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R-98-09-24-10B1 - 9/24/1998RESOLUTION NO. R- 98- 09- 24 -10B1 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 attached updated investment policy for the investment of City funds 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, and the Act. RESOLVED this 24th day of September, 1998. ATTEST: K:\ WPOOCS \RESOLUTI \R80924B1.WPD /scg LAND, City Secretary CHARLES CULPPPER, Mayor City of Round Rock, Texas invpol4Ei City of Round Rock, Texas Investment Policy September 25, 1997 24.1998 I City of Round Rock, Texas Investment Policy September 24. 1998 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 9 Depositories Selection and Compliance of Investment Providers VIII. Custodial Safekeeping 10 IX. Depository and Contractual Trading Requirements 10 Wire Transfer Authorizations Collateralization Requirement X. Portfolio Valuation and Reporting 11 Reporting Internal Controls External Audit XI. Quality and Capability of Investment Management 12 Training Limitation of Liability Ethics XII. Review and Amendment 13 XIII. Conclusion 13 Appendix Investment Strategy 14 Addendum A 18 Page 2 City of Round Rock, Texas Investment Policy September 2S,199'7 24.1998 'Pm not as concerned about the return on my principal as I am about the return of my principal." I Introduction Will Rogers 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. $cope 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 Page 3 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 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 Assistant Director of Finance, the Accounting Manager, and the Accountant II 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 eamings. 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: Page 5 1) Obligations of the United States or its agencies and instrumentalities; 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. Page 6 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 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) IJ.S. Government Agencies and 35 %50% InstrumentalitiesStatcs, Agencies, Counties, Citics and Other 21 States and their Agencies. Counties. Cities and 35%2.0% Other Political Subdivisions of a State 2 } Commercial Paper 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 Page 7 Maturity Limitation: The weighted average days to maturity for the operating fund portfolio shall be less than 270 days and the maximum allowable maturity shall be two 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 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 Page 8 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. 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). Page 9 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. 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) Page 10 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 tights 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. 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. Page 11 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. 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 Page 12 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 13 1. Operating Funds 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: 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 270 days and restricting the maximum allowable to two 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 Page 14 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. 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. Page 15 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. 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. Page 16 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. 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 17 CITY OF ROUND ROCK, TEXAS AUTHORIZED LIST OF BRIO IDEALERS 1. First Southwest Company* 1700 Pacific Avenue, Suite 1300 Dallas, TX 75201 -4652 800 -575 -3792 2. Chase Securities, Inc. 700 Lavaca P.O. Box 550 Austin, TX 78789 512- 479 -2865 3. Merrill Lynch, Inc. 2121 San Jacinto, 11th Floor Dallas, TX 75201 800 -574 -1610 4. First Tennessee Bank, N.A. 5949 Sherry Lane, Suite 810 Dallas, TX 75225 800 - 804 -6309 5. Vining-Sparks. IBG 8310 Capital of Texas Hwy North. Suite 355 Austin. TX 78731 800- 314 -3170 *Financial Advisors Addendum A Primary Dealer Primary Dealer Page 18 Proposed changes to the Investment Policy and Investment Strategy are summarized below and indicated in the attached policy. Section: DATE: September 18, 1998 SUBJECT: City Council Meeting - September 24, 1998 ITEM: 10.8.1. Consider a resolution adopting an updated City of Round Rock Investment Policy and investment Strategy. In accordance with the Public Funds Investment Act, the City Council must review the City's Investment Policy annually. The Investment Policy establishes guidelines for the Investment Officers with regard to how City funds will be invested. Staff Resource Person: David Kautz, Finance Director. Diversification by Investment Type This section is being changed to incorporate the Public Funds Investment Act definition of state agency investment types. The Public Funds Investment Act is the underlying legal basis for the City's investment policy guidelines. This change is for clarity only and does not affect the City's investments. Addendum A (as Referenced by Section VII. B.) Authorized List of Broker /Dealers The authorized list of Broker /Dealers is amended to add the following brokerage firm: Vining Sparks, IBG 8310 Capital of Texas Hwy North, Suite 355 Austin, TX 78731 800 - 314 -3170 This qualified firm will be added to the list of firms providing competitive quotes for investment securities. References provided have been investigated and approved by City Staff.