HomeMy WebLinkAboutResolution 2013-003 RESOLUTION NO. 2013 -003
WHEREAS, Chapter 2256, Texas Government Code requires that the governing
body of all municipalities adopt an Investment Policy; and,
WHEREAS, the City Council desires to conform to such requirements; NOW,
THEREFORE,
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF NORTH
RICHLAND HILLS, TEXAS:
Section 1: THAT the City of North Richland Hills hereby adopts the attached
Investment Policy for the City of North Richland Hills.
AND IT IS SO RESOLVED.
PASSED AND APPROVED this the 28th day of January, 2013.
CITY O N RTH C LAND HILLS
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By:
' Oscar vino, Mayor
J'TEST. '
..... ............ L
Patricia Hutson, City Secretary
APPR AS TO FORM AND LEGALITY:
George A. Staples, City Attorney
APPROVED AS TO CONTENT:
Larry Ko ce, Director of Finance
CITY OF NORTH RICHLAND HILLS
INVESTMENT STRATEGY
JANUARY 28, 2013
N FrZH
PREFACE
It is the policy of the City of North Richland Hills that, giving due regard to the safety and
risk of investment, all available funds shall be invested in conformance with State and
Federal Regulations, applicable Bond Resolution requirements, and the adopted
Investment Policy and Investment Strategy.
In accordance with the Public Funds Investment Act (Texas Government Code 10, Chapter
2256), the City of North Richland Hills' investment strategies shall address the following
priorities (in order of importance):
• Understanding the suitability of the investment to the financial requirements
of the City
• Preservation and safety of principal
• Liquidity
• Marketability of the investment prior to maturity
• Diversification of the investment portfolio
• Optimization of interest earnings
Effective investment strategy development coordinates the primary objectives of the City of
North Richland Hills' Investment Policy and cash management procedures to enhance
interest earnings and reduce investment risk. Aggressive cash management will increase
the available "investment period" and subsequently interest earnings. Maturity selections
shall be based on cash flow and market conditions to take advantage of various interest
rate cycles. The City's investment portfolio shall be designed and managed in a manner
responsive to the public trust and consistent with the Investment Policy.
The City's Funds shall be analyzed and invested according to the following major fund
types:
I. Operating Funds
II. Capital Improvement Funds
III. Debt Service Funds
IV. General Fund Balance Reserve
V. Revenue Bond Reserves
INVESTMENT STRATEGY
In order to minimize risk of loss on a sale because of fluctuating market prices, investment
maturities will not exceed the anticipated cash flow requirements of the funds. In general,
the City will structure the investment portfolio so that investments mature to meet cash
requirements for ongoing operations. From time to time, securities may be purchased at a
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premium or traded for other securities to improve yield, maturity or credit risk. For these
transactions, a loss may be incurred for accounting purposes to achieve optimal
investment return, provided any of the following occurs with respect to the replacement
security:
A. The yield has been increased, or
B. The maturity has been reduced or lengthened, or
C. The quality of the investment has been improved.
Investment guidelines by fund type are as follows:
I. Operating Funds
The City of North Richland Hills Operating Funds are as follows:
• General Fund
• Special Revenue Funds
• Special Investigation Fund
• Drainage Utility Fund
• Crime Control and Prevention District Fund
• Promotional Fund
• Economic Development Fund
• Donations Fund
• Parks and Recreation Facilities Development Fund
• Grant Fund
• Gas Development Fund
• Traffic Safety Fund
• Enterprise Funds
• Utility Fund
• Aquatic Park Fund
• Golf Course Fund
• Internal Service Funds
• Facilities /Construction Management Fund
• Fleet Services Fund
• Self- Insurance Fund
• Information Services Fund
• Capital Projects Funds
• General CIP Fund
• Permanent Street Maintenance Fund
• Sidewalk Maintenance Fund
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• Component Units
o Tax Increment Financing District 1 (TIF #1)
o Tax Increment Financing District 2 (TIF #2)
1) Suitability - Any investment eligible in the Investment Policy is suitable for the
Operating Funds.
2) Safety of Principal - All investments shall be in high quality securities with no
perceived default risk. The maximum allowable investment in commercial paper
shall be limited to 10% of total Operating Fund investments. Market price
fluctuations will occur. By managing the weighted average days to maturity for the
operating fund portfolio to be less than 3 years and restricting the maximum
allowable maturity to five years, the price volatility of the overall portfolio will be
minimized.
3) Marketability - Securities with active and efficient secondary markets are necessary
in the event of an unanticipated cash requirement. Active electronically traded
markets will define an efficient secondary market.
4) Liquidity - The Operating Funds require the greatest short-term liquidity of any of the
fund types. Short-term constant dollar investment pools and money market mutual
funds shall provide daily liquidity and may be utilized as a competitive yield
alternative to fixed maturity investments.
5) Diversification - Investment maturities shall be staggered throughout the fiscal year
to provide cash flow based on the anticipated operating needs of the City. Market
cycle risk will be reduced by diversifying the appropriate maturity structure not to
exceed the weighted average maturity allowed by the Investment Policy, and
through diversification by market sector.
6) Yield - Attaining a competitive market yield for comparable securities and portfolio
restrictions is the desired objective. The City's portfolio shall be designed with the
purpose of obtaining an optimized rate of return, through budgetary and economic
cycles, commensurate with the investment risk, policy constraints, and cash flow
requirements.
II. Capital Improvement Funds
The City of North Richland Hills Capital Improvement Funds are comprised of the
monies available from the sale of debt and other sources to finance capital
improvement projects. Bond proceeds are segregated from operating funds on the
general ledger and in investment accounts for arbitrage compliance purposes.
Capital Improvement Funds include all funding for the design and construction of
capital projects, including streets, drainage facilities, utility adjustments, park
improvements, and municipal buildings as well as the acquisition of capital assets.
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1) Suitability - Any investment eligible in the Investment Policy is suitable for Capital
Improvement Funds.
