HomeMy WebLinkAboutResolution 2014-001RESOLUTION NO. 2014 -001
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 13th day of January 2014.
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Patricia Hutson, City Secretary
APPROV
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Ge • ge £ . Stap es, City Attorney
APPROVED AS TO CONTENT:
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Larry Ko
ce, Director of Finance
Resolution No. 2014 -001
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CITY OF NORTH RICHLAND HILLS
INVESTMENT STRATEGY
JANUARY 13, 2014
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Resolution No. 2014 -001
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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
o Special Investigation Fund
o Drainage Utility Fund
o Crime Control and Prevention District Fund
o Promotional Fund
o Economic Development Fund
o Donations Fund
o Parks and Recreation Facilities Development Fund
o Grant Fund
o Gas Development Fund
o Traffic Safety Fund
• Enterprise Funds
o Utility Fund
o Aquatic Park Fund
o Golf Course Fund
• Internal Service Funds
o Facilities /Construction Management Fund
o Fleet Services Fund
o Self- Insurance Fund
o Information Services Fund
• Capital Projects Funds
o General CIP Fund
o Permanent Street Maintenance Fund
o 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 Tess 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
the Investment Policy. The maximum allowable individual maturity is restricted to
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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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CITY OF NORTH RICHLAND HILLS
INVESTMENT POLICY
JANUARY 13, 2014
Resolution No. 2014 -001
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TABLE OF CONTENTS
Page
Preface 1
I. Purpose and Objectives 3
II. Scope 5
III. Responsibility and Control 6
IV. Investment Committee 9
V. Suitable and Authorized Investments 10
VI. Investment Parameters 14
VII. Investment Procedures 15
VIII. Custodial Credit Risk Management 18
IX. Arbitrage 20
X. Depositories 21
XI. Investment Policy Adoption 22
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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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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.
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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 •
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
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(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.
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:
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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)
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.
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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 Tess than ten hours of instruction
relating to investment 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. 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
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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.
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
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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.
The Investment Committee shall perform the following functions:
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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 dates can 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.
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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 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
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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 Tess than A -1 or P -1 or an equivalent by at least:
(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 Tess 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
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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 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),
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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 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:
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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
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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.
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
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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, e-F 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 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
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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 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.
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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 collateralization is being maintained. Repurchase agreement
collateral must be maintained at the following levels, with respect to repurchase
agreement par value plus accrued interest:
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
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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.
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 Tess 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
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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
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
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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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t4RJ-I
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