(A) Scope. This investment policy applies to all financial assets of the city. These funds are accounted for in the city’s annual financial audit and include:
(1) General Fund;
(2) Special revenue funds;
(3) Debt service funds;
(4) Capital projects funds;
(5) Proprietary funds; and
(6) All other funds.
(B) Objectives.
(1) General.
(a) The city shall manage and invest its cash with four objectives, listed in order of priority: safety, liquidity, yield and public trust. The safety of the principal invested always remains the primary objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with state and local law.
(b) The city shall maintain a comprehensive cash management program that includes collection of accounts receivable, vendor payment in accordance with invoice terms and prudent investment of available cash. CASH MANAGEMENT is defined as the process of managing monies in order to ensure maximum cash availability and maximum yield on short-term investment of pooled idle cash.
(2) Safety. The primary objective of the city’s investment activity is the preservation of capital in the overall portfolio. Each investment transaction shall be conducted in a manner to avoid capital losses, whether they are from securities defaults or erosion of market value.
(3) Liquidity (PFIA, Tex. Gov’t Code § 2256.005 (b)(2)). The city’s investment portfolio shall be structured such that the city is able to meet all obligations in a timely manner. This shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets.
(4) Yield (PFIA, Tex. Gov’t Code § 2256.005 (b)(3)). The city’s cash management portfolio shall be designed with the objective of regularly exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the city’s weighted average maturity in days. The investment program shall seek to augment returns above this threshold consistent with risk limitations identified herein and prudent investment policies.
(5) Public trust. All participants in the city’s investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction which might impair public confidence in the city’s ability to govern effectively.
(C) Responsibility and control.
(1) Investment officers.
(a) Authority to manage the city’s investment program is derived from a resolution of the City Council. The Mayor is designated as Investment Officer of the city and is responsible for investment decisions and activities.
(b) The Investment Officer shall attend:
1. At least one training session relating to the officer’s responsibility under the Act within 12 months after assuming duties; and
2. A training session not less than once every two years and receive ten hours of training.
(c) Such training from an independent source shall be approved or endorsed by either the Government Finance Officers Association of Texas, the Government Treasurers Organization of Texas or the Texas Municipal League.
(2) Internal controls.
(a) The Investment Officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the city are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that:
1. The cost of a control should not exceed the benefits likely to be derived; and
2. The valuation of costs and benefits requires estimates and judgments by management.
(b) Accordingly, the Investment Officer shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. The results of this review shall be reported to the City Council. The internal controls shall address the following points:
1. Control of collusion;
2. Separation of transaction authority from accounting and record keeping;
3. Custodial safekeeping;
4. Avoidance of physical delivery securities;
5. Clear delegation of authority to subordinate staff members;
6. Written confirmation for telephone (voice) transactions for investments and wire transfers; and
7. Development of a wire transfer agreement with the depository bank or third party custodian.
(3) Prudence.
(a) The standard of prudence to be applied by the Investment Officer shall be the "prudent investor" rule, which states: "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." In determining whether an Investment Officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration:
1. The investment of all funds, or funds under the city’s control, over which the officer had responsibility rather than a consideration as to the prudence of a single investment; and
2. Whether the investment decision was consistent with the written investment policy of the city.
(b) The Investment Officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security’s credit risk or market price changes; provided that, these deviations are reported immediately and that appropriate action is taken to control adverse developments. The City Council retains the ultimate responsibility as fiduciaries of the assets of the city.
(4) Ethics and conflicts of interest.
(a) City staff 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 the ability to make impartial investment decisions. City staff shall disclose to the Investment Officer any material financial interests in financial institutions that conduct business with the city and they shall further disclose positions that could be related to the performance of the city’s portfolio. City staff shall subordinate their personal financial transactions to those of the city, particularly with regard to timing of purchases and sales.
(b) A statement by the Investment Officer required under this division (C)(4) must be filed with the State Ethics Commission and the governing body of the city if:
1. The officer has a personal business relationship with a business organization offering to engage in an investment transaction with the city (as defined in PFIA, Tex. Gov’t Code § 2256.005(i)(1-3));or
2. The officer is related within the second degree by affinity or third degree by consanguinity, as determined under Tex. Gov’t Code Ch. 573, to an individual seeking to transact investment business with the city. (PFIA, Tex. Gov’t Code § 2256.005(i)).
(D) Reporting.
(1) Quarterly reporting. The Investment Officer shall submit a signed investment report at least quarterly that summarizes current market conditions, economic developments and anticipated investment conditions. The report shall describe the portfolio in terms of investment securities, maturities, risk characteristics and shall explain the total investment return for the reporting period.
(2) Annual report. Within 60 days of the end of the fiscal year, the Investment Officer shall present an annual report on the investment program and investment activity to the City Council.