2) Safety of Principal - All investments shall be in high quality securities with no
perceived default risk. The maximum allowable investment in commercial paper
shall be limited to 10% of total Capital Improvement Fund investments. Market price
fluctuations will occur. By managing the various Capital Improvement accounts in
anticipation of cash flow requirements, the impact of market risk for the portfolio will
be minimized.
3) Marketability - Securities with active and efficient secondary markets are necessary
in the event of an unanticipated cash requirement. Active electronically traded
markets will define an efficient secondary market.
4) Liquidity - The City's funds used for construction and capital improvement programs
have reasonably predictable draw down schedules. Therefore, investment
maturities shall generally follow the anticipated cash flow requirements. Investment
pools and money market mutual funds shall provide readily available funds
generally equal to one month's anticipated cash flow needs, or a competitive
alternative for short -term fixed maturity investments. A singular repurchase
agreement may be utilized if disbursements are allowed in the amount necessary to
satisfy any expenditure request. This investment structure is commonly referred to
as a Flexible Repurchase Agreement.
5) Diversification - Market conditions and arbitrage regulations influence and limit the
selection and the laddering of maturities of fixed rate investments for bond proceeds
and other construction and capital improvement funds. When investing these types
of funds, every effort will be made to at least meet the maximum allowed yield, and
to select and ladder maturities to meet the cash flow needs of the funds. Maturities
should not exceed the normal life of the underlying projects supported by the fund.
6) Yield - Achieving a positive spread to the applicable arbitrage yield is the desired
objective for bond proceeds. The City's portfolio shall be designed with the purpose
of obtaining an optimized rate of return, through budgetary and economic cycles,
commensurate with the investment risk, policy constraints and cash flow
requirements.
III. Debt Service Funds
The City's Debt Service funds include the General Debt Service Fund and the Sales
Tax Revenue Debt Service Fund. The General Debt Service Fund is funded from ad
valorem tax collections and transfers from various other funds. The Sales Tax
Revenue Debt Service Fund is funded solely from transfers from the Park and
Recreation Facilities Development Fund.
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1) Suitability - Any investment listed as eligible in the Investment Policy is suitable for
the Debt Service Funds.
2) Safety of Principal - All investments shall be in high quality securities with no
perceived default risk. The maximum allowable investment in commercial paper
shall be limited to 10% of total Debt Service Fund investments. Market price
fluctuations will however occur. By limiting the Debt Service Funds Portfolio maturity
dates to the next scheduled debt service payment, the market risk of the overall
portfolio will be minimized.
3) Marketability - Securities with active and efficient secondary markets are not
necessary as the event of an unanticipated cash requirement is not probable.
4) Liquidity - Debt service funds have predictable payment schedules. Therefore,
investment maturities shall not exceed the anticipated cash flow requirements.
Investment pools and money market mutual funds may provide a competitive yield
alternative for time deposits and short-term fixed maturity investments. A singular
repurchase agreement may be utilized if disbursements are allowed in the amount
necessary to satisfy any expenditure request. This investment structure is
commonly referred to as a Flexible Repurchase Agreement.
5) Diversification - Market conditions influence the attractiveness of fully extending
maturities to the next unfunded payment date. At no time shall the debt service
schedule be exceeded in an attempt to bolster yield.
6) Yield - Attaining a competitive market yield for comparable securities and portfolio
restrictions is the desired objective. The City's portfolio shall be designed with the
purpose of obtaining an optimized rate of return, through budgetary and economic
cycles, commensurate with the investment risk, policy constraints and cash flow
requirements.
IV. General Fund Balance Reserve
The City's objective regarding the General Fund Balance is to maintain a sufficient
fund balance to operate the City for a period of sixty days or 15% of the following
year's budgeted expenditures. The amount of funds to be invested in non - liquid
other - than - overnight investments shall be limited to not more than 50% of this
amount of the General Fund Balance.
1) Suitability - Any investment eligible in the Investment Policy is suitable for General
Fund Balance Reserves.
2) Safety of Principal — Generally, the investment quality of all securities allowed as
investments in the Operating Funds will be allowable in the General Fund Balance
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Reserve. All investments shall be in high quality securities with no perceived default
risk. The maximum allowable investment in commercial paper shall be limited to
10% of total General Fund Balance Reserve investments. Market price fluctuations
will occur. Under no circumstance shall any investment from this portfolio cause the
combined portfolio's weighted average maturity to exceed the three year maximum
allowed by the Investment Policy. The maximum allowable individual maturity is
restricted to five years.
3) Marketability - Securities with active and efficient secondary markets are necessary
in the event of an unanticipated cash requirement. Active electronically traded
markets will define an efficient secondary market.
4) Liquidity - The Fund Balance Reserve requires the liquidity necessary to cover the
City's expenditures in the event of a cash shortfall. Short-term constant dollar
investment pools and money market mutual funds shall provide daily liquidity and
may be utilized as a competitive yield alternative to time deposits and fixed maturity
investments.
5) Diversification — Maturing investments shall be reinvested within the desired
maturity to provide cash flow in the event that cash is needed for the operating
needs of the City. Market cycle risk will be reduced by diversifying the appropriate
maturity structure throughout three years and through diversification by market
sector.
6) Yield - Attaining a competitive market yield for comparable securities and portfolio
restrictions is the desired objective. The City's portfolio shall be designed with the
purpose of obtaining an optimized rate of return, through budgetary and economic
cycles, commensurate with the investment risk, policy constraints and cash flow
requirements.
V. Revenue Bond Reserves
Debt service reserves are required by bond covenants for a particular revenue bond
issue.
1) Suitability - Any investment eligible in the Investment Policy is suitable for Debt
Service Fund Reserves.
2) Safety of Principal — Generally, the investment quality of all securities allowed as
investments in the Operating Funds will be allowable in the Debt Service Fund
Reserve. All investments shall be in high quality securities with no perceived default
risk. The maximum allowable investment in commercial paper shall be limited to
10% of total Revenue Bond Reserve investments. Market price fluctuations will
occur. Under no circumstance shall any investment from this portfolio cause the
combined portfolio's weighted average maturity to exceed the maximum allowed by
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the Investment Policy. The maximum allowable individual maturity is restricted to
five years.
