Livingston Municipal Code Ch. 13 Investment Policy

This statement provides guidelines for the prudent management of the city’s investment portfolio.

(Ord. 342, passed 12-15-1987)

(A) The primary objective of this investment policy is to achieve the highest yield possible without assuming unacceptable levels of risk while maintaining a liquidity position sufficient to meet current and anticipated cash needs. The following major guidelines are used to achieve the primary objective of the investment policy:

• 1. Investment authority and responsibility;
• 2. Available investment instruments;
• 3. Investment limitations;
• 4. General investment guidelines;
• 5. Prevention of risk;
• 6. Eligible financial institutions;
• 7. Administrative safeguards; and
• 8. Reporting and evaluation requirements.

(B) The policies described herein shall apply to the investment portfolios of the City Redevelopment Agency and other funds that may at various times be placed in the custody of the Treasurer.

(Ord. 342, passed 12-15-1987)

Pursuant to Cal. Gov’t Code § 53607, the City Manager and Finance Director as chief fiscal officers are authorized to undertake investment transactions on behalf of the city.

(A) Security purchases and holdings are maintained within statutory limits imposed by the Cal. Gov’t Code §§ 53600 et seq.

(B) 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 income to be derived.

(Ord. 342, passed 12-15-1987)

(A) Government agency issues. As authorized in Cal. Gov’t Code §§ 53601(a) through (e), this category includes a wide variety of government securities. There are no portfolio limitations on the amount or maturity period for these investment vehicles, which include the following:

• 1. Local government bonds or other indebtedness;
• 2. State bonds or other indebtedness;
• 3. U.S. treasury notes or other indebtedness secured by the full faith and credit of the federal government; and

4. Other federal agency securities such as issued by the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and small business administration.

(B) Bankers’ acceptances.

1. As provided in Cal. Gov’t Code § 53601(g), 40% of the city’s portfolio may be invested in bankers’ acceptances that are eligible for purchase by the federal reserve system, although no more than 30% of the portfolio may be invested in bankers’ acceptances with any one commercial bank.

2. Additionally, the maturity period cannot exceed 270 days; however, bankers’ acceptances are seldom marketed with maturities in excess of 180 days.

(C) Commercial paper. As authorized in Cal. Gov’t Code § 53601(h), 15% of the city’s portfolio may be invested in “prime” commercial paper as rated by Moody’s or Standard and Poor’s with maturities not to exceed 180 days. This percentage may be increased to 30% if the dollar weighted average maturity does not exceed 31 days. There are a number of other qualifications regarding investments in commercial paper based on the financial strength of the corporation and the size of the investment.

(D) Negotiable certificates of deposit. As authorized in Cal. Gov’t Code § 53601(i), the city may invest 30% of its portfolio in negotiable certificates of deposit issued by commercial banks. There is no limitation on the maturity period for this investment vehicle.

(E) Repurchase and reverse repurchase agreements.

1. As authorized in Cal. Gov’t Code § 53601(j), these investment vehicles are agreements between the local agency and seller for the purchase of government securities to be resold at a specific date and for a specific amount.

2. Repurchase agreements are generally used for short term investments varying from one day to two weeks, although there is no legal limitation on the maturity period or the amount. As provided in Cal. Gov’t Code § 53635, reverse repurchase agreements require the prior approval of the city.

(F) Council financial futures and financial option contracts. As authorized in Cal. Gov’t Code §53601(i), local agencies may invest in financial futures or option contracts in any of the above investment categories subject to the same overall portfolio limitations.

(G) Time certificates of deposit.

1. As authorized in Cal. Gov’t Code § 53652, certificates of deposit are fixed term investments which are required to be collateralized 110% by eligible pooled securities.

2. The pool is administered by the state, and is composed of a wide variety of government securities, including those indicated above (except municipal bonds), as well as promissory notes secured by first mortgages on improved residential property located in the state. There are no portfolio limits on the amount or maturity for this investment vehicle.

(Ord. 342, passed 12-15-1987)

All investment vehicles allowed by Cal. Gov’t Code §§ 53601 and 53630 et seq. may be used by the city with the exception of reverse repurchase agreements. Exclusion of these vehicles is consistent with the city’s desire to minimize risk. Although the possibility exists for greater earnings with these vehicles, it is believed that the potential level of risk exceeds their benefits.

(Ord. 342, passed 12-15-1987)

The criteria employed by the Treasurer in the selection of investment instruments in their order of importance are the following.

(A) Safety. The safety and risk associated with an investment refers to the potential loss of principal, accrued interest or a combination of these. The city employs investment instruments which are considered safe. The primary duty of the Treasurer is to protect the cash and investments placed in his or her trust on behalf of the citizens of the community.

