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ORD 2014-42 - Ord. 2014-42, FY14-15 budget S ORDINANCE NO. 2014-42 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF HUNTSVILLE, TEXAS, FINDING THAT ALL THINGS REQUISITE AND NECESSARY HAVE BEEN DONE IN PREPARATION AND PRESENTMENT OF AN ANNUAL BUDGET; APPROVING AND ADOPTING THE OPERATING AND CAPITAL IMPROVEMENTS BUDGET FOR THE CITY OF HUNTSVILLE, TEXAS, FOR THE PERIOD OCTOBER 1, 2014, THROUGH SEPTEMBER 30, 2015; RATIFYING AND APPROVING FISCAL AND BUDGETARY POLICIES; RATIFYING AND APPROVING THE INVESTMENT AND BANKING POLICIES; RATIFYING AND APPROVING VARIOUS FEES, RATES AND CHARGES; AND PROVIDING FOR AN EFFECTIVE DATE HEREOF. WHEREAS more than thirty days before the end of the City's fiscal year and more than thirty days before the adoption of this ordinance, the City Manager of the City Huntsville, Texas, submitted a proposed budget for the ensuing fiscal year according to Section 11.05 of the Charter of the City of Huntsville, Texas, and Texas Local Government Code Section 102.005;and WHEREAS the City Manager filed a copy of the proposed budget with the City Secretary and the budget was available for public inspection at least fifteen days before the budget hearing and tax levy for the fiscal year 2014- 2015 [Texas Local Government Code § 102.006];and WHEREAS the itemized budget shows a comparison of expenditures between the proposed budget and the actual expenditures for the same or similar purposes for the preceding year and the estimated amount of money carried for each[Texas Local Government Code § 102.003(a)]; and WHEREAS the budget contains financial information of the municipality that shows the outstanding obligations of the City, the available funds on hand to the credit of each fund, the funds received from all sources during the preceding year; the funds available from all sources during the ensuing year; the estimated revenue available to cover the proposed budget; and the estimated tax rate required to cover the proposed budget [Texas Local Government Code § 102.003(b)];and WHEREAS on August 27, 2014 the City Secretary published notice in the City's official newspaper of a public hearing relating to the budget, which include one publication not earlier than the 30'h day or later than the tenth day before the date of the hearing [Texas Local Government Code § 102.0065];and WHEREAS the budget for the year October 1, 2014, through September 30, 2015, has been presented to the City Council, and the City Council has held a public hearing with all notice as required by law, and all comments and objections have been considered; and WHEREAS the fees, rates and charges set out herein are reasonable and necessary and are established and set in the best interests of the City. NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HUNTSVILLE, TEXAS, that: SECTION 1: City Council adopts the budget for the City of Huntsville, Texas, now before the City Council for consideration and attached, as the budget for the City for the period of October 1, 2014, through September 30,2015. SECTION 2: The appropriation for the ensuing fiscal year for operating expenses, debt service and capital outlay budgets shall be fixed and determined as shown in Exhibit A and by reference to the Fund Summaries with account classification totals in the City Secretary's office. SECTION 3: New projects described for fiscal year 2014-2015 in the Capital Improvements budget portion of the 2014- 2015 budget are approved at the cost level indicated, subject to the availability of funding of project costs (Exhibit A1). SECTION 4: City Council approves the monthly payment for an eligible employee to the City's Medical Insurance Internal Service Fund of$750.00 per month($9,000.00 annually),per employee electing coverage. SECTION 5: City Council approves a budgeted TMRS rate established according to TMRS rates for the benefit levels elected by the City. SECTION 6: City Council approves a transfer of an amount equal to three and one half(3.5%) percent of the gross revenues received during Fiscal Year 2014-2015 from all water,wastewater, and solid waste customers, as a transfer to the Street Special Revenue Fund to compensate the City for the use of streets and rights-of- way by the Water, Wastewater, and Solid Waste Funds. SECTION 7: City Council hereby has reviewed and approves the Fiscal and Budgetary Policies(Exhibit B). SECTION 8: City Council approves fees, rates, charges and their associated revenue, which is incorporated into the budget. Council authorizes the City Manager to make such adjustments in fees, rates and charges from time to time as are in the City Manager's discretion reasonable and necessary based upon facts then existing, including the implementation of new fees, rates and charges or elimination of current ones; provided, however, that a change of more than 25%or the implementation or elimination of any fee, rate or charge shall be reported to the next regular