3) Marketability - Securities with active and efficient secondary markets are necessary
in the event of an unanticipated cash requirement. Active electronically traded
markets will define an efficient secondary market. By utilizing the yield advantages
of fixed income securities, maximum yield should be attained while meeting cash
requirements.
4) Liquidity - The Debt Service Reserve Funds require the amount of liquidity
necessary to convert securities into cash if needed for payment of debts on
schedule. Short-term constant dollar investment pools and money market mutual
funds shall provide liquidity and may be utilized as a competitive yield alternative to
fixed maturity investments.
5) Diversification - Market cycle risk will be reduced by diversifying the appropriate
maturity structure throughout three years and through diversification by market
sector.
6) Yield - Attaining a competitive market yield for comparable security -types and
portfolio restrictions is the desired objective. The City's portfolio shall be designed
with the purpose of obtaining an optimized rate of return, through budgetary and
economic cycles, commensurate with the investment risk, policy constraints and
cash flow requirements.
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NFZH
CITY OF NORTH RICHLAND HILLS
INVESTMENT POLICY
JANUARY 28, 2013
1***4m"
TABLE OF CONTENTS
Page
Preface 1
I. Purpose and Objectives 3
II. Scope 5
III. Responsibility and Control 6
IV. Investment Committee 8
V. Suitable and Authorized Investments 9
VI. Investment Parameters 12
VII. Investment Procedures 13
VIII. Custodial Credit Risk Management 15
IX. Arbitrage 18
X. Depositories 18
XI. Investment Policy Adoption 19
NMH
PREFACE
"A public office is a public trust."
Charles Sumner, 1872
If a public office is a public trust, then the trust must be administered properly. Public funds
are acquired by governments largely through involuntary payments, particularly through
taxation. In a modern democratic society, public officials are obligated to manage these
funds in a disciplined manner.
In most cases, laws govern the investment process. Laws alone however cannot compel
public officials to a series of actions that assure the public's best interests. The actions of
public officials responsible for investing public funds must be guided by knowledge, skills,
systems, policies, procedures and confidence that can be described only as professional
discipline.
It is the policy of the City of North Richland Hills that, giving due regard to safety and risk
of investments, all available funds shall be invested in conformance with these legal and
administrative guidelines, and, to the maximum extent possible, at the highest rates
obtainable at the time of the investment.
Effective cash management is recognized as essential to good fiscal management. An
aggressive cash management and investment policy will be pursued to take advantage of
investment interest as viable and material revenue to all operating and capital funds.
Investment income will be used in a manner that will best serve the interest of the City of
North Richland Hills.
The City's portfolio shall be designed and managed in a manner responsive to the public
trust and consistent with state and local law.
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"MH
I. PURPOSE AND OBJECTIVES
A. Purpose
The purpose of this document is to set forth the specific investment policy and
strategy guidelines for the City of North Richland Hills. All investment activity shall
be consistent with Texas law as defined in Government Code 10, Chapter 2256,
known as the Public Funds Investment Act (the Act), and local law.
- safety of investments and City funds
- preservation of capital and protection of principal
- maintenance of sufficient liquidity to meet operating needs
- diversification of investments to avoid unreasonable risks
- public trust from prudent investment activities
- optimization of investment income for the City's portfolio
The City is required under the Public Funds Investment Act, Section 5, to adopt a
formal written Investment Policy regarding the investment of its funds and funds
under its control. This policy is to be adopted annually to meet the requirements of
the Act, and has been revised periodically to comply with updated state
requirements. The City of North Richland Hills' Ordinance Number 2079 states
that all investment activities and procedures shall be governed by a written
Investment Policy. The Investment Policy addresses the methods, procedures,
and practices that must be exercised to ensure the effective and judicious
management of the City's funds.
B. Objectives
The City shall manage and invest its cash with four primary objectives, listed in the
order of priority: safety, liquidity, public trust, and yield, expressed as optimization
of investment income. The safety of the principal invested always remains the
primary objective. All investments shall be designed and managed in a manner
responsive to the public trust and consistent with state and local law.
An aggressive cash management program and investment policy will be pursued
by the Investment Officer to take advantage of investment interest as viable and
material revenue to all operating and capital funds. Cash management is defined
as the process of managing monies in order to ensure maximum cash availability
and maximum investment income on short -term investments of idle cash. The
City's portfolio shall be designed and managed in a manner responsive to the
public trust. Income from investments will be used in a manner that will best serve
the interests of the City of North Richland Hills.
1. Safety
Safety of invested principal is the foremost objective of the investment
program. Investments shall be undertaken in a manner that seeks to ensure
the preservation of capital in the overall portfolio. The objective will be to
mitigate credit and interest rate risk.
a. Credit Risk and Concentration of Credit Risk
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The City will minimize credit risk, the risk of loss due to the failure of the
issuer or backer of the investment, and concentration of credit risk, the
risk of loss attributed to the magnitude of investment in a single issuer,
by:
(1) Limiting investments to the safest types of investments,
(2) Pre - qualifying the financial institutions and broker /dealers with which
the City will do business, and
(3) Diversifying the investment portfolio to minimize potential losses on
individual issuers.
b. Interest Rate Risk
The City will manage the risk that the investment income and the market
value of investments in the portfolio will fall due to changes in the general
interest rates by:
(1) Structuring the investment portfolio so that investments mature to
meet cash requirements for ongoing operations. From time to time,
securities may be purchased at a premium or traded for other
securities to improve yield, maturity or credit risk. For these
transactions, a loss may be incurred for accounting purposes to
achieve optimal investment return, provided any of the following
occurs with respect to the replacement security:
A. The yield has been increased, or
B. The maturity has been reduced or lengthened, or
C. The quality of the investment has been improved.
(2) Investing operating funds primarily in certificates of deposit, shorter -
term securities, money market mutual funds, or local government
investment pools functioning as money market mutual funds,
(3) Diversifying maturities and staggering purchase dates to minimize
the impact of market movements over time, and
(4) Limiting the maximum weighted average maturity of the investment
portfolio to 3 years.
