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HomeMy WebLinkAbout6.g. Investment Policy Update EXECUTIVE SUMMARY City Council Regular Meeting: August 17, 2021 AGENDA ITEM: Investment Policy Update AGENDA SECTION: Consent PREPARED BY: Teah Malecha, Finance Director AGENDA NO. 6.g. ATTACHMENTS: Draft Investment Policy APPROVED BY: LJM RECOMMENDED ACTION: Motion to approve amended Investment Policy BACKGROUND The City’s current Investment Policy was last amended on July 16, 1996. The policy establishes the guidelines for investing City funds to attain a market rate of return while protecting the capital of the portfolio. The overall objectives are to maintain the safety of the principle, ensure adequate liquidity, and obtain the highest return with the lowest risk. The current portfolio contains investments in CDs, governmental securities, Insured Cash Sweep (ICS) accounts, and various checking and savings accounts. The policy has been updated to include state and local securities with a restriction to the top two rating categories by a national bond rating service such as Moody’s. This is more restrictive than MN Statute allows with “A” for state or local governments with taxing powers and “AA” for revenue obligations, but it minimizes the credit risk taken by the City. The breakdown by security sector is show below. The money market portion is comprised of the savings and ICS accounts. The policy also updates the FDIC coverage amount from $100,000 to fully insured which is currently at $250,000. 2 It is important to build a portfolio that allows the City’s liquidity to meet operating requirements and other cash flow needs without risking principle. The ability to utilize money market mutual funds and local government investment pools has been added. It can also be beneficial to purchase longer maturities to account for market fluctuations. The policy has been updated to reduce the maximum maturity length to no investments beyond 15 years with no more than 35 percent of the portfolio over 5 years. Currently, there is no maximum maturity for funds that are used other than for operations. The current maturity ranges are shown below. The 10+ years includes maturity dates of 2031 and 2045. RECOMMENDATION Staff recommends approval of the amended Investment Policy. CITY OF ROSEMOUNT POLICY TITLE: INVESTMENT POLICY EFFECTIVE DATE: JUNE 7, 1994 PROPOSED BY: FINANCE DATE APPROVED BY COUNCIL: JUNE 7, 1994 (AMENDED JULY 16, 1996) (AMENDED AUGUST 17, 2021) PURPOSE The purpose of this policy is to establish specific guidelines the City of Rosemount will use in the investment of City Ffunds. It will be the responsibility of the City Treasurer (Finance Director) or the City Administrator to invest City funds in order to attain a market rate of return while preserving and protecting the capital of the overall portfolio. Investments will be made, based on statutory constraints, in safe, low risk instruments. SCOPE The Finance Director or City Administrator is responsible for the investing of all funds in the custody of the City, including, but not necessarily limited to, the General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds (Water, Sewer, Storm Water & Arena) and Agency Funds.This policy applies to the investment of all City funds available for investment and not needed for immediate expenditure. The City will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to various funds based on their respective participation and in accordance with generally accepted accounting principles. PRUDENCE Prudent Man Person Rule – “Investment shall be made with the exercise of that judgement and care, under circumstances then prevailing, which men persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probably safety of their capital as well as the probable income to be derived.” Investment personnel acting in accordance with this policy, with Minnesota Statutes Chapter 118A and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes provided that reasonable action is taken to control adverse developments and unexpected deviations are reported in a timely manner. OBJECTIVE There are three main objectives of all investment activities that are prioritized as follows: A. Safety – Safety of principle is the first priority in the investment activities of the City of Rosemount. Avoiding capital losses shall be the primary objective of each investment transaction that the City enters into. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The goal will be to mitigate credit risk and interest rate risk. a. The City will minimize credit risk, which is a risk of loss due to the failure of the security issuer or backer, by investing only in securities that meet the ratings requirement set by State Statute, pre-qualifying brokers/dealers which do business with the City and diversifying the portfolio to minimize the potential losses from any one type of security or any one individual issuer. b. The City will minimize interest rate risk, which is the risk that the market value of securities in the portfolio will fall due to changing market rates, by structuring the portfolio to meet cash flow requirements. Extended maturities may be utilized to take advantage of higher yields; however no more than 35 percent of total investments should extend beyond 5 years and in no circumstance should any extend beyond 15 years. A.c. It is the policy of the City of Rosemount to diversify its investment portfolio by type and maturity of investment purchased to mitigate concentrated credit risk. This will minimize the risk of loss resulting from over concentration of assets in a specific maturity, issuer or class of securities. Portfolio maturities will be staggered to avoid undue concentration of assets in a specific maturity sector. Maturities selected will provide for stability of income and liquidity. The primary guidance in the diversification will be the ongoing cash flow requirement of the City. B. Liquidity – The City’s portfolio will contain instruments that contain a balance of liquidity to provide the City the ability to meet all operating requirements which might be reasonably anticipated. A portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same day liquidity for short-term funds. C. Rate of Return – An investment will be purchased with the best rate of return considering its safety. Funds will be invested to gain the highest investment return with the lowest risk of capital loss, while meeting daily cash flow demands of the City and conforming to all federal, state, and local statutes governing the investment of public funds. DELEGATION OF AUTHORITY The Finance Director or City Administrator will be responsible for making investment decisions on a daily basis and monitoring the portfolio. Also, they will be responsible for ensuring the amounts of cash available for investment and the time