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HomeMy WebLinkAboutMO # 1265621 MUNICIPAL ORDER NO. 1265 A MUNICIPAL ORDER ADOPTING A REVISED INVESTMENT POLICY FOR THE CITY OF PADUCAH, KENTUCKY PURSUANT TO KRS CHAPTER 66.480 WHEREAS, during the 1994 regular session, the Kentucky General Assembly enacted Senate Bill 199 which amended KRS 66.480, regulating the investment policy to govern the investment of its funds; and WHEREAS, this legislation requires every local government to adopt this written investment policy by January 1, 1995; and WHEREAS, by Municipal Order No. 699 the City of Paducah adopted its first investment policy on December 27, 1994; and WHEREAS, on January 9, 2001, the City of Paducah adopted by Municipal Order No. 867 a revised investment policy due to Kentucky Revised Statutes amendments; and WHEREAS, after review by staff it has been determined that revisions are necessary for the policy to be current and meet the financial needs of the City and for the City to qualify for the Government Finance Officers Association's Distinguished Budget Presentation Award. BE IT ORDERED BY THE CITY OF PADUCAH, KENTUCKY: SECTION 1. The City of Paducah hereby adopts a revised City of Paducah Investment policy pursuant to the provisions of KRS 66.480. A copy of this policy is attached hereto and incorporated by reference as if fully set out herein. Revisions include the following: 1. Clarifies who has authority and/or responsibility for oversight of the City's investment program including the establishment of internal controls to prevent and control losses of the City's funds. 2. Creates a section that addresses `conflict of interest; by establishing reporting requirements for certain government officials and employees involved in the investment process. SECTION 2. This order shall be in full force and effect from and after the date of its adoption. ATTEST: JVX�dMXAWk Tammara S. Brock, City Clerk Adopted by the Board of Commissioners February 13, 2007 Recorded by Tammara S. Brock, City Clerk, February 13, 2007 \noninvestment policy (rev 2007) 622 CITY OF PADUCAH, KY INVESTMENT POLICY GENERAL POLICY: It is the policy of the City of Paducah to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands of the City and conforming to all state and local statutes governing the investment of public funds. SCOPE: This investment policy applies to all financial assets of the City of Paducah. These funds are accounted for in the City of Paducah's Comprehensive Annual Financial Report and include all those funds outlined in Paducah's Administrative Policy FIN -20. Authority to Invest: Management responsibility for the City's investment program is delegated to the Finance Director. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Finance Director shall be ultimately responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials and employees The controls shall be designed to prevent and control losses of public funds arising from fraud employee error, misrgpresentation by third parties, and unanticipated changes in financial markets or imprudent actions by officers and employees. The Finance Director shall maintain all records related to the entity's investment program. Prudent Person Rule: 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 their capital as well as the probable income to be derived. The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. Investment Objectives: The primary objectives, in priority order, of the City of Paducah's investment activities shall be: • Safety: Safety of principal is the foremost objective of the investment program. Investments of the City of Paducah shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. Liquidity: The City of Paducah's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements, which might be reasonably anticipated. Page 1 of 1 623 • Return on Investments: The City of Paducah's investment port -folio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the City's investment risk constraints and the cash flow characteristics of the portfolio. Conflicts of Interest: Government officials and employees of the City of Paducah 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 their ability to make impartial investment decisions. AU personal investment or loans in excess of $250,000 in or with any entity that the City of Paducah has declared as a depository or regularly conducts investment business with shall be filed with the City Clerk Authorized Financial Dealers and Institutions: The Finance Director shall maintain a list of financial institutions authorized to provide investment services to the City of Paducah. In addition, a list shall also be maintained of approved security broker/dealers selected by credit worthiness who are authorized to provide investment services in the State of Kentucky. All financial institutions and broker/dealers who desire to provide investment services to the City of Paducah shall supply the Finance Director with information sufficient to adequately evaluate the institution and answer any and all inquiries posed by the Finance Director or the Mayor and City Commission, including the following information: • Audited financial statements. • Regulatory reports on financial condition. • Written memorandum of Agreement for the deposit of public funds or trading resolution, as appropriate. • Proof of National Association of Security Dealers certification and proof of state registration. • Any additional information considered necessary to allow the Finance Director to evaluate the creditworthiness of the institution. A current audited financial statement is required to be on file for each financial institution and broker/dealer in which the City of Paducah invests. Authorized & Suitable Investments: The City of Paducah is empowered by statute to invest in the following types of securities: • Obligations of the United States and of its agencies and instrumentalities, including obligations subject to repurchase agreements, provided that delivery of these obligations subject to repurchase agreements is taken either directly or through an authorized custodian. • Obligations and contracts for future delivery or purchase of obligations backed by the full faith and credit of the United States or a United States government agency. • Obligations of any corporation of the United States government. • Certificates of deposit issued by or other interest-bearing accounts of any bank or savings and loan institution which are insured by the Federal Deposit Insurance Page 2 of 2 624 Corporation or similar entity or which are collateralized, to the extent uninsured, by any obligations permitted by section 41.240(4) of the Kentucky Revised Statutes. • Bonds or certificates of indebtedness of the Commonwealth of Kentucky and of its agencies and instrumentalities. • Securities issued by a state or local government, or any instrumentality or agency thereof, in the United States, and rated in one (1) of the three (3) highest categories by a nationally recognized rating agency. Collateralization: Collateralization will be required on all types of investments. