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HomeMy WebLinkAbout5C 2019 Investment Policy Update Agenda Report 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL AGENDA REPORT MEETING DATE: December 2, 2019 AGENDA #: 5C PREPARED BY: CATHY ERICKSON, FINANCE DIRECTOR PRESENTED BY: CATHY ERICKSON AGENDA ITEM: CONSIDER APPROVAL OF A RESOLUTION AMENDING THE CITY OF PRIOR LAKE INVESTMENT POLICY GOAL AREA AND OBJECTIVE: High-Value City Services 1. Establish financial stability for all funds. DISCUSSION: Introduction The purpose of this agenda item is to consider adoption of a resolution amending the City’s current Investment Policy which was last adopted in October 2015. Current Circumstances Staff recommends updating the City’s Investment Policy language to follow the criteria as allowed in Minnesota Statute Sec 118A as follows: Investment Instruments: Update the Investment Instruments section to follow the investment types as allowed in Minnesota Statute Sec. 118A.04 Subd.2 through Subd. 5 and in Minnesota Statute Sec. 118A.05. This is simply an update in the ordering of the investment policy, so it is easier to compare to the Minnesota Statue on an ongoing basis. This includes adding Commercial Paper (CP) as an investment alternative. This was not included in the last update of the investment policy but is allowed per Minnesota Statute 118A. CP is often used by cities that have a daily sweep from their checking account into CP invested by their bank. Currently, the city periodically sweeps funds from our checking account to the 4M Fund money market account, but we would like the flexibility to sweep into CP at our bank if desired. Repurchase agreements, guaranteed investment contracts, and securities lending agreements criteria per Minnesota Statue Sec. 118A are also added to the investment policy. The current policy is silent on these allowable investment options; however, staff would like the criteria detailed in the updated investment policy for future reference. Diversification Added a table for ease of use and increased the percentage of State and Local Government securities from 20% to 25%. This would give staff the flexibility if needed to diversify (issuer, yield and maturity) the portfolio as appropriate. With changing market conditions, municipal bonds may provide a higher yield to maturity vs other investment options. For example, CD rates are currently only slightly above the treasury rate while municipal bonds are at higher yields. Collateralization Updated the safekeeping of collateral section to follow the criteria as allowed in Minnesota Statute Sec 118A.03. Safekeeping of Securities Updated the safekeeping of securities section to follow the criteria as allowed in Minnesota Statute Sec 118A.06. Management of Program Added the Accounting Manager to the list of individuals authorized to make investment transactions. Authority for banking and investment transactions is brought to the Council for approval on an annual basis as part of the annual appointments’ agenda item. ALTERNATIVES: 1. Approve, as part of the consent agenda, the City of Prior Lake’s Investment Policy amendments dated December 2, 2019 as submitted. 2. Remove this item from the consent agenda for additional discussion. RECOMMENDED MOTION: Alternative #1. ATTACHMENTS: 1. City of Prior Lake Investment Policy dated December 2, 2019 4646 Dakota Street SE Prior Lake, MN 55372 RESOLUTION 19-142 A RESOLUTION AMENDING THE CITY INVESTMENT POLICY Motion By: Second By: WHEREAS, WHEREAS, An Investment Policy promotes the acquisition of safe investments and maximum return on investments consistent with the cash flow needs of the City and state statutues; and Amendments to this policy are needed from time to time to take into account Minnesota statute and changing market conditions. NOW THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF PRIOR LAKE, MINNESOTA AS FOLLOWS: 1. The recitals set forth above are incorporated herein. 2. The revised Investment Policy is hereby adopted. PASSED AND ADOPTED THIS 2nd DAY OF DECEMBER 2019. VOTE Briggs Thompson Burkart Braid Erickson Aye ☐ ☐ ☐ ☐ ☐ Nay ☐ ☐ ☐ ☐ ☐ Absent ☐ ☐ ☐ ☐ ☐ Abstain ☐ ☐ ☐ ☐ ☐ ______________________________ Jason Wedel, City Manager Investment Policy and Procedure Manual Adopted December 2, 2002 Adopted Revision October 26, 2015 Adopted Revision December 2, 2019 Investment of City Funds The City shall maintain a set of procedures for the investment of City funds which shall address the following elements: 1. A listing of authorized investments. 2. Investment and diversification guidelines that are appropriate to the nature of the funds, the purpose for the funds, and the amount of the public funds within the investment portfolio. 3. Investment portfolio duration as to maximum term with respect to time of investment. 4. Guidelines regarding collateral requirements, if any, for the deposit of public funds in a financial institution made pursuant to State Statute, and, if applicable, guidelines for contractual arrangements for the custody and safekeeping of that collateral. 5. A system of internal controls and operational procedures designed to prevent losses of funds that might arise from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the City. 6. Appropriate periodic review of the investment portfolio, its effectiveness in meeting the City’s needs for safety, liquidity, rate of return, and diversification, and its general performance. 