HomeMy WebLinkAboutCouncil Policy No. 300-08 - Investment Policy
CITY OF LAKE ELSINORE, CALIFORNIA
COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
Effective Date: 6-1-98
Revised: 6-22-04
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BACKGROUND
State law permits the City to makes certain kinds of investments with respect to money in its
treasury not required for its immediate needs.
PURPOSE
To guide the City’s investment decisions.
POLICY
In accordance with the City Council Policy of the City of Lake Elsinore and under authority
granted by the City Council, the City Treasurer’s function and responsibility for investing the
unexpended cash in the City Treasury has been designated to the City Manager.
The investment of the funds of the City of Lake Elsinore is directed to the goals of safety,
liquidity and yield. The authority governing investments for municipal governments is set forth
in the California Government Code (CDC), Sections 53601 through 53659.
The primary objective of the investment policy of the City of Lake Elsinore is SAFETY OF
PRINCIPAL. Investments shall be placed in those securities as outlined by type and maturity
sector in this document. Effective cash flow management and resulting cash investment
practices are recognized as essential to good fiscal management and control. The City’s
portfolio shall be designed and managed in a manner responsive to the public analysis and, as a
result the balance between the various investments and maturities may change in order to give
the City of Lake Elsinore the optimum combination of necessary liquidity and optimal yield
based on cash flow projections.
SCOPE
The investment policy applies to all financial assets of the City of Lake Elsinore as accounted for
in the Comprehensive Annual Financial Report (CAFR). Policy statements outlined in this
document focus on the City of Lake Elsinore’s pooled funds, but will also apply to all other
funds under the City Manager’s span of control unless specifically exempted by statute or
ordinance. This policy is applicable, but not limited, to all funds listed below:
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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• General Fund
• Special Revenue Fund
• Debt Service Fund
• Capital Project Fund
• Enterprise Fund
• Trust and Agency Funds
• Any new fund created by the City Council unless specifically exempted.
Bond proceeds and reserve funds under the direct administration of a third party trustee may
have investments that may exceed the five-year policy period and are intended to coincide with
liquidity needs.
PRUDENCE
The standard to be used by investment officials shall be that of a “prudent person” and shall be
applied in the context of managing all aspects of the overall portfolio. Investments shall be made
with judgment and care, under circumstances then prevailing, which persons of prudence,
direction, 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.
It is the City’s full intent, at the time of purchase, to hold all investments until maturity to ensure
the return of all invested principal dollars.
However, it is realized that market prices of securities will vary depending on economic and
interest rate conditions at any point in time. It is further recognized, that in a well-diversified
investment portfolio, occasional measured losses are inevitable due to economic, bond market, or
individual security credit analysis. These occasional losses must be considered within the
context of the overall investment program objectives and the resultant long-term rate of return.
The City Manager and other individuals assigned to manage the investment portfolio, acting
within the intent and scope of the investment policy and other written procedures, an individual
security’s credit risk or market price changes, provided deviations from expectations are reported
in a timely manner, and appropriate action is taken to control adverse developments.
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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OBJECTIVES
As specified in CGC 53600.5, when investing, reinvesting, purchasing, acquiring, exchanging,
selling, and managing public funds, the primary objectives, in priority order, of the investment
activities shall be:
A) Safety of Principal
Safety of principal is the foremost objective of the City of Lake Elsinore. Each
investment transaction shall seek to ensure that capital losses are avoided, whether
form securities default, broker/dealer default, or erosion of market value. The
City shall seek to preserve principal by mitigating the two types of risk, credit risk
and market risk.
Credit Risk, defined as the risk of loss due to failure of the issuer of a security,
shall be mitigated by investing in investment-grade securities and by diversifying
the investment portfolio so that the failure of any one issuer does not unduly harm
the City’s capital base and cash flow.
Market Risk, defined as market value fluctuations due to overall changes in the
general level of interest rates, shall be mitigated by limiting the average maturity
of the City’s investment portfolio to two years, the maximum maturity of any one
security to five years, structuring the portfolio based on historic and current cash
flow analysis eliminating the need to sell securities prior to maturity, and avoiding
the purchase of long-term securities for the sole purpose of short-term
speculation.
B) Liquidity
Historical cash flow trends are compared to current cash flow requirements on an
ongoing basis in an effort to ensure that the City’s investment portfolio will
remain sufficiently liquid to enable the City to meet all reasonably anticipated
operating requirements.
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SUBJECT: Investment Policy Policy No. 300-8
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C) Yield
The investment portfolio shall be designed with the objective of attaining a
market rate of return throughout budgetary and economic cycles, taking into
account the investment risk constraints and the cash flow characteristics of the
portfolio.
PERFORMANCE EVALUATION
Investment performance is continually monitored and evaluated by the Director of
Administrative Services. Investment performance statistics and activity reports are generated on
a monthly basis for presentation to the City Manager, City Council and City Treasurer.
DELEGATION OF AUTHORITY
Daily management responsibility of the investment program has been delegated to the Director
of Administrative Services who shall establish procedures for the operation consistent with this
investment policy. 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 Director
of Administrative Services. The Director of Administrative Services shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the activities of
subordinate officials. Under the provisions of California Government Code 53600.3, the
Director of Administrative Services is a trustee and a fiduciary subject to the prudent investor
standard.
INVESTMENT PROCEDURES
The Director of Administrative Services shall establish written investment procedures and
guidelines for the operation of the investment program consistent with this policy. The
procedures should include reference to: safekeeping, PSA repurchase agreements, wire transfer
agreements, banking service contracts and collateral/depository agreements. 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 the
policy and the procedures established by the Director of Administrative Services.
