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Duvall, WA
Investment Policy
March 2001
Policy
It is the policy of the City of Duvall (hereafter referred to as the City) to invest public funds in a manner which will provide maximum security with the highest investment return while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds (RCW 35.39.030).
Scope
This investment policy applies to all financial assets of the City except it does not include assets held in escrow in order to defease refunded debt, nor does it include retirement funds managed by others such as the state, and deferred compensation plan providers.
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.
Objective
The primary objectives, in priority order, of the City's investment activities shall be:
- Safety. Safety of the principal is the foremost objective of the
investment program. Investments of the City shall be undertaken in a manner
that seeks to ensure the preservation of capital in the overall portfolio.
To obtain this objective, diversification is required in order that potential
losses on individual securities do not exceed the income generated from the
remainder of the portfolio.
- Liquidity. The City's investment portfolio will remain sufficiently
liquid to enable the City to meet all operating requirements which might be
reasonably anticipated.
- Yield. The City's investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio.
Delegation of Authority
Authority to manage the City's investment program is derived from the City of Duvall Resolution ___________. Management responsibility for the investment program is hereby delegated to the Finance Director, who shall establish written procedures for the operation of the investment program consistent with this investment policy (RCW 35.39.032). Procedures should include reference to: safekeeping, wire transfer agreements, custody agreements and investment related banking services contracts. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials.
Through DMC 2.01.070 there is a Finance Committee as created by city council that shall meet periodically to determine general strategies and monitor results.
Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the Finance Committee any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any personal financial/investment positions that could be related to the performance of the City's portfolio. Employees and officers shall subordinate their personal investment transactions to those of the City, particularly with regard to the timing of purchases and sales.
Authorized Financial Dealers and Institutions
The Finance Director will approve financial institutions to be eligible to conduct investment business with the City. A current list of approved brokerage firms will be maintained by the Finance Director. This list may include primary dealers (government securities reporting to the Market Reports Division of the Federal Reserve Bank of New York), regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capitalization), national banks, or in the case of certificates of deposit, those financial institutions recognized by the Public Deposit Protection Commission as qualified to hold public deposits (RCW 35A.40.040).
To become authorized to provide investment services to the City, each institution must provide an annual letter to the City from the individual providing the service certifying that he or she has read the City's investment policy and assures that all transactions with the City will fall within the policy boundaries. This letter shall also certify that the firm and broker assigned to this account have the required credentials and licenses with the NASD, SEC or appropriate agencies and that they must immediately notify the City if at any time the firm or broker is not in compliance with SEC rule 15C3-1, the firms capital position falls short of the Capital Adequacy or uniform Net Cap Rule standard, or a material control weakness is identified by the firm's independent auditor. In addition, each institution must also provide the City with a copy of their annual audited financial report or Consolidated Report of Condition (call report). (RCW 39.58)
Authorized and Suitable Investments
The City is empowered to invest in the following types of securities (RCW 35.39.034):
- Bank checking accounts, time deposits, or certificates of deposit at commercial
banks and savings and loan associations that are approved by the Washington
Public Deposit Protection Commission (PDPC).
- U. S. Treasury obligations with maturities of ten years or less
- Commercial paper purchased in the secondary market and having received
the highest rating by at least two (2) nationally recognized statistical rating
organizations, and purchased in accordance with the policies of the Washington
State Investment Board (SIB)
- Bankers acceptances purchased in the secondary market
- Money market mutual funds, that restrict investments to short-term U.S.
Treasury and Agency securities, to be used only for funds that are subject
to arbitrage provisions, per RCW 39.59.030
- State or other government agency collective investment pools, where the
investment policies are compatible with those of the City's
- Short-term obligations of U.S. government agencies and instrumentalities approved for investment purposes by the Finance Committee
Safekeeping and Custody
All security transactions entered into by the City shall be conducted on a Delivery-Versus-Payment (DVP) basis. Securities purchased by the entity will be delivered against payment and held in a custodial safekeeping account with the trust department of a bank. The trust department of a bank, a third party custodian, will be designated by the Finance Director and all transactions will be evidenced by safekeeping receipts.
Diversification
The City will diversify its investments by security type and institution. With the exception of U.S. Treasury securities and authorized pools, diversification by financial institution is as follows:
- Bankers Acceptance (BA's) - No more than ten (10) percent of total portfolio
with any one institution
- Certificates of Deposit (CD's) - No more that thirty-three (33) percent
of total portfolio with any one institution
- Washington State Local Government Investment Pool - At least ten (10) percent
of the portfolio
In the event there is no fiscal advantage of one institution over another, preference will be given to local investment institutions.
