(1) Scope of policy: The Lexington-Fayette Urban County Government, hereinafter referred to as "Government," maintains a variety of funds for accounting and budgetary purposes. The funds include those used to finance the general operations of the government and its proprietary activities, reserves established to insure the government against risk, reserves established related to debt issuance by bonding ordinances for debt service and capital improvements, and funds held by the government as an agent for other organizations.
(a) All funds of the government, except the retirement funds, are covered by this policy including the following:
(i) General Services Fund;
(ii) Full Urban Services Fund;
(iii) Special Revenue Funds including grant funds;
(iv) Fayette County Detention Center Corporation;
(v) Capital Project Funds;
(vi) Sanitary Sewer System;
(vii) Public Facilities Corporation;
(viii) Public Parking Corporation;
(ix) The self insurance funds.
(b) The following retirement funds are not covered by this policy because they are managed by their respective boards which are established by Kentucky Revised Statutes:
(i) The Policemen's and Firefighters' Retirement Fund (KRS 67A.360 et seq.);
(ii) The City Employees' Pension Fund (KRS 67A.320 and KRS 67A.350).
(2) Investment objectives and considerations: It is the policy of the government to invest funds in a manner which will provide the highest investment return with the maximum security of principal while meeting the daily cash flow demand of the government. These objectives should consider the following objectives:
(a) Safety of capital: Safety of capital is the primary objective of the government. Each investment transaction shall seek to ensure that capital losses are avoided, whether they be from security defaults or erosion of market value. Therefore, funds will be deposited and invested without undue exposure to credit risk.
(b) Liquidity: Funds will be available when needed for disbursement and will be invested without undue exposure to market risk or maturity risk.
(c) Yields: Funds which are not immediately needed for operations will be invested in interest earning investments. The investment of the government shall be designed to attain a market-average rate of return, taking into account the government's investment risk constraints and cash flow requirements.
(d) Legality: Funds will be deposited and invested in accordance with statutes, ordinances, bond indentures and internal procedures governing the specific funds.
(3) Delegation of investment authority: The department of finance is responsible for the custody, investment and disbursement of all funds of the government in accordance with the procedures and standards adopted by the urban county council. The commissioner of finance shall have the authority to establish additional specific written procedures and policies for the operation of the investment program which are consistent with the adopted investment policy. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the commissioner of finance. The mayor may sign contracts for investment services which conform to this policy and which are necessary for the implementation of this policy. The commissioner of finance shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials and employees. 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 by officers or employees.
(4) Statement of prudence: The standard of prudence to be applied by investment officials shall be the "prudent person" rule, which is defined to mean "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 capital as well as the probable income to be derived." The prudent investor standard shall be applied in the context of managing the overall portfolio.
(5) Pooling of funds: Investment efficiencies may be realized if cash is pooled: A higher rate of interest may be obtained from investing one (1) large sum of money than investing several small sums of money. Because of these efficiencies and to the extent that there are not legal restrictions, funds accounted for separately may be pooled for investment purposes.
(6) Eligible investments: The funds of the government will be invested in accordance with this policy and all applicable state statutes only in the following types of investment instruments:
(a) Obligations of the United States and of its agencies and instrumentalities, including obligations subject to repurchase agreements, provided that delivery of these obligations subject to repurchase agreements is taken either directly or through an authorized custodian subject to the limitations listed in subsection (7)(c);
(b) Obligations and contracts for future delivery or purchase of obligations backed by the full faith and credit of the United States or a United States government agency, including but not limited to:
(i) United States Treasury;
(ii) Export-Import Bank of the United States;
(iii) Farmers Home Administration;
(iv) Government National Mortgage Corporation; and
(v) Merchant Marine bonds.
(c) Obligations of any corporation of the United States government, including but not limited to:
(i) Federal Home Loan Mortgage Corporation;
(ii) Federal Farm Credit Banks;
(iii) Banks for Cooperatives;
(iv) Federal Intermediate Credit Banks;
(v) Federal Land Banks;
(vi) Federal Home Loan Banks;
(vii) Federal National Mortgage Association; and
(viii) Tennessee Valley Authority.
