HomeMy WebLinkAboutRes 2020-12-833 Amending Investment PolicyCITY OF ANNA, TEXAS
RESOLUTION NO. aOao' la %600
A RESOLUTION REVIEWING AND AMENDING THE INVESTMENT POLICY OF THE
CITY OF ANNA.
WHEREAS, my of Anna, Texas ("the City") is committed to principles and
practices of open and fair government that honor the public trust; and
WHEREAS, the City of Anna, Texas City Council ("City Council") has determined
that it is in the interests of the citizens of Anna to adopt an Investment Policy
that establishes policies and procedures to govern the management and care of
public funds; and
WHEREAS, The Public Funds Investment Act ("the Act") requires annual review
of the City's Investment Policy; and
WHEREAS, The most recent annual review of the City's Investment Policy has
prompted an amendment to the existing policy attached hereto as Exhibit 1;
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
ANNA, TEXAS, THAT.
Section 1. Recitals Incorporated.
The above -referenced recitals are incorporated herein as if set forth in full for all
pU1 poses.
Section 2. Investment Policy Reviewed
The City Council has reviewed the City's investment policy and investment strategies
and approves the amended Investment Policy attached hereto as Exhibit 1.
PASSED by the City Council of the City of Anna, Texas, on this the 8th day of December,
2020.
ATTEST:
Carrie L. Land, City Sec
T`F-X\`\\\\\``\
P�
//////11�i/111111110"
City of Anna, Texas
Investment Policy
December 8, 2020
TABLE OF CONTENTS
I. Policy.........................................................................................................................3
II. Scope........................................................................................................................3
III. Investment Objective and Strategy........................................................................3
A. Preservation and Safety of Principal................................................................4
B. Liquidity...............................................................................................................4
C. Public Trust.........................................................................................................4
D. Yield.....................................................................................................................5
E. Strategy...............................................................................................................5
IV. Standards of Care....................................................................................................6
A. Prudence.............................................................................................................6
B. Ethics and Conflict of Interest...........................................................................6
C. Delegation of Authority......................................................................................7
D. Internal Control...................................................................................................7
V. Authorized Investments and Parameters..............................................................8
A. Authorized Investments......................................................................................................8
B. Prohibited Investments......................................................................................9
C. Investments with Required Ratings..................................................................9
D. Diversification.....................................................................................................9
E. Maximum Maturity, . a 2 12 a 9 a a 0 a a X a a a a a a 9 a 9 1 a I a a 9 9 9 9 0 a a 9 a a a X X a A 0 2 9 a N 19 a A a 9 a a a a 0 K a a X a a X 0 a 0 a N X a a a a 9 a 9 3 a X 2 a V 2 a a a 0 0 1 10
F. Exemption for Existing Investments...... saffignuffs a onsugunwom No%"% non RON mannummummummus MKS among am am 10
VI. Selection of Banks and Dealers............ mmummum *woman"" wxxmmmaummzsam ussm was NEWSOM mmw*MXN KNONOMMAXIM mono 10
A. Depository.........................................................................................................10
B. Authorized Brokers/Dealers............................................................................11
C. Competitive Bid................................................................................................11
D. Delivery vs. Payment........................................................................................11
VII. Custodial Credit Risk Management.. swans OMEN 11
A. Safekeeping and Custody..... Non Effougon KAREN Ronan muffuum onvommoxom NSA Mason magansm wasnam asous KEE manna MEUSE 11
B. Collateralization................................................................................................12
VIII. Reporting...............................................................................................................13
IX. Investment Policy and Adoption.. mmummummm MEKNES MAN Knowas mosonmm No% mono WERESE amman sommufflum on Sol 3
2�Page
X. Financial Glossary.................................................................................................13
INVESTMENT POLICY
I. POLICY
The City will conform to all federal, state, and local statutes, rules, and regulations
governing the investment policy of the City of Anna (the "City"). It is the City's policy
to administer and invest its funds in a manner that will preserve the principal, maintain
liquidity, and optimize earnings while meeting the daily cash flow requirements of the
of the City and the guidelines to be followed in achieving its objectives.
The City's policy is to hold investments to maturity; however, securities may be sold
in order to minimize the potential loss of principal and interest whose credit quality has
declined; or to meet unanticipated liquidity needs of the City.
The policy and strategy shall be reviewed by the Investment Committee and City
Council at least annually. Any modifications will be formally approved by the City
Council. The investment policy, as approved, is in compliance with the provisions of
the Public Funds Investment Act of the Texas Government Code Chapter 2256. The
investment policy addresses the methods, procedures and practices that must be
exercised to ensure effective and judicious fiscal management of the City's funds.
II. SCOPE
This policy applies to all financial assets and investment activities of all current funds
of the City of Anna, Texas and any new funds created in the future, unless specifically
exempt or excluded hereafter, will be administered in accordance with the objectives
and restrictions set forth in this Investment Policy. These funds are accounted for in
the City's Comprehensive Annual Financial Report and include: General Fund,
Special Revenue Funds, Grant Funds, Debt Service Funds, Capital Project Funds,
Enterprise Funds, Trust Funds, and the City's component units.
This policy does not apply to the assets administered for the benefit of the City by
outside agencies under deferred compensation programs, retirement programs, or
defeased bonds held in trust escrow accounts.
Except for cash in certain restricted and special funds, the City of Anna will combine
cash balances from all funds in a pooled fund group to maximize investment earnings.
Investment income will be allocated to the various funds based on their respective
participation and in accordance with generally accepted accounting principles. In
addition, all the bond fund proceeds (to include capital projects, debt service and
reserve funds) will be managed by the governing debt ordinance and the provisions
of the Internal Revenue Code of 1986 applicable to the issuance of tax-exempt
obligations and the investment of debt proceeds.
