CR 10-107 Revise Legislative Policy 6-B Standards of InvestmentsSeptember 21, 2010 City of Kopkims Council Report 2010-107
REVISE LEGISLATIVE POLICY 6-B
STANDARDS OF INVESTMENTS
Proposed Action
Staff recommends approval of the following motion: Move that the Hopkins City Council adopt
Resolution 2010-063 revising Legislative Policy 6-B, Standards for Investments.
Approval of this motion will revise the language in Policy 6-B in order to update the City's
policy on investing public funds.
Overview
In 1987 the City of Hopkins adopted a policy regarding standards for investments which has not
been revised since initial adoption. There have been significant changes in the investment
environment, best practices regarding investing public funds have been adopted by the
Government Finance Officers Association (GFOA) and new pronouncements issued by the
Governmental Accounting Standards Board (GASB) that impact the decisions made regarding
investment of public funds. These documents were utilized in revising the City's policy.
The policy has been amended to include investment objectives encompassing safety (credit risk,
interest rate risk, and custodial risk), liquidity and yield; standards of care (prudence, ethics,
conflicts of interest and delegation of authority); safekeeping and custody of investments;
authorized collateral; diversification and broker certifications.
The revisions represent significant changes to the policy that provide additional guidelines and
requirements for the investment of public funds with the intention of safeguarding public funds.
Supporting Documents
• Resolution 2010-063
• Policy 6-B, Revised
• Policy 6-13, Original 1987 version
Christine M. Harkess, CPA, CGFM
Finance Director
Financial Impact: $ none Budgeted: Y/N N Source:
Related Documents (CIP, ERP, etc.): Notes:
City of Hopkins
Hennepin County, Minnesota
RESOLUTION NO. 2010-063
Revising Legislative Policy 613 — Standards for Investments
WHEREAS, the City Council of the City of Hopkins has approved a document entitled
the Legislative Policy Manual to provide uniform guidelines on City policies
so that actions taken are consistent and fair; and
WHEREAS, the City Council has established Legislative Policy 6-B in order to
establish guidelines for investment of city funds; and
WHEREAS, the City Council has determined that the existing policy needs to be
revised to make the policy relevant in regards to current practices of
investing public funds,
NOW THEREFORE BE IT RESOLVED, that the City Council of the City of Hopkins
hereby adopts revised Legislative Policy 6-13 — Standards for Investments.
Adopted by the City Council of the City of Hopkins this 21 st day of September 2010.
Gene Maxwell, Mayor
ATTEST:
Terry Obermaier, City Clerk
POLICY 6-B
STANDARDS FOR INVESTMENTS
I. PURPOSE
1.01 It is the policy of the City to invest public funds in a manner which will provide the
highest investment return with the maximum security while meeting the daily cash flow
requirements of the City and conforming to all state and local statutes governing the
investment of public funds. The purpose of this Policy statement is to establish standards
governing the investment of City funds. In accordance with Minnesota Statutes 385.05
and 118A.02 the City Treasurer is authorized to invest the City's funds in accordance
with Minnesota Statutes 118A.04 and 118A.05 which defines the types of securities and
financial instruments the City is allowed to purchase.
2. SCOPE
2.01 This Policy applies to the investment and deposit of all funds of the City.
A. Pooling of Funds
Except for cash in certain restricted and special funds, the City will consolidate cash
and reserve balances from all funds to maximize investment earnings and to increase
efficiencies with regard to investment pricing, safekeeping and administration.
Investment income will be allocated monthly to the various funds based on average
cash balance for the month and in accordance with generally accepted accounting
principles.
3. OBJECTIVE
3.01 At all times, investments of the City shall be in accordance with Minnesota Statutes
Chapter 118A and amendments thereto. The primary objectives of the City's investment
activities shall be the following, in order of priority:
A. Safety
Safety of principal is the foremost objective of the investment portfolio. 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 risk, interest rate risk, and
custodial risk.
Legislative Policy Manual -- Chapter 6-B
1. Credit Risk. Credit Risk is the risk of loss due to failure of the security issuer_ or
backer. Thus, designated depositories shall have insurance through the FDIC
(Federal Insurance) or the SIPC (Securities Investor Protection Corporation). To
ensure safety, it is the policy of the City that when considering an investment, all
depositories under consideration be cross-checked against existing investments to
make certain that funds in excess of insurance limits are not made in the same
institution unless collateralized as outlined below. Furthermore, the City Council
will approve all financial institutions, brokers, and advisers with which the City
will do business.