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SUBJECT: Investment Policy Policy No. 300-8
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ETHICS AND CONFLICTS OF INTEREST
Officers and employees involved in the investment process shall refrain from personal business
activity that conflicts with proper executions of the investment program, or impairs their ability
to make impartial investment decisions. Additionally, the city Officials are required to annually
file applicable financial disclosures as required by the Fair Political Practices Commission
(FPPC).
SAFEKEEPING AND CUSTODY
To protect against fraud or embezzlement of losses caused by collapse of an individual securities
dealer, all securities owned by the City shall be held in safekeeping by a third party bank / trust
department.
All security transactions entered into by the City of Lake Elsinore shall be conducted on
delivery-versus-payment (DVP) basis. All securities purchased or acquired shall be delivered
to the City of Lake Elsinore by book entry, physical delivery, or by third part custodial
agreement as required by CGC 53601.
Securities held custody of the City shall be independently audited on an annual basis to verify
investment holdings.
All exceptions to this safekeeping policy must be approved by the City Manager in written form
and included in monthly reporting to the City Council.
DIVERSIFICATION
The City of Lake Elsinore will diversify its investments by security type and institution. It is the
policy of the City of Lake Elsinore to diversify its investment portfolio. Assets shall be
diversified to eliminate the risk of loss resulting from over concentration of assets in a specific
maturity, a specific issuer, or a specific class of securities. Diversification strategies shall be
determined and revised periodically. In establishing specific diversification strategies, the
following general policies and constraints shall apply:
(a) Maturities selected shall provide for stability of income and liquidity.
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SUBJECT: Investment Policy Policy No. 300-8
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(b) Disbursement and payroll dates shall be covered through maturity investments,
marketable U.S. treasury bills, or other cash equivalent instruments such as
money market mutual funds.
INTERNAL CONTROL
The investment portfolio and all related transactions are reviewed and balanced to appropriate
general ledger accounts by the Finance Staff on a monthly basis.
An independent analysis by an external auditor shall be conducted annually to review internal
control, account activity, and compliance with policies and procedures and reported to City
Council.
REPORTING
The City Director of Administrative Services shall review and render monthly investment reports
to the City Manager, City Council and City Treasurer. The report shall include the face amount
of the cash investment, the classification of the investment, the name of the institution or entity,
the rate of interest, the maturity date, the current market value, and accrued interest due for all
securities. The report shall also detail all repurchase agreements and reverse repurchase
positions and associated liabilities.
The report will also include the source of the portfolio valuation. As specified in CGC 53646
(e), if all funds are placed in LAIF, FDIC-insured accounts, and/or in a county investment pool,
the foregoing report elements may be replaced by copies of the latest statements from such
institutions. The report must also include a certification that (1) all investment actions executed
since the last report have been made in full compliance with the investment policy, and (2) the
City of Lake Elsinore will meet its expenditure obligations for the next six months as required by
CGC 53646 (b) (2) and (3), respectively. The Director of Administrative Services shall maintain
a complete and timely record of all investment transactions.
QUALIFIED BROKER DEALERS
The City shall transact business only with banks, saving and loans, and with brokers/dealers. For
brokers/dealers of government securities and other investments, the standing with the California
Department of Securities, the Securities and Exchange Commission, the National Association of
Securities Dealers, or other applicable self-regulatory organizations.
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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Before engaging in investment transactions with a broker/dealer, the Director of Administrative
Services shall have received from said firm a signed certification form. This form shall attest
that the individual responsible for the City of Lake Elsinore’s account with that firm has
reviewed the City of Lake Elsinore’s investment policy, and that the firm understands the policy
and intends to present investment recommendations and transactions to the City of Lake Elsinore
that are appropriate under the terms and conditions of the investment policy. In addition,
broker/dealers must supply the Director of Administrative Services the following:
• Audited financial statements
• Proof of National Association of Security Dealers certification
• Proof of state registration
Complete broker/dealer questionnaire
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Director of Administrative Services.
Exceptions will be made only upon written authorization of the City Council.
AUTHORIZED INVESTMENTS
Investment of City funds is governed by the California Government Code sections 53601 et seq.
The California Government Code allows the City to invest in the following media:
• Securities of the U.S. Government, or its government sponsored agencies
• Small Business Administration loans
• Certificates of deposit, placed with commercial banks and savings and loan
companies
• Negotiable certificates of deposit
• Bankers acceptances
• Commercial paper
• Corporate notes and bonds, including medium term notes
• Local Agency Investment Fund
• Repurchase agreements
• Reverse repurchase agreements
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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• Passbook savings account demand deposits
• County Treasurer demand deposits
• Asset-backed and mortgage-backed securities
• Money market mutual funds
Within the context of the limitations, the following investments are authorized, as further limited
herein.
Maximum
Investment Type Authorization Limit % Maturity
US Treasury Bond/Notes/Bills 0 to 100% 5 Years
US Government Sponsored Agency Issues 0 to 100% 5 Years
Banker’s Acceptances 0 to 40% 180 Days
Time Certificates of Deposit 0 to 25% 5 Years
Negotiable Certificates of Deposit 0 to 30% 5 Years
Commercial Paper 0 to 15% 270 Days
Medium Term Corporate Notes 0 to 30% 5 Years
Repurchase Agreements 0 to 100% 1 Year
Reverse Repurchase Agreements 0 to 20% 92 Days
Local Agency Investment Fund 0 to 100% N/A
U.S. Treasury Bills - Issued weekly with maturity dates up to one year. They are issued and
traded on a discount basis with interest figured on a 360-day basis, actual number of days.