3�Page
III. INVESTMENT OBJECTIVE AND STRATEGY
The primary objectives of the City of Anna's investment activities, listed in priority
order, shall be as follows:
A. Preservation and Safety of Principal
Preservation and safety of principal is the foremost objective of the City. Each
investment transaction shall seek first to ensure that capital losses are avoided,
whether they are from issuer defaults, erosion of market value, or other risks. The
objectives will be to mitigate credit and interest rate risk.
i. Credit Risk and Concentration of Credit Risk —The City will minimize credit risk,
which is the risk of loss due to the failure of the security issuer or backer, and
concentration of credit risk, the risk of loss attributed to the magnitude of
investment in a single issuer, by:
• Limiting investments to the types listed in safest types of investments,
• Pre -qualifying the financial institutions, broker/dealers, intermediaries, and
advisers with which the City will do business, and
• Diversifying the investment portfolio so that potential losses on individual
securities will be minimized.
ii. Interest Rate Risk — The City will minimize interest rate risk, which is the risk
that the market value of securities in the portfolio will fall due to changes in
market interest rates, by:
• Limiting investments to the safest types of investments,
• Limiting maximum weighted average maturity of the investment portfolio to
365 days,
• Structure the investment portfolio so that investments mature to meet cash
requirements for ongoing operations, thereby avoiding the need to liquidate
investments prior to maturity, and
• Diversify maturities and staggering purchase dates to minimize the impact
of market movements over time.
B. Liquidity
The City's investment portfolio will remain sufficiently liquid to enable the City to
meet all operating requirements that can be reasonably anticipated. This is
accomplished by structuring the portfolio so that securities mature concurrent with
cash needs to meet anticipated demands. Furthermore, since all possible cash
demand cannot be anticipated, a portion of the portfolio will be invested in money
market funds that seek a stable $1.00 NAV or local government investment pools
that offer same-day liquidity for short-term needs.
C. Public Trust
All employees involved in the City's investment program shall seek to act
responsibly as custodians of the public trust. Investment Officers shall at all times
be cognizant of the standard of care and investment objectives and shall avoid any
transaction that might impair public confidence in the City's ability to govern
effectively.
D. Yield
The investment portfolio of the City shall be designed to attain a market rate of
return throughout budgetary and economic cycles taking into account risk
constraints and liquidity needs. Return on investment, while important, is of less
importance than safety and liquidity. The investment portfolio shall be designed
with the objective of regularly exceeding the average rate of return on a six-month
U.S. Treasury Bill.
Funds held for future capital projects will be invested in securities that can
reasonably be expected to produce enough income to offset inflationary costs
increases. However, such funds will never be unduly exposed to market price risks
that will jeopardize that asset's availability to accomplish their stated goal or be
invested in a matter inconsistent with applicable federal and state regulations.
Yields on debt proceeds that are not exempt from federal arbitrage regulations are
limited to the arbitrage yield of the debt obligation. Investment officials will seek to
preserve principal and maximize the yield of these funds in the same manner as
all other City funds. However, it is understood that if the yield achieved by the City
is higher than the arbitrage yield, positive arbitrage income will be averaged over
a five-year period and netted against any negative arbitrage income and the
positive arbitrage amount shall be rebated to the federal government as required
by current regulations.
E. Strategy
The City maintains pooled investments which are an aggregation of the majority of
City funds including tax receipts, enterprise funds, fine and fee revenues, special
revenues, grants, and non -bond capital project funds. This portfolio is maintained
to meet anticipated daily cash needs for City operations and capital projects. The
objectives of this portfolio are to ensure safety of principal; ensure adequate
investment liquidity; limit market and credit risk through diversification; and attain
a market rate of return in accordance with the objectives and restrictions set for in
this Policy. All investments will be of high quality with no perceived default risk.
i. Operating Funds —Operating Funds generally have greater cash flow needs
than other types of funds and therefore require the greatest short-term liquidity
of the Fund types. Investment strategies for operating funds and commingled
pools containing funds have as their primary objective to assure that anticipated
cash flows are matched with adequate investment liquidity. The secondary
objective is to create a portfolio structure which will experience minimal volatility
5 1 P a g e
during economic cycles. This may be accomplished by purchasing quality,
short to medium term securities which will complement each other in a laddered
structure. Of utmost importance is the preservation and safety of the
investment principal.
ii. Debt Service Funds — Investment strategies for Debt Service Funds shall have
as the primary objective the assurance of investment liquidity adequate to cover
the debt service obligation on the required payment date. Securities purchased
shall not have a stated final maturity date which exceeds the debt service
payment date. Surplus funds outside the debt service dates will be invested
according to the investment guidelines for operating funds.
iii. Capital Project Funds and Special Purpose Funds — The investment objective
of capital project funds is to schedule maturities to maximize investment
earnings while preserving principal. Funds for capital projects or special
purposes should allow for flexibility and unanticipated project outlays by having
a portion of their investments in highly liquid securities. The key to an effective
strategy is to be ware of project needs and match maturities to the period funds.
The stated final maturity dates of securities held should not exceed the
estimated project completion date.
IV. STANDARDS OF CARE
A. Prudence
The standard of prudence to be used by investment officers shall be the "prudent
person" rule. This rule states that "Investments shall be made with judgement 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 determination of whether an
investing officer has exercised prudence with respect to an investment decision
shall be applied in the context of managing an overall portfolio rather than a
consideration as to the prudence of a single transaction.
Investment officers acting in accordance with written procedures and this
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 unfavorable developments.
B. Ethics and Conflict of Interest
Each Investment Off
icer shall act as custodian of the public trust avoiding any
transaction which might involve a conflict of interest, the appearance of a conflict
of interest, or any activity which might otherwise discourage public confidence. An
Investment Officer shall refrain from personal business activity that could conflict
61Page
with proper execution of the investment program, or which could impair his/her
ability to make impartial investment decisions.
They shall further disclose any personal financianvestment posons that could
be related to the performance of the investment portfolio and shall refrain from
undertaking personal investment transactions with any individual with whom
business is conducted on behalf of the City of Anna. Additionally, an Investment
Officer shall file with the Texas Ethics Commission and the City Council a
statement disclosing any material interest they hold in financial institutions with
which they conduct business with on behalf of the City or any relationship with an
entity seeking to sell investments to the City or any relationship with the second
degree by affinity or consanguinity to an individual seeking to sell investments to
the City as determined under Chapter 573 of the Texas Government Code.