2. Interest Rate Risk: Interest Rate Risk is the risk that the market value of
securities in the portfolio will fall due to changes in general interest rates. The
City will minimize Interest Rate Risk by structuring the investment portfolio so
that securities mature to meet cash requirements for ongoing operations, thereby
avoiding the need to sell securities on the open market prior to maturity.
3. Custodial Risk: The City will minimize deposit Custodial Risk, which is the risk
of loss due to failure of the depository bank (or credit union), by obtaining
collateral or bond for all uninsured amounts on deposit, and by obtaining
necessary documentation to show compliance with state law and a perfected
security interest under federal law.
B. Liquidity
The investment portfolio shall remain sufficiently liquid to meet projected
disbursement requirements. This is accomplished by structuring the portfolio so that
securities mature concurrent with cash needs to meet anticipated demands (static
liquidity). Generally, investments shall have "laddered" maturities so that money
becomes available on a regular schedule. Furthermore, since all possible cash
demands cannot be anticipated, the portfolio should consist largely of securities with
active secondary or resale markets (dynamic liquidity). However, the City of
Hopkins practices the philosophy of "buy and hold", meaning that when a security is
purchased it is the intention of the City to hold the security until maturity.
C. Yield
The investment portfolio shall be designed with the objective of attaining a market
rate of return given cash flow characteristics of the portfolio. The core of investments
is limited to relatively low risk securities in anticipation of earning a fair return
relative to the risk being assumed. Securities shall not be sold prior to maturity
except when the liquidity needs of the portfolio require that the security be sold.
Legislative Policy Manual -- Chapter 6-B 2
4. STANDARDS OF CARE
4.01 Prudence
The standard of prudence to be used by investment officials shall be the "prudent
investor", and shall be applied in the context of managing the investments. All
investment transactions shall be made in good faith with the degree of judgment and care,
under the circumstances, that a person of prudence, discretion and intelligence would
exercise in the management of their own affairs. This standard of prudence shall mean
not for speculation, and with consideration of the probable safety of the capital as well as
the probable investment return derived from assets.
4.02 Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal
business activity that could conflict with the proper execution and management of the
investment program, or that could impair their ability to make impartial decisions.
Employees and investment officials shall disclose any material interests in financial
institutions with which they conduct business. They shall further disclose any personal
financial/investment positions that could be related to the performance of the investment
portfolio. Employees and officers shall refrain from undertaking personal investment
transactions with the same individual with whom business is conducted on behalf of the
City of Hopkins.
4.03 Delegation of Authority
In accordance with Minnesota Statute 118A.02, the City Council authorizes the Finance
Director/Treasurer to designate depositories, subject to ratification, and further authorizes
the Finance Director/Treasurer to make investments for the City. The authorized
individuals, when acting in accordance with this Policy and exercising due diligence,
shall not be held responsible for losses, provided that the losses are reported immediately
and that appropriate action is taken to control further losses.
5. AUTHORIZED FINANCIAL INSTITUTIONS
5.01 A list will be maintained of financial institutions and depositories authorized to provide
investment services. The City will conduct its investment transactions with several legal,
competing, reputable investment securities dealers or banks located in the
Minneapolis/St. Paul metropolitan area. The City will obtain a completed "Notification
to Broker and Certification by Broker" statement of investment restrictions from each
dealer in accordance with Minnesota Statute 118A.04.
Legislative Policy Manual -- Chapter 6-13
6. SAFEKEEPING AND CUSTODY
6.01 Delivery vs. Payment
All trades where applicable will be executed by delivery vs. payment (DVP). This
ensures that securities are deposited in the eligible financial institution prior to the release
of funds. Securities will be held by a third party custodian as evidenced by safekeeping
receipts.
6.02 Safekeeping
Securities will be held by an independent third -party custodian selected by the entity as
evidenced by safekeeping receipts in the City's name.