Finance Committee meeting(Exhibit Q. Exhibit C authorizes water rate increases as noted for volumetric rates. SECTION 9: City Council has reviewed and approves the investment policies, strategies, and the Investment and Banking Policies and Investment Policy Statement for the Post-Employment Benefit Plan(Exhibit D). SECTION 10: The City Secretary is directed to maintain a copy of the adopted budget,to file a copy of it with the City Library and the County Clerk, and to publish a notice saying the budget is available for public inspection [Texas Local Government Code §§ 102.008 and 102.009(d)]. SECTION 11: Council may amend this budget from time to time as provided by law for the purposes of authorizing emergency expenditures or for municipal purposes, provided, however, no obligation shall be incurred or any expenditure made except in conformity with the budget [Texas Local Government Code §§ 102.009- 102.011;Huntsville City Charter§§ 11.06-11.07]. SECTION 12: The City Manager may, within the policies adopted within this budget, authorize transfers between budget line items; City Council may transfer any unencumbered appropriated balance or portion of it from one office, department, or agency to another at any time, or any appropriation balance from one expenditure account to another within a single office, department, or agency of the City [Huntsville City Charter§11.06.]. SECTION 13: City Council expressly repeals all previous budget ordinances and appropriations if in conflict with the provisions of this ordinance. If a court of competent jurisdiction declares any part, portion, or section of this ordinance invalid, inoperative, or void for any reason, such decision, opinion, or judgment shall in no way affect the remaining portions, parts, or sections, or parts of a section of this ordinance, which provisions shall be,remain,and continue to be in full force and effect. SECTION 14: This ordinance shall take effect immediately after its passage. PASSED AND APPROVED on this,the 16`h day of September, 2014. THE CITY OF HUNTSVILLE,TEXAS Ma Woodward, ayor AT ST: APP O ED AS TO FORM: L oodward, City ecreta Le rd Sc Jhneider, City Attorney City of Huntsville, Texas Annual Operating Budget for Fiscal Year 2014-2015 This budget will raise more total property taxes than last year's budget by $129,500 (2.4%), and of that amount $96,145 is tax revenue to be raised from new property added to the tax roll this year. Record vote on adopting the FY 14-15 Budget: Councilmember Name Position Vote Yes/No Mac Woodward Mayor Joe Emmett Ward 1 Tish Humphrey Ward 2 Ronald Allen Ward 3 Joe Rodriquez Ward 4 Andy Brauninger Position 1 at large Lydia Montgomery Position 2 at large Don H. Johnson Position 3 at large Keith D. Olson Pos. 4 at large (Mayor Pro-Tem) Property Tax Rate Information: Fiscal Yr 14-15 Fiscal Yr 13-14 Tax Rate adopted $0.4106 $0.4206 Effective Tax Rate $0.4136 $0.4562 Effective M&O Tax Rate $0.2892 $0.3276 Debt Rate $0.1244 $0.1286 Rollback Tax Rate $0.4519 $0.4503 City Debt Obligations secured by property taxes $13,539,655 Agenda Item# 6a Page 4 TM N 0 0 VM h N N (D N v M O O v M N v (D Cl) to N O (O � t0 aj M (0 I� M N T M (0 m LO (0 1, O N w O mIT OD N r� (0 (O (0 OD h � d O M N Oo M m (0 N n N Q M M r (D OD r- QM (� (n O M tb t` N M fl {CR M (n rl Cl) (n (o aD N OD a0 v O (o (n (A (0 ()) (0 (n (0 O O O O qp O Xu 0) V to OD (D 1- 04 (0 N M ED (o V N N N (0 V' (o 0) (0 (o N 04 CN r O M N 0 r N Nr cl 1� M at O N M N .; t 3 y (D O o (O M o r o r r r r r r o o E Cl) rn no Cl) o � o O m r O O O O N n Cl) OO to C W ((? V (0 N M p V OO N N O O O. 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N L 9 W O N V 0 O V (O (o mR LL N O V .- OO V O 0 M O CD M N N (O V 0 O M O O V M N O (D Cl) (o V D/ (D p •¢ �_ 0 LO (D V O N Cl) (D N N O N 0) (D O N 0) V W 0) h (O N 0 ap n V to aj ((pp V O N O) C I� N (0 P- O N N (0 (D O (O (l (O (o M h Vi O M 1l V (O M f- t) O O n f` (O O Of (D M (O u9 = O N (o O O r(f (n N OD N 10 (A V V O m O OO (7/ (O N O) O M V0 N V (o (o V N N N N N M (O (0 O) (D O (0 OD r r 0) I� M N O N '- N 0 � M W'G j r- to M N N r r N $'' M, b ' yiak4 4 MIR JERI C m LL City of?funtsvilre FY 14-15 Capital Funding Additions and Sources (Exhibit Al, page 1 of 1) Ptoject Additions 14-15 Amount Funding Sources 7th St(Old Madisonville Road and Avenue M) Reconstruction 1,200,000 Streets Capital Projects 1,200,000 General Fund 101 Automated Meter Replacement(AMR) 100,000 Water Fund 220 Hydro Pneumatic Tank to 30"Water Transmission Line 390,000 Water Fund 220 Cost Participation for Development Projects 50,000 Water CIP Fund-Unallocated Water Capital Projects 540,000 17th St(Avenue S to Avenue R)Waterline Replacement 60,000 Water Fund 220 Ave R (17th St to 18th St)Waterline Replacement 40,000 Water Fund'220 Pine Valley(Eastham to Normal Park)Waterline Replacement 90,000 Water Fund 220 Ave M (11th St to FM 2821)Waterline Replacement 760,000 Water Fund 220 Normal Park(Avenue S to 19th St)Waterline Replacement 1 