C. Delegation of Authority
I
. Investment Officers and Training -The Assistant City Manager, Finance
Director, and Accounting Manager shall be the Investment Officers. The
Investment Officers shall oversee and approve any deposit, withdrawal,
investment, transfer, documentation, and otherwise manage City funds
according to this Policy. No person may engage in an investment transaction
or the management of funds except as provided under the terms of the
Investment Policy, the Statement of Investment Strategy, and other operational
procedures established by the Finance Director.
As stipulated in the PFIA Chapter 2256.008, in order to ensure qualified and
capable investment management, within twelve (12) months after taking office
or assuming duties, each Investment Officer shall attend training relating to
his/her investment responsibilities and accumulate not less than ten (10) hours
of instruction. On an ongoing basis, all Investment Officers shall receive not
less than eight (8) hours of instruction in each subsequent two-year period that
begins on the first day of the City's fiscal year and consists of the two
consecutive fiscal years after that date. Training will be conducted by an
independent source approved by the Investment Committee and must include
education in investment controls, security risks, strategy risks, market risks,
diversification of investment portfolio, and compliance with the Public Funds
Investment Act.
Investment Committee The
Committee shall monitor the investment activities;
assist in the development of investment policies, strategies and procedures;
and annually review and approve the City's broker/dealers and independent
training sources.
D. Internal Control
7�Page
The Finance Director will establish and maintain a system of internal controls to
ensure that the assets 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 the cost
of a control should not exceed the benefits likely to be derived and the valuation of
costs and benefits requires estimates and judgement by management.
Accordingly, the Finance Director shall establish a process for an independent
review by an external officer to assure compliance with policies and procedures.
This annual compliance is required by the "Public Funds Investment Act" (PFIA)
[Section 2256.005m]. Controls deemed most important include, but are not limited
to:
• Control of collusion
• Separation of duties
• Separating transaction authority from accounting and record-keeping
• Custodial safekeeping
• Avoidance of physical delivery securities
• Clear delegation of authority
• Documentation of transactions
• Dual authorization of fed wire transfers
• Compliance with investment policies
• Accurate and timely investment reports
• Documentation of investment bidding
V. AUTHORIZED INVESTMENTS AND PARAMETERS
A. Authorized Investments
Funds of the City may be invested in the following instruments described below
consistent with Chapter 2256 of the State of Texas Government Code, known as
the "Public Funds Investment Act" (PFIA) and as authorized by this policy.
Investments not specifically listed below will not be permitted by policy.
1. Obligations of the United States government or its agencies and
instrumentalities, including the Federal Home Loan Banks.
2. Other obligations, the principal and interest of which are unconditionally
guaranteed or insured by, or backed by the full faith and credit of, this State or
the United States or their respective agencies and instrumentalities, including
obligations that are fully guaranteed or insured by the Federal Deposit
Insurance Corporation or by the explicit full faith and credit of the United States.
3. Direct obligations of this State or its agencies and instrumentalities.
4. Obligations of states, agencies, counties, cities, and other political subdivisions
of any state rated as to investment quality by at least one nationally recognized
rating firm not less than A or its equivalent.
5. Certificates of Deposit, and other forms of deposit, issued in compliance with
the PFIA, and insured by the FDIC, or when applicable, collateralized in
accordance with this Policy and the Public Funds Collateral Act that are issued
by a depository institution that has its main office or a branch office in the state
of Texas.
6. Repurchase agreements, with the execution of a Master Repurchase
Agreement, placed and secured in compliance with the PFIA and, collateralized
with a minimum market value of 102% of the dollar value of the transaction plus
accumulated accrued interest.
7. SEC -registered, AAAm, or its equivalent, (as rated by Fitch, Moody's or
Standard & Poor's), no-load money market mutual funds. The investment
objective of the fund must be to maintain a stable dollar net asset value of
$1.0000. The City may not invest funds under its control in an amount that
exceeds 10% of total assets of any individual money market mutual fund. A
fund prospectus shall be reviewed for compliance with this Policy prior to
depositing monies.
8. Interest bearing checking accounts that are fully collateralized at 102% of the
ledger balance less the amount insured by the Federal Deposit Insurance
Corporation (FDIC) or the National Credit Union Share Insurance Fund or their
respective successors.
B. Prohibited Investments
The Investment Officers shall not knowingly permit City funds to be invested with
any of the following investment instruments that are strictly prohibited:
1. Options trading or futures contracts
2. Hedging or purchasing any security that is not authorized by Texas State law
3. Any investment in asset backed or mortgage-backed securities
4. Any other restricted instruments or limitations that involve outright speculation.
C. Investments with Required Ratings
If an investment is downgraded below minimum required ratings, the city will take
all prudent measures to liquidate the investment.
D. Diversification
In order to minimize risk of loss due to interest rate fluctuations, investment
maturities will not exceed the anticipated cash flow requirements of the funds.
When appropriate and applicable, diversification by investment type shall be
maintained by ensuring an active and efficient secondary market in portfolio
investments, and by controlling the market and opportunity risks associated with
specific investment types. Undue concentrations of assets in a specific maturity
sector shall be avoided. Bond proceeds may be invested to comply with Federal
arbitrage restrictions or to facilitate arbitrage record-keeping and calculation.
9 1 P a g e
In establishing specific diversification strategies, the following general policies and
constraints shall apply:
1. Portfolio maturities and potential call dates shall be staggered in away that
protects interest income from volatility of interest rates and avoids undue
concentration of securities from a specific maturity or callable sector. Securities
shall be selected which provide for stability of income and reasonable liquidity.
2. Continuously investing a portion of the portfolio in readily available funds such
as government investment pools, money market funds or overnight repurchase
agreements to ensure that appropriate liquidity is maintained in order to meet
ongoing obligations.
The Investment Officers shall conduct a quarterly review of these diversification
guidelines and shall evaluate the probability of market and default risk in various
instrument sectors as part of its consideration.
E. Maximum Maturity
To the extent possible, the City shall attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the
City will not directly invest in securities more than three (3) years from the date of
purchase. The composite portfolio will have a weighted average maturity of 365
days or less. This dollar weighted average maturity will be calculated using the
stated maturity date(s) of each security.