6.03 Internal Controls
The investment officer is responsible for establishing and maintaining an internal control
structure designed to prevent loss of public funds due to fraud, error, misrepresentation,
unanticipated market changes, or imprudent actions. The internal control structure shall
be designed to provide reasonable assurance that these objectives are met. The concept
of reasonable assurance recognized that (1) the cost of the control should not exceed the
benefits likely to be derived and (2) the valuation of costs and benefits requires estimates
and judgments by management.
7. AUTHORIZED INVESTMENTS
7.01 All City investments and deposits shall be those allowable by Minnesota Statutes Chapter
118A.04-.05 and amendments thereto which are categorized as follows:
A. United States securities -governmental bonds, notes, bills, mortgages (excluding high-
risk mortgage-backed securities), and other securities, which are direct obligations or
are guaranteed or insured issues of the United States, its agencies, its
instrumentalities, or organizations created by the Acts of Congress.
B. State and Local securities -general obligations securities of any state or local
government rated "A" or better, revenue obligation securities of any state or local
government rated "AA" or better; and a general obligation of the Minnesota housing
finance agency which is a moral obligation of the State and is rated "A" or better.
C. Commercial paper -unsecured promissory notes by corporations that are rated in the
highest quality category by at least two nationally recognized rating agencies and
matures in 270 days or less.
D. Time deposits -certificates of deposit fully insured by the Federal Deposit Insurance
Corporation or bankers acceptances of United State banks; or have full collateral by
the financial institution.
E. Repurchase agreements (Repos) contracts whereby a holder of securities sells the
securities to an investor and agrees to repurchase them at a fixed price on a fixed date.
The City in effect lends money to another party and holds the security as collateral
until it is repurchased by the other party.
F. Money market mutual funds -shares of a Minnesota joint powers investment trust
whose investments are restricted to securities described in (1) through (5) above, or
Legislative Policy Manual -- Chapter 6-B 4
shares of an investment company that meets the requirements of Minnesota Statutes
118A.05, subd. 4 (4).
8. AUTHORIZED COLLATERALIZATION
8.01 In accordance with MN Statutes 118A, collateralization will be required on all demand
deposit accounts, including checking, savings, and money market accounts, and non-
negotiable certificates of deposit in excess of federal deposit insurance.
State law defines the types of securities that a financial institution may pledge as
collateral for public deposits. These securities include:
• United States Treasury Issues
• Issues of US Government Agencies and Instrumentalities
• Obligations of State and Local Governments
• Time Deposits (Certificates of Deposits fully insured by the federal deposit
insurance company or federal agency).
Since the amount a public entity has on deposit will vary from time to time, the financial
institution needs sufficient amounts of pledged collateral to cover 110% of the uninsured
amount on deposit during peak deposit times.
9. DIVERSIFICATION
9.01 The City will attempt to diversify its investments according to type and maturity. The
portfolio, as much as .possible, will contain both short-term and long-term investments.
The City will attempt to match its investments with anticipated cash flow requirements.
Extended maturities may be utilized to take advantage of higher yields.
10. BROKER REPRESENTATIONS
10.01 Municipalities must obtain from their brokers certain representations regarding future
investments. Pursuant to Minnesota Statutes 118A, the City shall provide each broker
with the City's investment policy, and the securities broker shall submit a certification
annually to the City stating that the officer has reviewed the investment policies and
objectives, as well as applicable state law, and agrees to disclose potential conflicts of
interest or risk to public funds that might arise out of business transactions between the
firm and the City. All financial institutions shall agree to undertake reasonable efforts to
preclude imprudent transactions involving the City's funds.
11. REPORTING
11.01 The Finance Director will report at least quarterly to the City Council on the total of all
funds invested, the types of securities held, the amount held in each class of security and
the total interest received on all securities year to date.
12. POLICY CONSIDERATIONS
12.01 This policy shall be reviewed on an annual basis by the Finance Director. Any changes
must be approved by the Finance Director and the City Council.
Legislative Policy Manual -- Chapter 6-B
13. APPROVAL OF INVESTMENT POLICY
13.01 The investment policy shall be formally approved and adopted by the City Council of the
City of Hopkins.