400,0001 Water Fund 220 Water R&R Capital Projects 1 1,350,000 N.B. Davidson Systems Replacement& Rehabilitation Design 150,000 Wastewater Fund 221 Ave M from 9th St to Ave J Sewer Line Replacement 900,000 $660K WW Fd 2211$240K WWCtP' Unalloc BOT/TDCJ Sanitary Sewer Interceptor Project 700,000 Wastewater Fund 221 Cost Participation for Development Projects 50,000 WW Fund CIP-Unallocated Wastewater Capital Projects 1,800,000 Transfer Station- Engineering &Construction down payment 944,145 Solid Waste Fund 224 Solid Waste Projects 944,145'' 14-15 Total Uses of Funds 5,834,145 Total Sources Summary General Fund Contributions $ 1,200,000 Water Contributions $ 1,840,000 Water CIP- Unallocated $ 50,000 Wastewater Contributions $ 1,510,000 WW CIP- Unallocated $ 290,000 Solid Waste Fund Contributions $ 944,145 14-15 Total Sources of Funds $ 5,834,145 Exhibit B FY 14- 15 Fiscal and Budgetary Policies 1. STATEMENT OF PURPOSE The purpose of the Fiscal and Budgetary Policies is to identify and present an overview of policies dictated by state law, the City Charter, City ordinances, and administrative policies. The aim of these policies is to achieve long-term stability and a positive financial condition. These policies provide guidelines to the administration and finance staff in planning and directing the City's day-to-day financial affairs and in developing financial recommendations to the City Council. These policies set forth the basic framework for the overall fiscal management of the City. Operating independently of changing circumstances and conditions, these policies assist in the decision-making process. These policies provide guidelines for evaluating both current activities and proposals for future programs. These policies represent long-standing principles, traditions and practices which have guided the City in the past and have helped maintain financial stability. An important aspect of the policies is the application of budget and fiscal policies in the context of a long-term financial approach. The scope of these policies span accounting, auditing, financial reporting, internal controls, operating and capital budgeting, revenue management, cash and investment management, expenditure control, asset management and debt management. The City Council and/or Finance Committee annually review and approve the Fiscal and Budgetary Policies as part of the budget process. ll. BASIS OF ACCOUNTING A. Accounting in Accordance with GAAP. The City's finances shall be accounted for in accordance with generally accepted accounting principles as established by the Governmental Accounting Standards Board. 1. Organization of Accounts. The accounts of the City shall be organized and operated on the basis of funds. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions 2. Fund Structure. The City of Huntsville uses the following fund groups: Governmental Funds General Fund General Obligation Debt Service Fund Capital Projects Funds Special Revenue Funds: Street Municipal Court Special Revenues Library Special Revenues Airport Special Revenues Police Special Revenues Hotel/Motel Tax &Arts 1 Exhibit B FY 14- 15 Proprietary Funds: Enterprise Funds: Water Wastewater Solid Waste Internal Service Funds: Medical Insurance Equipment Replacement Computer Replacement Permanent Funds: Library Endowment Oakwood Cemetery Endowment Trust Funds: Retiree PEB Trust—Medical Scholarship Fund Employee Assistance Fund 3. Governmental Fund Types. Governmental funds are used to account for the government's general government activities and include the General, Special Revenue, General Obligation Debt Service, and Capital Project funds. Governmental fund types shall use the flow of current financial resources measurement focus and the modified accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when susceptible to accrual (i.e., when they are "measurable and available"). "Measurable" means the amount of the transaction can be determined and "available" means collectible within the current period or soon enough thereafter to pay liabilities of the current period. Expenditures are recognized when the related fund liability is incurred, if measurable, except for principal and interest on general long-term debt, which are recorded when due, and compensated absences, which are recorded when payable from currently available financial resources. 4. Proprietary Fund Types. Proprietary fund types are used to account for the City's business type activities (e.g., activities that receive a significant portion of their funding through user charges). The City has two types of proprietary funds: Enterprise Funds and Internal Service Funds. The City's Proprietary fund types are accounted for on a flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. Enterprise funds receive their revenues primarily through user charges for service. Internal Service funds receive their revenues primarily from the other funds of the City. 5. Permanent Funds. The Library Endowment Fund and Oakwood Cemetery Endowment Fund are used to account for endowments received by the City. Money available for expenditures in these funds is the accumulated interest earnings. 