HomeMy WebLinkAboutResolution 2011-009 RESOLUTION NO. 2011-009
RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF ATASCADERO, CALIFORNIA,
AMENDING AND ADOPTING THE CITY OF ATASCADERO
INVESTMENT POLICY
WHEREAS,the City Council of the City of Atascadero desires to prudently invest idle
funds of the City to maximize use of taxpayer funds, and,
WHEREAS, the California Government Code Section 53600.3 states that "all governing
bodies of local agencies or persons authorized to make investments decisions on behalf of those
local agencies investing public funds pursuant to this chapter are trustees and therefore
fiduciaries subject to the prudent investor standard", and,
WHEREAS, the California Government Code Section 53646 requires all local agency
governing boards to adopt an investment policy and requires the Treasurer or Chief Financial
Officer to provide an investment report to the legislative body at least quarterly; and,
WHEREAS, the California Government Code Section 53607 authorizes the legislative
body to delegate investment authority and responsibility for a period not to exceed one year but
renewable annually, upon review, and,
WHEREAS, the City of Atascadero Investment Policy requires its annual submittal to
the City Council for adoption, and the policy was last revised and adopted in 2010
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of
Atascadero that the City of Atascadero Investment Policy, attached hereto, is adopted.
SECTION 1 Recitals. The foregoing recitals are true and correct and the City Council
so finds and determines.
SECTION 2. Investment Policy The Investment Policy hereby attached as Exhibit A
shall become part of this resolution.
SECTION 3 Effective Date. This resolution shall take effect immediately after the
effective date of this Resolution, and shall remain in effect, until revised by the City Council
On motion by Council Member Fonzi, and seconded by Council Member Clay, the foregoing
Resolution is hereby adopted in its entirety on the following roll call vote
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City of Atascadero
Resolution No. 2011-009
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AYES Council Members Clay,Fonzi, Kelley, Sturtevant and Mayor O'Malley
NOES None
ABSENT None
ADOPTED- February 22, 2011
;C %F ATASC ERO
By• Tolley, May
ATTEST
— —
Marcia McClure Torgerson, C.M.C., Ci Clerk
APPROVEDAS T FO
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Brian A. Pienk, City Attorney
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City of Atascadero
Resolution No.2011-009
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Exhibit A
Due to the size of Exhibit A, it is not included as an attachment; however, it may be
viewed in its entirety in the Office of the City Clerk
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Resolution No. 2011-009, Exhibit A
City of Atascadero
Investment Policy
Dated February 22, 2011
TABLE OF CONTENTS
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I. OVERVIEW......................................................................................... 1
Introduction
Scope
General Objectives
Standards of Care
II. INVESTMENT AUTHORITY AND RESPONSIBILITIES ................................ 4
Authorized Investment Officers
Investment Procedures
Internal Control
State Oversight
Conflicts of Interest
III. ELIGIBLE FINANCIAL INSTITUTIONS..................................................... 6
Selection of Eligible Financial Institutions
Safekeeping and Custody
IV. AUTHORIZED INVESTMENTS.............................................................. 8
Investment Types
Due Diligence Requirement
Prohibited Investments
Legislative Changes
V. INVESTMENT PARAMETERS............................................................... 12
Diversification
Maximum Maturities
VI. CASH MANAGEMENT......................................................................... 13
VII. EVALUATION OF INVESTMENT PERFORMANCE ................................... 14
Benchmark Comparison
VIII. INVESTMENT REPORTING................................................................. 15
IX. INVESTMENT POLICY REVIEW AND ADOPTION ................................... 16
X. APPENDIX
Glossary................................................................................ Glossary -1
I. OVERVIEW
INTRODUCTION
The purpose of this document is to provide guidelines for the prudent investment of
funds not required for the immediate needs of the City, and outline policies for
maximizing the efficiency of the City's cash management system. The ultimate goal is to
enhance the economic status of the City while protecting its pooled cash.
SCOPE
Included in the scope of the City's investment policy are the following major guidelines
and practices, which are to be used in achieving the City's primary investment
objectives:
Investment Authority and Responsibilities
Eligible Financial Institutions
Authorized Investments
Investment Parameters
Cash Management
Evaluation of Investment Performance
Investment Reporting
Investment Policy Review and Adoption
It is intended that this policy cover all funds and investment activities under the direct
authority of the City. These funds are accounted for in the Annual Financial Report and
include the general fund, special revenue funds, debt service funds, capital project
funds, enterprise funds, internal service funds and agency funds, including any
Redevelopment Agency funds in the City's pooled cash funds.
Subject to the prior written consent and approval of the City Treasurer and City
Manager, financial assets held and invested by trustees or fiscal agents are excluded
from this policy. However, such assets are nevertheless subject to the regulations
established by the State of California pertaining to investments by local agencies as well
as the related bond indentures.
