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CITY COUNCIL AGENDA ITEM NO. 10

Meeting Date: April 27, 2004

Subject/Title: Approve a resolution amending Council Policy 10-4, City of Brentwood Investment Policy

Prepared by: Gail Leech, Management Analyst

Submitted by: Pamela Ehler, Director of Finance and Information Systems

RECOMMENDATION
Approve a resolution amending Council Policy 10-4, City of Brentwood Investment Policy.

PREVIOUS ACTION
On October 22, 1991, the City Council adopted an Investment Policy that set parameters for the types of investments the City may utilize for all funds (except retirement funds).

The Investment Policy is reviewed annually by the City Council at a public meeting as required by Government Code 53601(n). The Investment Policy was reviewed on October 14, 2003. Resolution No. 2992 was passed updating the City’s Investment Policy.

BACKGROUND
The Government Code 53601(n) requires the City’s Investment Policy to be reviewed annually by the City Council at a public meeting (Section XII), and delegate the investment management responsibility to the Treasurer for a one-year period. Delegation of the investment management is included within the Policy under (Section V).

This year’s annual amendment includes legislative changes to the California Government Code affecting local agency investments revised the Code’s requirements for commercial paper under section 53601(g) in two ways. First, the section was revised to replace specific references to the rating agencies with the generic term “nationally recognized statistical-rating organization (NRSRO)”. Second, the section was revised to provide specific requirements for the purchase of Asset Backed Commercial Paper (ABCP). Therefore, the section of the Investment Policy as it relates to commercial paper has been revised as follows:

Commercial Paper: Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):
(1) The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated “A” or higher by a nationally recognized statistical-rating organization (NRSRO).
(2) The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond. (C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by a nationally recognized statistical-rating organization.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their money in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.

This revised Code language should have little impact on the purchase of commercial paper; however, we have incorporated the revised language in order to remain consistent with the Code.

FISCAL IMPACT
None

Attachments
Resolution
Policy 10-4

RESOLUTION NO.

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BRENTWOOD TO AMEND COUNCIL POLICY 10-4, CITY OF BRENTWOOD INVESTMENT POLICY

WHEREAS, on October 22, 1991, the City Council adopted an Investment Policy that set parameters for the types of investments the City may utilize for all funds (except retirement funds); and

WHEREAS, the Investment Policy is reviewed annually by the City Council at a public meeting as required by Government Code 53601(n). The Investment Policy was reviewed on October 14, 2003. Resolution 2992 was passed updating the City’s Investment Policy; and

WHEREAS, the Government Code 53601(n) requires the City’s Investment Policy to be reviewed annually by the City Council at a public meeting (Section XII), and delegate the investment management responsibility to the Treasurer for a one-year period. Delegation of the investment management is included within the Policy under (Section V); and

WHEREAS, legislative changes to the California Government Code affecting local agency investments revised the Code’s requirements for commercial paper under section 53601(g) in two ways. First, the section was revised to replace specific references to the rating agencies with the generic term “nationally recognized statistical-rating organization (NRSRO)”. Second, the section was revised to provide specific requirements for the purchase of Asset Backed Commercial Paper (ABCP).

NOW, THEREFORE BE IT RESOLVED the section of the Investment Policy as relates to commercial paper has been revised as follows:

Commercial Paper: Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (MRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):
(1) The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated “A” or higher by a nationally recognized statistical-rating organization (NRSRO).
(2) The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond. (C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by a nationally recognized statistical-rating organization.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their money in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.

PASSED, APPROVED AND ADOPTED by the City Council of the City of Brentwood at a regular meeting held on the day of, 2004 by the following vote:

AYES:
NOES:
ABSENT:
ABSTAIN :

_____________________________
Brian Swisher
Mayor

ATTEST:

__________________________________
Karen Diaz, CMC
City Clerk/Director of Administrative Services

1. Introduction
The purpose of this document is to identify various policies and procedures that enhance opportunities for a prudent and systematic investment policy and to organize and formalize investment-related activities.
The investment policies and practices of the City of Brentwood are based on state law and prudent money management. All funds will be invested in accordance with the City of Brentwood's Investment Policy, and California Government Code Sections 53601, 53601.1, 53601.5, 53635 and 53635.5. The investment of bond proceeds will be further restricted by the provisions of relevant bond documents.

2. Scope
It is intended that this policy cover all funds (except retirement funds) and investment activities under the direction of the Brentwood City Council.

3. Prudence
Investments shall be made with judgment and care—under circumstances then prevailing—which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.

The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

4. Objectives
The primary objectives, in priority order, of the investment activities of the City of Brentwood shall be:

4.1 Safety. Safety of principal is the foremost objective of the investment program. Investments of the City of Brentwood shall be undertaken in a manner that seeks to ensure preservation of capital in the portfolio.