6. Trust Funds. The PEB Trust for retirees is used to account for funds designated for use for retiree Health Insurance costs if needed. Monies in this Fund help to lessen the City's Unfunded Accrued Actuarial Liability (UAAL) that is the result of the City providing a health insurance benefit to certain retirees. The Employee Assistance Fund is funded by contributions from City employees and monies are used to assist employees encountering catastrophic illness (examples — cancer, vehicle accidents, etc.) medical costs. The Scholarship Fund is also funded by 2 i Exhibit B FY 14- 15 contributions from employee. The monies are used to provide $500 scholarships to graduating seniors of employees who will be continuing their education at a university, junior/community college, or a technical school. 7. Encumbrance Accounting. The City shall utilize encumbrance accounting under which purchase orders, contracts and other commitments for the expenditure of monies are recorded in order to reserve that portion of the applicable appropriation. III. OPERATING BUDGET A. BUDGET PROCESS. 1. Proposed Budget. Section 11.05 of the City Charter requires that the City Manager submit to the City Council a proposed budget at least 30 days prior to the end of the fiscal year that presents a complete financial plan for the ensuing year. Public hearings shall be held in the manner prescribed by the laws of the State of Texas relating to budgets in cities and towns. The Charter requires that no budget be adopted or appropriations made unless the total of estimated revenues, income and funds available shall be equal to or in excess of such budget or appropriations. Past practice has been to present a draft budget to City Council at least six weeks prior to fiscal year end. a. The budget shall include four basic segments for review and evaluation: (1) personnel costs, (2) base budget (same level of service) for operations and maintenance costs, (3) decision packages for capital and other (non-capital) project costs, and (4) revenues. b. The budget review process shall include City Council participation in the development of each of the four segments of the proposed budget. c. The budget process will allow the opportunity for the City Council to address policy and fiscal issues. d. A copy of the proposed budget shall be posted on the City's website when it is submitted to the City Council 2. Modified Incremental Approach. The operating budget less prior year supplemental requests, shall serve as the starting point for budget estimates. 3. Adoption. Upon the presentation of a proposed budget document to the City Council, the City Council shall call and publicize a public hearing. The City Council shall subsequently adopt by Ordinance such budget, as it may have been amended, as the City's Annual Budget, effective for the fiscal year beginning October 1. As required by Section 11.05 of the Charter, if the City Council takes no action to adopt a budget on or prior to September 27th, the budget as submitted by the City Manager, is deemed to have been finally adopted by the City Council. 4. Government Finance Officers Association. The annual budget shall be submitted to the Government Finance Officers Association (GFOA) for evaluation and consideration for the Distinguished Budget Presentation Award. 3 Exhibit B FY 14 - 15 5. Truth in Taxation. Budget development procedures will be in conformance with State law, outlined in the Truth in Taxation process. In the event of a tax increase, at least two notices will be given and public hearings held. B. PLANNING. Budgeting is an essential element of the financial planning, control, and evaluation process of municipal government. The budget planning process is for a five year period recognizing that budgets are influenced by decisions made in prior year budgets and that decisions made in the current year budgets serve a precursor to future budget requirements. The City shall recognize both short-term needs and objectives in relation to the long-term goals of the City. C. PREPARATION. The operating budget is the City's annual financial operating plan. The budget includes all of the operating departments of the City, the debt service fund, all capital projects funds, internal service funds, and all special revenue funds of the City. An annual budget shall be prepared for all funds of the City, with the exception that capital projects will be budgeted on a project length basis, rather than an annual basis. 