F. Exemption for Existing Investments
Any investment currently held that does not meet the guidelines of this policy, but
was authorized at the time of purchase, shall be exempted from the requirements
of this policy and investment officers shall not be required to liquidate the
investment. At Maturity or liquidation, such monies shall be reinvested only as
provided by this policy.
VI. SELECTION OF BANKS AND DEALERS
A. Depository
At least once every five years, a qualified depository shall be selected through the
City's banking services procurement process, which shall include a formal request
for proposal and be consistent with state law. In selecting depositories, the service
cost, hours of operation, yield on deposits, credit worthiness, location of
depository, ability to meet service requirements and banking relationship of the
institutions shall be considered.
All depository balances shall be insured or collateralized in compliance with
applicable State law. The City reserves the right, in its sole discretion, to accept or
reject any form of insurance or collateralization pledged towards depository
deposits. Depositories will be required to sign a Depository Agreement with the
101
Page
City. The Agreement shall address any concerns in relation to acceptable
collateral, levels of collateral, substitution and addition of collateral, and reporting
and monitoring of collateral. The collateralized deposit portion of the Agreement
shall define the City's rights to the collateral in case of default, bankruptcy, or
closing and shall establish a perfected security interest in compliance with Federal
and State regulations, including:
® The Agreement must be in writing,
® The Agreement must be executed by the Depository and the City
contemporaneously with the acquisition of the asset,
® The Agreement must be approved by the Board of Directors or Designated
Committee of the Depository and a copy of the meeting minutes must be
delivered to the City, and
® The Agreement must be part of the Depository's "official record" continuously
since its execution.
B. Authorized Brokers/Dealers
Brokers and dealers are approved by the Investment Committee. At least once
annually, the Committee will review, revise, and adopt a list of qualified banks,
brokers, and dealers that are authorized to engage in investment transactions with
the City.
Evaluation of security dealers and financial institutions are based upon (1)
Financial conditions, strength, and capability to fulfill commitments; (2) overall
reputation with other dealers or investors (3) regulatory status of the dealer; and
(4) background and expertise of the individual representatives. All brokers and
dealers must be on the approved list in order to transact business with the City.
All local government investment pools and discretionary
investment management
fiI ms must sign a certification acknowledging that the organization has received
and reviewed the City's Investment Policy, and that reasonable procedures and
controls have been implemented to preclude investment transactions that are not
authorized by the City's Policy.
C. Competitive Bid
It is the policy of the City to require competitive bidding for all individual security
purchases except for money market mutual funds and local government
investment pools, which are deemed to be made at prevailing market rates. All
other securities will be competitively bid with at least three competitive offers or
bids.
D. Delivery vs. Payment
All investment transactions, except local government investment pools and mutual
funds, must be settled on a delivery versus payment basis. That is, funds shall not
111
Page
be released or paid until verification has been made that the collateral or security
was received by the Trustee or custodian.
VII. CUSTODIAL CREDIT RISK MANAGEMENT
A. Safekeeping and Custody
Safekeeping and custody of securities and collateral shall be in accordance with
state law. The City shall contract with a bank or banks for the safekeeping of
securities either owned by the City as part of its investment portfolio or held as
collateral to secure financial institution deposits.
Securities owned by the City shall be held in the City's account as evidenced by
safekeeping receipts of the institution holding the securities. Safekeeping
institutions shall be independent from the parties involved in the investment
transaction.
Collateral will be held by a third -party custodian designated by the City, the Federal
Reserve Bank, branch of the Federal Reserve Bank, or a Federal Home Loan Bank
and pledged to the City as evidenced by pledge receipts of the institution with
which the collateral is deposited. The original copy of the safekeeping receipt shall
be delivered to the City.
B. Collateralization
All time and demand deposits and repurchase (and reverse) agreements shall be
secured by pledged collateral with a market value equal to or not less than vi M/o
of the deposits plus accrued interest less an amount insured by the FDIC and
evidenced by original safekeeping receipts. Evidence of the pledged collateral
shall be maintained by the Finance Director or designee and held by an
independent party with whom the City has a current custodial agreement with.
Any substitutions of collateral must meet the requirements of the Public Funds
Collateral Act, Public Funds Investment Act and this investment policy. Substitution
of collateral must be approved by at least one Investment Officer of the City.
Written notice must be provided to the bank or safekeeping agent prior to any
security release.
Collateral shall be reviewed on a monthly basis to ensure the market value of the
securities pledged equals or exceeds the related time and deposit accounts or
repurchase (and reverse) agreements.
The City of Anna shall accept only the following securities as collateral:
• FDIC Insurance coverage
® Direct obligations of the United States or other obligations of the United States,
the principal and interest of which are unconditionally guaranteed or insured
by, or backed by the full faith and credit of the United States
12�Page
® Direct debt obligations of an agency or instrumentality of the United States
® Direct debt of states, agencies, counties, cities, and other political subdivisions
of any state rate as to investment quality by a nationally recognized investment
rating firm not less than A or its equivalent.
® Letter of credit issued to the City by the Federal Home Loan Bank
® Other securities specifically authorized by the Investment Committee and this
Investment Policy
The City expressly prohibits the acceptance of Interest -only (10) and Principal -only
(PO) Collateralized Mortgage Obligations (CMOs) as collateral for bank deposits or
repurchase agreements. The City's Investment Officers reserve the right to accept or
reject any form of collateral or enhancement at their sole discretion.
VIII. REPORTING
The Investment Officers shall prepare an investment report at least quarterly in
compliance with the PFIA. This report will be prepared in a manner that will allow the
City to ascertain whether investment activities during the reporting period have
conformed to this Policy. The report will be provided to the City Council. In conjunction
with the annual audit, the external auditor will perform a formal review of the quarterly
reports with the results reported to the City Council.
Market value of all securities in the portfolio will be calculated on a quarterly basis and
disclosed to the governing body quarterly in the investment report. Pricing information
will come from Bloomberg, Intercontinental Exchange, Inc. (ICE), International Data
Corporation (IDC), or any other reputable and independent source deemed reliable by
the Director of Finance.
IX. INVESTMENT POLICY AND ADOPTION
The investment policy and investment strategies shall be adopted by Resolution of the
City Council. The Resolution so adopted shall record any changes made to either the
policy or the strategies. The City Council shall review the investment policy not less
than annually. The investment policy strategies shall be reviewed at least annually by
the Investment Committee.
