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.
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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.