7. Ethics and conflicts of interest provision. 8. The standard of care that must be maintained by the persons investing the public funds. 9. Procedure for selection of investment advisors. 10. At least quarterly written reports of investment activities by the Finance Director for submission to the City Council. The Finance Director shall establish such procedures as included within this Investment Policy for the Council’s approval and shall periodically review and propose needed amendments. Such procedures and this Policy shall be kept available for public review at the City’s administrative offices. Scope This Investment Policy applies to all funds of the City. These funds are accounted for in the City’s annual financial report including all current funds, and any other funds that may be created from time to time. The portion of idle funds invested shall have a target percentage of 98%. All transactions involving the funds and related activity of any funds shall be administered in accordance with the provisions of this Policy. Objectives 1. Safety of Principal – Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of principal in the overall portfolio. To attain this objective only appropriate investment instruments will be purchased, and insurance or collateral may be required to ensure the return of principal. 2. Liquidity - The City’s investment portfolio shall be structured in such manner as to provide sufficient liquidity to pay obligations as they come due. 3. Return on Investments - The investment portfolio shall be designed to attain a market- average rate of return throughout budgetary and economic cycles, taking into account the risk constraints, the cash flow characteristics of the portfolio and legal restrictions for return on investments. 4. Maintaining the Public’s Trust - The investment officers shall seek to act responsibly as custodians of the public trust and shall avoid any transaction that might impair public confidence in the City and oversight as executed by its investment officers. Investment Instruments The City may invest in any type of security allowed by Minnesota Statutes as may be amended from time to time. The City currently invests in the instruments listed below: 1. United States securities. Public funds may be invested in governmental bonds, notes, bills, mortgages (excluding high-risk mortgage-backed securities), and other securities, which are direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities, or organizations created by an act of Congress (including but not limited to: U.S. Treasury obligations and US Agency securities/Government Sponsored Enterprises such as FHLB, FHLMC, FFCB, and FNMA); 2. State and local securities. . Funds may be invested in the following: a) any security which is a general obligation of any state or local government with taxing powers which is rated "A" or better by a national bond rating service; b) any security which is a revenue obligation of any state or local government which is rated "AA" or better by a national bond rating service; c) a general obligation of the Minnesota housing finance agency which is a moral obligation of the state of Minnesota and is rated "A" or better by a national bond rating agency; and d) any security which is an obligation of a school district with an original maturity not exceeding 13 months and (i) rated in the highest category by a national bond rating service or (ii) enrolled in the credit enhancement program pursuant to section 126C.55. 3. Commercial papers. Funds may be invested in commercial paper issued by United States corporations or their Canadian subsidiaries that is rated in the highest quality category by at least two nationally recognized rating agencies and matures in 270 days or less. 4. Time deposits. Funds may be invested in time deposits that are fully insured by the Federal Deposit Insurance Corporation or bankers acceptances of United States banks including but not limited to the following: a) Interest bearing checking and savings accounts, or any other investments constituting direct obligations of any bank; b) Certificates of deposit at state and federally chartered institutions that are limited to the amount of coverage provided by the Federal Deposit Insurance Corporation; c) Money market accounts that are invested in above referenced government securities. 5. Minnesota joint powers investment trust. Government entities may enter into agreements or contracts for: a) shares of a Minnesota joint powers investment trust whose investments are restricted to securities described in Minn. Stat. Secs. 118A.05, 118A.04, and 118A.07, subd. 7; b) units of a short-term investment fund established and administered pursuant to regulation 9 of the Office of the Comptroller of the Currency, in which investments are restricted to securities described in Minn. Stat. Secs. 118A.05 and 118A.04; c) shares of an investment company which is registered under the Federal Investment Company Act of 1940 and which holds itself out as a money market fund meeting the conditions of rule 2a-7 of the Securities and Exchange Commission and is rated in one of the two highest rating categories for money market funds by at least one nationally recognized statistical rating organization; or d) shares of an investment company which is registered under the Federal Investment Company Act of 1940, and whose shares are registered under the Federal