They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly
liquid security.
U.S. Treasury Notes - Initially issued with two- to ten-year maturities. They are actively
traded in a large secondary market and are very liquid. The Treasury may issue Note issues
with a minimum of $1,000; however, the average minimum is $5,000.
Federal Government Sponsored Agency Issues - Guaranteed directly or indirectly by the
United States Government. All agency obligations qualify as legal investments and are
acceptable as security for public deposits.
They usually provide higher yields than regular Treasury issues with all of the same
advantages. Examples include:
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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• FICBs (Federal Intermediate Credit Bank Debentures) - Loans to lending institutions
used to finance the short-term and intermediate needs of farmers, such as seasonal
production. They are usually issued monthly in minimum denominations of $3,000
with a nine-month maturity. Interest is payable at maturity and is calculated on a
360-day, 30-day month basis.
• FFCBs (Federal Farm Credit Bank) - Debt instruments used to finance the short and
intermediate term needs of farmers and the national agricultural industry. They are
issued monthly with three- and six-month maturities. The FFCB issues larger issues
(one to ten year) on a periodic basis. These issues are highly liquid.
• FLBs (Federal Land Bank Bonds) - Long-term mortgage credit provided to farmers
by Federal Land Banks. These bonds are issued at irregular times for various
maturities ranging from a few months to ten years. The minimum denomination is
$1,000. They carry semi-annual coupons. Interest is calculated on a 360-day, 30-
day month basis.
• FHLBs (Federal Home Loan Bank Notes and Bonds) - Issued by the Federal Home
Loan Bank System to help finance the housing industry. The notes and bonds
provide liquidity and home mortgage credit to savings and loan associations, mutual
savings banks, cooperative banks, insurance companies, and mortgage-lending
institutions. They are issued irregularly for various maturities. The minimum
denomination is $5,000. The notes are issued with maturities of less than one year
and interest is paid at maturity. The bonds are issued with various maturities and
carry semi-annual coupons. Interest is calculated on a 360-day, 30-day month basis.
• FNMAs (Federal National Mortgage Association) - Used to assist the home
mortgage market by purchasing mortgages insured by the Federal Housing
• Administration and the Farmers Home Administration, as well as those guaranteed
by the Veterans Administration. They are issued about four times a year for
maturities ranging from a few months to eight years. They are issued in minimum
denominations of $10,000. They carry semi-annual coupons. Interest is computed
on a 360-day, 30-day month basis.
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COUNCIL POLICY MANUAL
SUBJECT: Investment Policy Policy No. 300-8
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FHLMCs (Federal Home Loan Mortgage Corporation) - A government-sponsored
corporation established to develop the secondary market for conventional home mortgages.
Mortgages are purchased solely from the Federal Home Loan Bank
System member lending institutions whose deposits are insured by agencies of the
United States Government. They are issued for various maturities and in minimum
denominations of $10,000. Interest is paid semi-annually and is calculated on a 360-
day, 30-day month basis.
• Other federal agency issues are Small Business Administration notes (SBAs),
Government National Mortgage Association notes (GNMAs), Tennessee Valley
Authority notes (TVAs), and Student Loan Marketing Association notes (SALLIE-
MAEs). As a matter of practice, the City does not invest in these issues as they do
not suit our purposes as well as other investment opportunities available.
The City limits its investments to no more than 40% of its surplus funds in any one Federal
Agency.
Bankers Acceptances - Short-term credit arrangements to enable businesses to obtain funds
to finance commercial transactions. They are time drafts drawn on a bank by an exporter or
importer to obtain funds to pay for specific merchandise. By its acceptance, the bank
becomes primarily liable for the payment of the draft at its maturity. An acceptance is a
high-grade negotiable instrument. Bankers Acceptances can be purchased in various
denominations for 30, 60, or 90 days, but no longer than -180 days. The interest is
calculated on a 360-day discount basis similar to Treasury Bills. Local agencies may not
invest more than 40% of their surplus funds in bankers’ acceptances or more than 10% of
the agency’s surplus funds in bankers’ acceptances of any one commercial bank.
Certificates of Deposit - Time deposits of a bank or savings and loan. They are purchased in
various denominations with maturities ranging from 30 to 360 days. The interest is
calculated on a 360-day, actual-day month basis and is payable monthly.
Negotiable Certificates of Deposit - Unsecured obligations of the financial institution, bank
or savings and loan, bought at par value with the promise to pay face value plus accrued
interest at maturity. They are high-grade negotiable instruments, paying a higher interest
rate than regular certificates of deposit. The primary market issuance is in multiples of
$1,000,000; the secondary market usually trades in denominations of $500,000, although
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SUBJECT: Investment Policy Policy No. 300-8
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smaller lots are occasionally available. As a matter of practice, only the ten largest U.S.
banks where there is a secondary market established for continued liquidity are considered
for investment. The City’s total investment in negotiable certificates of deposit may not
exceed 30% of surplus funds.
Commercial Paper - Short-term unsecured promissory notes issued by a corporation to raise
working capital. These negotiable instruments are purchased at a discount to par value or at
par value with interest bearing.