1. Basis of Budget. Operating budgets are adopted on a basis consistent with generally accepted accounting principles as promulgated by the Governmental Accounting Standards Board, with exceptions, including that depreciation is not included in the budget, capital purchases are budgeted in the year of purchase, unmatured interest on long-term debt is recognized when due, and debt principal is budgeted in the year it is to be paid. a. Governmental Fund Types are budgeted on a modified accrual basis, with exceptions as noted above. Revenues are included in the budget in the year they are expected to become measurable and available. Expenditures are included in the budget when they are measurable, a liability is incurred, and the liability will be liquidated with resources included in the budget. b. Capital project budgets are project length budgets and are budgeted on a modified accrual basis. c. Proprietary fund types are budgeted generally on an accrual basis with exceptions as noted above. Revenues are budgeted in the year they are expected to be earned and expenses are budgeted in the year the liability is expected to be incurred. The emphasis is on cash transactions in lieu of non- cash transactions, such as depreciation. The focus is on the net change in working capital. 2. Legal Level of Control. The budget shall be adopted at the "legal level of control," which is, by Division, within individual funds. The level at which management, without prior council approval, loses the ability to reapply budgeted resources from one use to another is known as the budgets' "legal level of control." The City has a number of levels of detail in the operating budgets - the fund, the department, the division, the object and the line item. 4 I Exhibit B FY 14- 15 Example: Fund - General Fund Department- Public Safety Division - Police Object - Salaries, Other Pay and Benefits Line Item - Regular Salaries In the above example, the legal level of control is the budget total for the Police Division. Department Heads may not exceed budget allocations at the object code level in controllable account without City Manager approval. 3. Identify Available Funds. The budget shall be sufficiently detailed to identify all available funds. The format will include estimated beginning funds, sources of funds, uses of funds, and estimated remaining funds at budget year-end. An actual prior year, estimated current year and proposed budget shall be presented. 4. Interfund Transfers/Charges. A summary showing transfers and charges between funds will be provided during the budget process to explain the "double counting" of revenues and expenditures. 5. Periodic Reports. In compliance with Section 11.02(e) of the Charter, the City will maintain a budgetary control system to ensure adherence to the budget and will prepare periodic reports comparing actual revenues, expenditures and encumbrances with budgeted amounts. 6. Self-Sufficient Enterprise Funds. Enterprise operations Water, Wastewater, and Solid Waste are intended to be self-sufficient. 7. Administrative Cost Reimbursement. Enterprise fund budgets shall include a reimbursement to the General Fund to pay a proportionate share of administrative costs. Documentation to support the transfer shall be presented to City Council during the budget process. 8. Charges to Other Funds by Internal Service Funds. Charges by internal service funds to user divisions and funds shall be documented as part of the budget process. 9. Appropriations Lapse. Pursuant with Section 11.06 of the Charter, annual appropriations lapse at year end. Items purchased through the formal purchase order system (i.e., the encumbered portions), and not received by fiscal year end, are presented to City Council for re-appropriation in the subsequent fiscal year. To be eligible for automatic re-appropriation in a subsequent year, the goods or services must have been ordered in good faith and appropriated in the year encumbered.. The original budget is amended to include the re-appropriations. Capital projects budgets do not lapse at year-end. 10. Performance Indicators and Productivity Indicators. The annual budget, where possible, will utilize performance measures and productivity indicators. D. BALANCED BUDGET. The budget shall be balanced using a combination of current revenues and available funds. Current year operating expenses shall be funded with current year generated revenues. No budget shall be adopted unless the total of estimated revenues, income, and funds available is equal to or in excess of such budget. 5 Exhibit B FY 14- 15 E. REPORTING. Periodic financial reports shall be prepared to enable the Department Heads to manage their budgets and to enable monitoring and control of the budget. F. CONTROL. Operating Expenditure Control is addressed in Section V of these Policies. G. CONTINGENT APPROPRIATION. The General Fund, Water Fund, Wastewater Fund, Solid Waste Fund, and Street Fund may have an adequate contingent appropriation. This contingent appropriation, titled "Reserve for Future Allocation", shall be disbursed only by transfer to another departmental appropriation. Transfers from this item shall be controlled as outlined in Section VI, D of these policies. H. EMPLOYEE BENEFITS. The City budget process shall include a review of employee benefits. 