Established 8/18/87
Revised 9/21/2010
City of Hopkins
Legislative Policy Manual -- Chapter 6-B 6
987
Poli
POLICY 6-B LTi!�!ev
STANDARDS FOR INVESTMENTS
1. PURPOSE
1.01 The purpose of this Policy Statement is to establish standards governing the investment
of City funds. It is the City's policy that available funds be invested to the maximum
extent possible, at the highest rates obtainable at the time of investment, in conformance
with the legal and administrative guidelines outlined herein.
2. APPLICABILITY
2.01 This directive applies to all investments made by the City, irrespective of fund.
3. SCOPE OF INVESTMENTS
3.01 The City will invest only in the following instruments or those others that may
subsequently be permitted by State Statute.
a. United States Treasury Obligations
b. Federal Agency Securities
c. Repurchase Agreements (Repos)
d. Certificates of Deposit (C.D.'s)
e. Commercial Paper
f. Banker's Acceptance
g. Money Market Funds
These instruments are defined in Section 7.
4. VENDOR QUALIFICATIONS
4.01 The vendor qualifications for investments focus upon protection of taxpayer dollars and
investment income, consistent with statutory authorization and financial prudence. The
City will conduct its investment transactions with several legal competing, reputable
investment security dealers and qualifying banks located within the Twin Cities area,
utilizing the following guidelines:
Legislative Policy Manual -- Chapter 6-B 1
4.02 Repurchase Agreements (Repos)
1. Perfecting Collateral.
Repo's are considered secured loans with securities as underlying collateral. The
collateral in each Repo transaction shall be perfected. (Perfection is a legal concept
by which the City attains the right to take delivery and ownership of the collateral
involved in a loan in the event that a debtor defaults and files bankruptcy). With
collateral perfection there is less principal risk for the City since the claim against the
collateral is in place in relation to those of other parties.
For Repo's with maturities of 45 days or less, collateral is considered perfected
without security delivery. For Repo's with maturities extending past 45 days,
perfection occurs only by taking possession of securities. The City will insist on
delivery of securities if the Repo transaction is greater than 45 days.
2. Selection of Repo Vendors
The City will purchase Repo's from vendors who meet certain criteria:
a) Reporting dealers who are monitored by the New York Federal Reserve Bank.
b) Nationally supervised commercial banks whose combined capital and surplus
equals or exceeds $25,000,000.
c) Local designated depository banks issuing Repo's in amounts of $500,000 or less
and scheduled to mature in 15 days or less.
d) The qualifying bank or dealer must have demonstrated over a significant period of
time, a successful, profitable, and reliable operation.
e) The qualifying bank or dealer must have an established managerial component and
knowledgeable professional staff capable of ensuring the continued success of the
enterprise.
4.03 Local Investments
In order to provide an opportunity for small local banks to compete in the bidding
process, efforts will be made to offer smaller dollar amounts for bid.
The City of Hopkins will purchase short-term and medium-term certificates of deposit
from vendors based on the following criteria:
1. The rate should match or exceed other investment options.
2. The collateral shall be government securities in excess of FDIC maximum insurance
($100,000 under current law).
Legislative Policy Manual -- Chapter 6-B 2
4.04 Bankers Acceptances
Although authorized by Minnesota Law, Bankers Acceptances and Commercial Paper are
more risky than instruments of the Federal government or Federal agencies. Because of
the credit risk, the City of Hopkins will follow these guidelines:
1. Bankers Acceptances shall be restricted to the top 40 banks in the United States (as
measured by deposits).
2. The broker, dealer, or banker shall verify that the Bankers Acceptance is eligible for
repurchase by the Federal Reserve System.
3. Bankers Acceptances should not be purchased unless the yield is greater than United
States Treasury Obligations or Federal Agency Issues.
4.05 Commercial Paper
1. Commercial Paper shall be restricted to issues which mature in 270 days or less with
a rating of A-1 (Moody's), P-1 (Standard & Poors), or F-1 (Fitch) among at least two
of the three rating agencies.
2. Commercial Paper shall be purchased only from dealers who report to the Federal
Reserve Bank of New York or from qualifying banks.
3. Commercial Paper shall not be purchased unless the yield is greater than United
States Treasury Obligations or Federal Agency Issues.
4.06 Money Market Funds. In order to insure maximum security only those Money Market
Funds with portfolios consisting solely of United States Treasury Obligations and/or
Federal Agency Issues will be considered for investment.
