, cities and other political subdivisions of any state
rated as to investment quality by a nationally recognized investment rating firm not less than"A"
or its equivalent.
5) Certificates of Deposit as authorized under Section 2256.010 Public Funds Investment Act.
6) Repurchase Agreements which are fully collateralized and are as authorized under Section
2256.011 Public Funds Investment Act.
7) Commercial Paper as authorized under Section 2256.013 Public Funds Investment Act.
8) No-Load Money Market Mutual Funds as authorized under Section 2256.014 Public Funds
Investment Act.
9) Investment Pools as authorized under Section 2256.016 Public Funds Investment Act and,
provided the Investment Pools are in compliance with the requirements of the Public Funds
Investment Act and,provided objectives of the pool include a stable net asset value of$1.00.
B. Unacceptable Investments
This Policy bestows the authority upon the Investment Officer to determine certain investment
instruments as unsuitable for the City even though those investments may be authorized by this
Policy and/or the Public Funds Investment Act. Additionally, certain investments are expressly
prohibited by the Public Funds Investment Act.
An investment that requires a minimum rating under this Policy and/or the Public Funds
Investment Act does not qualify as an authorized investment during the period the investment
does not have the minimum rating. The City shall take all prudent measures that are consistent
with its Investment Policy to liquidate an investment that does not have the minimum rating.
C. Protection of Principal
The City shall seek to control the risk of loss due to the failure of a security issuer or grantor.
Such risk shall be controlled by investing only in the safest types of securities as defined in this
Policy; by qualifying the broker, dealer and financial institution with whom the City will
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transact; by collateralization as required by law; and through portfolio diversification by maturity
and type.
The purchase of individual securities shall be executed "delivery versus payment" through the
City's safekeeping agent. By so doing, City funds are not released until the City has received,
through the safekeeping agent, the securities purchased.
D. Diversification by Investment Type
Diversification by investment type is primarily intended to reduce the credit risk inherent to a
particular issuer or investment type. The City will diversify its investments by security type and
institution. With the exception of U.S. Treasury securities and authorized pools, and the
percentage limitations listed below, no more than 50% of the City's total investment portfolio
will be invested in a single security type or with a single financial institution.
Investment Type Portfolio Limitation
1) U.S. Government Agencies and Instrumentalities 50%
2) States and their Agencies, Counties, Cities and 35%
Other Political Subdivisions of a State.....
3) Commercial Paper .................................... 20%
Bond proceeds may be invested in a single security or investment if the Investment Officers
determine that such an investment is necessary to comply with Federal arbitrage restrictions or to
facilitate arbitrage recordkeeping and calculation.
E. Diversification by Investment Maturity
In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not
exceed the anticipated cash flow requirements of the funds. Maturity guidelines by fund are as
follows:
1) Operating Funds
Maturity Limitation: The weighted average days to maturity for the operating fund portfolio
shall be less than 300 days and the maximum allowable maturity shall be three years.
2) Capital Project Funds
Maturity Limitation: Funds used for construction programs have reasonably predictable draw
down schedules. Therefore, investment maturities shall generally follow the anticipated cash
flow requirements. Bond proceeds (excluding reserve and debt service funds) shall generally be
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limited to the cash flow requirements or the "temporary period" as defined by Federal tax law.
During the temporary period bond proceeds may be invested at an unrestricted yield. After the
expiration of the temporary period, bond proceeds subject to yield restriction shall be invested
considering the anticipated cash flow requirements of the funds and market conditions to
achieve compliance with the applicable regulations.
3) Debt Service Funds
Debt Service Funds shall be invested to ensure adequate funding for each consecutive debt
service payment.
Maturity Limitation: The Investment Officers shall invest in such a manner as not to exceed an
"unfunded" debt service date with the maturity of any investment. An unfunded debt service
date is defined as a coupon or principal payment date that does not have cash or investment
securities available to satisfy said payment.
4) Debt Service Reserve Funds
Market conditions, Bond Ordinance constraints and Arbitrage regulation compliance will be
considered when formulating Reserve Fund strategy.
Maturity Limitation: Maturities shall generally not exceed the call provisions of the Bond
Ordinance and shall not exceed the final maturity of the bond issue. All Debt Service Reserve
Fund investment maturities shall not exceed five years.