4.2 Liquidity. The investment portfolio of the City of Brentwood will remain sufficiently liquid to enable the City to meet its cash flow requirements.

4.3 Return On Investment. The investment portfolio of the City of Brentwood shall be designed with the objective of attaining a market rate of return on its investments consistent with the constraints imposed by its safety objective and cash flow considerations.

5. Delegation of Authority
The management responsibility for the investment program is hereby delegated to the Treasurer for a one-year period, subject to review and renewable annually. The Treasurer shall monitor and review all investments for consistency with this investment policy. No person may engage in an investment transaction except as provided under the limits of this policy. The Treasurer may delegate its investment decision making and execution authority to an investment advisor. The advisor shall follow the policy and such other written instructions as are provided.

6. Ethics and Conflict of Interest
Officers and employees involved in the investment process shall refrain from personal business activities that could conflict with proper execution of the investment program, or which could impair their ability to make impartial decisions.

7. Permitted Investment Instruments
7.1 U.S. Treasuries: Government obligations for which the full faith and credit of the United States are pledged for the payment of principal and interest.

7.2 U.S. Agency Obligations: Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.

7.2.1 Any mortgage pass through security issued and guaranteed by a Federal Agency with a maximum final maturity of five years. Purchase of securities authorized by this subdivision may not exceed 20 percent of the City's surplus money.

7.3 California State & Local Agency Obligations: Obligations of the State of California or any local agency within the state, including bonds payable solely out of revenues from a revenue-producing property owned, controlled or operated by the state or any local agency or by a department, board, agency or authority of the state or any local agency; provided that the obligations are rated in one of the two highest categories by Moody's or Standard and Poor's.

7.4 Repurchase Agreements: Repurchase Agreements used solely as short-term investments not to exceed 90 days.

The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities as described in 1 and 2 will be acceptable collateral. All securities underlying Repurchase Agreements must be delivered to the City's custodian bank versus payment or be handled under a tri-party repurchase agreement. The total of all collateral for each Repurchase Agreement must equal or exceed, on the basis of market value plus accrued interest, 102 percent of the total dollar value of the money invested by the City of Brentwood for the term of the investment. For any Repurchase Agreement with a term of more than one day, the value of the underlying securities must be reviewed on a regular basis.
Market value must be calculated each time there is a substitution of collateral.

The City of Brentwood or its trustee shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to Repurchase Agreement.

The City of Brentwood may enter into Repurchase Agreements with (1) primary dealers in U.S. Government securities who are eligible to transact business with, and who report to, the Federal Reserve Bank of New York, and (2) California and non-California banking institutions having assets in excess of $1 billion and in the highest short-term rating category as provided by Moody's Investors Service, Inc. or Standard & Poor's Corporation.

The City of Brentwood will have specific written agreements with each firm with which it enters into Repurchase Agreements.

7.5 Reverse Repurchase Agreements: Reverse repurchase agreements will not be allowed without the prior approval of the City Council. If a reverse repurchase agreement is approved, the following guidelines will be applied: The City may invest in reverse repurchase agreements only with "primary dealers" with which the City has entered into a master repurchase agreement contract. The City may invest in reverse repurchase agreements with the following conditions: The City may only use reverse repurchase agreements to (1) cover a temporary cash shortage, or (2) augment earnings. Reverse repurchase agreements may not be used to leverage the portfolio.

In addition, if a reverse repurchase agreement is authorized, it may be utilized only if the security to be sold on reverse repurchase agreement has been owned and fully paid for by the City for a minimum of 30 days prior to the sale; the total of all reverse repurchase agreements on investments owned by the City does not exceed 20% of the portfolio; and the agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of the security using a reverse repurchase agreement and the final maturity date of the same security. The proceeds of the reverse repurchase agreement may not be invested in securities whose maturity exceeds the term of the Reverse Repurchase Agreement.
7.6 Bankers' Acceptances: Bankers' Acceptances issued by domestic or foreign banks, which are eligible for purchase by the Federal Reserve System, the short-term paper of which is rated in the highest category by Moody's Investors Services or by Standard & Poor's Corporation.

Purchases of Banker's Acceptances may not exceed 180 days maturity or 40 percent of the City of Brentwood's investment portfolio. No more than 10 percent of the City's investment portfolio may be invested in the Banker's Acceptances of any one commercial bank.

7.7 Commercial Paper: Commercial paper rated in the highest short-term rating category, as provided by Moody's Investors Service, Inc. or Standard & Poor's Corporation; or Fitch Financial Services, Inc., provided that the issuing corporation is organized and operating within the United States, has total assets in excess of $500 million and has an "A" or higher rating for its long-term debt, if any, as provided by Moody's or Standard & Poor's.

Purchases of eligible commercial paper may not exceed 180 days maturity nor represent more than 10 percent of the outstanding paper of an issuing corporation.

Purchases of commercial paper may not exceed 25 percent of the City's investment portfolio.