(3) Methods. The investment report provided to the City Council shall include a succinct management summary that provides a clear picture of the status of the current investment portfolio and transactions made over the reporting period. This management summary will be prepared in a manner that will allow the City Council to ascertain whether investment activities during the reporting period conformed to the investment policy. The report will include the following as maybe applicable:
(a) A listing of individual securities held at the end of the reporting period. This list will include the name of the fund or pooled group fund for which each individual investment was acquired;
(b) Unrealized gains or losses resulting from appreciation or depreciation by listing the beginning and ending book and market value of securities for the period. Market values shall be obtained from financial institutions or portfolio reporting services independent from the broker/dealer from which the security was purchased;
(c) Additions and changes to the market value during the period;
(d) Fully accrued interest for the reporting period;
(e) Average weighted yield to maturity of portfolio on entity investments as compared to applicable benchmarks;
(f) Listing of investments by maturity date;
(g) The percentage of the total portfolio which each type of investment represents; and
(h) Statement of compliance of the city’s investment portfolio with state law and the investment strategy and policy approved by the City Council.
(E) Investment portfolio.
(1) Active portfolio management. The city shall pursue an active versus a passive portfolio management philosophy. That is, securities may be sold before they mature if market conditions present an opportunity for the city to benefit from the trade. The Investment Officer will routinely monitor the contents of the portfolio, the available markets, and the relative value of competing instruments, and will adjust the portfolio accordingly.
(2) Investments. Assets of the city may be invested in the following instruments; provided, however, that, at no time shall assets of the city be invested in any instrument or security not authorized for investment under the Act, as the Act may from time to time be amended. The city is not required to liquidate investments that were authorized investments at the time of purchase.
(a) Authorized.
1. Obligations of the United States of America, its agencies and instrumentalities, which have a liquid market with a readily determinable market value;
2. Direct obligations of the state and agencies thereof;
3. Other obligations, the principal of and interest on which are unconditionally guaranteed by the state or United States of America;
4. Obligations of the states, agencies thereof, counties, cities and other political subdivisions of any state having been rated as investment quality by a nationally recognized rating firm, and having received a rating of not less than "A" or its equivalent;
5. Certificates of deposit of state and national banks domiciled in Texas, guaranteed or insured by the Federal Deposit Insurance or its successor or secured by obligations described in divisions (E)(2)(a)1. through (E)(2)(a)4. above, which are intended to include all direct agency or instrumentality issued mortgage backed securities rated AAA by a nationally recognized rating agency, or by Tex. Gov’t Code Art. 2529b-l and that have a market value of not less than the principal, amount of the certificates;
6. Fully collateralized direct repurchase agreements with a defined termination date secured by obligations of the United States or its agencies and instrumentalities pledged with a third party, selected by the Investment Officer, other than an agency for the pledgor. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a bank domiciled in Texas. A master repurchase agreement must be signed by the bank/dealer prior to investment in a repurchase agreement; and
7. Joint pools of political subdivisions in the state which invest in instruments and follow practices allowed by current law. Investment in such pools shall be limited to 15% of the city’s entire portfolio. A pool must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service.
(b) Prohibited. The city’s authorized investments options are more restrictive than those allowed by state law. State law specifically prohibits investment in the following investment securities:
1. Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal;
2. Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest;
3. Collateralized mortgage obligations that have a stated final maturity date of greater than ten years; and
4. Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.
(3) Holding period.
(a) The city intends to match the holding periods of investment funds with liquidity needs of the city. In no case will the average maturity of investments of the city’s operating funds exceed one year. The maximum final stated maturity of any investment shall not exceed five years.
(b) Investments in all funds shall be managed in such a way that the market price losses resulting from interest rate volatility would be offset by coupon income and current income received from the volume of the portfolio during a 12-month period.
(4) Risk and diversification. The city recognizes that investment risks can result from issuer defaults, market price changes or various technical complications leading to temporary illiquidity. Risk is controlled through portfolio diversification that shall be achieved by the following general guidelines.
(a) Risk of issuer default is controlled by limiting investments to those instruments allowed by the Act, which are described herein.
(b) Risk of market price changes shall be controlled by avoiding over-concentration of assets in a specific maturity sector, limitation of average maturity of operating funds investments to one year, and avoidance of over-concentration of assets in specific instruments other than U.S. Treasury securities and insured or collateralized certificates of deposits.
(c) Risk of illiquidity due to technical complications shall be controlled by the selection of securities dealers as described herein.
(F) Selection of banks and dealers.
(1) Depository. At least every three years, a depository shall be selected through the city’s banking services procurement process, which shall include a formal request for proposal (RFP). In selecting a depository, the credit worthiness of institutions shall be considered, and the Investment Officer shall conduct a comprehensive review of prospective depositories’ credit characteristics and financial history.
(2) Certificates of deposit. Banks seeking to establish eligibility for the city’s competitive certificate of deposit purchase program shall submit for review annual financial statements, evidence of federal insurance and other information required by the Investment Officer.
(3) Securities dealers.