I. OVERVIEW (continued)
GENERAL OBJECTIVES
The primary objectives of investment activities, in priority order, shall be safety, liquidity,
and yield:
1. Safety
Safety of 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 risk and interest rate risk.
a. Credit Risk
The City will minimize credit risk, the risk of loss due to the failure of the
security issuer or backer, by:
• Limiting investments to the safest types of securities.
• Pre -qualifying the financial institutions, broker/dealers,
intermediaries, and advisers with which the City will do
business.
• Diversifying the investment portfolio so that potential losses on
individual securities will be minimized.
b. Interest Rate Risk
The City will minimize the risk that the market value of securities in the
portfolio will fall due to changes in general interest rates, 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.
• Investing operating funds primarily in shorter -term securities,
money market mutual funds, or similar investment pools.
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 securities mature concurrent with cash needs to
meet anticipated demands (static liquidity). Furthermore, since all possible cash
demands cannot be anticipated, the portfolio should consist largely of securities
with active secondary or resale markets (dynamic liquidity). A portion of the
portfolio will also be placed in money market mutual funds or local government
investment pools, which offer same-day liquidity for short-term funds.
i►a
I. OVERVIEW (continued)
GENERAL OBJECTIVES (continued)
3. Yield
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. The core of investments is limited to relatively low
risk securities in anticipation of earning a fair return relative to the risk being
assumed. For purposes of comparing alternative investments all yields should
be converted to a "money market" equivalent yield. Securities shall not be sold
prior to maturity with the following exceptions:
a. A security with declining credit may be sold early to minimize loss of
principal.
b. A security swap would improve the quality, yield, or target duration in the
portfolio.
c. Liquidity needs of the portfolio require that the security be sold.
d. A capital gain would be realized that better positions the overall portfolio
in achieving investment policy goals.
STANDARDS OF CARE
The City operates its pooled idle cash investments under the "Prudent Person Rule"
which obligates a fiduciary to ensure that investments shall be made:
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... using the judgment and care, under circumstances then prevailing,
which persons of prudence, discretion, and intelligence exercise in the
management of their own affairs, not in regard to speculation but in regard
to the permanent disposition of their funds, considering the probable
income as well as the probable safety of their capital' (Uniform Prudent
Investor Act)
Investment officers acting in accordance with written procedures and this 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 the liquidity and the sale of securities
are carried out in accordance with the terms of this policy.
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II. INVESTMENT AUTHORITY AND RESPONSIBILITIES
AUTHORIZED INVESTMENT OFFICERS
The ultimate responsibility for investment activity shall reside with the City Council. Idle
cash management and investment transactions are the responsibility of the City
Treasurer or designee. The City Council has authorized the following officials to
undertake investment transactions on behalf of the City:
City Treasurer
City Manager
Director of Administrative Services
It is the policy of the City for the Director of Administrative Services to manage the
investment activity of the funds of the City. The City Manager and the City Treasurer
shall supervise the activities of the Director of Administrative Services.
The Finance Review Committee shall meet to discuss the status of current investments,
strategies for future investment, and other investment matters deemed relevant, and
shall report to the City Council as necessary. The City Attorney shall, as required by
Government Code section 36518, review the bonding requirement for the City Treasurer
on an annual basis.
INVESTMENT PROCEDURES
The authorized investment officers as stated above, in accordance with the City of
Atascadero Investment Policy, are responsible for administering an investment program
which:
• Adheres to the Statement of Investment Policy
• Prioritizes safety and liquidity
• Determines risk and optimizes return
• Provides for a system of due diligence in making investment decisions.
INTERNAL CONTROL
The Director of Administrative Services is responsible for establishing and maintaining
an internal control structure designed to ensure that the assets of the City are protected
from loss, theft or misuse. The internal control structure shall be designed to 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.
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II. INVESTMENT AUTHORITY AND RESPONSIBILITIES (continued)
INTERNAL CONTROL (continued)
Accordingly, the Director of Administrative Services shall establish a process for an
annual independent review by an external auditor to assure compliance with policies
and procedures. The internal controls shall address the following points:
• Control of collusion
• Separation of transaction authority from accounting and record keeping
• Custodial safekeeping
• Avoidance of physical delivery securities
• Clear delegation of authority to subordinate staff members
• Written confirmation of transactions for investments and wire transfers
• Development of a wire transfer agreement with the lead bank and third party
custodian
STATE OVERSIGHT
The City shall comply with the regulations established by the State of California
pertaining to investments.
CONFLICTS OF INTEREST
The City adopts the following policy concerning conflicts of interest:
1. Officers and employees 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.
2. Officers and employees involved in the investment process shall disclose to
the City Clerk any material financial interest in financial institutions that
conduct business with the City of Atascadero and they shall further disclose
any large personal financial/investment positions that could be related to the
performance of the City's portfolio.