2. Liquidity
The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by
structuring the portfolio so that investments mature concurrent with cash needs
to meet anticipated demands. Because all possible cash demands cannot be
anticipated, a portion of the portfolio will be invested in shares of money market
mutual funds or local government investment pools that offer same -day
liquidity.
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3. Public Trust
All participants in the City's investment process shall seek to act responsibly as
custodians of the public trust. Investment officers shall avoid any transaction
that might impair public trust in the City's ability to govern effectively.
4. Yield (Optimization of Investment Income)
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 liquidity needs. Return on
investment is of secondary importance compared to the safety and liquidity
objectives described above.
II. SCOPE
This investment policy applies to all financial assets of the City of North Richland Hills
in all current funds, any funds to be created in the future, and any other funds held in
custody by the City, unless expressly prohibited by law or unless it is in contravention
of any depository contract between the City and its depository bank. However, this
policy does not apply to the assets administered for the benefit of the City by outside
agencies. These funds are accounted for in the City's Comprehensive Annual
Financial Report and include:
Operating Funds
• General Fund
• Special Investigation Fund
• Drainage Utility Fund
• Crime Control and Prevention District Fund
• Promotional Fund
• Economic Development Fund
• Donations Fund
• Parks and Recreation Facilities Development Fund
• Grant Fund
• Gas Development Fund
• Traffic Safety Fund
• Utility Fund
• Aquatic Park Fund
• Golf Course Fund
• Facilities /Construction Management Fund
• Fleet Services Fund
• Self- Insurance Fund
• Information Services Fund
• General CIP Fund
• Permanent Street Maintenance Fund
• Sidewalk Maintenance Fund
• Tax Increment Financing District 1 (TIF #1)
• Tax Increment Financing District 2 (TIF #2)
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Capital Improvement Funds
Debt Service Funds
General Fund Balance Reserve
Revenue Bond Reserves
The City will consolidate cash balances from all funds with the exception of bond
proceeds to optimize investment income. Investment income will be allocated to the
various funds based on their respective participation and in accordance with generally
accepted accounting principles.
III. RESPONSIBILITY AND CONTROL
A. Delegation of Authority
This Investment Policy and the outlining of investment practices and authorities is
compiled in accordance with the Public Funds Investment Act, which requires the
adoption of rules governing investment policies and strategies and the designation of
an Investment Officer, as well as City Ordinance Number 2079 which designates
investment officers and provides prudent investment rules. Collateral requirements are
created in accordance with the Public Funds Collateral Act (Texas Government Code
10, Chapter 2257).
Ultimate responsibility and authority for all investment transactions and cash
management reside with the City Manager and the City's Director of Finance. The
Director of Finance is also responsible for considering the quality and capability of staff
to be involved in investment management and procedures. The Director of Finance
may delegate responsibility for the day to day investment activities to other qualified
staff members. These staff members will be termed Investment Officers of the City.
One of these Investment Officers will be designated the Primary Investment Officer by
the Director of Finance to conduct daily investment activity and prepare required
investment reports. Investment Officers will not conduct any investment or banking
activities involving City funds until a resolution or ordinance giving them authority to do
so has been approved by the City Council of the City of North Richland Hills. All
participants in the investment process shall seek to act responsibly as custodians of
public trust.
B. Quality and Capability of Investment Management
The City shall provide periodic training in investments for the designated Investment
Officers and other investment personnel through courses and seminars offered by
professional organizations, associations, and other independent sources approved by
the Investment Committee in order to ensure the quality and capability of investment
management in compliance with the Public Funds Investment Act.
C. Training Requirements
In accordance with the Public Funds Investment Act, all authorized Investment Officers
shall attend an investment training session not less than once each state fiscal
biennium and shall receive not less than ten hours of instruction relating to investment
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responsibilities. A newly appointed Investment Officer must attend a training session of
at least ten hours of instruction within twelve months of taking over or assuming duties
and attend an investment training session not less than once in a two year period that
begins on the first day of the local government's fiscal year and consists of the two
consecutive fiscal years after that date. The training shall be provided by an
independent, source approved by the Investment Committee.. i. For purposes of this
policy, an "independent source" from which investment training shall be obtained shall
include: a professional organization, an institution of higher education, or any other
sponsor certified to provide such training.
D. Management and Internal Controls
The Director of Finance is responsible for establishing and maintaining an internal
control structure designed to ensure the City's assets are protected from loss, theft, or
misuse. The internal control structure shall be designed to provide reasonable
assurance that these objectives are met. The concept of reasonable assurance
recognizes that (1) the cost of a control should not exceed the benefits likely to be
derived; and (2) the valuation of costs and benefits requires estimates and judgments
by management.
Accordingly, the Director of Finance shall establish a process for annual independent
review by an external auditor to assure compliance with policies and procedures. The
internal controls shall address the following points:
• Minimize risk of collusion
• Separation of transactions authority from accounting and record keeping
• Custodial safekeeping
• Avoidance of physical delivery securities
• Clear delegation of authority to subordinate staff members
• Written confirmation for telephone (voice) transactions for investments and wire
transfers
• Development of a wire transfer agreement with the depository bank or third party
custodian
E. Prudence
The standard of prudence to be applied by the Investment Officer shall be the "prudent
investor" rule, which states: "Investments shall be made with judgment and care, under
circumstances then prevailing, which persons of prudence, discretion, and intelligence
exercise in the management of their own affairs, not for speculation, but for
investment, considering the probable safety of capital as well as the probable income
to be derived." It should be noted that, in a diversified portfolio, occasional losses are
inevitable and must be considered within the context of the overall portfolio's return.
In determining whether an Investment Officer has exercised prudence with respect to
an investment decision, the determination shall take into consideration the investment
of all funds, or funds under the City's control, over which the Investment Officer had
responsibility rather than a consideration as to the prudence of a single investment,
and whether the investment decision was consistent with the written investment policy
of the City.