(a) For brokers and dealers of government securities, the city shall select only those dealers reporting to the Market Reports Division of the Federal Reserve Board of New York, also known as the Primary Government Security Dealers, unless a comprehensive credit and capitalization analysis reveals that other firms are adequately financed to conduct public business. Only brokers and dealers with a Harlingen, Texas, office shall be selected. Investment officials shall not knowingly conduct business with any firm with whom public entities have sustained losses on investments. All securities dealers shall provide the city with references from public entities that they are currently serving. The Investment Officer may adopt and annually review a list of qualified brokers authorized to engage in investment transactions with the entity.
(b) All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following as appropriate:
1. Audited financial statements;
2. Proof of National Association of Securities Dealers (NASD) certification;
3. Proof of state registration;
4. Completed broker/dealer questionnaire;
5. Certification of having read the city’s investment policy, signed by a qualified representative of the organization; and
6. Acknowledgment that the organization has implemented reasonable procedures and controls in an effort to preclude imprudent investment activities arising out of investment transactions conducted between the city and the organization.
(c) QUALIFIED REPRESENTATIVE means a person who holds a position with a business organization, who is authorized to act on behalf of the business organization and who is one of the following:
1. For a business organization doing business that is regulated by or registered with a securities commission, a person who is registered under the rules of the National Association of Securities Dealers;
2. For a state or federal bank, a savings bank or a state or federal credit union, a member of the loan committee for the bank or branch of the bank or a person authorized by corporate resolution to act on behalf of and bind the banking institution; or
3. For an investment pool, the person authorized by the elected official or board with authority to administer the activities of the investment pool to sign the certification on behalf of the investment pool.
(d) A thorough investigation of the pool is required prior to investing, and on a continual basis. All investment pools must supply the following information in order to be eligible to receive funds:
1. The types of investments in which money is allowed to be invested;
2. The maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool;
3. The maximum stated maturity date any investment security within the portfolio has;
4. The objectives of the pool;
5. The size of the pool;
6. The names of the members of the advisory board of the pool and the dates their terms expire;
7. The custodian bank that will safe keep the pool’s assets;
8. Whether the intent of the pool is to maintain a net asset value of $1 and the risk of market price fluctuation;
9. Whether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment;
10. The name and address of the independent auditor of the pool to deposit funds in and withdraw funds from the pool and any deadlines or other operating policies required for the entity to invest funds in and withdraw funds from the pool;
11. The performance history of the pool, including yield, average dollar-weighted maturities and expense ratios; and
12. A description of interest calculations and how interest is distributed, and how gains and losses are treated.
(4) Annual review. An annual review of the financial condition and registration of qualified bidders will be conducted by the Investment Officer.
(G) Safekeeping and custody.
(1) Insurance or collateral. All deposits and investments of city funds other than direct purchases of U.S. Treasuries or Agencies shall be secured by pledged collateral. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest on the deposits or investments less an amount insured by the FDIC or FSLIC. Evidence of the pledged collateral shall be maintained by the Investment Officer or a third party financial institution. Repurchase agreements shall be documented by a specific agreement noting the collateral pledge in each agreement. Collateral shall be reviewed periodically to ensure that the market value of the pledged securities is adequate.
(2) Safekeeping agreement. Collateral pledged to secure deposits of the city shall be held by a safekeeping institution in accordance with a safekeeping agreement which clearly defines the procedural steps for gaining access to the collateral should the city determine that the city’s funds are in jeopardy. The safekeeping institution, or trustee, shall be the Federal Reserve Bank or an institution not affiliated with the firm pledging the collateral. The safekeeping agreement shall include the signatures of authorized representatives of the city, the firm pledging the collateral and the trustee.
(3) "Collateral" defined. The city shall accept only the following securities as collateral:
(a) FDIC and FSLIC insurance coverage;
(b) A bond, certificate of indebtedness or treasury note of the United States, or other evidence of indebtedness of the United States that is guaranteed as to principal and interest by the United States;
(c) Obligations, the principal and interest on which are unconditionally guaranteed or insured by the state; and
(d) A bond of the state or of a county, city or other political subdivision of the state having been rated as investment grade (investment rating no less than "A" or its equivalent) by a nationally recognized rating agency with a remaining maturity of ten years or less.
1. Subject to audit. All collateral shall be subject to inspection and audit by the Director of Finance or the city’s independent auditors.
2. Delivery versus payment. Treasury bills, notes, bonds, repurchase agreements and government agencies’ securities shall be purchased using the delivery versus payment method. That is, funds shall not be wired or paid until verification has been made that the correct security was received by the trustee. The security shall be held in the name of the city or held on behalf of the city. The trustee’s records shall assure the notation of the city’s ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the city.
(H) Investment policy adoption. The City Council shall review these investment policies and strategies not less than annually through the adoption of a resolution.
(Ord. 2012-5, passed 9-24-2012)