The City’s Investment and Cash Management Policy requires that it be reviewed annually to ensure consistency with respect to the objectives of safety, liquidity, yield and relevance to current laws and financial and economic trends. State law also requires that the City’s Investment Policy be rendered annually to the City Council.

The City’s Investment Policy for FY 2001/2002 was reviewed by the Municipal Treasurer’s Association of United States and Canada (MTA US&C) and received their Written Investment Policy Certification.

In accordance with State law, the City Council adopted a policy governing investment of City funds on July 30, 1985. This policy has routinely been updated on an annual basis.

The key provisions of the existing policy are as follows:

1. Safety of principal is the foremost objective of the investment program. Diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.
2. Liquidity-the portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated.
3. Return on Investment-the portfolio will be maintained with the objectives of safety and liquidity first, and then the objective of obtaining a market rate of return throughout the budgetary and economic cycles, taking into account the City’s investment risk constraints and the cash flow characteristics of the portfolio.

As required in the City’s Investment Policy, a report of portfolio performance and compliance with the Investment Policy for the prior year shall be presented to the City Council as part of the annual Investment Policy review.

Safety: The City’s portfolio is diversified by type of investment, issuer, and maturity date. All investments fully comply with the requirement that the City have all instruments either in direct custody or in safekeeping by a third party bank trust department. All investments are held for safekeeping by the Trust Department of the City’s contract bank (currently Union Bank).

Liquidity: A schedule of major revenues and expenditures for at least 13 months is maintained in order to determine liquidity needs. Liquidity requirements have been met through utilizing the State’s Local Agency Investment Fund (LAIF), overnight repurchase agreements, and the City’s interest-bearing business checking account.

Yield: For Fiscal Year 2001/2002, the portfolio yield has averaged 5.16% while the one-year Treasury bill yielded an average of 2.64%; a difference of 2.52%.

Use of Security Dealers and Brokers: During FY 2001/2002 staff has complied with all requirements specified in the existing Investment Policy regarding the use of security dealers and brokers. In addition, in accordance with policy, when staff has purchased an investment security, quotations have been solicited from at least three financial dealers or institutions whenever possible.

Responsibility and Reporting: City staff has the responsibility for ensuring that any investment decision complies with the Investment Policy. The Treasurer is required by law to file a quarterly investment report with the City Council, City Manager, and Internal Auditor within 30 days following the end of the quarter covered by the report. Staff, in fact, submits an investment report on an accounting period basis, rather than quarterly basis to ensure that the City Council, City Manager, and Internal Auditor have the most timely information.

For the past four years, staff has participated in the Investment Policy Certification Program sponsored by the MTA US&C. This program provides professional guidance and assistance in improving investment policies in the public sector and involves a review by at least three experts in the field, with certification that it meets their standards. Those jurisdictions who comply with MTA US&C’s criteria are presented with the Association’s Written Investment Policy Certification. The City has applied for and received certification of its Investment Policy by MTA US&C for the past four fiscal years.

The proposed Investment Policy includes two clarifications and some minor wording changes, but remains largely the same as last year’s policy. When MTA US&C certified our investment policy for FY 2001/2002, they asked us to consider some slight modifications to the format and wording, which have been incorporated.

The first clarification has been made to Section II B of the policy. MTA US &C’s investment policy review committee felt that the City should include what information broker/dealers are required to provide in order to be considered eligible to conduct business with the City. We have added a section to the policy requiring that all financial institutions and dealers who desire to become qualified must supply audited financial statements, proof of National Association of Securities Dealers (NASD) certification, a completed broker/dealer questionnaire, and certification that they have read and agree to comply with our Investment Policy.

The second clarification has been made to Section III, E, 2 regarding objectives for return on investment. In this section, the performance benchmark has been changed from the one year US Treasury bill to the "yield of a Treasury security with a similar average life." This benchmark is consistent with our recently adopted outcome measure.

The proposed Investment Policy for FY 2002/2003 is attached for Council review. Once approved, staff will begin to implement the recommended revisions to the Investment and Cash Management policy.

Public contact was made through posting of the Council agenda on the City's official notice bulletin board, posting of the agenda and report on the City's web page, publication of the Council agenda in the San Jose Mercury News, and the availability of the report in the Library and the City Clerk's Office.

1. Investment and Cash Management Policy for FY 2002/2003