1. Medical Insurance Fund - The Finance Committee shall review rates to be charged for employee and dependent coverage. 2. Retirement Plan - The City is a member of the Texas Municipal Retirement System (TMRS). Employees working at least 1,000 hours per year shall contribute 7% to the TMRS plan. The City's match will be established according to TMRS rates for the benefit levels elected by the City. Any budgeted funds not spent can be deposited with TMRS to reduce the City's unfunded liability with Council's approval or will revert back to the unallocated monies in the appropriate fund. 3. Workers Compensation Insurance - The City shall participate in the Texas Municipal League (TML) Workers Compensation Risk Pool. Rates for required coverage will be established by the Pool, adjusted for experience on an annual basis. Refunds that may be granted through the pool will be prorated between the City funds. Unspent monies will revert back to the appropriate fund. 4. Social Security/Medicare - The City does not pay Social Security for employees. Medicare is paid for employees hired after March 31, 1986 or for those employees otherwise having access through the City. 5. Recommendations for adjustments to the pay and classification system will be made annually in order to maintain external parity and internal equity. Recommendations will be built into the proposed basic budget. IV. RESERVES/UNALLOCATED FUNDS A. OPERATING RESERVES/FUND BALANCES. The City shall maintain unallocated reserves in operating funds to pay expenditures caused by unforeseen emergencies or for shortfalls caused by revenue declines, and to eliminate any short-term borrowing for cash flow purposes. Generally, unallocated reserves for all operating funds excluding, Internal Service Funds, Capital Projects, and Special Revenue Fund (except the Street Fund) shall be maintained at a minimum amount of 25% of the annual budget (less transfers to capital projects) for each fund unless specifically identified in this section. Unallocated reserves shall not be used to support on-going operating expenditures. This reserve is defined as unreserved current assets less inventory and on-going receivables (ex. utility billing, sales tax) minus current liabilities payable from these assets. 6 Exhibit B FY 14 - 15 B. FUND BALANCES USED FOR CAPITAL EXPENDITURES. Reserves shall be used for one time capital expenditures only if: 1. there are surplus balances remaining after all reserve and fund allocations are made; or 2. the City has made a rational analysis with justifying evidence that it has an adequate level of short and long-term resources. C. SPECIFIC APPROPRIATION BY CITY COUNCIL. If fund balances are used to support one time capital and onetime non-operating expenditures, the funds must be specifically appropriated by the City Council. D. SPECIAL REVENUE FUNDS. Monies in the Special Revenue Funds shall be expended for their intended purposes, in accordance with an approved budget. There is no reserve requirement. E. CAPITAL PROJECT FUNDS. Monies in the Capital Projects Funds shall be expended in accordance with an approved budget. There is no reserve requirement. F. INTERNAL SERVICE FUNDS. Working capital in equipment replacement funds will vary to meet annual fluctuations in expenditures. Monies in the Internal Service Funds shall be expended for their intended purpose in conformance with the approved budget and approved replacement schedules. Additions to the Fleet or additional computer equipment will not be funded from replacement funds without council approval. G. GENERAL OBLIGATION DEBT SERVICE FUND AND INTEREST ACCOUNTS. Reserves in the General Obligation Debt Service Fund and Water and Wastewater Funds Interest and Sinking accounts shall be maintained as required by outstanding bond indentures. Reduction of reserves for debt shall be done only with City Council approval after Council has conferred with the City's financial advisor to insure there is no violation of bond covenants. H. DEBT COVERAGE RATIOS. Debt Coverage Ratios shall be maintained as specified by the bond covenants. I. MEDICAL INSURANCE FUND RESERVE. A reserve shall be established in the City's Health Insurance Fund to avoid potential shortages. Such reserve shall be used for no purpose other than for financing losses under the insurance program. J. The City shall contract for an actuarial review once every two years related to its OPEB liability for retiree medical insurance benefit, in accordance with Government Accounting Standard Board pronouncements. V. REVENUE MANAGEMENT A. CHARACTERISTICS OF THE REVENUE SYSTEM. The City strives for the following optimum characteristics in its revenue system: 1. Simplicity and Certainty. The City shall strive to keep the revenue classification system simple to promote understanding of the revenue sources. The City shall describe its revenue sources and enact consistent collection policies to provide assurances that the revenue are collected according to budgets and plans. 