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RES 2012-38 - 14933RESOLUTION NO. 2012 - 38 A RESOLUTION APPROVING THE REVISED INVESTMENT POLICY FOR THE CITY AND THE FRIDLEY HOUSING AND REDEVELOPMENT AUTHORITY WHEREAS, the City of Fridley recognizes that an Investment Policy promotes acquisition of safe investments by providing structure to the treasury function, and limiting the risk to public funds, and WHEREAS, the Investment Policy provides for a systematic review of public funds, and WHEREAS, the Investment Policy was last updated in March of 1994 and due to changes in State Statutes and the implementation Governmental Accounting Standards Board Statement 40 revisions to the Investment Policy were needed, and WHEREAS, the Investment Policy has been revised to incorporate current State Statutes, OSA's legal compliance guide, and model policies from the League of Minnesota Cities and the Government Finance Officers Association. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Fridley adapts the Revised Investment Policy as identified as Exhibit 1 attached. PASSED AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF FRIDLEY THIS 25TH DAY OF JUNE, 2012. 44?'— f4 Scott J. Lund, Mayor ATTEST: tL—avns�— Debra A. Skagen, Ca Clerk Resolution No. 2012-38 City of Fridley Investment Policy Adopted by City Council June 25, 2012 Prepared by the Finance Department Exhibit I Resolution No. 2012 - 3 8 Investment Policy Table of Contents Exhibit 1 I. Purpose and Need for Policy ........................................................... ..............................3 II. Scope .............................................................................................. ..............................3 III. Prudence ......................................................................................... ..............................3 IV. Objective ........................................................................................ ..............................4 V. Delegation of Authority .................................................................. ..............................5 VI. Ethics and Conflicts of Interest ....................................................... ..............................6 VII. Authorized Broker/Dealers ............................................................. ..............................6 VIII. Authorized and Suitable Investments .............................................. ..............................6 IX. Concentration of Credit Risk .......................................................... ..............................8 X. Collateralizations ............................................................................ ..............................8 XI. Safekeeping and Custody ................................................................ ..............................9 XII. Maximum Maturities ..................................................................... .............................10 XIII. Internal Control ............................................................................. .............................10 XIV. Performance Standards .................................................................. .............................10 XV. Market Yield/Benchmark ............................................................... .............................10 XVI. Reporting ....................................................................................... .............................11 XVII. Investment Policy Adoption ........................................................... .............................11 City of Fridley Investment Policy Page 2 Resolution No. 2012 - 3 S I. Purpose and Need for Policy Exhibit 1 This policy specifically outlines the investing philosophy and practices of the City of Fridley and the Fridley Housing and Redevelopment Authority (hereafter collectively referred to as "the City "), and has been developed to serve as a reference point for the management of city assets. It is the policy of the City to invest public funds in a manner which will provide for the following in order of importance: Safety, Liquidity; and Yield (return on investment) that conforms to all federal, state and local regulations governing the investment of public funds. The purpose of this Policy is to develop an overall program for cash investments, designed and managed with a high degree of professionalism, worthy of the public trust; to establish that elected and appointed officials and employees are custodians of a portfolio which shall be subject to public review; to establish cash investment objectives, delegation of authority, standards of prudence, internal controls, authorized investments, selection process for investments, and broker representations. II. Scope This Investment Policy applies to all financial assets of the City. These funds are accounted for within the City's Comprehensive Annual Financial Report and include: • General Fund • Special Revenue Funds • Capital Project Funds • Debt Service Funds • Enterprise Funds • Internal Service Funds • Trust and Agency Funds • Any new fund created by the City, unless specifically exempted by City Council. III. Prudence Investments shall be made with judgment and care, under circumstances existing at the time the investment is made, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering probable safety of their capital as well as interest yield to be derived. The standard of prudence to be used by investment officials shall be the "prudent investor" standard and shall be applied in the context of managing the overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal liability 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 situations. Investment City of Fridley Investment Policy Page 3 Resolution No. 2012 - ' S Exhibit 1 procedures developed for the Finance Department must be complied with by those with access to and management responsibilities for City investments. IV. Objective 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 in the following 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. Credit Risk. Credit Risk is the risk of loss due to failure of the security issuer. Thus, designated depositories shall have insurance through the FDIC (Federal Insurance) or appropriate collateral. Credit Risk will be minimized by: • Limiting investments to the type of securities listed in Section VIII of this investment policy. • Diversifying the investment portfolio so that the impact of potential losses from any type of security or from any one individual issuer will be minimized. 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. The City has also established diversification guidelines and maturity limits to control the sensitivity of the portfolio to changes in interest rates. 