X. FINANCIAL GLOSSARY
Accretion of Discount: An accounting method for realizing the additional income
earned through the purchase of a discounted, or zero-coupon security where the
difference between the discounted purchase price and the par value is credited to an
income account, gradually increasing the book value until it reaches par at maturity.
Also see amortization.
Accrued Interest: The interest accumulated on a security from its issue date or since
the last payment of interest up to but not including the purchase date. The purchaser
of the security pays to the seller the market price plus accrued interest.
13�Page
Agency: A category of investments that include Government Sponsored Enterprises
(GSEs) of Fannie Mae, Freddie Mac, the Federal Home Loan Bank (FHLB), and the
Federal Farm Credit Bank (FFCB). Federal agencies are generally considered to be
government securities, and all carry the highest possible senior debt rating from both
Moody's and S&P.
Amortization of Premium: Period straight-line decreases in the book or carrying
value of a security so that the premium paid for a bond above its face value or call
prices is completely eliminated.
Ask or Asking Price: The price at which securities are offered by the broker/dealer;
the price at which a governmental entity buys a security; also referred to as an "offer"
or "offering price".
Asset -Backed Security (ABS): A broad term used to describe a security created by
pooling certain loans together, whereby principal and interest payments made on the
loans are used to pay the security holders.
Basis Points: The unit of measurement for yield equal to 1/100th of 1 percent; e.g., 1/4
of 1 percent is equal to 25 basis points.
Benchmark: A comparative base for performance evaluation. A good benchmark
should be verifiable, easy to understand and appropriate to the portfolio to which it is
being compared. Typical benchmarks used in the public sector include the three-
month, six-month, and one-year T-bill averages over a similar measurement
timeframe.
Bid: The price off
ered for securities by purchasers. (When selling securities, one asks
for a bid.)
Bond: A very
broad term used to describe a debt obligation. A bond may have a fixed
oI floating coupon rate; may be issued by the U.S. Treasury or an agency or a
corporation; and may be callable or non -callable.
Book Entry Securities: Stocks, bonds, other securities, and some certificates of
deposit that are purchased, sold, and held as electronic computer entries on the
records of a central holder. These securities are not available for purchase in physical
form; buyers get a receipt or confirmation as evidence of ownership.
Book Value: The original cost of the security as adjusted for amortization for any
premium paid or accretion of discount since the date of purchase.
Broker: A party who brings buyers and sellers together. Brokers do not take
ownership of the property being traded. They are compensated by commissions.
They are not the same as dealers; however, the same firms that act as brokers in
some transactions may act as dealers in other transactions.
14�Page
"Bullet": Slang term for a type of bond that repays the entire principal amount on the
maturity date.
"Buy -and -Hold": A common investment strategy for conservative investors with
specific cash flow objectives or cyclical cash flow patterns, whereby securities are
purchased with no intention to sell prior to maturity.
Callable Bond: A bond that the issuer has the right to redeem prior to maturity at a
specified price. Some callable bonds may be redeemed on one call date while others
have multiple call dates.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a
certificate.
Capital Gain: The profitable result of the sale of a security or asset, whereby the
principal exceeds the book value of a security.
Capital Loss: The resulting loss when the principal amount on the sale of a security
or asset is less than the book value of a security.
Collateral: Securities, evidence of deposit or other property which a borrower pledges
to secure repayment of a loan. Also refers to securities pledged by a bank to secure
deposits of public monies.
Collateralized Mortgage Obligation (CMO): A type of mortgage-backed security
created by dividing the rights to receive the principal and interest cash flows from an
underlying pool of mortgages in separate classes or tiers.
Commercial Paper: Short-term unsecured promissory notes issued by corporations
for a maturity specified by the buyer. It is used primarily by corporations for short-term
financing needs at a rate which is generally lower than the prime rate.
Confirmation: The document used to state in writing the terms of the trade which had
previously been agreed to verbally.
Coupon Rate: The stated annual rate of interest payable on a coupon bond
expressed as a percentage of the bond's face value.
Constant Dollar Fund or Pool: A type of money market fund or investment pool
whose stated objective is to offer safety of principal and liquidity by maintaining a $1
dollar share value for all its participants, meaning that the dollar value of the original
deposit is expected to be maintained through conservative management practices;
aIso referred to as a "dollar in/dollar out" fund or pool.
Credit Risk: The risk that (1) the issuer is downgraded to a lower quality category
and/or (2) the issue fails to make timely payments of principal and interest.
Cusip Number: A nine -digit number established by the Committee on Uniform
Securities Identification Procedures that is used to identify publicly traded securities.
151Pa
ge
Each publicly traded security receives a unique CUSIP number when the security is
issued.
Custody: The service of an organization, usually a financial institution, of holding
and reporting) a customer's securities for safekeeping. The financial institution is
known as the custodian.
Dealer: A firm which buys and sells for its own account. Dealers have ownership,
even if only for an instant, between a purchase from one party and a sale to another
party. They are compensated by the spread between the price they pay and the price
they receive. Dealers are not the same as brokers; however, the same firms which
act as dealers in some transactions may act as brokers in other transactions.
Delivery Versus Payment (DVP): DVP requires that the delivery is made at the same
time payment for those securities is received in the account.
Depository Trust Company (DTC): An organization that holds physical certificates
for stocks and bonds and issues receipts to owners. Securities held by DTC are
immobilized so that they can be traded on a book entry basis.
Discount: The amount by which the price paid for a security is less than its face value.
Discount Securities: Securities that do not pay periodic interest. Investors earn the
difference between the discount issue price and the full -face value paid at maturity.
Diversification: Dividing the investment funds among a variety of securities offering
independent returns, to reduce risk inherent in particular securities.
Duration: A sophisticated measure of the weighted average maturity of a bond's cash
flow stream, where the present values of cash flows serve as the weights.
Face Value: The principal amount due and payable to a bondholder at maturity; par
value. Also, the amount on which coupon interest is computed.
Fair Value: The amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or liquidation sale.
Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank
deposits.
