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

Staff is proposing that the current policy be revised to increase the maximum limit on investment with the Local Agency Investment Fund (LAIF) from the current $4 million to no more than $15 million. In addition, staff is recommending that corporate medium term notes be included as allowable investments in the City’s portfolio.

Currently, pooled cash investments of the City represent over $155 million and are managed every day to capture interest earnings of nearly $10 million per year.

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. The City restricts its investments to the safest types of securities, which include those backed by the U.S. Government or its agencies, those which have federal insurance on principal by the FDIC, or those having collateral backing of the invested principal as defined by this Policy and/or State Code. Investments will be placed only in institutions that meet the City’s financial criteria, and the portfolio shall be diversified by type of investment, institution, maturity date and percentage of portfolio.
2. Liquidity will be assured by cash management, timing of maturity, and maintaining at least $4,000,000 in investments that can readily be converted to cash within a 24-hour period.
3. Repurchase agreements and reverse repurchase agreements will be permitted only for short-term needs and not for trading purposes. Additionally, any reverse repurchase agreement requires prior approval of the City Council.
4. Long-term securities of more than five years will be limited to 40% of the portfolio.
5. Investment maturities greater than seven years require approval of the City Manger.

SAFETY: All investments have complied with the existing requirements of safety, liquidity, and yield. Furthermore, all investments fully comply with the requirement that the City have all instruments either in direct custody or in third party custodial trust. All investments are currently held for safekeeping by the Trust Department of the City’s contract bank (currently Union Bank).

LIQUIDITY: The City’s Investment Policy requires that $4,000,000 of the portfolio be available within 24 hours to meet unanticipated cash flow requirements. This minimum liquidity requirement has been met through utilizing the LAIF, overnight repurchase agreements, and the City’s interest-bearing business checking account.

By utilizing the LAIF, overnight repurchase agreements, and the interest-bearing checking accounts, along with continued monitoring of the City’s cash flow needs, staff has been able to maintain liquidity sufficient to cover City expenditures while still ensuring an adequate return.

YIELD: The policy has established a benchmark yield against which the portfolio performance can be measured. The benchmark yield is the average yield of the one-year Treasury Bill for the prior year.

USE OF SECURITY DEALERS AND BROKERS: During FY 1997/98, staff has complied with all requirements specified in the existing Investment Policy regarding the use of security dealers and brokers. In addition, when staff has purchased an investment security through a broker, quotations have been solicited from two or more brokers, with the security being purchased from the broker with the most favorable terms.

ELIGIBLE SECURITIES AND FINANCIAL CRITERIA: To the best of staff’s knowledge, all new investment purchases complied with this requirement.

RESPONSIBILITY AND REPORTING: City staff has the financial responsibility for any decision on an investment and assurance that it complies with the Investment Policy. To document existing City practices, an Administrative Policy has been adopted which contains sections relating to Cash Management. Standard Operating Procedures have been developed that detail procedures for monitoring cash flow, obtaining quotations, purchasing securities, and preparing the Portfolio Evaluation Report after each accounting period.

In May 1998, the City retained the services of Chandler Liquid Asset Management, a respected investment management firm located in San Diego, to evaluate the City’s portfolio and provide recommendations as to how the City should maximize portfolio management. Highlights of the report by Chandler Liquid Asset Management include:

• The portfolio complies fully both with the City’s investment policy and with State law regarding local agency investing.
• The credit quality of the City’s portfolio is very high.
• The City’s cash position appears to be very strong.
• The portfolio has grown in value steadily and consistently over the years.

In the report, Chandler Liquid Asset Management made two recommendations for change which staff is recommending for incorporation into the City’s Investment Policy at this time.

The first proposed change was to increase the maximum allocation limit to LAIF from $4million to $15 million. The City’s current limit of a $4 million maximum investment in LAIF was adopted some time ago and based on a significantly smaller total portfolio amount. The proposed increase in the maximum allocation will ensure that the City has sufficient liquidity for unanticipated City expenditures while maximizing the return on the City’s liquid funds. Currently, State law allows a maximum investment allocation of $30 million into the LAIF pool.

The second proposed change was to include corporate medium-term notes of investment grade quality and no greater than 5 year maturity as eligible investments for the portfolio. Over time, high quality domestic corporate notes add return to the portfolio without increasing volatility. Historically, the market value change between medium-term notes (MTN) and Treasury securities has been negligible as to increases and decreases in interest rates. MTNs are designed to fill the funding gap between commercial paper and long-term bonds. All MTNs must be registered with the Securities Exchange Commission (SEC). MTNs are also rated by the nationally recognized rating companies such as Moody’s Investors Service and Standard & Poors Corporation. The City’s Investment Policy currently allows the City to invest up to 15% of the portfolio in Commercial Paper, which is a type of short term corporate security. Under the California Government Code, cities may invest up to 30% of their portfolios in corporate MTNs. Staff agrees with Chandler Liquid Asset Management’s recommendation and believes amending the Investment Policy to include corporate securities would be prudent.

A copy of the Investments and Cash Management Council Policy is attached, with the two recommended changes marked in italic text. Once approved, staff will begin to implement the Investment and Cash Management Policy revisions.

Although no fiscal impact from the proposed policy can be reasonably estimated at this time, the proposed recommendations do offer the potential to increase the City’s portfolio yield without increasing its exposure to market risk.

1. Adopt the attached Investment Policy, which incorporates two investment policy revisions: increase maximum LAIF investment to $15 million; include medium term corporate notes in the investment policy as authorized by the California Government Codes.
2. Take no action and allow the existing policy to continue with no change.

Notice has been provided through the publication of the City Council Agenda.

It is recommended that the City Council approve Alternative 1.

Approved by:

Robert S. LaSala
City Manager