(B) Liquidity. Liquidity refers to the ability to convert investment holdings to cash immediately with a minimal loss of principal or accrued interest. This quality of an investment is important when the need for unexpected funds suddenly occurs.

(C) Yield. Yield is the dollar earnings that investment provides. Yield becomes important only after the fundamental requirements of safety and liquidity have been met.

(Ord. 342, passed 12-15-1987)

(A) Diversification of instruments. The portfolio should consist of a mix of various types of securities, issuers and maturities.

(B) Staggering of maturities. Investment maturities are scheduled in such a manner so that adequate cash will be available to pay disbursement obligations as they become due and payable.

(C) Cash flow requirements used to establish maturity. Projected cash flow requirements are the primary factor to be used in determining investment maturity terms. After cash flow needs have been met, yield considerations will be the next factor used in determining maturity terms, with the expectation that longer maturity periods will generally yield greater returns on investments.

(D) Sale of investments before maturity. Investments may be sold prior to maturity for cash flow or appreciation purposes; however, no investment shall be made based on yields resulting from capital gains.

(E) Terms of investments. Investments longer than one year may be made if consistent with the city’s cash flow needs and related intent of holding until maturity.

(Ord. 342, passed 12-15-1987)

(A) Pooled cash. Cash for all general city funds are consolidated into one general bank account and invested on a pooled concept basis. Interest earnings are allocated according to fund ledger balances.

(B) Competitive bids. Purchase and sale of securities are made on the basis of competitive offers and bids.

(C) Time deposit placement. Insured $100,000 time deposits are not placed with banks and/or savings and loan associations unless an office is maintained in the state.

(D) Security marketability. The marketability (salability) of a security is considered at the time of purchase, as the security may have to be sold prior to maturity in order to meet unanticipated cash demands.

(E) TCD evaluation. Time certificates of deposit (TCD) are evaluated in terms of FDIC or FSLIC coverage. For deposits in excess of the insured maximum of $100,000, approved collateral at full market value is required, as prescribed in the Cal. Gov’t Code 53652.

(F) NCD evaluation. Negotiable certificates of deposit (NCD) are evaluated in terms of the credit worthiness of the issuer, as these deposits are unsecured and uncollateralized promissory notes.

(G) Broker authorization. Investment transactions are executed only with previously approved brokers/dealers.

(H) Financial capacity. The financial capacity and credit worthiness of the financial institution shall be considered prior to the placement of city investments.

(I) Safekeeping. Securities purchased from secondary brokers/dealers shall be held in third party safekeeping by the Trust Department of the city’s bank, or by another third party trustee designated by the City Treasurer. Securities purchased from primary dealers shall be held in the name of local agency with the trustee executing investment transactions as directed by the City Treasurer.

(Ord. 342, passed 12-15-1987)

(A) Before the placement of an investment with any financial institution, the city investigates the ability of that institution to meet its financial obligations.

(B) Several criteria that portray the financial well being of an institution are studied. Among these are:

1. Profitability. The first and simplest test of an institution’s ability to meet its liabilities is to study profits or earnings history. An institution that is losing money erodes its capital and could find insufficient assets to offset depositors’ claims;

2. Capitalization. Capital is the owners’ or shareholders’ equity investment (assets minus liabilities). A well capitalized firm can withstand temporary losses and offers reassurance that cash will be available to redeem a note or certificate;

3. Asset quality. Asset quality is a key analytical concern. Default risk is greatest among institutions with deteriorating assets; and

4. Financial statement. To facilitate evaluation, the financial institution shall submit audited financial statements prepared by an independent certified public accountant to the city on an annual basis prompting following the end of the institution’s fiscal year.

(Ord. 342, passed 12-15-1987)

The city employs methods to ensure safe administration of its investment program. Two main areas of concern are the following.

(A) Internal controls. The city attempts to separate the investment placing function and the resultant accounting activity.

(B) Bonding. All employees involved in investment duties are properly bonded.

(Ord. 342, passed 12-15-1987)

(A) Monthly report. By law, the Treasurer must issue a monthly report to the chief executive officer and legislative body of the city showing the type of investment, institution, date of maturity, amount of deposit, current market value for all securities with a maturity of more than 12 months, rate of interest and other relevant data that may be requested.

(B) Annual report and review. The Treasurer shall prepare an annual report for review with the legislative body showing average daily funds invested by portfolio, interest earned, portfolio yield and average life. The report will include yields on other comparable portfolios for comparison purposes. Other topics for discussion will include the general condition of the portfolio, outlook for future interest rates and planned strategy for executing investment transactions. Such reviews and evaluations should result in a uniform portfolio administration policy.

(Ord. 342, passed 12-15-1987)

Statutory reference:

Similar provisions, see Cal. Gov’t Code § 53646(b)(1)