Local agencies are permitted by State law to invest in commercial paper of "prime" quality
of the highest ranking or of the highest letter and numerical rating as provided by Moody's
Investor's Service, Inc., and/or Standard and Poor's Corporation. Eligible paper is further
limited to issuing corporations that are organized and operating within the United States and
having total assets in excess of five hundred million dollars ($500,000,000) and having an
“A” or higher rating for the issuer’s debt other than commercial paper. Commercial Paper
issued by an Issuer that has a rating of “A” on their debt other than commercial paper but are
on credit watch for a possible downgrade by a nationally recognized rating agency shall not
be considered for investment purposes. Purchases of eligible commercial paper may not
exceed -270 days maturity nor represent more than 10% of the outstanding paper of an
issuing corporation. Purchases of commercial paper may not exceed 15 percent of the
portfolio. An additional 15%, for a total of 30 percent of the portfolio, may be invested only
if the dollar-weighted average of the entire investment in commercial paper does not exceed
31 days. “Dollar-weighted average maturity” is defined as the sum of the amount of each
outstanding commercial paper investment multiplied by the number of days to maturity,
divided by the total amount of outstanding commercial paper.
Medium Term Corporate Notes - Unsecured promissory notes issued by a corporation
organized and operating in the United States. These are negotiable instruments and are
traded in the secondary market. Medium term corporate notes can be defined as extended
maturity commercial paper.
Local agencies are restricted by the Government Code to investments in corporations rated
in the top three note categories by Moody's Investors Service, Inc., and/or Standard and
Poor's Corporation. For medium-term notes, eligible purchases consist of instruments that
have a rating of "A" or better by both Moody's Investors Service, Inc., and Standard and
Poor's Corporation. Corporate Notes issued by an issuer that has a rating of “A” but are on
credit watch for a possible downgrade by a nationally recognized rating agency shall not be
considered for investment purposes. If the security's credit rating falls below "A" by one of
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SUBJECT: Investment Policy Policy No. 300-8
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these agencies, then awareness is heightened and the security monitored closely to
determine if credit risk has been significantly increased. If a security falls below "A" by
both rating agencies, then the Director of Administrative Services will evaluate the need to
sell the security prior to maturity. Further restrictions are a maximum term of five years to
maturity and total investments in medium term corporate notes may not exceed 30% of the
local agency's surplus funds.
Repurchase Agreements - A repurchase agreement is a short-term investment transaction.
Banks buy temporarily idle funds from a customer by selling U.S. Government or other
securities with a contractual agreement to repurchase the same securities on a future date.
Repurchase agreements are typically for one to ten days in maturity. The customer receives
interest from the bank. The interest rate reflects both the prevailing demand for Federal
funds and the maturity of the repurchase agreement. Some banks will execute repurchase
agreements for a minimum of $100,000 to $500,000, but most banks have a minimum of
$1,000,000. The term of a repurchase agreement may not exceed one year. The market
value of securities that underlay a repurchase agreement shall be valued at 102 percent or
greater of the funds borrowed against those securities and the value shall be adjusted no less
than quarterly. Repurchase Agreements can only be executed with financial institutions or
broker/dealers that have signed a Master Repurchase Agreement with the City.
Reverse Repurchase Agreements - A reverse repurchase agreement is the opposite of a
repurchase agreement. The City loans a security to a bank in exchange for cash. The City
agrees to pay off the loan with interest on a future date. As this type of investment actually
involves a loan arrangement, the City may not invest more than 10% of its surplus funds in
reverse repurchase agreements, and must always match its maturities to the reinvestment.
Reverse repurchase agreements may be utilized only when either of the following conditions
is met:
1. The security was owned or specifically committed to purchase, by the local agency,
prior to December 31, 1994, and was sold using a reverse repurchase agreement on
December 31, 1994.
2. The security:
a) to be sold has been owned and fully paid for a minimum of 30 days prior to sale;
and
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SUBJECT: Investment Policy Policy No. 300-8
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b) total of all reverse repurchase agreements owned does not exceed 10 percent of
the base value of the portfolio; and
c) agreement does not exceed a term of 92 days, unless the agreement includes a
written codicil guaranteeing a minimum earning or spread for the entire period
between the sale of a security using a reverse repurchase agreement and the final
maturity date of the same security.
LAIF (Local Agency Investment Fund) - A special fund in the State Treasury which local
agencies may use to deposit funds for investment. There is no minimum investment period
and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum
balance of $40,000,000 for any agency. The City is restricted to a maximum of fifteen
transactions per month. It offers high liquidity because deposits can be converted to cash in
24 hours and no interest is lost. All interest is distributed to those agencies participating on a
proportionate share basis determined by the amounts deposited and the length of time they
are deposited. Interest is paid quarterly. The State retains an amount for reasonable costs of
making the investments, not to exceed one-quarter of one percent of the earnings. California
Government Code §16429.3 states, in part:
"money placed with the State Treasurer for deposit in the Local Agency
Investment Fund by cities, counties, or special districts shall not be subject to
impoundment or seizure by any state official or state agency."
Prohibited Investments
Under the provisions of CGC 53601.6 and 53631.5, the City of Lake Elsinore shall not
invest any funds covered by this investment policy in inverse floaters, range notes,
interest-only strips derived from mortgage pools, or any investment that my result in a
zero interest accrual if held to maturity.
Investment of Bond Proceeds
When investing proceeds from the issuance of bonds, the City of Lake Elsinore will
follow this Investment Policy when determining allowable investments. Should the
trust agreement of a particular bond issue be more or less restrictive than the City's
policy on permitted investments, then the trust agreement will take precedence.
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SUBJECT: Investment Policy Policy No. 300-8
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COLLATERAL REQUIREMENTS
Collateral is required for investments in certificates of deposit, repurchase agreements, and
reverse repurchase agreements. All certificates of deposit must be collateralized by U.S.