3. Officers shall refrain from undertaking personal investment transactions with
the same individual with which business is conducted on behalf of the City.
4. In making investment decisions, the Investment Officers shall be guided by
the recommendations of the Finance Review Committee and avoid the undue
influence of individual City officers and officials.
5. Investments are prohibited in certificates of deposit of state or federal credit
unions if any city officer, city manager or city fiscal officer serves on the credit
union board or in any key committee positions.
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III. ELIGIBLE FINANCIAL INSTITUTIONS
SELECTION OF ELIGIBLE FINANCIAL INSTITUTIONS
All financial institutions and broker/dealers and safekeeping/custodial agents who desire
to become qualified for investment transactions must provide the following documents
(as appropriate) for annual review by the City Treasurer:
• Audited financial statements
• Proof of National Association of Securities Dealers (NASD) certification
• Proof of state registration
• Completed broker/dealer questionnaire
• Certification of having read and understood and agreeing to comply with the
City's investment policy.
In selecting financial institutions for deposit or investment of funds, the authorized
Investment Officers shall consider the credit -worthiness of the institution.
Deposits The City will only deposit funds with an institution that has a rating of at
least "A" as assigned by an established rating service based on quarterly financial
information provided by the Federal Reserve Board and the Federal Home Loan
Bank Board (i.e., The Financial Directory). Ratings will be monitored on a quarterly
basis and any downgrade in rating below "A" will be reported to the Finance Review
Committee together with a recommendation for possible action.
Brokers/Dealer Investments must be purchased directly from the issuer, from an
institution licensed by the state as a broker-dealer, from a member of a federally
regulated securities exchange, or from a brokerage firm designated as a primary
government dealer by the Federal Reserve Bank. Broker/dealers shall be selected
by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at least
five years of operation).
Safekeeping and Custodial Institutions Safekeeping and custodial institutions shall
be selected on the basis of credit worthiness with a minimum of capitalization of
$100,000,000 and at least 5 years of operation. Safekeeping and custodial
institutions must be fiduciaries of the City and independent of any broker/dealers. All
safekeeping and custodial arrangements shall require written agreements. All
safekeeping and custodial agreements shall be reviewed by the City Treasurer and
Director of Administrative Services and approved by the City Attorney prior to
conducting any investment activities.
From time to time, the investment officer may choose to invest in instruments offered by
minority and community financial institutions. In such situations, a waiver to the above
criteria may be granted. All terms and relationships will be fully disclosed prior to
purchase and will be reported to the appropriate entity on a consistent basis and should
be consistent with state or local law. These types of investment purchases should be
approved by City Council in advance.
0
M. ELIGIBLE FINANCIAL INSTITUTIONS (continued)
SELECTION OF ELIGIBLE FINANCIAL INSTITUTIONS (continued)
The authorized Investment Officers will maintain a file of the broker/dealers and
authorized safekeeping/custodial institutions with which it is currently doing business
which will include the firm name, contact person, telephone number, and current audited
financial statements.
SAFEKEEPING AND CUSTODY
All trades where applicable will be executed by delivery vs. payment (DVP) to ensure
that securities are deposited in an eligible financial institution prior to the release of
funds. A third -party custodian as evidenced by safekeeping receipts will hold securities.
IV. AUTHORIZED INVESTMENTS
INVESTMENT TYPES
The California Government Code Sections 16429.1 and 53601 govern investment of
City funds. Investments may not have a term or maturity at the time of investment of
longer than that authorized by Section 53601 or five years unless the City Council has
granted prior express authority.
As previously stated, the City operates its investments under the prudent man rule (Civil
Code Section 2261, et. seq.), except where more specifically restricted. This affords the
City a broad spectrum of investments, so long as the investment is deemed prudent and
is allowable under current legislation of the State of California (Government Code
Section 53600, et. seq.) and applicable City trust agreements, if any.
It should be noted that while the Government Code specifies the maximum percentage
of the portfolio that may be held in each type of investment at any one time, fluctuations
in the portfolio balance will prevent strict adherence to such restrictions. Therefore,
percentage limitations shall apply to investments at the time of purchase.
Consistent with the GFOA Policy Statement on State and Local Laws Concerning
Investment Practices, the following investments will be permitted by this policy and are
those defined by state and local law where applicable:
1. State Treasurer's Local Agency Investment Fund (LAIF)
Government Code Section 16429.1: The City may invest in the Local Agency
Investment Fund. LAIF is a diversified investment pool administered by the
California State Treasurer. Monies invested with LAIF are pooled with State
monies in order to earn the maximum rate of return consistent with safe and
prudent treasury management.
The LAIF handbook including LAIF policies and restrictions shall be available in
the City's Administrative Services Department. A thorough investigation of the
pool is required on a continual basis. (See Due Diligence Requirement on page
10.)