Maximum Maturities
To the extent possible, the City will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, diversification by instrument will be as follows:
- U.S. Treasury Obligations maturing in less than ten (10) years - maximum
100%
- U.S. Government Agency Securities and Instrumentalities of Government Sponsored
Corporations maturing in no more than two (2) years - maximum 100%
- Banker's Acceptance (BA's) - maximum 20%
- Certificates of Deposits (CD's) maturing in no more than two (2) years
- maximum 20%
- Local Government Investment Pool - maximum 100%
Internal Controls
The process of independent review by an external auditor occurs annually by the Washington State Auditors Office. In addition, internal controls shall be available for review by the Finance Committee. These reviews will provide internal control by assuring compliance with policies and procedures.
Performance Standards
The investment portfolio will be designed to obtain an average rate of return during budgetary and economic cycles which meets or exceeds a 90 day CD rate. This performance standard shall take into account the City's investment risk constraints and cash flow needs. The City's investment strategy is active.
Reporting
The Finance Director is charged with the responsibility of reporting to the Finance Committee a quarterly market report on the investment activity and returns of the City. Reports will include average balance invested, number of trades, interest earnings, investment type and maturity disclosure, and performance considerations.
Investment Policy Adoption
The City's investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed on an annual basis by the Finance Committee and any modifications must be taken to the City Council for approval.
Appendix: Glossary
Agency - A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each particular agency with a market perception that there is an implicit government guarantee. An example of federal agency is the Government National Mortgage Association (GNMA). An example of a FSA is the Federal National Mortgage Association (FNMA).
Banker's Acceptance (BA) - A short-term financial instrument that is the unconditional obligation of the accepting bank. Banker's acceptances, or BAs, arise from transactions involving the import, export, transit, or storage of goods-domestic as well as international transit.
Cash Sale/Purchase - A transaction which calls for delivery and payment of securities on the same day that the transaction is initiated.
Certificate of Deposit (CD) - A deposit of funds, in a bank or savings and loan association, for a specified term that earns interest at a specified rate or rate formula.
Collateralization - Process by which a borrower pledges securities, property, or other deposits for the purpose of securing the repayment of a loan and/or security.
Commercial Paper - An unsecured short-term promissory note issued by corporations, with maturities ranging from 2 to 270 days.
Credit Risk - The risk to an investor that an issuer will default in the payment of interest and/or principal on a security.
Current Yield (Current Return) - A yield calculation determined by dividing the annual interest received on a security by the current market price of that security.
Delivery Versus Payment (DVP) - A type of securities transaction in which the purchaser pays for the securities when they are delivered either to the purchaser or his/her custodian.
Diversification - A process of investing assets among a range of security types by sector, maturity, and quality rating.
Government Securities - An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, and Bonds."
Internal Controls - An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived, and the valuation of costs an benefits requires estimates and judgments by management.
Investment Policy - A concise and clear statement of the objectives and parameters formulated by an investor or investment manager for a portfolio of investment securities.
Liquidity - An asset that can be converted easily and quickly into cash.
Local Government Investment Pool (LGIP) - An investment by local governments in which their money is pooled as a method for managing local funds.
Market Risk - The risk that the value of a security will rise or decline as a result of changes in the market conditions.
Market Value - Current market price of a security.
Maturity - The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder.
Money Market Mutual Fund - Mutual funds that invest solely in money market instruments (short-term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds).
Mutual Fund - An investment company that pools money and can invest in a variety of securities, including fixed income securities and money market instruments. Mutual funds are regulated by the Investment Company Act of 1940 and must abide by the Securities and Exchange Commission (SEC) disclosure guidelines.
Portfolio - A collection of financial assets belonging to a single owner.
Principal - The face value or par value of a debt instrument. Also may refer to the amount of capital invested in a given security.
Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of public funds investors relating to investment practices.
Safekeeping - Holding of assets (e.g., securities) by a financial institution.
Sinking Fund - Money accumulated on a regular basis in a separte custodial account that is used to redeem debt securities or preferred stock issues.
Treasury Bills - Short-term U.S. government non-interest bearing debt securities with maturities of no longer than one year and issued in minimum denominations of $10,000. Auctions of three- and six-month bills are weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored closely I the money markets for signs of interest rate trends.
Treasury Notes - Intermediate U.S. government debt securities with maturities of one to 10 years and issued in denominations ranging from $1,000 to $1 million or more.
Treasury Bonds - Long-term U.S. government debt securities with maturities of ten years or longer and issued in minimum denominations of $1,000. Currently, the longest outstanding maturity for such securities is 30 years.
Volatility - A degree of fluctuation in the price and valuation of securities.
Yield - The current rate of return on an investment security generally expressed as a percentage of the security's current price.