Federal Farm Credit Banks (FFCB): A government-sponsored corporation what was
created in 1916 and is a nationwide system of banks and associations providing
mortgage loans, credit, and related services to farmers, rural homeowners, and
agricultural and rural cooperatives. The banks and associations are cooperatively
owned, directly or indirectly, by their respective borrowers. The Federal Farm Credit
System is supervised by the Farm Credit Administration, an independent agency of
the U.S. government. (See Government Sponsored Enterprises)
16�Page
Federal Funds Rate: The rate of interest at which banks with excess reserves charge
banks lacking reserves for overnight loans to meet reserve requirements. This key
overnight rate determines, in large part, the rate at which overnight repurchase
agreements will trade. When the Federal Reserve "raises rates", the target fed funds
rate is increased and other short-term security yields follow. Since pools and money
market funds invest heavily in short-term securities, their rates often approximate the
fed funds rate at any given point in time.
Federal Home Loan Banks (FHLB): Government-sponsored wholesale banks
(currently twelve regional banks) which lend funds and provide correspondent banking
services to member commercial bank, thrift institutions, credit unions and insurance
companies. The mission of the FHLBs is to liquefy the housing related assets of its
members who must purchase stock in their district Bank. (See Government
Sponsored Enterprises)
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): A
government-sponsored corporation that was created in July 1970, by the enactment
of Title III of the Emergency Home Finance Act of 1970. Freddie Mac was established
to help maintain the availability of mortgage credit for residential housing, primarily
through developing and maintaining an active, nationwide secondary market in
conventional residential mortgages. (See Government Sponsored Enterprises)
Federal National Mortgage Association (FNMA or Fannie Mae): FNMA, like
GNMA was chartered under the Federal National Association Act in 1938. FNMA is
a federal corporation working under the auspices of the Department of Housing and
Urban Development (HUD). It is the largest single provider of residential mortgage
funds in the United States. Fannie Mae is a private stockholder-owned corporation.
FNMA securities are highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and
interest. (See Government Sponsored Enterprises)
Federal Open Market Committee (FOMC): A group of Federal Reserve Officials that
meet eight times per year to set U.S. monetary policy (raise and lower interest rates).
The Committee must balance its two primary and often conflicting objectives of
achieving stable economic growth and keeping inflation at acceptable levels.
Federal Reserve System: The central bank of the United States created by Congress
and consisting of a seven-member Board of Governors in Washington, D.C., twelve
regional banks and about 5,700 commercial banks that are members of the system.
Government-Sponsored Enterprises (GSE's): Payment of principal and interest on
securities issues by these corporations is not guaranteed explicitly by the U.S.
government; however, must investors consider these securities to carry an implicit
U.S. government guarantee. The debt is fully guaranteed by the issuing corporations.
GSE's include: Farm Credit System, Federal Home Loan Bank System, Federal Home
17�Page
Loan Mortgage System, Federal Home Loan Mortgage Corporation, and Federal
National Mortgage Association.
Interest Rate Risk: The risk that the general level of interest rates will change,
causing unexpected price appreciations or depreciations.
Ladder: A common investment strategy whereby securities are purchased to mature
at regular intervals so that cash is always available to meet known obligations or be
reinvested back into the market at prevailing rates.
Liquidity: An entity's capacity to meet future monetary outflows (whether they are
required or optional) from available resources. Liquidity is often obtained from
reductions of cash or by converting assets into cash.
Liquidity Risk: The risk that an investment will be difficult to sell at a fair market price
in a timely fashion.
Market Risk: The risk that the value of a security will rise or decline as a result of
changes in market conditions. It is that part of a security's risk that is common to all
securities of the same general class (stocks and bonds) and thus cannot be eliminated
by diversification; also known as systematic risk.
Market Value: the price at which a security is trading and could presumably be
purchased or sold.
Master Repurchase Agreement: A written contract coverall all future transactions
between the parties to repurchase agreements that establishes each party's rights in
the transactions. A master agreement will often specify, among other things, the right
of the buyer to liquidate the underlying securities in the event of default by the seller.
Maturity Date: The date on which the principal or face value of an investment
becomes due and payable.
Mortgage-Backed Securities: Securities composed of, or collateralized by, loans
that are themselves collateralized by liens on real property.
Offer: The price asked by a seller of a security. (When purchasing securities, one
asks for an offer).
PAR: See Face Value
Pooled Fund Group: An internally created fund of an investing entity in which one or
more institutional accounts of the investing entity are invested.
Premium: The amount by which the price paid for a security exceeds its face value.
Primary Dealer: A group of government securities dealers that submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve
Bank of New York and are subject to its informal oversight. Primary dealers include
18�Page
Securities and Exchange Commission (SEC), registered securities broker-dealers,
banks, and few unregulated firms.
Principal: The face or par value of an instrument, exclusive of accrued interest.
Prudent Person Rule: An investment standard. In some states the law requires that
a fiduciary, such as a trustee, may invest money only in a list of securities selected by
the state. In other states the trustee may invest in a security if it is one which would
be bought by a prudent person of discretion and intelligence who is seeking a
reasonable income and preservation of capital.
Rate of Return: The amount of income received from an investment, expressed as a
percentage. A market rate of return is yield that an investor can expect to receive in
the current interest -rate environment utilizing a buy -and -hold to maturity investment
strategy.
Reinvestment Rate: The interest rate earned on the reinvestment of coupon
payments.
Reinvestment Rate Risk: The risk that the actual reinvestment rate falls short of the
expected or assumed reinvestment rate.
Repurchase Agreement (RP or REPO): A type of agreement in which an investor
exchanges cash for securities with a primary dealer or bank and earns a fixed rate of
interest for a specific period. At the end of the period, securities are returned for
principal along with accrued interest. Dealers and banks use repo proceeds to finance
their inventory positions.
Safekeeping: A procedure where securities are held by a third party acting as
custodian for a fee.
Secondary Market: A market made for the purchase and sale of outstanding issues
following initial distribution.
Securities and Exchange Commission (SEC): Agency created by Congress to
protect investors in securities transactions by administering securities legislation.
Settlement Date: The purchase (or sale) date of a security on which the money
actually changes hand.