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F. Indemnification
The Investment Officer, acting in accordance with written procedures and exercising
due diligence, shall not be held personally responsible for a specific security's credit
risk or market price changes, provided that these deviations are reported in a timely
manner and appropriate action is taken to control the effects of such adverse
developments.
The City shall provide for the defense and indemnification of any Investment Officer or
Investment Committee member who is made party to any suit or proceeding, other
than by actions of the City, or against whom a claim is asserted by reasons of their
actions taken within the scope of their service as Investment Officers or appointed
members of the Investment Committee. Such indemnity shall extend to judgments,
fines, and amounts paid in settlement of any such claim, suit or proceeding, including
any appeal thereof. This protection shall extend only to members who have acted in
good faith and in a manner which they reasonably believe to be in, or not opposed to,
the best interests of the City.
G. Ethics and Conflicts of Interest
City staff involved in the investment process shall refrain from personal business
activity that could conflict with proper execution of the investment program, or which
could impair the ability to make impartial investment decisions. City staff should
disclose to the City Manager any material personal financial investments in financial
institutions that conduct business with the City and they shall further disclose positions
that could be related to the performance of the City's portfolio. City staff shall
subordinate their personal financial transactions to those of the City, particularly with
regard to the timing of purchases and sales.
An Investment Officer of the City who has a personal business relationship, as defined
by the Public Funds Investment Act of 1997, Section 2256.005 (i), with an organization
seeking to sell an investment to the City shall file a statement disclosing that personal
business interest. An Investment Officer who is related within the second degree of
affinity or consanguinity to an individual seeking to sell an investment to the City shall
file a statement disclosing that relationship. A disclosure statement required under this
section must be filed with the Texas Ethics Commission and the governing body of the
City.
IV. INVESTMENT COMMITTEE
An Investment Committee shall be established to assist in monitoring the performance
and structure of the City's portfolio and approved brokers. Members of this committee
shall include the Director of Finance (as Chairman) and the Assistant Director of
Finance as permanent members. Additional members, numbering no less than three,
will be appointed at the discretion of the Director of Finance. The Primary Investment
Officer will report to and make recommendations to the Investment Committee, but will
have no vote concerning investment policy or suitability of investments. Any matters
presented to the committee requiring a vote of the members shall be passed or denied
by a simple majority.
The Investment Officer or any other member of the committee shall have the power to
call meetings of the committee. The committee shall meet no less than quarterly.
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The Investment Committee shall perform the following functions:
1. Approve the process of selecting authorized dealers, brokers, investment
advisors, and safekeeping agents /custodians used by the City.
2. Review the City's general portfolio activity and performance for compliance to
this policy and recommend any changes or amendments to this policy to the
City Council.
3. Approve the Investment Strategy document, as prepared by the Investment
Officer. This document is required by State law to be separate from the
Investment Policy. The Investment Strategy will be a guide to the investment of
all funds controlled by the City as described in Section II of the Investment
Policy. The strategy is intended to adapt to changes in market conditions.
4. Advise the Investment Officer as to recommendations regarding investment
strategy and portfolio performance.
5. Approve the purchase of any securities with maturities over three (3) years.
6. Immediately notify the Investment Officer of any information brought to their
attention that materially affects the portfolio or the marketability of any
investments purchased in accordance with the Investment Policy.
7. Oversee the activities of the persons designated to carry out investment
transactions and inform the City Council of unaddressed concerns with the
management of the City's investment portfolio.
V. SUITABLE AND AUTHORIZED INVESTMENTS
The City currently has a "buy and hold" portfolio strategy for the portion of the portfolio
where maturity datescan be matched with cash flow requirements and investments are
able to be purchased with the intention of being held until maturity. However,
investments may be liquidated prior to maturity for the following reasons:
- An investment with declining credit may be liquidated early to minimize loss of
Principal
- Cash flow needs of the City require that the investment be liquidated
- An investment can be liquidated prior to maturity in the event that the gain and, or,
overall benefit from selling and reinvesting the security is greater than the benefit
that would be realized if the security continued to be held to maturity. This will occur
primarily in the core portion of the city's portfolio that is available for longer term
investment.
City funds governed by this policy may be invested in the instruments described below,
all of which are authorized by Chapter 2256 of Government Code 10 (Public Funds
Investment Act), with further restrictions imposed by local ordinances. Investments of
City funds in any instrument or security not authorized for investment under the Act and
City ordinance is strictly prohibited. The City will not be required to liquidate an
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investment that becomes unauthorized, for reasons other than loss of rating,
subsequent to its purchase. All prudent measures will be taken to liquidate an
investment that is downgraded to less than the required minimum rating.
A. Authorized Investments
1. Obligations of the United States, its agencies, and instrumentalities
2. Direct Obligations of the State of Texas or its agencies
3. Collateralized Mortgage Obligations ( "CMOs ") directly issued by a federal
agency or instrumentality of the United States, the underlying security for which
is guaranteed by an agency or instrumentality of the United States
4. Other obligations, the principal and interest of which are unconditionally
guaranteed or insured by, backed by the full faith and credit of, this state or the
United States or their respective agencies and instrumentalities, including
obligations that are fully guaranteed or insured by the Federal Deposit
Insurance Corporation or by the explicit full faith and credit of the United States
5. Obligations of states, agencies, counties, cities, and other political subdivisions
of any state rated as to investment quality of not less than A or its equivalent by
a nationally recognized investment rating firm
6. Certificates of deposit issued by a depository institution as permitted by Texas
Public Funds Investment Act section 2256.010. Certificates of deposit must be
guaranteed or insured by the Federal Deposit Insurance Corporation or its
successor, and secured by obligations in a manner and amount as provided by
law.
7. Fully Collateralized Repurchase Agreements that are structured in compliance
with the Public Funds Investment Act. A flexible repurchase agreement can be
utilized for the investment of bond proceeds to meet projected cash outflows.