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be (101%) of market value of principal and accrued interest. The City of Paducah chooses to limit collateral to the types of instruments authorized as collateral for state funds in KRS 41.240. Safekeeping and Custody: All security transactions, including collateral for repurchase agreements, entered into by the City of Paducah shall be conducted on a delivery -versus -payment (DVP) basis. Securities will be held by a third party custodian designated safekeeping receipts. Diversification of Investments: The City of Paducah recognizes that some level of risk is inherent in any investment transaction. Losses maybe incurred due to issuer default, market price changes, or closing investments prior to maturity due to unanticipated cash flow needs. Diversification of the City of Paducah investment portfolio by institution, type of investment instrument, and term to maturity is the primary method to minimize investment risk. Maximum Maturities: To the extent possible, the City of Paducah will attempt to match its investment with anticipated cash flow requirements. Unless matched to a specific cash flow need, the City of Paducah's funds should not, in general, be invested in securities maturing more than five years from the date of purchase. Reserve funds may be invested in securities exceeding five years if the maturity of such investments are made to coincide as nearly as practicable with the expected use of the funds. Internal Control: In connection with the audit of City funds conducted by an independent certified public accountant, the auditor shall review the City of Paducah's investment program, including internal controls and procedures, and the results of the review, including recommended changes, may be included in the City of Paducah's annual management advisory review letter. Page 3 of 3 625 Performance Standards: The investment portfolio will be designed to obtain a market rate of return during budgetary and economic cycles, taking into account the City of Paducah's investment risk constraints and cash flow needs. Market Yield: The City of Paducah's investment strategy is active. Given this strategy, the basis used by the Finance Director to determine whether market yields are being achieved shall be the Federal Funds offered rate and the six- month rate of return on an average $100,000 certificate of deposit taken from "Money Rates" as published in the Friday Wall Street Journal. Reporting: The Finance Director or his designee is charged with the responsibility of preparing a quarterly market report on investment activity. This report shall include: • Name of financial institution from which the investment was purchased or in which assets are deposited. • Type of investment. • Certificate or other reference number, if applicable. • Percentage yield on an annualized basis. • Purchase date, purchase price, and maturity date. The Finance Director and his designees, before entering their duties as outlined in this policy, shall execute a bond, with a good corporate surety, and general liability insurance coverage, with limits no less than the City's general liability policy limits. The cost of the bonds and insurance required under this section shall be borne by the City. Investment Policy Adoption: City of Paducah's investment policy shall be adopted by municipal order of the City of Paducah's Mayor and Commission and shall become effective on the date set forth in the order. The policy shall be reviewed annually and revised, as appropriate. Ani amendments to this policy must be made by order of the Board of Commissioners. GLOSSARY AGENCIES: Federal agency securities. ASKED: The price at which securities are offered. BID: The price offered for securities. BROKER: A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in interdealer markets. COLLATERAL: Securities, evidence of deposit or other property, which a borrower pledges to secure payment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Paducah. It includes five combined statements and basic financial Page 4 of 4 626 statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance -related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a certificate. Large -denomination CD's are typically negotiable.' COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A Certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT: The difference between the cost price of a security and its value at maturity when quoted at a lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U. S. Treasury bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan Banks play a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development, H.U.D. It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder -owned corporation. The corporation's purchases include a variety of Page 5 of 5 I ,, 627 adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA OR Ginnie Mae): Securities guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U. S. Government. Ginnie Mae securities are backed by FHA, VA or FMHM mortgages. The term pass-through is often used to describe Ginnie Maes. �II LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase -- reverse repurchase agreements that establishes each party's rights in the transaction. A master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the event of default by the seller -borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of securities held by an investor. PRUDENT PERSON RULE: An investment standard. In some states, the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the state -the so-called legal list. In other states, the trustee may invest in a security if it is one, which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital. PRIMARY DEALER: A group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers, banks, and a few unregulated firms. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return. Page 6 of 6 M. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sales or compensating use of ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. REPURCHASE AGREEMENT (RP or REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: When the Fed is said to be doing RP, it is lending money that is, increasing bank reserves. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. TREASURY BILLS: A non-interest bearing discount security issued by the U. S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BOND: Long-term U. S. Treasury securities having initial maturities of more than ten years. TREASURY NOTES: Intermediate term coupon bearing U. S. Treasury securities having initial maturities of from one to ten years. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1: also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. Page 7 of 7