2. U.S. Government Issues
Government Code Sections 53601 (b) and (f): A maximum forty percent (40%)
of the City's portfolio may be invested in U.S. government obligations, U.S.
government agency obligations, and U.S. government instrumentality obligations,
which have a liquid market with a readily determinable market value.
3. Bankers Acceptances
Government Code Section 53601 (g): Up to forty percent (40%) of the City's
portfolio may be invested in Bankers Acceptances which are defined
as bills of exchange or time drafts, drawn on and accepted by a commercial
IV. AUTHORIZED INVESTMENTS (continued)
INVESTMENT TYPES (continued)
3. Bankers Acceptances (continued)
bank, which are eligible for purchase by the Federal Reserve System, although
no more than thirty percent (30%) of the portfolio may be invested in Bankers
Acceptances with any one commercial bank. Additionally, the maturity periods
cannot exceed 180 days.
4. Commercial Paper
Government Code Section 53601 (h): A maximum of twenty five percent (25%) of
the City's portfolio may be invested in highest tier (e.g. A-1, P-1, F-1 or D-1 or
higher) commercial paper as rated by Moody's or Standard and Poor's rating
service. Issuing corporations must be organized and operating in the United
States, have in excess of $500 million total assets, and have at least an "A"
rating (by Moody's or Standard and Poor's) on debt other than commercial paper.
The maturity period cannot exceed 270 days. Purchases of eligible commercial
paper may not exceed ten percent (10%) of the outstanding paper of an issuing
corporation.
5. Certificates of Deposit and Passbook Savings Accounts
Government Code Section 53601 (i): There is no limit to the amount of the
investment portfolio that may be deposited in certificates of deposit or passbook
savings account. The minimum requirements for Certificate of Deposit
investments shall be:
• Investments and accrued interest shall never exceed the FDIC insurance
limit in any one institution.
• Qualified institutions must have a minimum equity ratio of 6% and a
minimum capitalization of $10,000,000.
Purchases of negotiable certificates of deposit, issued by a nationally or state -
chartered bank or a state or federal association, or by a state licensed
branch of a foreign bank, may not exceed 30 percent of the agency's
surplus money, which may be invested pursuant to this section.
Negotiable certificates of deposit may be purchased in the secondary
market at a discount but never at a premium, since the premium would not
be FDIC insured.
California law requires that public funds be collateralized by maintaining with the
agent of the depository government securities having a market value of at
least one hundred ten percent (110%) of the value of the public fund
accounts. The collateralization requirement may be waived to the extent
that funds are federally insured. For deposits equivalent to the maximum
insured amount, security may also be waived for interest accrued on the
deposit provided the interest is computed by the depository on the
average daily balance of the deposits, paid monthly and computed on a
360 -day basis.
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IV. AUTHORIZED INVESTMENTS (continued)
INVESTMENT TYPES (continued)
6. Money Market Mutual Funds
Government Code Section 53601 (1): Shares of beneficial interest issued by
diversified management companies that are money market funds
registered with the Securities and Exchange Commission under the
Investment Company Act of 1940 (15 U.S.C. Sec 80a -I et seq.) shall not
exceed twenty percent (20%) of the agency's surplus money that may be
invested pursuant to this section. The fund shall be managed by a
registered or exempt investment advisor with not less than 5 years
experience managing money market mutual funds with assets under
management in excess of five hundred million dollars ($500,000,000).
The fund shall have attained the highest ranking or the highest letter and
numerical rating provided by not less than two nationally recognized
statistical rating organizations. No more than ten percent (10%) of the
agency's surplus funds may be invested in shares of beneficial interest of
any one money market mutual fund
DUE DILIGENCE REQUIREMENT
As stated, a thorough investigation of an investment pool or mutual fund is required
prior to investing and on a continual basis. At a minimum, the following information shall
be reviewed annually for each pool and/or mutual fund:
1. A description of eligible investment securities, and a written statement of
investment policy and objectives.
2. A description of interest calculations, how interest is distributed, and how
gains and losses are treated.
3. A description of how these securities are safeguarded (including the
settlement process), and how often these securities are priced and the
program audited.
4. A description of who may invest in the program, how often, and the size of
deposits and withdrawals.
5. A schedule for receiving statements and portfolio listings.
6. Whether reserves, retained earnings, etc. are utilized by the pool/fund.
7. A fee schedule, and when and how fees are assessed.
8. Whether the pool/fund is eligible for bond proceeds and/or will it accept such
proceeds.
PROHIBITED INVESTMENTS
The City of Atascadero shall not invest in any investment instrument/pool/fund unless
specifically allowed under the "Investment Types" section of this policy.