Repurchase agreements must be: secured by a combination of cash and
obligations of the United States or its agencies and instrumentalities; pledged to
the City or held in the City's name; deposited at the same time the investment is
made; and have a defined termination date. Flexible repurchase agreements
(Flex - Repos) must be purchased through a primary government securities
dealer, as defined by the Federal Reserve, or financial institutions doing
business in this state. Flex - Repos may be utilized on new bond issues as
deemed necessary and advantageous to the City. Repurchase Agreements will
only be executed with counterparties that have signed a TBMA Tri -Party
Repurchase Agreement with the City.
8. Commercial Paper
a. Commercial Paper is an authorized investment of this policy if the
commercial paper:
(1) Has a stated maturity of 270 days or fewer from the date of
issuance; and
(2) Is rated not less than A -1 or P -1 or an equivalent by at least:
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(a) Two nationally recognized credit rating agencies;
or
(b) One nationally recognized credit rating agency
and is fully secured by an irrevocable letter of credit
issued by a bank organized and existing under the
laws of the United States or any state.
9. Mutual Funds
a. No -load Money Market Mutual Funds are acceptable investments provided
they are registered and regulated by the Securities and Exchange
Commission, have a dollar- weighted average stated maturity of 90 days or
less, maintain a stable net asset value of $1 per share, and provide the City
with a prospectus and other information required by the Securities
Exchange Act of 1934 or the Investment Company Act of 1940.
b. No -load Mutual Funds are acceptable investments provided they are
regulated by the Securities and Exchange Commission, have an average
weighted maturity of less than two years, are invested exclusively in
obligations as expressed in Section 2256, subchapter A, are continuously
rated not less than AAA or it's equivalent by at least one nationally
recognized credit rating agency, and conform to all requirements under the
Public Funds Investment Act relating to the eligibility of investment pools to
receive and invest funds of investing entities.
10. Investment Pools
a. Investment pools must provide the Investment Officer with an offering
circular or other similar disclosure instrument that contains specific and
detailed information required by the Act. Additionally, the pool shall provide
transaction confirmations, detailed monthly transaction summaries, and
monthly performance reports to the Investment Officer. The specific
requirements for authorized investment pools are detailed in the Public
Funds Investment Act, Subchapter A, Section 2256.016. Authorized pools
must maintain credit ratings no lower than AAA or AAAm or an equivalent
rating by at least one nationally recognized rating service. An investment
pool shall invest the funds it received from entities in authorized
investments permitted by the Public Funds Investment Act. An Investment
pool created to operate as a money market mutual fund must maintain a
maximum weighted average maturity not to exceed 90 days and maintain
a net asset value of $1 per share with the market value per share between
.995 and 1.005. Any investment pool that does not meet the requirements
of one that is created to function as a money market mutual fund must
maintain a maximum average dollar weighted maturity that does not
exceed 365 days (or 366 days in the case of leap year) and must provide a
fixed interest rate and a fixed maturity term for each pool position.
b. In order to participate in an investment pool, the City Council must approve
by resolution or ordinance a Participation Agreement or Inter -local
Agreement to be executed with the State or Inter -local authority responsible
for the investment pool. This agreement will specify the City's authorized
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representatives and the standard delivery instructions for fund transfers and
information reports.
B. Unauthorized Investments
The following investment instruments are specifically not authorized:
1. Obligations whose payment represents the coupon payments on the
outstanding principal balance of the underlying mortgage- backed security
collateral and pays no principal (Collateralized Mortgage Obligations (CMO) -
derived Interest Only Strips),
2. Obligations whose payment represent the principal stream of cash flow from
the underlying mortgage- backed security collateral and bears no interest
(CMO- derived Principal Only Strips),
3. Collateralized Mortgage Obligations that have a stated final maturity date of
greater than ten (10) years,
4. Collateralized Mortgage Obligations whose interest rates are determined by an
index that adjusts opposite to the changes in a market index (Inverse Floaters),
5. Certificates of Deposit and other investments issued by Savings and Loans,
6. Share Certificates and other investments issued by Credit Unions, and
7. Guaranteed Investment Contracts.
VI. INVESTMENT PARAMETERS
A. Diversification
Diversification of funds and investments must be accompanied by competitive
bidding of all investments to assure diversification among securities dealers.
Diversification is necessary to reduce the portfolio's credit and market risks, while
helping the portfolio attain a market rate of return. The City shall seek to conduct
its investment transactions with several competing, reputable investment security
dealers and brokers to protect principal while optimizing interest opportunities. To
assure diversification of financial institutions, business involving two party
transactions (i.e. repurchase agreements) with any one investment broker should
be limited to thirty percent (30 %) of the par value of the total portfolio for any
reporting period. In this way, a bankruptcy, receivership, or legal action would not
immobilize the City's ability to meet payroll, operating, or other expenses.
It is the policy of the City to diversify its investment portfolio so that reliance on any
one issuer or broker will not place an undue financial burden on the City.
B. Investment Type
Depositories for Municipal Funds (Chapter 105, Local Government Code), the
Public Funds Investment Act (Chapter 10, Government Code), and City Ordinance
Number 2079 authorize depositories and define allowable investment programs for
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municipal governments.
It is the policy of the City to purchase only securities authorized by both the Public
Funds Investment Act and Section V., subsection A., of the City's investment
policy. Market risk shall be minimized by diversification of investment types. The
following limits, by instrument, are established for the City's total portfolio:
1. Repurchase Agreements 50%
2. Certificates of Deposit 30%
3. U.S. Treasury Notes /Bonds /Bills 100%
4. U.S. Agencies and Instrumentalities 75%
5. Commercial paper 10%
6. State and Local Bonds and Notes 20%
7. Money Market Mutual Funds 80%
8. Mutual Funds 15%
9. Investment Pools 100%
The maximum maturity of any given investment in the portfolio shall not exceed a
final, stated maturity of 5 years from the date of purchase and overall portfolio
weighted average maturity is not to exceed 3 years.