7 Exhibit B FY 14 - 15 2. Equity. The City shall make every effort to maintain equity in its revenue system structure. The City shall minimize all forms of subsidization between entities, funds, services, utilities, and customers. 3. Realistic and Conservative Estimates. Revenues are to be estimated realistically. Revenues of volatile nature shall be budgeted conservatively. 4. Centralized Reporting. Receipts will be submitted daily to the Finance Department for deposit and investment. Daily transaction reports and supporting documentation will be prepared. 5. Review of Fees and Charges. The City shall review all fees and charges annually in order to match fees and charges with the cost of providing that service. 6. Aggressive Collection Policy. The City shall follow an aggressive policy of collecting revenues. Utility services will be discontinued (i.e. turned off) for non- payment in accordance with established policies and ordinances. The attorney responsible for delinquent tax collection, through the central collection agency, shall be encouraged to collect delinquent property taxes using an established tax suit policy and sale of real and personal property to satisfy non-payment of property taxes. A warrant officer will aggressively pursue outstanding warrants, and the Court will use a collection agency to pursue delinquent fines. B. NON-RECURRING REVENUES. One-time or non-recurring revenues will not be used to finance current ongoing operations. Non-recurring revenues will be used only for one- time expenditures such as capital needs. C. PROPERTY TAX REVENUES. All real and business personal property located within the City shall be valued at 100% of the fair market value based on the appraisal supplied by the Walker County Appraisal District. Reappraisal and reassessment is as provided by the Appraisal District. Property tax rates shall be maintained at a rate adequate to fund an acceptable service level. Based upon taxable values, rates may be adjusted to fund this service level. Collection services shall be contracted out with a central collection agency, currently the Walker County Appraisal District. D. INTEREST INCOME. Interest earned from investment of available monies, whether pooled or not, shall be distributed to the funds in accordance with the equity balance of the fund from which monies were invested. E. USER-BASED FEES AND SERVICE CHARGES. For services associated with a user fee or charge, the direct and indirect costs of that service shall be offset wholly or partially by a fee where possible. There shall be an annual review of fees and charges to ensure that the fees provide adequate coverage of costs of services. Full fee support for operations and debt service costs shall be required in the Proprietary Funds. Partial fee support shall be generated by charges for miscellaneous licenses and fines, sports programs, and from other parks, recreational, cultural activities, and youth programs. F. UTILITY RATES. The City shall review and adopt utility rates annually that generate revenues required to cover operating expenditures, meet the legal requirements of applicable bond covenants, and provide for an adequate level of working capital. 8 Exhibit B FY 14- 15 G. COST REIMBURSEMENTS TO THE GENERAL FUND. The General Fund shall be reimbursed by other funds for a proportionate share of administrative costs. Documentation to support the transfer shall be presented to City Council as part of the budget process. H. INTERGOVERNMENTAL REVENUES/GRANTS/SPECIAL REVENUES. Grant revenues and other special revenues shall be spent for the purpose(s) intended. The City shall review grant match requirements and include in the budget all grant revenues and expenditures. I. REVENUE MONITORING. Revenues actually received are to be regularly compared to budgeted revenues. J. REVENUE PROJECTIONS. Each existing and potential revenue source shall be re- examined annually. VI. EXPENDITURE CONTROL A. APPROPRIATIONS. The responsibility for budgetary control lies with the Department Head. Department Heads may not approve expenditures that exceed monies available at the object code level. Capital expenditures are approved by the City Council on a per project basis. B. AMENDMENTS TO THE BUDGET. In accordance with the City Charter, the City Council may transfer any unencumbered appropriated balance or portion thereof from any office, department, or agency to another at any time. C. CITY MANAGER'S AUTHORITY TO AMEND BUDGET. 1. Reserve for Future Allocation. The City Manager may authorize transfers of $50,000 or less from the budgeted Reserve for Future Allocation. For authorizations of $25,000 or less, the City Manager will report the use of Reserve for Future Allocation as an informational item. For authorizations between $25,001 and $50,000, the City Manager shall provide written notice to the Council of his/her intent to authorize a transfer of Reserve for Future Allocation in excess of$25,000 (but not more than $50,000), and allow seven (7) business days to pass without a request by a Councilmember to place the proposed expenditure on a City Council meeting agenda for full City Council consideration. 