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IV. AUTHORIZED INVESTMENTS (continued)
PROHIBITED INVESTMENTS (continued)
The City of Atascadero shall comply with Government Code Section 53601.6 that states
in pertinent part, "(a) A local agency shall not invest any funds pursuant to this article in
inverse floaters, range notes, or mortgage -derived interest -only strips. (b) A local
agency shall not invest any funds pursuant to this article in any security that could result
in zero interest accrual if held to maturity."
LEGISLATIVE CHANGES
Any State of California legislative action that further restricts allowable maturities,
investment types or percentage allocations will be incorporated into the City of
Atascadero Investment Policy and supersede any and all previous applicable language.
If the City is holding an investment that is subsequently prohibited by a legislative
change, the City may hold that investment, if it is deemed prudent by the Finance
Review Committee, until the maturity date to avoid an unnecessary loss.
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V. INVESTMENT PARAMETERS
DIVERSIFICATION
The investments shall be diversified by:
• Limiting investments to avoid over concentration in securities from a specific
issuer or business sector (excluding Local Agency Investment Fund and U.S.
Treasury securities),
• Limiting investment in securities that have higher credit risks,
• Investing in securities with varying maturities, and
• Continuously investing a portion of the portfolio in readily available funds such
as local government investment pools (LAIF), or money market funds to
ensure that appropriate liquidity is maintained in order to meet ongoing
obligations.
MAXIMUM MATURITIES
In order to minimize the impact of market risk, it is intended that all investments will be
held to maturity.
To the extent possible, the City shall attempt to match its investments with anticipated
cash flow requirements. Unless matched to a specific cash flow, the City will not
directly invest in securities maturing more than five (5) years from the date of purchase
or in accordance with state and local statutes and ordinances. The Finance Review
Committee shall meet to review weighted average maturity limitations (which often
range from 90 days to 2 years), consistent with investment objectives and economic
conditions.
Investments may be sold prior to maturity for cash flow, appreciation purposes or in
order to limit losses; however, no investment shall be made based solely on earnings
anticipated from capital gains.
Because of inherent difficulties in accurately forecasting cash flow requirements, a
portion of the portfolio should be continuously invested in readily available funds.
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VI. CASH MANAGEMENT
In order to obtain a reasonable return on public funds, the following cash management
practice will be followed:
1. Maintain maximum investment of all City funds not required to meet
immediate cash flow needs.
2. Except for cash in certain restricted and special funds, the City will
consolidate cash balances from all funds to maximize investment earnings.
Investment income will be allocated to the various funds based on their
respective participation and in accordance with generally accepted
accounting principles.
3. Maximize the City's cash flow through immediate deposit of all receipts, use
of direct deposit when available, and appropriate timing of payment to
vendors.
4. Maximize cash flow information available through the use of only one
operating bank account.
5. Daily cash flow management shall be the responsibility of the Director of
Administrative Services in conjunction with the City Treasurer.
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VII. EVALUATION OF INVESTMENT PERFORMANCE
The investment portfolio will be designed to obtain a market average rate of return
during budgetary and economic cycles, taking into account the City's investment risk
constraints and cash flow needs.
BENCHMARK COMPARISON
The investment portfolio shall be structured to optimize the return given the risk
constraints and cash flow needs.
Investment performance shall be continually monitored and evaluated by the Finance
Review Committee. Investment performance statistics and activity reports shall be
generated on a monthly basis for presentation to the City Council.
In evaluating the performance of the City's portfolio in complying with this policy, it is
expected that yields on City investments will regularly meet or exceed the average
return on a two-year U.S. Treasury Note. However, the Finance Review Committee for
evaluation purposes considers a variance of .5% positive or negative from the
benchmark reasonable.
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VIII. INVESTMENT REPORTING
REPORTS TO CITY COUNCIL
The City Treasurer shall prepare and submit a quarterly investment report to the City
Council. This report will include the following elements relative to the investments held
at quarter -end.
1. Face value.
2. Security description.
3. Coupon rate.
4. Maturity date.
5. Investment rating.
6. Investment type.
7. Purchase date.
8. Cost of security.
9. Yield -to -Maturity
10. Estimated market value.
11. Amortized premium/discount.
12. Unrealized Gain <Loss>.
13. Listing of investment by maturity.
14. Gains or Losses on the sale of securities.
15. Bank failures.
16. Investment ratings downgraded by Moody's or Standard and Poor's.
17. Statement relating the report to the Statement of Investment Policy.
18. Statement that there are sufficient funds to meet the next six months'
obligations.
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IX. INVESTMENT POLICY REVIEW AND ADOPTION
The Statement of Investment Policy shall be submitted annually to the City Council for
adoption. The policy shall be reviewed at least annually to ensure its consistency with
the overall objectives of the City and its relevance to current law and financial and
economic trends. Any modifications made thereto must be approved by the City
Council.