(d) Certificates of deposit issued by or other interest-bearing accounts of any bank or savings and loan institution which are insured by the Federal Deposit Insurance Corporation or similar entity or which are collateralized, to the extent uninsured, by any obligations, including surety bonds, permitted by KRS 41.240(4);
(e) Bankers' acceptances for banks rated in one (1) of the three (3) highest categories by a nationally recognized rating agency;
(f) Commercial paper rated in the highest category by a nationally recognized rating agency;
(g) Bonds or certificates of indebtedness of the Commonwealth of Kentucky and of its agencies and instrumentalities;
(h) Securities issued by a state or local government, or any instrumentality or agency thereof, in the United States, and rated in one (1) of the three (3) highest categories by a nationally recognized rating agency; and
(i) Shares of mutual funds, each of which shall have the following characteristics:
(i) The mutual fund shall be an open-end diversified investment company registered under the Federal Investment Company Act of 1940, as amended;
(ii) The management company of the investment company shall have been in operation for at least five (5) years; and
(iii) All of the securities in the mutual fund shall be eligible investments under this section.
(7) Investment limitations: With regard to the eligible investments, the following limitations shall apply:
(a) The combined investments at any one time in the categories of the investments authorized in subsections (6)(e), (6)(f), and (6)(h) shall not exceed twenty (20) percent of the total invested funds;
(b) No investment shall be purchased on a margin or through the use of any similar leveraging technique;
(c) Repurchase agreements are to be entered into only with primary dealers. Primary dealers include banks which are members of the Federal Reserve, SEC-registered broker-dealers and those government security dealers included in the "List of Government Securities Dealers Reporting to the Market Reports Division of the Federal Reserve Bank of New York (NY Fed)". The securities held as collateral for repurchase agreements shall be held in safekeeping by an independent third-party custodian in the name of the government. The securities serving as collateral will be marked to market periodically to ensure they have not fallen below the required collateralization level.
(8) Diversification of investments: The government recognizes that investment risk can result from changes in credit quality underlying a security, issuer defaults, market price changes or temporary liquidity problems. In order to reduce investment risk while attaining market average rates of return, it is the policy of the government to diversify its investment portfolio with respect to the type of securities in the portfolio, the concentration of investments held by with any financial institution, and the length of maturities of investments.
(a) In order to reduce credit risk, the following principles will be pursued:
(i) The investments held by a financial institution, excluding that held in a money market mutual fund should be limited to no more than thirty-five (35) percent of the total investments.
(ii) Financial institutions and brokers wishing to conduct business with the government shall annually submit audited financial reports to the government.
(iii) In the event of significant changes in credit quality of an issuer of a security, the financial institution holding the security, or with the custodian of the security, the commissioner of finance shall review and, if appropriate, proceed to liquidate securities.
(b) In order to ensure liquidity and reduce market and maturity risk, the following actions and principles will be pursued:
(i) Weekly, monthly, and annual cash flow forecasts, based on reasonable knowledge of future fiscal events and historical fiscal trends, will be developed by the department of finance. Investment lengths will be based on these forecasts so that cash may be available to meet anticipated expenditures.
(ii) Market price volatility should be controlled through maturity diversification.
(iii) Yields on investments will be monitored and compared to that currently available in the market. In the event that current market yields are higher than that of current investments and the cost of liquidating current investments are relatively small when compared to potential interest earnings, the commissioner of finance may liquidate securities prior to maturity.
(iv) In the event that there are unanticipated disruptions of cash flows which create liquidity problems for the government, the commissioner of finance may liquidate securities prior to maturity.
(9) Selection of financial institutions and broker-dealers: In selecting financial institutions, the credit-worthiness of the institution shall be considered. Banks and savings and loan associations seeking to be eligible for the government's certificate of deposit purchase program, security transactions, repurchase agreements and safekeeping agreements shall annually submit to the government audited financial statements and regulatory reports on financial condition. For broker-dealers of securities not associated with a bank, the government may select only primary government securities dealers that report daily to the New York Federal Reserve Bank, unless a credit and capitalization analysis conducted by or on behalf of the department of finance reveals that other firms are adequately financed to conduct public business. In all cases the broker-dealer must provide proof of certification and state registration by the National Association of Security Dealers.
(10) Safekeeping and collateralization: All investment securities purchased by the government shall be held in third-party safekeeping by an institution designated as primary agent. All cash deposits in excess of FDIC insurable amounts and investments maintained by any financial institution will be collateralized. Collateralized securities shall be purchased using the delivery versus payment procedure. Collateral shall be marked to market periodically.
(11) Reporting requirements: The department of finance will generate daily, monthly and annual reports for management purposes and will submit quarterly status reports to the urban county council. The performance of the investments shall be reported to the urban county council annually. Investments and conformity to this investment policy will be reviewed annually by the independent auditor.
(Ord. No. 248-94, § 1, 12-8-94; Ord. No. 11-95, § 1, 1-26-95; Ord. No. 161-98, § 1, 6-25-98)