Reductions in the size of the portfolio due to cash outflows may cause an
investment type to exceed the maximum percentage allowed for that investment
type. In such situations, securities will be sold to reduce the percentage to
allowable levels only if no loss will be realized from the sale. If a loss will be
realized, then the investment may be held to maturity.
To allow for efficient and effective placement, a singular repurchase agreement
can be utilized for the investment of bond proceeds, which exceeds the 50%
limitation.
VII. INVESTMENT PROCEDURES
The City's portfolio shall be designed with the objective of obtaining a rate of return
through budgetary and economic cycles, commensurate with the investment risk
constraints and the cash flow requirements. The risk - return relationship will be
controlled through the investment parameters, operating requirements, and guiding
policies of the City Council. Market value of all securities owned will be compared to
current book value of those securities to determine portfolio performance on a
quarterly basis. Safety of principal is the foremost objective of this investment policy.
The City will practice competitive bidding when purchasing all investments to
guarantee the highest rate of return for the desired maturity date. The right is reserved
to reject the most financially favorable bid if it is potentially disruptive to the investment
strategy or portfolio composition of the City.
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A. Approval of Broker /Dealers
It is the policy of the City to purchase securities only from those institutions on the
City's approved list of broker /dealers and banks. The Investment Committee shall at
least annually, review, revise, and adopt a list of qualified brokers that are authorized
to engage in investment transactions with the City. All securities dealers must be
registered and certified with the Texas State Securities Commission, National
Association of Security Dealers ( "NASD ") and Securities and Exchange Commission
( "SEC ").
Those firms that request to become qualified bidders for securities transactions,
including financial institutions, banks, money market mutual funds, and local
government investment pools, will be required to provide a completed broker /dealer
questionnaire that provides information regarding creditworthiness, experience, and
reputation. Additional requirements include a certification stating that the firm has
received, read, understood, and agreed to comply with the City's investment policy and
implemented reasonable procedures and controls to preclude investment transactions
that are not authorized by the City's investment policy. This list may be revised by the
Investment Committee as the City's investment needs change. The Investment
Committee shall approve all broker /dealers and shall also have the ability to limit the
number of authorized securities dealers /banks doing business with the City.
All banks authorized to sell securities to the City will be Federal Reserve member
banks and must be approved by the Investment Committee. No investments will be
placed with Savings and Loan Institutions or Credit Unions.
It is the policy of the City to purchase securities from those institutions on investment
manager's approved list. The City authorizes the investment manager to engage in
security transactions with broker /dealers on a carefully monitored broker /dealer list.
The Investment Committee shall at least annually review the list of broker /dealers with
investment manager.
B. Investment Transactions
It is the policy of the City of North Richland Hills to require competitive bidding for all
individual security purchases and sales except for transactions with money market
mutual funds and local government investment pools. A minimum of three bids must
be obtained to ensure a competitive price for the transaction. All investment
transactions must be approved by the Assistant Director of Finance, the Director of
Finance, or registered investment advisor as appointed by the City Manager to
execute transactions on behalf of the City. or, in their absence, an authorized
Investment Officer. All securities purchased shall require delivery on the settlement
date to the City or its third party accounts on a delivery versus payment ( "DVP ") basis,
with the exception of investment pools and mutual funds. By so doing, City funds are
not released until the City has received, through the Federal Reserve wire, the
securities purchased.
C. Investment Reporting
The Public Funds Investment Act and City Ordinance Number 2079 require the
preparation of quarterly management reports and an annual report of all investment
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transactions of the City be presented to the City Council. The fourth quarter report for
the fiscal year will be considered as the annual report. The Primary Investment Officer
will prepare the required quarterly and annual reports for evaluating investment
portfolio performance. The reports will be approved and signed by all members of the
Investment Committee. The reports will include the following information, as required
by the Public Funds Investment Act:
1. A summary narrative of investment activity and portfolio performance over the
Period
2. Size and composition of portfolio at the beginning and end of the reporting period
3. List all investments according to the fund for which they were purchased
4. Beginning and ending book and market value for all securities held
5. Beginning and ending book and market value for the total portfolio
6. All additions and changes to the market value during the period
7. State the compliance of the portfolio to the investment policy and the Public Funds
Investment Act
8. Yield
9. Diversification of investments
10. Total sales, maturities, and purchases
11. Accrued interest
12. Performance compared to an established benchmark
These quarterly reports should be used along with the annual report to fully evaluate
and explain market trends and adjustment of investment strategies to manage market
fluctuations. The annual report will show on a fiscal year basis the results of the overall
investment strategy. The quarterly reports will conform to GAAP and be reviewed
annually by the City's independent auditor, with results reported to the City Council.
D. Marking to Market
Market value of all securities in the portfolio will be determined on a quarterly basis.
These values will be obtained from a reputable and independent source and disclosed
to the governing body in the quarterly investment report.
VIII. CUSTODIAL CREDIT RISK MANAGEMENT
A. Safekeeping and Custodial Agreements
The laws of the State of Texas and prudent treasury management require that all
purchased securities shall be held in safekeeping by either the City, a City account in
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a third party financial institution, or the City's safekeeping account with its designated
depository bank.
All securities owned by the City shall be held by a third party safekeeping agent, or in
the Federal Reserve Bank, except for certificates of deposit that have FDIC insurance
provided. For certificates of deposit with FDIC insurance, the City will hold the deposit
receipt.
Transfers of securities in safekeeping shall be processed with written confirmations.
The confirmation will be used for documentation and retention purposes. One of the
City's designated Investment Officers must approve release of collateral prior to its
removal from the safekeeping account.
B. Collateral Policy
Consistent with the requirements of Texas law as defined in Government Code 10,
Chapter 2257, known as the Public Funds Collateral Act, it is the policy of the City to
require full collateralization of all City investments other than obligations of the United
States and its agencies and instrumentalities. Collateral on investments shall be
maintained by an appropriate third party safekeeping agent, as designated by the City.
This policy also applies to any deposits held in an approved depository in excess of
the amount protected by FDIC insurance.