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APPENDIX: Glossary
The following is a glossary* of key investing terms, many of which appear in GFOA'S
Sample Investment Policy.
Accrued Interest - The accumulated interest due on a bond as of the last interest
payment made by the issuer.
Agency - A debt security issued by a federal or federally sponsored agency. Federal
agencies are backed by the full faith and credit of the U.S. Government. Federally
sponsored agencies (FSAs) are backed by each particular agency with a market
perception that there is an implicit government guarantee. An example of federal
agency is the Government National Mortgage Association (GNMA). An example of a
FSA is the Federal National Mortgage Association (FNMA).
Amortization - The systematic reduction of the amount owed on a debt issue through
periodic payments of principal.
Average Life - The average length of time that an issue of serial bonds and/or term
bonds with a mandatory sinking fund feature is expected to be outstanding.
Basis Point - A unit of measurement used in the valuation of fixed-income securities
equal to 1/100 of 1 percent of yield, e.g., "1/4" of 1 percent is equal to 25 basis points.
Bid - The indicated price at which a buyer is willing to purchase a security or
commodity.
Book Value - The value at which a security is carried on the inventory lists or other
financial records of an investor. The book value may differ significantly from the
security's current value in the market.
Callable Bond - A bond issue in which all or part of its outstanding principal amount
may be redeemed before maturity by the issuer under specified conditions.
Call Price - The price at which an issuer may redeem a bond prior to maturity. The
price is usually at a slight premium to the bond's original issue price to compensate the
holder for loss of income and ownership.
Call Risk - The risk to a bondholder that a bond may be redeemed prior to maturity.
Cash Sale/Purchase - A transaction that calls for delivery and payment of securities on
the same day that the transaction is initiated.
*This glossary has been adapted from an article, entitled "Investment terms for everyday use," that appeared in the April 5, 1996,
issue of Public Investor, GFOA's subscription investment newsletter.
Glossary -1
Collateralization - Process by which a borrower pledges securities, property, or other
deposits for the purpose of securing the repayment of a loan and/or security.
Commercial Paper - An unsecured short-term promissory note issued by corporations,
with maturities ranging from 2 to 365 days.
Convexity - A measure of a bond's price sensitivity to changing interest rates. A high
convexity indicates greater sensitivity of a bond's price to interest rate changes.
Coupon Rate - The annual rate of interest received by an investor from the issuer of
certain types of fixed-income securities. Also known as the "interest rate".
Credit Quality - The measurement of the financial strength of a bond issuer. This
measurement helps an investor to understand an issuer's ability to make timely interest
payments and repay the loan principal upon maturity. Generally, the higher the credit
quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of
default is lower. Credit quality ratings are provided by nationally recognized rating
agencies.
Credit Risk - The risk to an investor that an issuer will default in the payment of interest
and/or principal on a security.
Current Yield (Current Return) - A yield calculation determined by dividing the annual
interest received on a security by the current market price of that security.
Delivery Versus Payment (DVP) - A type of securities transaction in which the
purchaser pays for the securities when they are delivered either to the purchaser or
his/her custodian.
Derivative Security - Financial instrument created from, or whose value depends upon,
one or more underlying assets or indexes of asset values.
Discount - The amount by which the par value of a security exceeds the price paid for
the security.
Diversification - A process of investing assets among a range of security types by
sector, maturity, and quality rating.
Duration - A measure of the timing of the cash flows, such as the interest payments
and the principal repayment, to be received from a given fixed-income security. This
calculation is based on three variables: term to maturity, coupon rate, and yield to
maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates.
Glossary -2
Fair Value - The amount at which an investment could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Federal Funds (Fed Funds) - Funds placed in Federal Reserve banks by depository
institutions in excess of current reserve requirements. These depository institutions
may lend fed funds to each other overnight or on a longer basis. They may also
transfer funds among each other on a same-day basis through the Federal Reserve
banking system. Fed funds are considered to be immediately available funds.
Federal Funds Rate - Interest rate charged by one institution lending federal funds to
the other.
Government Securities - An obligation of the U.S. government, backed by the full faith
and credit of the government. These securities are regarded as the highest quality of
investment securities available in the U.S. securities market. See "Treasury Bills,
Notes, and Bonds."
Interest Rate - See "Coupon Rate".
Interest Rate Risk - The risk associated with declines or rises in interest rates that
cause an investment in a fixed-income security to increase or decrease in value.
Internal Controls - An internal control structure designed to ensure that the assets of
the entity are protected from loss, theft, or misuse. The internal control structure is
designed to 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. Internal controls should address the
following points:
1. Control of collusion - Collusion is a situation where two or more employees are
working in conjunction to defraud their employers.
2. Separation of transaction authority from accounting and record keeping - By
separating the person who authorizes or performs the transaction from the people
who record or otherwise account for the transaction, a separation of duties is
achieved.