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. The City will minimize investment Custodial Risk by holding investments in securities with a major bank's corporate trust department. Investment Custodial Risk is the risk that in the event of failure of the counterparty to a transaction, the City will not be able to recover the value of its investment securities that are in possession of an outside party. Investments in investment pools and money markets are not evidenced by securities that exist in physical or book entry form, and therefore are not subject to custodial Credit Risk disclosures. City of Fridley Investment Policy Page 4 Resolution No. 2012 - S B. Liquidity Exhibit 1 The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements that might reasonably be anticipated. The portfolio will be structured 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). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same day liquidity for short-term funds. C. Yield The City's investment portfolio shall be designed with the objective of attaining a market rate return. The core of investments is limited to low -risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be held until maturity with the following exceptions: • security with declining credit may be sold early to minimize loss of principal. • security swap would improve the quality, yield, or target duration in the portfolio. Liquidity needs of the portfolio require that the security be sold. D. Trading Portfolio purchases will focus on holding investments until maturity to maintain securities at amortized cost. Excessive investment portfolio turnover commonly referred to as "trading" or "overtrading" to obtain short-term gains is not consistent with the City's stated investment objectives and will be prohibited. V. Delegation of Authority The investment program shall be operated in conformance with federal, state, and other legal requirements. Authority to manage the City's investment program is derived from the following: • Minnesota Statutes Chapter 118A, Deposit and Investment of Local Public Funds • Fridley City Charter Section 7.13, Receipts to go to City Treasurer Management responsibility for the investment program is hereby delegated to the Finance Director, who shall establish written procedures for the operations of the Investment Program consistent with this Investment Policy. The Finance Director, with assistance from finance department staff, monitors performance of the investment portfolio; and ensures that proper internal controls are developed to safeguard investments assets. Procedures should include reference to: safekeeping, delivery versus payment (DVP), investment accounting, wire transfer agreements, collateral/depository agreements and City of Fridley Investment Policy Page 5 Resolution No. 2012 - 3 S Exhibit 1 banking service contracts. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. 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 responsible for all investment transactions and shall establish a system of controls to regulate the activities of subordinate officials. VI. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall refrain from conducting personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Investment officials shall annually disclose to the City Clerk any material financial interests as required by state statute on an annual Statement of Economic Interest form. Employees and officers shall subordinate their personal investment transactions to those of the City, particularly with regard to the time of purchases and sales, and shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. VII. Authorized Broker /Dealers The City will conduct investment transactions only with authorized broker /dealers that have met the following criteria: • They act as primary or regional dealers that qualify under Securities & Exchange Commission Rule 1503- 1(Uniform Net Capital Rule). • Submit annually to the Finance Director a Minnesota State Auditor Broker Certification Form. All broker /dealer relationships, providing they meet the above requirements, will be maintained at the discretion of the Finance Director. The purchase of all investments must be from institutional brokers. The City may enter into contracts with investment advisory firms at the discretion of the Finance Director when their services are deemed beneficiary to the City. Any such firm must be registered under the Investment Advisor's Act of 1940. The advisor may have authority to transact investments on behalf of the City and must comply with State Statue and this Investment Policy. VIII. Authorized and Suitable Investments City of Fridley Investment Policy Page 6 Resolution No. 2012 - S Exhibit 1 Based on the investment objectives as defined in section IV of this policy, the City will limit its investments to securities authorized under Minnesota Statute 118A and future revisions. Current statute allows the City to invest in the following types of securities: • United States Securities including bonds, notes, bills, mortgages or other securities which are direct obligations or are guaranteed or insured issues of the United States, its agencies, its instrumentalities, or organizations created by an act of Congress. Mortgage- backed securities that are defined as high risk or in certificates of deposit secured by letters of credit issued by federal home loan banks are not permissible investments. • General obligation bonds of state or local governments rated A or better by a national bond rating services. • Revenue obligations of state or local governments rated AA or better by a national bond rating service. • General obligation bonds of the Minnesota Housing Finance Agency rated A or better by a national bond rating service. • General obligations of the Housing Finance Agency of any state rated AA or better and if it includes the moral obligation of the state. • Certificates of Deposits (Time Deposits) that are fully insured by the Federal Deposit Insurance Corporation. • Bankers acceptances of United States banks purchased on the secondary market rated with the highest short-term credit rating of any two Nationally Recognized Statistical Rating Organizations (NSROs), at the time of purchase. Maximum maturity will be 270 days. If the banker's acceptance is rated by more than two NRSROs, it must have the highest rating from all the organizations. • Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated A -1, P -1, or F -1 or better by at least two nationally recognized rating agencies and matures in 270 days or less. • Money Market Mutual Funds provided such investment company is registered under the Federal Investment Company Act of 1940, and which holds itself out as a money market fund meeting the conditions of rule 2a -7 of the Securities and Exchange Commission and is rated in one of the two highest rating categories for money market funds by at least one nationally recognized statistical rating organization, or whose shares are registered under the Federal Securities Act of 1933, as long as the investment company's fund receives the highest credit rating and is rated in one of the two highest risk rating categories by at least one nationally recognized statistical rating organization and is invested in financial instruments with a final maturity no longer than 13 months. City of Fridley Investment Policy Page 7 Resolution No. 2012 - S Exhibit 1 In addition, the