4.07 Speculative investment will not be allowed. The City will not purchase investments that,
at the time of investment, cannot be held to maturity. This does not mean that an
investment cannot be sold prior to maturity.
5. ADMINISTRATIVE PROCESS
5.01 Investments shall be undertaken so as to insure the preservation of capital in the overall
portfolio. Safety of principal is the foremost objective. Liquidity and yield are also
important considerations. It is essential that money is always available when needed,
therefore, Hopkins' investment goal is to maximize yield while scheduling maturity dates
to coincide with expenditure needs.
5.02 The City's investment portfolio shall be designed to attain a market -average rate of return
during budgetary and economic cycles, taking into account the City's investment risk
constraint and the cash flow characteristics of the portfolio.
5.03 All participating in the investment process shall seek to act responsibly as custodians of
the public trust. Investment officials shall avoid any transaction that might impair public
confidence in the City of Hopkins' ability to govern effectively.
Legislative Policy Manual -- Chapter 6-B
6. PROCEDURES
6.01 Cash management is essential to a good investment program. The Finance Department
has responsibility to organize and establish procedures for effective cash management,
based on the following guidelines:
6.02 Cash flow projections will be prepared at the beginning of each budget year.
6.03 Each morning cash balances will be prepared based on cash received the previous day,
warrants paid the previous day, and sizable checks or wire transfers that present
investment opportunity.
6.04 Each morning the investment records will be reviewed and updated as investments
mature or are purchased.
6.05 Each month the investment records will be balanced to the financial records.
6.06 Semiannually, finance will submit a report of the City's investments and cash position to
the City Council.
6.07 Interest earnings will be allocated to the various City funds at year end.
6.08 The General Fund will be allocated a management fee equal to seven percent of the
investment earnings.
7. ELIGIBLE INSTRUMENTS FOR CITY INVESTMENT
7.01 United States Treasury Obligations - constitutes the largest segment of the market for
fixed income securities. The major securities issued are bills, notes and bonds. Treasury
bills are auctioned weekly and with maturities of several months. They carry no coupon,
but are sold on a discount basis. Treasury notes are issued for maturities of one to seven
years; the original maturity on Treasury Bonds is over seven years. Both carry coupons.
In general, Treasury securities are the safest and most marketable securities and yield the
lowest return for a given maturity of all investment instruments.
7.02 Federal Agency Securities - obligations of various agencies and corporations chartered by
the federal government and guaranteed by the agency issuing the security. Principal
agencies issuing securities are the federal land banks, the federal home loan banks, the
federal intermediate credit banks, the Federal National Mortgage Association (Fannie
Mae"), the Government National Mortgage Association (Ginnie Mae), and the bank for
cooperatives. Maturities of these issues range upward from a month to approximately
fifteen years. They generally have a higher yield than Treasury obligations.
Legislative Policy Manual -- Chapter 6-B 4
7.03 Repurchase Agreements (Repo's) - provide for the sale of short-term securities by a
securities dealer to investors, such as cities, with an agreement to repurchase the
securities at a specified future date. The investor receives a given yield while holding the
security and the repurchase price is guaranteed in advance. The length of the holding
period is tailored to the needs of the investor, but is usually of very short duration. Rates
are related to the rates on Treasury Bills, federal funds, and loans to government security
dealers by commercial banks.
7.04 Certificates of Deposit (C.D.'s) - the deposit of funds at a commercial bank for a specified
period of time and at a specified rate of interest. Yields on Certificates of Deposit tend to
be higher than on Treasury Bills of comparable maturity.
7.05 Commercial Paper - an unsecured promissory note with a fixed maturity of no more than
270 days. Commercial Paper is normally sold at a discount from face value.
7.06 Bankers Acceptance - short term, noninterest bearing note sold at discount and redeemed
at face value. It is secured by the goods which it finances, the bank that accepts the draft,
and the issuers promise to pay. These notes trade at a rate equal to or slightly higher than
Certificates of Deposit, depending on market supply and demand.
7.07 Money Market Funds - these are short term, high quality investments, sold by large
banks. These instruments include Treasury Bills and notes, Certificates of Deposit,
Commercial Paper, Banker's Acceptances, and Eurodollar instruments.
Established 8/18/87
City of Hopkins
Legislative Policy Manual -- Chapter 6-B