Treasury Obligations. Collateral must be held by a third party trustee and valued on a monthly
basis. In order to reduce market risk, the collateral level will be set at the maximum allowed by
state and federal law.
DERIVATIVE INVESTMENTS
Derivative investments have value “derived” from a benchmark or index. That benchmark can
be almost any financial measure from interest rates to commodity and stock prices. When
appropriate, limited use of derivative investments tied solely to interest rate structures are
allowable. However, any investment of this type must receive prior approval from the City
Council. Securities or investments classified as derivatives must be issued by an agency or entity
authorized by this investment policy.
LEGISLATIVE CHANGES
Any State of California legislative action that further restricts allowable maturities, investment
type or percentage allocations will be incorporated into the City of Lake Elsinore’s investment
policy and superseded any and all applicable language.
INTEREST EARNINGS
All moneys earned and collected from investments authorized in this policy shall be allocated
quarterly to various fund accounts based on the cash balance in each fund as a percentage of the
entire pooled portfolio.
LIMITING MARKET VALUE EROSION
The longer the maturity of securities, the greater their market price volatility. Therefore, it is the
general policy of the City to limit the potential effects from erosion in market values by adhering
to the following guidelines:
All immediate and anticipated liquidity requirements will be addressed prior to purchasing all
investments.
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Maturity dates for long-term investments will coincide with significant cash flow requirements
where possible, to assist with short-term cash requirements at maturity.
All long-term securities will be purchased with the intent to hold all investments to maturity
under then prevailing economic conditions. However, economic or market conditions may
change, making it the City’s best interest to sell or trade a security prior to maturity.
PORTFOLIO MANAGEMENT ACTIVITY
The investment program shall seek to augment returns consistent with the intent of this policy,
identified risk limitations, and prudent investment principals. These objectives will be achieved
by use of the following strategy.
Utilize the expert investment professionals of the State (Local Agency Investment Fund).
POLICY REVIEW
The City of Lake Elsinore’s investment policy shall be adopted by the City Council on an annual
basis. This investment policy shall be reviewed at least annually to insure its consistency with
the overall objectives of preservation of principal, liquidity and yield, and its relevance to current
law and financial and economic trends. Any amendments to the policy shall be forwarded to the
City Council for approval.
The current policy of utilizing State Local Agency Investment Funds will continue to be the
primary investment instrument of the City.
GLOSSARY
Because this policy is to be available to the public as well as the governing body, it is important
that a glossary of related terminology be part of the policy.
Glossary
Agency: Federal agency securities and /or Government-sponsored enterprises.
Bankers’ Acceptance (BA): A draft or bill or exchange accepted by a bank or trust company.
The accepting institution guarantees payment of the bill, as well as the issuer.
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Broker: A broker brings buyers and sellers together for a commission.
California Local Government Debt: Is bonds, notes, warrants, or other evidences of
indebtedness of any local agency within California. California local government debt is a
permitted investment under the California Government Code. The Government Code does not
specify minimum credit ratings for local government debt in which local agencies may invest.
The Authority does not invest in these securities.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate.
Large-denomination CD’s are typically negotiable.
Collateral: Securities, evidence of deposit of 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.
Comprehensive Annual Financial Report (CAFR): The official annual report for the City of
Lake Elsinore. It includes five combine statements for each individual fund and account group
prepared in conformity with GAAP. It also includes supporting schedules necessary to
demonstrate compliance with finance-related legal and contractual provisions, extensive
introductory material, and a detailed Statistical Section.
Coupon: (a) The annual rate of interest that a bond’s issuer promises to pay the bondholder on
the bond’s face value. (b) A certificate attached to a bond evidencing interest due on a payment
date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying
and selling for his own account.
Debenture: A bond secured only by the general credit of the issuer.
Delivery versus Payment: There are two methods of delivery of securities: delivery versus
payment and delivery versus receipt. Delivery versus payment is delivery of securities with an
exchange of money for the securities. Delivery versus receipt is delivery of securities with an
exchange of a signed receipt for the securities.
Derivatives: (1) Financial instruments whose return profile is linked to, or derived from, the
movement of one or more underlying index or security, and may include a leveraging factor, or
(2) financial contracts based upon notional amounts whose value is derived from an underlying
index or security (interest rates, foreign exchange rates, equities or commodities).
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Discount: The difference between the cost price of a security and its maturity when quoted at
lower than face value. A security selling below original offering price shortly after sale also is
considered to be at a discount.
Diversification: Dividing investment funds among a variety of securities offering independent
returns.
Federal Credit Agencies: Agencies of the Federal government set up to supply credit to
various classes of institutions and individuals, e.g., S&L’s, small business firms, students,
farmers, farm cooperatives, and exporters.
Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank deposits,
currently up to $100,000 per deposit.
Federal Funds Rate: The rate of interest at which Fed funds are traded. This rate is currently
pegged by the Federal Reserve through open-market operations.
Federal Home Loan Banks (FHLB): Government sponsored wholesale banks (currently 12
regional banks) which lend funds and provide correspondent banking services to member
commercial banks, thrift institutions, credit unions and insurance companies. The mission of the
FHLB is to liquefy the housing related assets of its members who must purchase stock in their
district Bank.
Federal National Mortgage Association (FNMA): FNMA, like GNMA was chartered under
the Federal National Mortgage 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, as the
corporation is called, is a private stockholder-owned corporation. The corporation’s purchases
include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages.
FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
Federal Open Market Committee (FOMC): Consists of seven members of the Federal
Reserve Board and five of the twelve Federal Reserve and Presidents. The President of the New
York Federal Reserve Bank is a permanent member, while the other Presidents serve on a
rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding
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SUBJECT: Investment Policy Policy No. 300-8
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purchases and sales of Government Securities in the open market as a means of influencing the
volume of bank credit and money.
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., 12 regional banks and
about 5,700 commercial banks that are members of the system.
Government National Mortgage Association (GNMA or Ginnie Mae): Securities influencing
the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial
banks, savings and loan associations, and other institutions. Security holder is protected by full
faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or
FmHA mortgages. The term “pass-throughs” is often used to describe Ginnie Maes.
Issuer: Any corporation, government unit or financial institution which borrows money through
the sale of securities.
Liquidity: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread
between bid and asked prices is narrow and reasonable size can be done at those quotes.
Local Agency Investment Fund (LAIF): A special fund in the State Treasury which local
agencies may use to deposit funds for investment. All interest is distributed to those agencies
participating on a proportionate share determined by the amounts deposited and the length of
time they are deposited. Interest is paid quarterly via direct deposit to the LAIF account. The
State keeps an amount for reasonable costs of making the investments, not to exceed one-quarter
of one per cent of the earnings.
Local Government Investment Pool (LGIP): The aggregate of all funds from political
subdivisions that are placed in the custody of the State Treasurer for investment and
reinvestment.
Market Value: The price at which a security is trading and could presumably be purchased or
sold.
Master Repurchase Agreement: A written contract covering all future transactions between
the parties to repurchase – reverse repurchase agreements that establish each party’s rights in the
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transactions. A master agreement will often specify, among other things, the right of the buyer-
lender to liquidate the underlying securities in the event of default by the seller-borrower.
Maturity: The date upon which the principal or stated value of an investment becomes due and
payable.
Member: Refers to a governmental entity which is a signatory to the Joint Powers Agreement
establishing the California Joint Powers Insurance Authority.
Money Market: The market in which short-term debt instruments (bills, commercial paper,
bankers’ acceptances, etc.) are issued and traded.
Mutual Funds: Referred to in the Government Code, Section 53601(k) as “shares of beneficial
interest issued by diversified management companies.” The Mutual Fund must be restricted by
its by-laws to the same investments as the local agency by the Government Code. These
investments are Treasury issues, Federal Agency issues, State of California and City (within
California) debt obligations, Bankers Acceptances, Commercial Paper, Certificates of Deposit,
Negotiable Certificates of Deposit, Repurchase Agreements, Reverse Repurchase Agreements,
and Medium Term Corporate Notes. The quality rating and percentage restrictions in each
investment category applicable to the local agency also apply to the Mutual Fund.
Negotiable: Term used to designate a security, the title to which is transferable by delivery.
Offer: The price asked by a seller of securities. (When you are buying securities, you ask for an
offer). See Asked and Bid.
Open Market Operations: Purchases and sales of government and certain other securities in
the open market by the New York Federal Reserve Bank as directed by the FOMC in order to
influence the volume of money and credit in the economy. Purchases inject reserves into the
bank system and stimulate growth of money and credit; sales have the opposite effect. Open
market operations are the Federal Reserve’s most important and most flexible monetary policy
tool.
Portfolio: Collection of securities held by an investor.
Primary Dealer: A group of government securities dealers who submit daily reports of market
activity and positions and monthly financial statements to the Federal Reserve Bank of New
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SUBJECT: Investment Policy Policy No. 300-8
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York and are subject to its informal oversight. Primary dealers included Securities and
Exchange Commission (SEC) – registered securities broker-dealers, banks, and a few
unregulated firms.
Principal: Describes the original cost of a security. It represents the amount of capital or
money which the investor pays for the investment.
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 custody state – the
so-called legal list. 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.
Qualified Public Depositories: A financial institution which does not claim exemption from
the payment of any sales or compensating use or ad valorem taxes under the laws of this state,
which has segregated for the benefit of the commission eligible collateral having a value of not
less than its maximum liability and which has been approved by the Public Deposit Protection
Commission to hold public deposits.
Rate of Return: The yield obtainable on a security based on its purchase price or its current
market price. This may be the amortized yield to maturity on a bond the current income return.
Repurchase Agreement (RP or Repo): A holder of securities sells these securities to an
investor with an agreement to repurchase them at a fixed price on a fixed date. The security
“buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the
agreement are structured to compensate him for this. Dealers use RP extensively to finance their
positions. Exception: When the Fed is said to be doing RP, it is lending money, that is,
increasing bank services.
Safekeeping: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank’s vaults for protection.
Secondary Market: A market made for the purchase and sale of outstanding issues following
the initial distribution.
Securities & Exchange Commission: Agency created by Congress to protect investors in
securities transactions by administering securities legislation.
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SUBJECT: Investment Policy Policy No. 300-8
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SEC Rule 15C3-1: See Uniform Net Capital Rule.
Structured Notes: Notes issued by Government Sponsored Enterprises (FHLB, FNMA,
SLMA, etc.) and Corporations which have imbedded options (e.g., call features, step-up
coupons, floating rate coupons, derivative-based returns) into their debt structure. Their market
performance is impacted by the fluctuation of interest rates, the volatility of the imbedded
options and shifts in the shape of the yield curve.
Treasury Bills: A non-interest bearing discount security issued by the U.S. Treasury to finance
the national debt. Most bills are issued to mature in three months, six months, or one year.