City funds that are considered "bond proceeds" for arbitrage purposes will be invested using a
more conservative approach than the standard investment strategy when arbitrage rebate rules
require refunding excess earnings. All earnings in excess of the allowable arbitrage earnings
will be made available for any necessary payments to the U.S. Treasury.
VII. Relationships With Financial Institutions and Firms
A. Depositories
Depositories shall be selected through the banking service procurement process, which shall
include a formal request for proposals no less than every five (5) years. In selecting the
depository, the creditworthiness of institutions shall be considered and the Investment Officers
shall conduct a comprehensive review of prospective depositories' credit characteristics and
financial history. The City depository contract and other financial relationships for banking
services are outside the scope of this Investment Policy.
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B. Selection And Compliance Of Investment Providers
An investment firm offering to engage in an investment transaction with the City must execute a
written instrument stating that the qualified representative has received and thoroughly reviewed
the Investment Policy of the City. The qualified representative also must acknowledge that the
firm has implemented reasonable procedures and controls to preclude transactions conducted
between the City and the firm that are not authorized by the City's investment policy, except to
the extent that this authorization is dependent on an analysis of the makeup of the City's entire
portfolio, or requires an interpretation of subjective investment standards.. The Investment
Officers may not acquire or otherwise obtain any authorized investment from a person who has
not delivered to the City an instrument in substantially the form described above. The following
institutions or firms may qualify under this section:
1) Security Dealers and Dealer Banks which are the approved and designated
Dealers of the Federal Reserve Bank of New York "Primary Dealers".
2) Security Dealers, Dealer Banks and Savings and Loans which are not designated
as "Primary Dealers" but which are approved individually by the City Council.
3) Banks and Savings and Loans Associations domiciled in the State of Texas (for
the placement of insured and collateralized certificates of deposit).
Addendum A is the list of brokers/dealers who have qualified and are hereby approved to
conduct business with the City as required by Section 2256.025 of the Public Funds Investment
Act. The qualified broker/dealer list must be reviewed and approved at least annually.
VIII. Custodial Safekeeping
To protect against potential fraud and embezzlement, investments shall be secured through third
party custody and safekeeping procedures. All security purchases and trades conducted for the
City of Round Rock will be settled and protected by the City's third party custodial agent.
The City shall contract with a third party custodial agent for the safekeeping of securities either
owned by the City as part of its investment portfolio or held as collateral to secure deposits or
repurchase agreements. The use of the Delivery Versus Payment (DVP) procedure will be
continually used for investment securities transactions, purchases and sales. The City shall
authorize the release of DVP funds only after its safekeeping agent has received securities or
receipt for same into the City's safekeeping account.
Safekeeping procedures shall be reviewed annually by the independent auditor.
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IX. Depository and Contractual Trading Requirements
A. Wire Transfer Authorizations
Whenever possible, the City will use pre-formatted wire transfer to restrict the transfer of funds
to pre-authorized accounts only. Dual authorization forms shall be in continual use for all wire
transfers. Secondary authorization for all wires will be required by the City.
B. Collateralization Requirement
The City, in accordance with state statute, requires all City funds held by financial institutions
above the FDIC insurable limit to be collateralized with securities pledged to the City. Those
securities shall have a market value equaling at least 102% of the market value of City funds
held and shall be placed with a third party custodial agent. Collateral may be substituted or
released only with the written authorization of an Investment Officer. Allowable collateral may
consist of those securities or instruments permitted as suitable investments under the Public
Funds Collateral Act(Texas Government Code, Ch. 2257)
Financial institutions serving as City Depositories will be required to sign a Depository
Agreement with the City. The "Security for Deposits"portion of the Agreement shall define the
City's rights to the collateral in case of default, bankruptcy or closing and shall establish a
perfected security interest in compliance with Federal and State regulations, including:
1. the Agreement must be in writing
2. the Agreement has to be executed by the Depository and the City contemporaneously with the
acquisition of the asset;
3. the Agreement must be approved by the Board of Directors or the loan committee of the
Depository and a copy of the meeting minutes must be delivered to the City;
4. the Agreement must be part of the Depository's "official record" continuously since its
execution.