period for which the funds may be invested with a reasonable level of confidence in relation to necessary cash flows for the City’s operations. CONFLICT OF INTEREST Any City official involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program or which could impair his/her ability to make impartial investment decisions. Any material interests in financial institutions in which they conduct business shall be disclosed to the governing body along with any personal financial/investment positions that could be related to the performance of the investment portfolio. City officials shall refrain from undertaking any personal investment transactions with the same individual with whom business is conducted on behalf of the City. DESIGNATED DEPOSITORIES In accordance with Minnesota Statutes §Chapter 118A.005, it shall be the policy of the City to authorize the Finance Director or the City Administrator the ability, by resolution, to designate all depositories for all City checking and investment deposits. AUTHORIZED AND SUITABLE INVESTMENTS The City shall invest in the following instruments as allowed by Minnesota Statutes Chapter 118A: §475.66 subd. 3 lists all permissible investments for municipalities. This list establishes the maximum investment risk permitted for a Minnesota municipality. The City of Rosemount will not authorize its employees to invest in all of these investments, staying consistent with its number one priority of safety of capital. The following are investments the City will be authorized to invest in: 1. Governmental Securities: Instruments such as bonds, notes, bills, mortgages and other securities which are direct obligations of the federal government or its agencies, with the principle fully guaranteed by the U.S. government or its agencies. The City will not invest in any mortgage or mortgage related security unless a return of principle is completely guaranteed by a federal entity. 2. Certificate of Deposit: A negotiable or nonnegotiable instrument issued by commercial banks and fully insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). (See “Collateralization”) 3. Repurchase Agreement: An investment which consists of two simultaneous transactions, where an investor purchases securities from a bank or dealer. At the same time, the selling bank or dealer agrees to repurchase the securities at the same price plus interest at some agreed-upon future date. The security purchased is the collateral protecting the investment. (See “Collateralization”) 4. Reverse Repurchase Agreement: Opposite of a repurchase agreement. The investor owns the security and sells it to the bank or dealer. 5. Prime Commercial Paper: An investment used by corporations to finance receivables. A short-term (matures in 270 days or less) unsecured promissory note is issued for a maturity specified by the purchaser. Corporations market their paper through dealers who in turn market the paper to investors. 6. Any security which is a general obligation of the State of Minnesota or any of its municipalities.State and Local Securities: Securities shall be restricted to issues rated in the top two rating categories by a national bond rating service. 7. Bankers acceptances of United States banks eligible for purchase by the Federal Reserve System. COLLATERALIZATION Collateralization will be required on any funds, including checking accounts, that exceed the available federal deposit insurance at the close of the banking day as permitted by state statute. two types of investments, Certificates of Deposit and Repurchase Agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110 percent of the market value of principle and accrued interest. Collateral shall be deposited in the name of the City of Rosemount, Minnesota, subject to release by the City’s Finance Director or City Administrator. All investment securities purchased by the City shall be held in third part safe keeping by an institution designated as primary agent. The primary agent shall issue a safe keeping receipt to the City listing the specific instrument rate maturity and other pertinent information. All deposits will be insured or collateralized in accordance with Minnesota Statutes Chapter 118A. DIVERSIFICATION The City will attempt to diversify its investments according to type and maturity. The portfolio, as much as possible, will contain both short-term and long-term investments. The long-term portion of the portfolio, meaning longer than five years, will not exceed thirty-five percent of the total funds in the portfolio. This is done to reduce overall market risk of rates changing. MAXIMUM MATURITIES City operating funds are not to be invested for a term exceeding three years unless those investments are structured such that the operating funds can be accessed without loss of principle or interest earnings. Operating funds include, but may not be limited to, the General Fund, the Water Utility Fund, the Sewer Utility Fund, the Storm Water Utility Fund and the Arena Fund. Funds that have a use that is other than for operation have no restrictions on length. The City of Rosemount invests its funds with the assurance that it will meet its current short-term cash flow needs. INTERNAL CONTROL The investment portfolio of the City is to be audited by an external auditor annually. This review provides internal controls by assuring compliance with policies and procedures. BROKER REPRESENTATIONS Beginning January 1, 1994, municipalities must obtain from their brokers certain representations regarding future investments. Minnesota Statutes §Chapter 118A457.66 subd. 6 requires municipalities to annually provide each broker with information a written statement regarding the municipality’s investment restrictions. A broker must acknowledge annually receipt of the statement of investment restrictions in writing and agree to handle the government entity’s account in accordance with these restrictions. A government entity may not enter into a transaction with a broker until the broker has provided this written agreement. Before engaging in investment transactions with the City of Rosemount, the supervising officer at the securities broker/dealer shall submit a certification. The document will state that the officer at the reviewed the investment policies and objectives, as well as applicable state law, and agrees to disclose potential conflicts of interest or risk to public funds that might arise out of business transactions between the firm and the City of Rosemount. All financial institutions shall agree to undertake reasonable efforts to preclude imprudent transactions involving the City’s funds. CONCLUSION The intent of this policy is to ensure safety of all City funds. The main goal of the City will be to achieve a market rate of return while maintaining the safety of its principle. It is felt that this policy will ensure this.