Treasury Notes: Medium-term coupon-bearing U.S. Treasury securities issued as direct
obligations of the U.S. Government and having initial maturities from two to ten years.
Uniform Net Capital Rule: Securities and Exchange Commission requirement that member
firms as well as nonmember broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and commitments to
purchase securities, one reason new public issues are spread among member of underwriting
syndicates. Liquid capital includes cash and assets easily converted into cash.
Yield: The rate of annual income return on an investment, expressed as a percentage. (a)
Income Yield is obtained by dividing the current dollar income by the current market price for
the security. (b) Net Yield or Yield to Maturity is the current income yield minus any premium
above par or plus any discount from par in purchase price, with the adjustment spread over the
period from the date of purchase to the date of maturity of the bond.
INVESTMENT PROCEDURES, GUIDELINES AND STRATEGY
A. PROCEDURES AND GUIDELINES – Procedures and guidelines are established to
direct and control activities in such a manner that previously established goals are
achieved and policies are followed.
1. Investment Selection. Every investment transaction must be authorized by
City Council and reviewed by the Director of Administrative Services.
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SUBJECT: Investment Policy Policy No. 300-8
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The Director of Administrative Services reviews how much of the cash
balance is available for investment as determined by the Finance Manager
and selects the area of the yield curve that most closely matches the
required maturity date.
A review of some of the flowing sources should be made to determine
whether the investments should be placed to match projected expenditures
or shorter, or to take advantage of current and expected interest rate
environments:
a) Wall Street Journal or similar daily business publication.
b) Input from approved broker/dealers.
c) Input from depository banks.
d) Publications on general trends of economic statistics.
e) Input from data services (Telerate, Bloomberg, Reuters,
etc.)
2. Pooled Cash. Whenever practical, local agency cash is consolidated into one
bank account and invested on a pooled concept basis. Interest earnings are
allocated quarterly according to month-end cash and investment balances for
each fund.
3. Competitive Bids. Purchase and sales of securities are made on the basis of
competitive offers and bids when practical.
4. Cash Forecast. The cash flow for the City is analyzed with the receipt of
revenues and maturity of investments scheduled so that adequate cash will
be available to meet disbursement requirements.
5. Liquidity. The marketability of a security is considered at the time of
purchase, as the security may have to be sold at a later date to meet
unanticipated cash demands.
6. Diversification. The portfolio should consist of a mix of various types of
securities, issuers, and maturities.
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SUBJECT: Investment Policy Policy No. 300-8
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7. Purchasing an Investment.
Establish with whom the City of Lake Elsinore is going to transact
business. This should be accomplished through the use of a questionnaire,
which helps provide the following evaluation:
a) Financial condition, strength and capability to fulfill commitments.
b) Overall reputation with other dealers and investors.
c) Regulatory status of the broker/dealer (providers).
d) Background and expertise of the individual representative.
The following must be determined prior to contacting the providers:
a) Settlement – cash, regular (next day), corporate (3 business days)
or when-issued of a new issue.
b) Amount – either par value or total dollars to be invested.
c) Type of security to be purchased, or type to be excluded.
d) Targeted maturity, or maturity range.
e) Time limit to show offering – 5 minutes, 15 minutes, etc.
Before concluding the transaction, the Director of Administrative Services
should validate the following:
a) The security selected for purchase meets all criteria, including
portfolio diversification, collateralization (if appropriate) and
maturity. If the security has any imbedded options such as call
provisions or coupon adjustments, these should also be reviewed.
b) Yield calculations should be verified.
c) Total purchase cost (including accrued interest) does not exceed
funds available for investment.
d) Advise the successful provider that their offering has been selected
for purchase.
e) After confirmation of the purchase, as a courtesy, notify the other
broker/dealers that you have placed the investment. Best price
may be disclosed, if you choose.
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SUBJECT: Investment Policy Policy No. 300-8
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After consummation of the transaction, and prior to settlement date, the
Director of Administrative Services and the provider should exchange and
review the following information to ensure prompt, and uninterrupted
settlement:
a) Name of third-party safekeeping agent.
b) ABA number of safekeeping agent.
c) Safekeeping account number.
d) Reconfirm amount of transaction.
e) Reconfirm settlement date.
f) Acquire CUSIP number of security, if applicable.
8. Evaluate Certificates of Deposit
a) Certificates of Deposit shall be evaluated in terms of FDIC coverage.
For deposits in excess of the insured maximum of $100,000,
approved collateral at full market value shall be required. (California
Government Code Section 53652 and/or 53651(m) and
53651.2(a)(1).
b) Negotiable Certificates of Deposit shall be evaluated in terms of the
credit worthiness of the issuer, as these deposits are uninsured and
uncollateralized promissory notes.
9. Settlement & Follow-through
The Director of Administrative Services should forward to the safekeeping
agent a report of the investment transaction. The report may be verbal, but
a written form should be sent and acknowledged. When applicable, the
following should be verified:
a) Provision of receipt of disbursement of funds.
b) Internal transfer or wiring of funds.
c) Validation of written “safekeeping receipt”
d) Notification of discrepancy prior to acceptance or rejection of the
transaction.
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e) Immediate notification if a fail has occurred: by provider if they
are responsible, by safekeeping agent if they are responsible.
10. Safekeeping: All transactions will be handled on a Delivery Verses
Payment (DVP) using a third party safekeeping custodian.
11. Repurchase agreements, wire transfer agreements, banking service
contracts and collateral/depository agreements: All investing agreements
will be reviewed by the City Attorney, managed by the Director of
Administrative Services, and executed by the City Manager.