7.7 Commercial Paper: Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical-rating organization (MRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or paragraph (2):
(1) The entity meets the following criteria: (A) Is organized and operating in the United States as a general corporation. (B) Has total assets in excess of five hundred million dollars ($500,000,000). (C) Has debt other than commercial paper, if any, that is rated “A” or higher by a nationally recognized statistical-rating organization (NRSRO).
(2) The entity meets the following criteria: (A) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (B) Has program wide credit enhancements, including, but not limited to, over collateralization, letters of credit or surety bond. (C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by a nationally recognized statistical-rating organization.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their money in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.

7.8 Medium-Term Notes: Medium-term corporate notes defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the U.S. or any state and operating within the U.S. Medium-term notes shall be rated in a rating category "AA-" or its equivalent or better by a nationally recognized rating service. Purchase of medium-term corporate notes may not exceed 30 percent of the City's investment portfolio.

7.9 Time Deposits: FDIC insured or fully collateralized time certificates of deposit in financial institutions located in California, including U.S. branches of foreign banks licensed to do business in California. All time deposits must be collateralized in accordance with the California Government Code section 53561, either at 150% by promissory notes secured by first mortgages and first trust deeds upon improved residential property in California eligible under section (m) or at 110% by eligible marketable securities listed in subsections (a) through (l) and (n) and (o).

Purchase of time deposits shall not exceed 25% of the City's investment portfolio.

7.10 Negotiable Certificates of Deposit: Negotiable certificates of deposit or deposit notes issued by a nationally or state-chartered bank or a state or federal savings and loan association or by a state-licensed branch of a foreign bank; provided that the senior debt obligations of the issuing institution are rated "AA" or better by Moody's or Standard & Poor's.

Purchase of negotiable certificates of deposit may not exceed 30 percent of the City of Brentwood's investment portfolio.

7.11 State of California's Local Agency Investment Fund: The City may invest in the Local Agency Investment Fund (LAIF) established by the State Treasurer for the benefit of local agencies. The City may invest up to the maximum permitted under Section 16429.1 of the Government Code ($40,000,000).The LAIF portfolio should be reviewed periodically.
7.12 Insured Savings Account or Money Market Account
7.13 California Asset Management Program

7.14 Money Market Funds: Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S. C. Sec. 80a-1, et seq.). The company must have met either of the following criteria: (1) attained the highest ranking letter and numerical rating provided by not less than two nationally recognized rating services or (2) have an investment advisor registered with the Securities and Exchange Commission with not less than five years' experience managing money market mutual funds with assets under management in excess of $500,000,000.

The purchase price of shares shall not exceed 15 percent of the investment portfolio of the City of Brentwood.

Credit criteria listed in this section refers to the credit of the issuing organization at the time the security is purchased. The maximum percentage limitations apply at the time of purchase.

8. Prohibited Investments
The City may only invest in those obligations authorized by this policy and shall not invest any funds in inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages, or in any security that could result in zero interest accrual if held to maturity.

9. Maximum Maturity
Investment maturities shall be based on a review of cash flow forecasts. Maturities will be scheduled so as to permit the City of Brentwood to meet all projected obligations.
Unless otherwise noted within this investment policy, the City may not invest in a security that exceeds five (5) years from the date of purchase.

10. Reporting Requirements
The City Treasurer or outside Investment Advisor shall generate and present to the Brentwood City Council monthly reports for accounting and management purposes. Required elements of this report will include:
 Description of investment instrument
 Interest rate or yield to maturity
 Purchase date
 Maturity date
 Purchase price
 Par value
 Current market value as of the date of the report and the source of this valuation
 Portfolio average duration
 Overall portfolio yield based on cost
 List of all transactions during the past month
On a quarterly basis, within 30 days following the end of the quarter, a quarterly report will be prepared and rendered to the Brentwood City Council. This report will provide data similar to the monthly data as well as any narrative necessary for clarification. Also, the quarterly report shall state compliance of the portfolio to the statement of investment policy, or manner in which the portfolio is not in compliance. In addition, the City Treasurer will include in this report a statement denoting the ability of the City to meet its expenditure requirements for the next six months, or provide an explanation as to why sufficient money shall, or may, not be available.

11. Safekeeping and Custody
The assets of the City of Brentwood shall be secured through the third-party custody and safekeeping procedures. Bearer instruments shall be held only through third-party institutions. Collateralized securities such as repurchase agreements shall be purchased using the delivery vs. payment procedure.

12. Annual Review of Policy
The Treasurer shall annually render to the City Council this Statement of Investment Policy, which shall be considered at a public meeting. Any changes in the policy shall also be considered by the City Council at a public meeting.

City Administration
City of Brentwood City Council
150 City Park Way
Brentwood, CA 94513
(925) 516-5440
Fax (925) 516-5441
E-mail allcouncil@brentwoodca.gov