Securities Act of 1933, as long as the investment company's fund receives the highest credit rating and is rated in one of the two highest risk rating categories by at least one nationally recognized statistical rating organization and is invested in financial instruments with a final maturity no longer than 13 months. Minnesota Statutes also permit investment in repurchase agreements, securities lending agreements and guaranteed investment contracts. Although the City currently does not invest in these instruments they are included in the policy as the Finance Director may chose to do so in the future. Use of these investment instruments must follow the specific criteria established in Minn. Stat. Sec 118A. Prohibited Investments Investment products that are considered as derivatives are specifically excluded from approved investments. Diversification It is the policy of the City to diversify its investment portfolio. Investments shall be diversified to eliminate the risk of loss resulting in over concentration in a specific maturity, issuer, or class of securities. Diversification strategies will be implemented by the Finance Director with the following constraints: ISSUER TYPE Max % OF TOTAL PORTFOLIO US Treasury Obligations 100% Agency Securities (GSEs) 100% Municipal Securities 25% Money Market Funds 25% Savings/demand deposits 10% Bankers Acceptance 10% Commercial Paper 10% Due to fluctuations in the value of the portfolio, maximum percentages for an issuer or investment type may be exceed at a point in time subsequent to the purchase or maturity of a particular security. Securities need not be liquidated to realign the portfolio; however, consideration should be given to this matter when future purchases are made. Duration It is the policy of the City to require that all investment maturities shall not extend beyond ten (10) years with no more than 20% maturing beyond five (5) years. Subject to market conditions and cash flow requirements, it is desirable for the City’s investments to be laddered over time in an effort to reduce interest rate market risk. Collateralization It is the policy of the City to require that time deposits in excess of FDIC insurable limits be secured by collateral or private insurance to protect public deposits in a single financial institution if it were to default. Collateralization must be equal to 110% of the uninsured portion when pledging government securities or agencies. Eligible collateral instruments are any investment instruments acceptable under Minn. Stat. Sec. 118A.03. The collateral must be placed in safekeeping at or before the time the City buys the investments so that it is evident that the purchase of the investment is predicated on the securing of collateral. 1. Safekeeping of Collateral a. Safekeeping is required for all collateral. To accomplish this, all collateral shall be placed in safekeeping in a restricted account at a Federal Reserve bank, or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral. b. Safekeeping will be documented by an approved written agreement between the City and the governing counsel of the issuing bank. This may be in the form of a safekeeping agreement. c. Substitution or exchange of collateral held in safekeeping for the City can be approved exclusively by the Finance Director. Safekeeping of Investments, Contracts and Agreements 1. Investments, contracts and agreements shall be held in safekeeping with one or more of the following: • any Federal Reserve bank; • any bank authorized under the laws of the United States or any state to exercise corporate trust powers, including, but not limited to, the bank from which the investment is purchased; • a primary reporting dealer in United States government securities to the Federal Reserve Bank of New York; or • a securities broker-dealer, or an affiliate of it, that meets the following requirements: (i) it is registered as a broker-dealer under chapter 80A or is exempt from the registration requirements; (ii) it is regulated by the Securities and Exchange Commission; and (iii) it maintains insurance through the Securities Investor Protection Corporation or excess insurance coverage in an amount equal to or greater than the value of the securities held. 2. Safekeeping will be documented by an approved written agreement between the City and the holder of the investment, contractor or agreement. This may be in the form of a safekeeping agreement, trust agreement, escrow agreement or custody agreement. 3. The City’s ownership of all investments, contracts and agreements should be evidenced by written acknowledgments identifying the securities by the names of the issuers, maturity dates, interest rates, CUSIP number, or other distinguishing marks. Original certificates of deposits will be held by the originating bank except with brokered c.d. programs whereby a master certificate is held in safekeeping at the broker designated depository. A safekeeping receipt will be acceptable documentation. Qualified Financial Institutions and Intermediaries 1. Depositories - Demand Deposits (Checking Accounts) a. Any financial institution selected by the City shall provide normal banking services, including, but not limited to: checking accounts, wire transfers and safekeeping services. b. The City will not maintain funds in any financial institution that is not a member of the FDIC system. In addition, the City will not maintain funds in any institution that does not first agree to post required collateral for funds or purchase private insurance in excess of FDIC insurable limits and in amounts acceptable to the City. c. Fees for banking services shall be mutually agreed to by an authorized representative of the depository bank and the City Finance Director on an annual basis. Fees for services shall be substantiated by a monthly account analysis. d. All financial institutions acting as a depository for the City must enter into a “Depository Agreement.” 