B. STRATEGY - Strategy refers to the ability to manage financial resources in the most
advantageous manner.
1. Economic Forecasts. Economic Forecasts are obtained periodically from
economists and financial experts through bankers and brokers to assist the
Director of Administrative Services with the formulation of an investment
strategy for the local agency.
2. Implementing Investment Strategy. Investment transactions are executed
which conform to anticipated interest rate trends and the current investment
strategy plan.
3. Preserve Portfolio Value. Field standards are developed in order to maintain
earnings near the market and to preserve the value of the portfolio.
INTERNAL CONTROL - GUIDELINES
A. OBJECTIVES OF INTERNAL CONTROL
Internal control is the plan of organization and all the related systems established by
the management's objective of ensuring, as far as practicable:
• The orderly and efficient conduct of its business, including adherence to
management policies.
• The safeguarding of assets.
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• The prevention or detection of errors and fraud.
• The accuracy and completeness of the accounting records.
• The timely preparation of reliable financial information.
B. LIMITATIONS OF INTERNAL CONTROL
No internal control system, however elaborate, can by itself guarantee the
achievement of management's objectives. Internal control can provide only
reasonable assurance that the objectives are met, because of its inherent limitations,
including:
• Management's usual requirement that a control be cost-effective.
• The direction of most controls at recurring, rather than unusual, types of
transactions.
• Human error due to misunderstanding, carelessness, fatigue, or distraction.
• Potential for collusion that circumvents controls dependent on the
segregation of functions.
• Potential for a person responsible for exercising control abusing that
responsibility; a responsible staff member could be in a position to override
controls which management has set up.
C. ELEMENTS OF INTERNAL CONTROL
Elements of a system of internal control are the means by which an organization can
satisfy the objectives of internal control. These elements are:
1. ORGANIZATION
Specific responsibility for the performance of duties should be assigned and
lines of authority and reporting clearly identified and understood.
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SUBJECT: Investment Policy Policy No. 300-8
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2. PERSONNEL
Personnel should have capabilities commensurate with their responsibilities.
Personnel selection and training policies together with the quality and
quantity of supervision are thus important.
3. SEGREGATION OF FUNCTIONS
Segregation of incompatible functions reduces the risk that a person is in a
position both to perpetrate and conceal errors or fraud in the normal course
of duty. If two parts of a transaction are handled by different people,
collusion is necessary to conceal errors or fraud. In particular, the functions
that should be considered when evaluating segregation of functions are
authorization, execution, recording, custody of assets, and performing
reconciliations.
4. AUTHORIZATION
All transactions should be authorized by an appropriate responsible
individual. The responsibilities and limits of authorization should be clearly
delineated. The individual or group authorizing a specific transaction or
granting general authority for transactions should be in a position
commensurate with the nature and significance of the transactions.
Delegation of authority to authorize transactions should be handled very
carefully.
5. CONTROLS OVER AN ACCOUNTING SYSTEM
Controls over an accounting system include the procedures, both manual and
computerized, carried out independently to ascertain that transactions are
complete, valid, authorized, and properly recorded.
CASH CONTROLS
PROCEDURES PERFORMED BY EXTERNAL AUDITORS WITH RESPECT TO CASH RECEIPTS
A. City procedures and controls are reviewed. Some of the system strengths are:
1. Receipts are controlled upon receipt by proper registration devices.
2. Receipts are reconciled on a daily basis.
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3. Amounts are deposited intact.
4. Bank reconciliations are reviewed.
5. Prompt posting of cash receipt entries in books.
6. Proper approval required for write-off's of customer accounts.
7. Checks are restrictively endorsed upon receipt or when run through cash
register.
8. Adequate physical security over cash.
9 Individuals that handle cash do not post to customer account records or
process billing statements.
10. Adequate supervision of Finance Department operations.
B. Significant revenues are confirmed directly with payer and compared with City
books to make sure amounts are recorded properly.
C. Cash balances are substantiated by confirming all account balances recorded in
books. Bank reconciliations are reviewed for propriety and recalculated by the
auditor. All significant reconciling items on bank reconciliations are verified as
valid reconciling items by proving to subsequent bank statements.
SEGREGATION OF RESPONSIBILITIES OF
THE TREASURY FUNCTIONS
Function Responsibility
1. Formal Investment Policy should be:
* Prepared By: Director of Administrative Services
* Approved By: City Council
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2. Investment Plan with specific City Council
investments in mind
3. Investment Transactions for Director of Administrative Services
execution of Investment Plan
should be approved by
4. Execution of investment Finance Manager
transactions
5. Timely recording of investment Finance Manger (but reviewed by
transactions: Director)
Recording of investment transactions Finance Manger (but reviewed by
in the City's records Director)
Recording of investment Account Specialist
transactions in the
accounting records
6. Verification of investment, Director of Administrative Services
i.e., match broker confirma-
tion to City's records
7. Safeguarding of Assets and Records:
Reconciliation of City's Finance Manger
records to the accounting records
Reconciliation of City's Finance Manager (but reviewed by
records to bank statements and Director)
safekeeping records
Function Responsibility
8. Safeguarding of Assets and Records
(continued):
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Annual review of (a) financial Director of Administrative Services
institution's financial condition,
(b) safety, liquidity, and potential
yields of investment instruments.
9. No less than an annual Independent Auditors
review of investment
portfolio as prepared by
Director of Administrative Services
HISTORY
Approved by Minute Action 6/22/04