share value of the money market funds must be equal to $1.00. • The Minnesota Municipal Money Market Fund (4M) that was established by the League of Minnesota Cities in 1987 to address the investment needs of Minnesota cities. IX. Concentration of Credit Risk It is the intent of the City to diversify its investments and thereby reduce the risk of loss resulting from the over - concentration of assets in a specific maturity, issuer, institution, or class of securities. No more than 50% of the entity's total investment portfolio will be invested in a single class of securities and no more than 15% of the overall portfolio may be invested in the securities of a single issuer. The following investments are exempt from diversification restrictions: Securities of the U. S. Government, Money Market Funds, Local Government Investment Pools and Deposits. Due to the fluctuations in the value of the portfolio, maximum percentages for a particular issuer or investment type may be exceeded at a point in time subsequent to the purchase or maturity of a particular security. Securities need not be liquidated to realign the portfolio; however, consideration should be given to this matter when future purchases are made. Given the smaller portfolio of the Housing and Redevelopment Authority, the above restrictions will be waived. Prudent judgment in regards to concentration of credit risk should still be exercised when possible. X. Collateralizations In accordance with Minnesota Statute I I8a.03, financial institutions will be required to provide collateral on the following: • Certificates of Deposits (Time Deposits) • Demand Deposits In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 110% of market value of principal and accrued interest. The underlying securities will be subject to periodic (monthly) market valuations to ensure there is no market exposure. The City chooses to limit collateral to the following U.S. government securities: • Treasury Bills • Treasury Notes • Treasury Bonds City of Fridley Investment Policy Page 8 Resolution No. 2012 - S Exhibit 1 • Federal National Mortgage Associations (FNMA) • Federal Home Loan Bank (FHLB) • Federal Farm Credit Bank (FFCB) • Government National Mortgage Association (GNMA) • Federal Home Loan Mortgage Corporation (FIILMC) For cash deposits on hand collateral will always be held by an independent third party with whom the entity has a current custodial agreement. Clearly marked evidence of ownership (safekeeping receipt) must be supplied by the entity and retained. Collateralization shall be in the form of specific securities held for the City. The only exceptions are federal Depository Insurance Corporation (FDIC), Securities Investor Protection Corporation (SIPQ and pre - approved insurance coverage. The right of collateral substitution is granted, subject to approval from the Finance Director. XI. Safekeeping and Custody Securities purchased shall be held in a segregated account for the City's benefit at a third party trustee as safekeeping agent. The investment dealer or bank from which the security is purchased shall issue a confirmation ticket to the City listing the specific instrument, issuer, coupon, maturity, CUSIP number, purchase or sale price, transaction date, and other pertinent information. The financial service provider who executes the transaction on the City's behalf shall deliver all securities on a delivery versus payment method (DVP) to the designated third party. DVP is a way of controlling the risk to which securities market participants are exposed. Delivery of securities (i.e. the change in their ownership) is done simultaneously with payment. This means that neither the buyer nor the seller is exposed to the risk that the other will default. Investments, contracts, and agreements may be held in safekeeping with: • Any Federal Reserve Bank. • Any bank authorized under the laws of the United States or any state to exercise corporate trust powers including, but not limited to, the bank from which the investment is purchased. The City's ownership of all securities should be evidenced by written acknowledgements identifying the securities by: • The names of the issuers. • The maturity dates. • The interest rates. • Any CUSIP, serial numbers, or other distinguishing marks. The City may not invest in securities that are both uninsured and not registered in the name of the City and are held by either the counterparty or the counterparty's trust department or agent, but not in the name of the City. City of Fridley Investment Policy Page 9 Resolution No. 2012 - 3 8 XII. Maximum Maturities Exhibit 1 To the extent possible, the City will attempt to match its investment maturities with anticipated cash flow liquidity demands (static liquidity). A majority of the City's funds will be invested in securities maturing in 5 years or less, with no more than 20% of the City's funds being invested in securities maturing 12 years or more. Consideration should also be given to the average duration of securities. Actual maturity dates may be considerably sooner than the issued maturity dates due to options such as calls and step increases. These options often provide for an increased rate of return, compared to non - option securities, with actual investment durations typically being shorter than stated maturity dates. Portfolio maturities shall be staggered to avoid undue concentration of assets in a specific sector. Maturities selected shall provide for stability of income and reasonable liquidity. Because of the inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as local government investment pools and /or money market funds to ensure that appropriate liquidity is maintained to meet ongoing obligations. XIII. Internal Control The Finance Director 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 the costs and benefits requires estimates and judgments by management. The City will engage an external auditor for an annual independent review to assure compliance with policies and procedures. XIV. Performance Standards 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. XV. Market Yield /Benchmark The City's investment strategy is conservative. Under this conservative philosophy, the City will purchase investments that fit in accordance with this policy. Given this strategy, the basis used by the Finance Director to determine whether market yields are being achieved shall be the 6 -month Treasury Bill. City of Fridley Investment Policy Page 10 Resolution No. 2012 - ' 8 XVI. Reporting Exhibit 1 The Finance Director is charged with the responsibility of including a report on investment activity and returns which are included in the City's Comprehensive Annual Financial Report. The report will include security diversification information, maturity breakdowns, and investment earnings. XVII. Investment Policy Adoption The City's Investment Policy shall be adopted by the City Council. The Policy shall be reviewed periodically by the Finance Director and any modifications made must be approved by the City Council. Adopted by City Council June 25, 2012 City of Fridley Investment Policy Page 11