Spread: Most commonly used when referring to the difference between the bid and
asked prices in a quote. Additionally, it may also refer to additional basis points that
a non -Treasury security earns over and above a Treasury with a comparable maturity
date.
Treasury Bills: Anon -interest-bearing discount security issued by the U.S. Treasury
,
generally having initial maturities of 3 months, 6 months, or 1 year.
19�Page
Treasury Bonds: Long-term, coupon bearing U.S. Treasury securities having initial
maturities of more than 10 years.
Treasury Notes: Intermediate-term, coupon bearing U.S. Treasury securities having
initial maturities of 2.10 years.
Unrealized Gain or Loss: The amount of profit (or loss) that would be reflected on
the sale of a security if that security were sold. The unrealized gain or loss is
calculated by taking the difference between book value and market value of the
security at any given point in time.
Weighted Average Maturity (WAM): This common term, usually expressed in
number of days, represents a dollar -weighted average of the remaining term to
maturity of all assets in a pool or securities portfolio. A longer WAM generally indicates
higher market risk.
Yield: The return, expressed as a percentage, that a security will earn as a result of
both the coupon rate and any discount earned or premium paid. A yield will exceed
the coupon if purchased at a discount (and vice -versa).
Yield Curve: The relationship between yields and maturity dates for a set of similar
bonds, usually Treasuries, at a given point in time. A yield curve is a standard
measure of risk and return and answers the question "How much additional yield will
I earn if I extend my maturity and assume additional market risk?".-
Yield -to -Maturity: The expected rate of return of a bond if it is held to its maturity
date; calculated by taking into account the current market price, stated redemption
value, coupon payments and time to maturity and assuming all coupons are
reinvested at the same rate; equivalent to the internal rate of return (IRR).
20�Page
Entity:
Government Treasurers' Organization of Texas
Investment Policy Certification Checklist
Office Use Only
Reviewer:
Date:
*Applicant must indicate in this column where item is located in the investment policy submitted for review. (Example:
Authorized and Suitable Investments, Section 6, page 10)
Page 1 of 6
PLACEMENT
ACCEPTABLE
UNACCEPTABLE
CRITERIA
IN POLICY*
(RECOMMENDATIONS)**
(RECOMMENDATIONS)
Policy Statement
Policy statement emphasizing the guiding principles
of the investment program and conformance to all
statutes, rules and regulations governing the
investment of public funds.
Scope
List of funds covered by the policy. Funds can either
be defined specifically as they are listed in the
CAFR, or more generally (i.e. short-term operating
funds). This section should also specify which funds,
if any, are combined for investing purposes as a
"pooled fund group", and which funds are managed
as "separately invested assets", as defined in PFIA
2256.002(9),
General Objectives
Investment policy must primarily emphasize safety
of principal, liquidity [PFIA 2256.005 (b)(2)], and
yield [PFIA 2256.005 (b)(3)]. Policy includes
procedures to monitor rating changes and liquidation
of such investments consistent with [PFIA 2256.005
(b)(4)(17)].
Prudent Person Rule
"Prudent Person" statement relating to the standard
of care that must be exercised when investing public
funds. PFIA 2256.006 (a -b)
Capability of Investment Management
Investment policy must address quality and
capability of investment management. PFIA
2256.005 (b)(3)
Ethics Disclosure and Conflicts of Interest
Investment Policy must require the investment
officer(s) to file a disclosure statement with the
Texas Ethics Commission and the governing body if:
a. the officer has a personal business relationship
with a business organization offering to engage in
an investment transaction with the City (as defined
in 2256.005 (i)(1-3)); or
b. the officer is related within the second degree by
affinity or consanguinity, as determined under
Chapter 573 of the Texas Government Code, to
an individual seeking to transact investment
business with the entity. PFIA 2256.005 (i)
Page 1 of 6
CRITERIA
PLACEMENT
IN POLICY*
ACCEPTABLE
(RECOMMENDATIONS) *
UNACCEPTABLE
(RECOMMENDATIONS)
Delegation of Investment Authority
Investment Policy must designate one or more
officers of the entity as the investment officer(s)
responsible for the investment of its funds (does not
apply to a state agency, local government, or
investment pool for which an officer of the entity is
assigned by law the function of investing funds).
PFIA 2256.005 (f)
Investment Training
Investment training is required for the treasurer,
CFO, and the investment officer(s) of a local
government (see 2256.007 for training requirements
for state agencies). Training must be received from
an independent source, approved by the entity's
governing body or investment committee, and must
include education in investment controls, security
risks, strategy risks, market risks, diversification of
investment portfolio, and compliance with PFIA. The
hours of training vary and must be completed within
a specific number of months of taking office or
assuming duties. Thereafter, renewal training hours
must be completed every two years. (State
Agencies, Higher Education, and Community
Colleges training cycles are concurrent with the
state fiscal biennium.) (Local governments training
cycles are concurrent with the government s' fiscal
year.) Training hours vary with entity types and
investment holdings of municipalities and schools
with local investments. Training requirements can
be viewed at httas://cr)m.has.unt.edu/traininq-
requirements. PFIA 2256.008
Page 2 of 6
Page 3 of 6
PLACEMENT
ACCEPTABLE
UNACCEPTABLE
CRITERIA
IN POLICY*
(RECOMMENDATIONS)*
(RECOMMENDATIONS)
Signed Investment Policy Certification form
HB 1701 changes "person" to "business
organization" and narrowly defines business
organization as either an investment pool or an
investment management firm under contract to
manage the entity's portfolio with discretionary
authority. Very few investment management
contracts for public funds grant such discretion,
meaning investment pools will generally be the only
organizations still required to sign this certification.
This bill has all but killed the legal requirement for
the policy certification Public entities may wish to
revise their investment policy as it seems likely that
brokers, absolved of this legal requirement, may no
longer be willing to sign those certifications.
Public entities should still provide their investment
policy to their brokers, who in fact should be asking
for it. Among other things, FINRA's "Know Your
Customer" rules, largely established by the suitability
requirements of FINRA Rule 2111, require that
brokers, "have a reasonable basis to believe that a
recommendation is suitable for a particular customer
based on that customer's investment profile."
Providing the broker with your investment policy
should very clearly describe your investment profile,
particularly with regard to the primary objective of
safety of principal.