2. Banks and Savings and Loans - Certificates of Deposit Any financial institution utilized by the City to purchase certificate of deposits must: a. provide wire transfer and certificate of deposit safekeeping services; b. be a member of FDIC system and be willing and capable of posting required collateral or private insurance for funds in excess of FDIC insurable limits and in amounts required by the City; and c. meet at all times the financial criteria as established in this Investment Policy. 3. Brokerage Dealers Any financial brokerage dealer selected by the City to handle investments must: a. provide wire transfer and deposit safekeeping services; b. be a member of a recognized U.S. Securities and Exchange Commission Self-Regulatory Organization such as the New York Stock Exchange, National Association of Securities Dealers, Municipal Securities Rule Making Counsel, etc; c. provide an annual audit upon request; d. maintain an office within the State of Minnesota and be licensed to conduct business in this State; and e. be familiar with the City’s policy and accept financial responsibility for any investment not appropriate according to the policy Management of Program The following individuals are authorized to purchase and sell investments, authorize wire transfers, authorize the release of pledged collateral, and to execute any documents required under this Policy: 1. City Manager 2. Finance Director 3. Accounting Manager These documents include but are not limited to: 1. Wire Transfer Agreement 2. Depository Agreement 3. Safekeeping Agreement 4. Custody Agreement Management responsibility for the investment program is hereby delegated to the Finance Director, who shall establish operational procedures designed to prevent losses of funds that might arise from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the entity. Such procedures shall include explicit delegation of authority to persons responsible for the execution under the direction of the Finance Director of specific financial transactions, including: investment transactions; check signing, check reconcilement, deposits, bond payments, report preparation and wire transfers. No person may engage in any investment transaction except as provided for under the terms of this Policy. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinates. Performance The Finance Director will seek to earn a rate of return appropriate for the type of investments being managed given the portfolio objectives defined in the “Objectives” section of this Policy. In general, the Finance Director will strive to earn an average rate of return equal to or greater than the ninety (90) day U.S. Treasury Bill rate. Ethics and Conflicts of Interest Officers and employees involved in the investment program shall refrain from personal activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Further, no officer or employee involved in the investment program shall receive any compensation from or undertake any investment with the sellers, sponsors or managers of City investments. Indemnification Investment officers and employees of the City acting in accordance with this Investment Policy who exercise due diligence and act with reasonable prudence, shall be relieved of personal liability for an individual security’s credit risk or market changes per Minn. Stat. Sec.[118A.02, Subd. 2. Investment Advisor Selection The Finance Director is hereby authorized to determine those investment brokers that would serve the best interests of the City in providing investment advice and services consistent with the requirements of this Investment Policy. 1. For purposes of administering the City’s investments on an efficient and timely basis, the number shall be limited to no more than three (3) investment advisors. 2. Participation in the League 4M Fund is hereby endorsed by the City Council for the investment of the City’s available money market funds. 3. All brokers must acknowledge annually receipt of the City’s statement of investment restrictions in writing (Broker Certification pursuant to Minn. Statute 118A.04 Subd. 9) and agree to handle the City’s account in accordance with the restrictions and requirements of this Investment Policy. Reporting The Finance Director shall submit to the City Council a quarterly investment report that shall include information regarding securities in the portfolio by type, advisor affiliation, principal amount and aggregate rate of return as of the report date. A Council approved listing of authorized investments for information purposes shall accompany the report. Amendment This Policy shall be reviewed from time to time by the Finance Director with regards to the Investment Policy’s effectiveness in meeting the City’s needs for safety, liquidity, rate of return, diversification, and general performance. Any substantive changes will be subject to approval by the City Council.