X. Portfolio Valuation And Reporting
A. Reporting
As required by law, the Investment Officers shall submit a written investment report, prepared in
accordance with GAAP, signed by each Investment Officer of the City within a reasonable time
after the end of each fiscal quarter to the City Council detailing the investment position for the
previous quarter. Quarterly market values will be obtained from the City's financial advisor, or
other source believed to be reliable, in order to monitor the portfolio's position.
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I.) For pooled investments-
a. the report must state the beginning book value and market value of the pool portfolio
for the reporting period,
b. changes to the book value and market value during the reporting period
c. the ending book value and market value of the portfolio and
d. the fully accrued interest for the reporting period.
2.) For separately invested assets-
a. the report must state the book value and market value for each investment at the
beginning and end of the reporting period
b. the report also must disclose the stated maturity date for each separate investment and
c. must show the specific fund from which moneys were received to purchase the
investment.
3.) The report must state compliance of the investment portfolio with the City's Investment
Strategy and relevant provisions of the Public Funds Investment Act.
B. Internal Controls
The Investment Officers shall establish a system of internal controls, which shall be documented
in writing and reviewed periodically by the City auditors. The controls shall be designed to
prevent and control losses of public funds arising from fraud, employee error, misrepresentation
by third parties, unanticipated changes in financial markets or imprudent actions. Dual controls
of all investment activities will consistently be maintained by the Investment Officers.
The Investment Officers shall develop and maintain written administrative procedures for the
operation of the investment and cash management program, consistent with this Investment
Policy.
C. External Audit
In accordance with the Public Funds Investment Act, in conjunction with the City's annual
financial audit, a compliance audit of management controls on investments and adherence to the
City's established investment policies shall be performed. An annual review of the City's
quarterly reports will also be performed by an independent auditor with the results being
presented to the City Council.
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XI. Quality and Capability of Investment Management
A. Training
It is the City's policy to provide training required by the Public Funds Investment Act Section
2256.008(a)(2) through courses and seminars offered in compliance with the Act in order to
insure the quality and capability of the Investment Officers in making investment decisions.
B. Limitation of Liability
The Investment Officers acting in accordance with this Policy and the City's Investment
Strategy and exercising due diligence shall be relieved of personal responsibility for an
individual security's performance provided that deviations from expectations are reported in a
timely fashion and appropriate action is taken to control adverse development.
C. Ethics
The Investment Officers involved in the investment process shall refrain from personal business
activity that could conflict with proper execution of the investment program, or which could
impair their ability to make impartial investment decisions. Furthermore, in accordance with the
Public Funds Investment Act, an Investment Officer who has a personal business relationship
with a firm or is related to individuals seeking to sell to the Investment Officer must disclose
such relationships in accordance with Section 2256.005 of the Public Funds Investment Act.
XII. Review and Amendment
This Policy shall be reviewed annually by the City Council. Amendments must be approved by
the Investment Officers and adopted by the City Council.
XIII. Conclusion
The Investment Officers will adhere to this Investment Policy in all investment decisions for the
City of Round Rock, Texas. The City will review the Investment Policy every year because of
the dynamic nature of the financial markets. If changes are necessary because of changes to the
financial markets and State law, the City Council will consider the changes recommended by the
Investment Officers.
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City of Round Rock, Texas
Investment Strategy
In order to minimize risk of loss due to interest rate fluctuations, investment maturities will not
exceed the anticipated cash flow requirements of the funds. The investment strategy for all funds
is established according to the following priorities:
1) investment suitability,
2) Preservation and safety of principal,
3) Liquidity,
4) Marketability prior to maturity of each investment,
5) Diversification and
6) Yield.
Investment guidelines by fund-type are as follows:
1. Operating Funds
The current operating funds are used for day-to-day operating activities and, accordingly, require
short-term liquidity.
Suitability - Any investment eligible in the Investment Policy is suitable for the Operating
Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the weighted average
days to maturity for the Operating Funds portfolio to less than 300 days and restricting the
maximum allowable to three years, the price volatility of the overall portfolio will be minimized.
Marketability - Securities with active and efficient secondary markets are necessary in the event
of an unanticipated cash requirement. An efficient market is generally defined as a s bid-asked
price relationship being no greater than 1/4 of 1 percent of principal value.
Liquidity - Short term investment pools and money market mutual funds shall provide daily
liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. .