Compliant certification includes acknowledging that
the business organization has:
a. received and reviewed the entity's Investment
Policy; and
b. implemented reasonable procedures and controls
in an effort to preclude investment transactions
conducted between the entity and the organization
that are not authorized by the entity's Investment
Policy, except to the extent that this authorization
is dependent on an analysis of the makeup of the
entity's entire portfolio or requires an interpretation
of subjective investment standards. PFIA
2256.005 (k4)
Establishment and annual review of qualified
bidders list
Investment Policy must require either the entity's
governing body, or its Investment Committee to, at
least annually, review, revise, and adopt a list of
qualified brokers that are authorized to engage in
investment transactions with the entity. PFIA
2256.025
Independent Third-Party Safekeeping
Securities and collateral will be held by a third party
custodian designated by the entity, and held in the
entity's name as evidenced by safekeeping receipts
of the institution with which the securities are
deposited.
Delivery vs. Payment
Investment Policy must require "delivery vs.
payment" (DVP) settlement of all transactions,
except local government investment pool and mutual
fund transactions. PFIA 2256.005 (b)(4)(E)
Page 3 of 6
Page 4 of 6
PLACEMENT
ACCEPTABLE
UNACCEPTABLE
CRITERIA
IN POLICY*
(RECOMMENDATIONS)**
(RECOMMENDATIONS)
Competitive Bidding
Investment Policy should require at least three
competitive offers or bids for all individual security
purchases and sales (excluding transactions with
money market mutual funds, local government
investment pools and when issued securities, which
are deemed to be made at prevailing market rates).
Suitable and Authorized Investments
List the types of authorized investments in which the
investing entity's funds may be invested.
Investments authorized by PFIA are listed in
Sections 2256.009 — 2256.016 and Section
2256.019 — 2256.0201. It is recommended that
investment descriptions be either directly quoted
from PFIA and/or referenced to PFIA. Be sure to
include minimum required ratings and maximum
allowable stated maturities, where applicable. If
Repurchase Agreements are an authorized
investment, the policy should require execution of a
"Master Repurchase Agreement". Your policy may
be more restrictive than PFIA and need not include
every investment authorized by PFIA.
PFIA 2256.005 (b)(4)(A-B)
Prohibited Investments
An entity may choose to prohibit certain investments
that are authorized by PFIA. The Policy should
either:
a. list prohibited investments, including those
specifically prohibited in PFIA 2256.009 (b)(1-4);
or
b. state only those investments listed in this section
are authorized.
Effect of Loss of Required Rating
All prudent measures will be taken to liquidate an
investment that is downgraded to less than the
required minimum rating. PFIA 2256.021 (do we
need to state this twice, it was added to General
Objectives)
Collateral Policy
The governing body must approve a written policy
relating to collateralization. It should be included in
the Investment Policy and require collateralization
for all uninsured collected balances, plus accrued
interest, if any. In addition, the policy should address
acceptance, substitution, release, and valuation of
collateral. Collateral for Public Funds, Chapter
2257, Texas Government Code
Diversification and Maximum Maturities
Investment policy must address investment
diversification, yield, and maturity. (Yield is normally
addressed under General Objectives following
primary objectives of safety of principal and
liquidity.) PFIA 2256.005 (b)(3)
Page 4 of 6
CRITERIA
PLACEMENT
ACCEPTABLE
UNACCEPTABLE
IN POLICY"
(RECOMMENDATIONS)"
(RECOMMENDATIONS)
Investment Strategies
The Investment Policy must require adoption by the
governing body of a separate investment strategy for
each of the funds, or group of funds, under its
control. Each investment strategy must describe the
investment objectives for the particular fund using
the following priorities in order of importance:
(1) understanding of the suitability of the
investment to the financial requirements of the
entity;
(2) preservation and safety of principal;
(3) liquidity;
(4) marketability of the investment if the need
arises to liquidate the investment before
maturity;
(5) diversification of the investment portfolio; and
(6) yield (assign performance benchmarks as
appropriate) PFIA 2256.005 (d)
Weighted Average Maturity for Pooled Fund
Groups
If your entity combines funds as a "pooled fund
group" for investing purposes, then the maximum
dollar -weighted average maturity of the portfolio,
based on the stated maturity date, must be included
in your Investment Policy. PFIA 2256.005 (b)(4)(C)
Quarterly Reporting
Investment Policy must require quarterly investment
reports, prepared by the investment officer(s) and
submitted to the governing body. Specific PFIA
reporting requirements should be either be included
in your policy or referenced to PFIA. PFIA 2256.023
Review by Independent Auditor
Quarterly reports must be formally reviewed at least
annually by an independent auditor and reported to
the governing body. (An entity is exempt from this
review if it only invests in money market mutual
funds, investment pools or accounts offered by its
depository bank in the form of CDs or money market
accounts.) PFIA 2256.023 (d)
Marking to Market
The market value of the portfolio must be
determined at least quarterly and included in the
quarterly investment reports. The Investment Policy
must include methods to monitor the market price of
investments acquired with public funds (e.g. IDC,
Bloomberg, etc.) PFIA 2256.005 b)(4)(D)
Internal Controls
Investment Policy must require, in conjunction with
its annual financial audit, a compliance audit of
management controls on investments and
adherence to the entity's established investment
policies (see 2256.005(n) for the requirement for
state agencies). PFIA 2256.005 (m)
Exemption for Existing Investments
An entity is not required to liquidate investments that
were authorized investments at the time of
purchase. PFIA 2256.017
Page 5 of 6
CRITERIA
PLACEMENT
IN POLICY`
ACCEPTABLE
(RECOMMENDATIONS)"
UNACCEPTABLE
(RECOMMENDATIONS)
Annual Review and Adoption of Investment
Policy and Strategies
Investment Policy must require the governing body
to, not less than annually, adopt a written instrument
stating that it has reviewed the Investment Policy
and investment strategies and that the written
instrument so adopted shall record any changes
made to either the policy or strategies. PFIA
2256.005 (e)
"*Reviewer may assign an "acceptable" grade to an item and, if desired, also indicate how the discussion of the item may
be improved in the policy.
CZa►�!7f�
Page 6 of 6