3. Custodial safekeeping - Securities purchased from any bank or dealer including
appropriate collateral (as defined by state law) shall be placed with an independent
third party for custodial safekeeping.
4. Avoidance of physical delivery securities - Book -entry securities are much easier to
transfer and account for since actual delivery of a document never takes place.
Delivered securities must be properly safeguarded against loss or destruction. The
potential for fraud and loss increases with physically delivered securities.
Glossary -3
Internal Controls (continued)
5. Clear delegation of authority to subordinate staff members - Subordinate staff
members must have a clear understanding of their authority and responsibilities to
avoid improper actions. Clear delegation of authority also preserves the internal
control structure that is contingent on the various staff positions and their respective
responsibilities.
6. Written confirmation of transactions for investments and wire transfers - Due to the
potential for error and improprieties arising from telephone and electronic
transactions, all transactions should be supported by written communications and
approved by the appropriate person. Written communications may be via fax if on
letterhead and if the safekeeping institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and third -party
custodian - The designated official should ensure that an agreement will be entered
into and will address the following points: controls, security provisions, and
responsibilities of each party making and receiving wire transfers.
Inverted Yield Curve - A chart formation that illustrates long-term securities having
lower yields than short-term securities. This configuration usually occurs during periods
of high inflation coupled with low levels of confidence in the economy and a restrictive
monetary policy.
Investment Company Act of 1940 - Federal legislation which sets the standards by
which investment companies, such as mutual funds, are regulated in the areas of
advertising, promotion, performance reporting requirements, and securities valuations.
Investment Policy - A concise and clear statement of the objectives and parameters
formulated by an investor or investment manager for a portfolio of investment securities.
Investment-grade Obligations - An investment instrument suitable for purchase by
institutional investors under the prudent person rule. Investment-grade is restricted to
those obligations rated BBB or higher by a rating agency.
Liquidity - An asset that can be converted easily and quickly into cash.
Local Government Investment Pool (LGIP) - An investment by local governments in
which their money is pooled as a method for managing local funds.
Mark -to -market - The process whereby the book value or collateral value of a security
is adjusted to reflect its current market value.
Market Risk - The risk that the value of a security will rise or decline as a result of
changes in market conditions.
Market Value - Current market price of a security.
Glossary -4
Maturity - The date on which payment of a financial obligation is due. The final stated
maturity is the date on which the issuer must retire a bond and pay the face value to the
bondholder. See "Weighted Average Maturity."
Money Market Mutual Fund - Mutual funds that invest solely in money market
instruments (short-term debt instruments, such as Treasury bills, commercial paper,
bankers' acceptances, repos and federal funds).
Mutual Fund - An investment company that pools money and can invest in a variety of
securities, including fixed-income securities and money market instruments. Mutual
funds are regulated by the Investment Company Act of 1940 and must abide by the
following Securities and Exchange Commission (SEC) disclosure guidelines:
1. Report standardized performance calculations.
2. Disseminate timely and accurate information regarding the fund's holdings,
performance, management and general investment policy.
3. Have the fund's investment policies and activities supervised by a board of trustees,
which are independent of the adviser, administrator or other vendor of the fund.
4. Maintain the daily liquidity of the fund's shares.
5. Value their portfolios on a daily basis.
6. Have all individuals who sell SEC -registered products licensed with a self-regulating
organization (SRO) such as National Association of Securities Dealers (NASD).
7. Have an investment policy governed by a prospectus that is updated and filed by the
SEC annually.
Mutual Fund Statistical Services - Companies that track and rate mutual funds, e.g.,
IBC/Donoghue, Lipper Analytical Services, and Morningstar.
National Association of Securities Dealers (NASD) - A self-regulatory organization
(SRO) of brokers and dealers in the over-the-counter securities business. Its regulatory
mandate includes authority over firms that distribute mutual fund shares as well as other
securities.
Net Asset Value - The market value of one share of an investment company, such as a
mutual fund. This figure is calculated by totaling a fund's assets which includes
securities, cash, and any accrued earnings, subtracting this from the fund's liabilities
and dividing this total by the number of shares outstanding. This is calculated once a
day based on the closing price for each security in the fund's portfolio. (See below.)
[(Total assets) - (Liabilities)]/(Number of shares outstanding)
No Load Fund - A mutual fund that does not levy a sales charge on the purchase of its
shares.
Nominal Yield - The stated rate of interest that a bond pays its current owner, based on
par value of the security. It is also known as the "coupon," "coupon rate," or "interest
rate."
Glossary -5
Offer - An indicated price at which market participants are willing to sell a security or
commodity. Also referred to as the "Ask price."
Par - Face value or principal value of a bond, typically $1,000 per bond.