Reserves established in accordance with the City's cash reserves policy or designated for
specific purposes and time frames may be invested for longer terms.
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Diversification -Diversified investment maturities shall provide monthly cash flow based on the
anticipated operating needs of the City. Short term investment pools, money market mutual
funds and staggered maturities of securities shall provide timely liquidity and may be utilized.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
2. Debt Service Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Debt Service
Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Debt Service
Fund's portfolio to not exceed the debt service payment schedule, the market risk of the overall
portfolio will be minimized.
Marketability - Securities with active and efficient secondary markets are not necessary as the
event of an unanticipated cash requirement is not probable.
Liquidity - Short term investment pools and money market mutual funds shall provide daily
liquidity and may be utilized as a competitive yield alternative to fixed maturity investments.
Diversification - Short term investment pools, money market mutual funds and staggered
maturities of securities shall provide timely liquidity and may be utilized.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
3. Capital Project Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Capital
Improvement Funds.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Capital Project
Fund's portfolio to anticipate the construction and or acquisition cash flow requirements, the
market risk of the overall portfolio will be minimized.
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Marketability- Securities with active and efficient secondary markets are necessary in the event
of an unanticipated cash requirement.
Liquidity - Funds used for construction programs have reasonably predictable draw down
schedules. Therefore, investment maturities shall generally follow the anticipated cash flow
requirements. Because of the potential for variance from the anticipated draw down schedule
and actual expenditures most investment securities shall have active and efficient secondary
markets. Investment pools and money market mutual funds are suitable for providing readily
available funds.
Diversification - Diversified investment maturities shall provide monthly cash flow based on the
anticipated operating needs of the City. Short term investment pools, money market mutual
funds and staggered maturities of securities shall provide timely liquidity and may be utilized.
Bond proceeds may be invested in a single security or investment if the Investment Officers
determine that such an investment is necessary to comply with Federal arbitrage restrictions or to
facilitate arbitrage recordkeeping and calculation.
Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective.
4. Debt Service Reserve Funds
Suitability - Any investment eligible in the Investment Policy is suitable for the Debt Service
Funds. Bond ordinance constraints and insurance company restrictions may create issue-specific
considerations in addition to the Investment Policy.
Safety of Principal - All investments are to be of high quality instruments with no perceived
default risk. Market price fluctuations will, however, occur. By managing the Debt Service
Reserve fund's portfolio to not exceed five years or maturity provisions or, generally, the call
provisions of the bond issue, the market risk of the overall portfolio will be minimized.
Marketability- Securities with active and efficient secondary markets are not necessary for Debt
Service Reserve funds.
Liquidity - Debt Service Reserve funds have no anticipated expenditures. Therefore, liquidity
up to the maturity date or call date is of minor importance.
Diversification - Market conditions and the arbitrage regulations influence the attractiveness of
staggering the maturity of fixed rate investments for Debt Service Reserve funds. At no time
shall the final debt service payment date of the bond issue be exceeded in an attempt to bolster
yield.
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Yield - Attaining a competitive market yield for comparable security-types and portfolio
restrictions is the desired objective. The comparative yield of a like-term treasury bill shall be
the minimum yield objective. Arbitrage regulations should be heeded in investing for yield.
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Addendum A
CITY OF ROUND ROCK, TEXAS
AUTHORIZED LIST OF BROKER/DEALERS
1. First Southwest Company* *Financial Advisor
1700 Pacific Avenue, Suite 1300
Dallas, TX 75201-4652
800-575-3792
2. Citigroup Global Markets, Inc Primary Dealer
221 W. 6th Street, Suite 1400
Austin, TX 78701
512-481-3735
3. Merrill Lynch, Inc. Primary Dealer
2121 San Jacinto, 1 lth Floor
Dallas, TX 75201
800-574-1610
4. JP Morgan Securities, Inc Primary Dealer
1717 Main Street, Floor LL-1
Dallas, TX 75201
800-926-0762
5. Coastal Securities
5555 San Felipe, Suite 2200
Houston, TX 77056
800-681-4121
6. Wells Fargo Brokerage Services
111 Congress Avenue, 3rd Floor
Austin, TX 78701
512-344-7415
7. Duncan-Williams, Inc.
9801 Westheimer#302
Houston, TX 77042
800-266-5652
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