The City of North Richland Hills shall accept only the following securities as collateral:
1. FDIC insurance coverage
2. A bond, certificate of indebtedness, or Treasury Note of the United States, or other
evidence of indebtedness of the United States that is guaranteed as to principal
and interest by the United States
3. Obligations of the United States, its Agencies, and Instrumentalities
4. A bond of the State of Texas or of a county, city, or other political subdivision of the
State of Texas having been rated as investment grade (investment rating no less
than "A" or its equivalent) by a nationally recognized rating agency with a
remaining maturity of ten (10) years or less
Certificates of deposit plus accrued interest per non - depository bank do not need to be
collateralized pursuant to this policy as long as FDIC insurance is provided.
Certificates of Deposit, including accrued interest must be secured by approved
collateral for the amount in excess of FDIC insurance coverage.
Collateral is valued at current market plus interest accrued through the date of the
valuation. Collateral shall be marked to market daily to determine if adequate
collateral ization is being maintained. Repurchase agreement collateral must be
maintained at the following levels, with respect to repurchase agreement par value
plus accrued interest:
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Maturity of U. S. Treasury Other
Collateral Securities Securities
1 year or less 101% 102%
1 year to 5 years 102% 105%
Over 5 years 103% 110%
Collateral levels should be maintained during an investment transaction. The amount
placed in the bank to cover the cost of a security purchase should be fully
collateralized in the event the security fails to be delivered to the safekeeping agent.
Collateralized investments often require substitution of collateral. Any broker or
financial institution requesting substitution must contact the Primary Investment
Officer, or in his absence any other authorized Investment Officer, for approval and
settlement. The substituted collateral's value will be calculated and the substitution
approved if its value is equal to or greater than the original collateralization level.
The Director of Finance, or an authorized designee, must give immediate notification
of the decision to the bank or third party holding the collateral. Substitution is allowable
for all transactions, but should be limited, if possible, to minimize potential
administrative problems and transfer expense. The Director of Finance may limit
substitution and assess appropriate fees if substitution becomes excessive or abusive.
Collateral shall be audited at least annually by the City's independent audit firm, and
may be audited by the City at any time during normal business hours of the
safekeeping party.
The financial institutions with which the City invests and /or maintains other deposits
shall provide, as requested by the City, a listing of the City's certificates of deposit and
other deposits at the institution and a listing of collateral pledged to the City marked to
current market prices. The listing shall include total pledged securities with the
following information:
Name
Type /description
CUSIP
Par value
Current market value
Maturity date
Moody's or Standard & Poor's rating (both if available)
Under Chapter 2257, Public Funds Collateral Act, substitution and release of collateral
must be approved by the governing body. City of North Richland Hills Ordinance
Number 2079 Section 3 delegates the Investment Officers' overall responsibilities to
ensure that investment objectives are accomplished, and therefore, the authority to
release and substitute collateral as deemed necessary and reasonable within the
guidelines of this policy.
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IX. ARBITRAGE
The Tax Reform Act of 1986 (Title 26 U.S.C. Section 148) provides limitations on the
City's yield from investing tax - exempt bond proceeds and debt service funds. These
arbitrage rebate provisions require that the City compute earnings on investments from
each issue of bonds on a periodic basis to determine if a rebate is required. To determine
the City's arbitrage position, the City is required to calculate the actual yield earned on the
investment of the funds and compare it to the yield that would have been earned if the
funds had been invested at a rate equal to the yield on the bonds sold by the City. The
rebate provisions state that periodically (not less than once every five years, and not later
than sixty days after maturity of the bonds), the City is required to pay the U.S. Treasury a
rebate of any excess earnings. These restrictions require extreme precision in the
monitoring and record keeping of investments, particularly in computing yields to ensure
compliance. Failure to comply can dictate that the bonds become taxable, retroactively
from the date of issuance.
The City's investment position relative to the arbitrage restrictions is to continue pursuing
the maximum yield on applicable investments while ensuring the safety of capital and
liquidity. It is a fiscally sound position to continue maximization of yield and to rebate
excess earnings, if necessary.
X. DEPOSITORIES
The Texas City Depository Act, Local Government Code Chapter 105, prescribes
procedures for selection of a city depository designating that both general -law and home -
rule cities are "authorized to receive applications (as depository) for the custody of city
funds from any banking corporation, association, or individual banker doing business
within the city." This clause indicates that cities are not required to designate one central
depository.
The City of North Richland Hills will, through a request for proposals process, designate
one or more banks to serve as its primary depository(ies) to maximize investment
capabilities and minimize banking cost. The depository designation does not limit
investment activity to one financial institution.
The consideration the City of North Richland Hills will use to execute a banking services
contract will include:
• Ability of Bank to perform and provide the required and requested services
• Reputation of bidder and quality of services provided
• Cost of banking services
• Interest paid on interest bearing accounts and deposits
• Earnings credit calculation on account balances
• Completeness of proposal and agreement to points outlined in the request for
proposals
• Convenience of locations
• Previous service relationship with the City
• Financial strength and stability of institution
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Obtaining competitive proposals on the City's depository specifications will be the
responsibility of the Director of Finance. Selection of the depository shall be based on
the institutions offering the most favorable terms and conditions for the handling of City
funds and the services available to the City.
The maximum term for a depository contract under State law is five years. The City's
contract shall not exceed five years. A performance review will be conducted at least
once every six months by the Investment Committee to evaluate the working
relationship between the City and the depository bank. Special banking needs may be
contracted for by the City outside the depository contract if approved by City Council. If
a depository does not meet the City's requirements in the banking services contract,
the bank will be required to meet the requirements within ninety days or lose the
depository contract.
XI. INVESTMENT POLICY ADOPTION
The investment policy shall be adopted by ordinance or resolution of the City Council.
It is the City's intent to comply with state laws and regulations. The policy shall be
reviewed annually by the Investment Committee and the City Council. City Ordinance
Number 2079 states that policy revisions that require enactment due to updates of
applicable state or federal laws may be authorized by the City Manager; however,
other significant revisions must be approved by the City Council.
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NFZH