Positive Yield Curve - A chart formation that illustrates short-term securities having
lower yields than long-term securities.
Premium - The amount by which the price paid for a security exceeds the security's par
value.
Prime Rate - A preferred interest rate charged by commercial banks to their most
creditworthy customers. Many interest rates are keyed to this rate.
Principal - The face value or par value of a debt instrument. Also may refer to the
amount of capital invested in a given security.
Prospectus - A legal document that must be provided to any prospective purchaser of
a new securities offering registered with the SEC. This can include information on the
issuer, the issuer's business, the proposed use of proceeds, the experience of the
issuer's management, and certain certified financial statements.
Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of
public funds investors relating to investment practices.
Regular Way Delivery - Securities settlement that calls for delivery and payment on the
third business day following the trade date (T+3); payment on a T+1 basis is currently
under consideration. Mutual funds are settled on a same day basis; government
securities are settled on the next business day.
Reinvestment Risk - The risk that a fixed-income investor will be unable to reinvest
income proceeds from a security holding at the same rate of return currently generated
by that holding.
Repurchase Agreement (Repo or RP) - An agreement of one party to sell securities at
a specified price to a second party and a simultaneous agreement of the first party to
repurchase the securities at a specified price or at a specified later date.
Reverse Repurchase Agreement (Reverse Repo) - An agreement of one party to
purchase securities at a specified price from a second party and a simultaneous
agreement by the first party to resell the securities at a specified price to the second
party on demand or at a specified date.
Glossary -6
Rule 2a-7 of the Investment Company Act - Applies to all money market mutual funds
and mandates such funds to maintain certain standards, including a 13 -month maturity
limit and a 90 -day average maturity on investments, to help maintain a constant net
asset value of one dollar ($1.00).
Safekeeping - Holding of assets (e.g., securities) by a financial institution.
Serial Bond - A bond issue, usually of a municipality, with various maturity dates
scheduled at regular intervals until the entire issue is retired.
Sinking Fund - Money accumulated on a regular basis in a separate custodial account
that is used to redeem debt securities or preferred stock issues.
Swap - Trading one asset for another.
Term Bond - Bonds comprising a large part or all of a particular issue that come due in
a single maturity. The issuer usually agrees to make periodic payments into a sinking
fund for mandatory redemption of term bonds before maturity.
Total Return - The sum of all investment income plus changes in the capital value of
the portfolio. For mutual funds, return on an investment is composed of share price
appreciation plus any realized dividends or capital gains. This is calculated by taking
the following components during a certain period.
(Price appreciation) + (Dividends paid) + (Capital gains) = Total Return
Treasury Bills - Short-term U.S. government non-interest bearing debt securities with
maturities of no longer than one year and issued in minimum denominations of $10,000.
Auctions of three- and six-month bills are weekly, while auctions of one-year bills are
monthly. The yields on these bills are monitored closely in the money markets for signs
of interest rate trends.
Treasury Notes - Intermediate U.S. government debt securities with maturities of one
to ten years and issued in denominations ranging from $1,000 to $1,000,000 or more.
Treasury Bonds - Long-term U.S. government debt securities with maturities of ten
years or longer and issued in minimum denominations of $1,000. Currently, the longest
outstanding maturity for such securities is 30 years.
Uniform Net Capital Rule - SEC Rule 15C3-1 outlining capital requirements for
broker/dealers.
Volatility - A degree of fluctuation in the price and valuation of securities.
Glossary -7
"Volatility Risk" Rating - A rating system to clearly indicate the level of volatility and
other non-credit risks associated with securities and certain bond funds. The rating for
bond funds range from those that have extremely low sensitivity to changing market
conditions and offer the greatest stability of the returns ("aaa" by S&P; W-1" by Fitch) to
those that are highly sensitive with currently identifiable market volatility risk ("ccc-" by
S&P, N-10" by Fitch).
Weighted Average Maturity (WAM) - The average maturity of all the securities that
comprise a portfolio. According to SEC rule 2a-7, the WAM for SEC registered money
market mutual funds may not exceed 90 days and no one security may have a maturity
that exceeds 397 days.
When Issued (WI) - A conditional transaction in which an authorized new security has
not been issued. All "when issued" transactions are settled when the actual security is
issued.
Yield - The current rate of return on an investment security generally expressed as a
percentage of the security's current price.
Yield -to -call (YTC) - The rate of return an investor earns from a bond assuming the
bond is redeemed (called) prior to its nominal maturity date.
Yield -to -maturity - The rate of return yielded by a debt security held to maturity when
both interest payments and the investor's potential capital gain or loss are included in
the calculation of return.
Zero-coupon Securities - Security that is issued at a discount and makes no periodic
interest payments. The rate of return consists of a gradual accretion of the principal of
the security and is payable at par upon maturity.
Glossary -8