2. Transfer Between Line Items. The City Manager may, without prior City Council approval, authorize transfers between budget line items within a fund with the exception that: a) Regular personnel allocations may not be changed, except increases in temporary, part-time, or overtime accounts b) The expenditure is not budgeted; c) Savings from City Council - approved capital purchases may not be spent for other than their intended purpose; 9 Exhibit B FY 14- 15 d) Additions to the Fleet and additional computer equipment may not be purchased from equipment replacement funds 3. Capital Project Budgets. The City Manager shall have the authority to transfer amounts between line items of a capital project budget and to transfer monies from a project's Contingency Reserve to fund change orders on the project. The City Manager, without prior Council approval, may approve a change order to a construction or engineering contract in an amount not to exceed $50,000, as long as the cumulative total of all change orders to the project do not exceed the State allowed maximum of 25% of the original contract price. E. PURCHASING. All purchases shall be made in accordance with the Purchasing Procurement and Disposition Policies approved by the Finance Committee. Purchasing will review all bids before posting. The sealed bid requirement will be increased to $50,000. Separate and sequential purchases of $50,000 and more require city council approval. Purchases from $25,000 to $50,000 shall be reported quarterly to city council as informational items. The following shows a summary of approval requirements for purchases. APPROVAL REQUIREMENTS FOR PURCHASES Supervisor Or Director Department Purchasing City City Dollar Figure Designee Director Agent Manager Council Less than $1,000 ✓ $1,000 to less than $3,000 ✓ ✓ (Quotation Form) I ! $3,000 to$8,000 ✓ ✓ ✓ $8,000 to less than $50,000(Purchase ✓ ✓ ✓ ✓ Order) i $50,000 or more ✓ ✓ ✓ ✓ i ✓ Denotes signature approval i F. CONTRACTS. The City Manager, or Mayor as authorized by Council, shall be the signature authority on contracts above $8,000 pursuant to the approval requirement for purchases as outlines after review by the City Attorney and Finance Director. G. PROMPT PAYMENT. All invoices approved for payment by the proper City authorities shall be paid by the Finance Department within thirty (30) calendar days of receipt, in accordance with the provisions of state law. Proper procedures shall be established that 10 Exhibit B FY 14- 15 enables the City to take advantage of all purchase discounts, except in the instance where payments can be reasonably and legally delayed in order to maximize the City's investable cash. VII.CAPITAL IMPROVEMENTS PROGRAM AND THE CAPITAL BUDGET. A. PROGRAM PLANNING. The City shall develop and maintain a multi-year plan for capital improvements and make capital improvements in accordance with the approved plan. The Capital Improvements Program will be updated annually. The Capital Improvements Program (CIP) is a planning document and does not authorize or fund projects. The planning time frame for the capital improvements program will normally be five to ten years. B. BUDGET PREPARATION. The capital budget shall evolve from the Capital Improvements Program. Capital project expenditures must be appropriated in the capital budget. A funding source and resource availability shall be presented to the City Council at the time a project is presented for funding. The City's Capital Budget is to be prepared annually in conjunction with the operating budget on a fiscal year basis to ensure that capital and operating needs are balanced against each other. Projects approved for funding from the Capital Improvements Program will be included in the Capital Budget. C. PROJECT LENGTH BUDGET. A budget for a capital project shall be a project length budget. At the end of the fiscal year, the unspent budget of an approved capital project shall automatically carry forward to the subsequent fiscal year until the project is completed. At project end, funds shall be available for project reallocation or returned to the originating fund. D. BUDGET AMENDMENT. All budget amendments shall be in accordance with State law. City Manager authority to amend the budget is identified in Section VI - D. E. FINANCING PROGRAMS. Alternative financing sources will be explored. The term of the debt issue may not exceed the expected useful life of the asset. F. REPORTING. Periodic financial reports shall be prepared to enable the Department Heads to manage their capital budgets and to enable the Finance Department to monitor, report, and provide information about the capital budget. G. EVALUATION CRITERIA. Capital investments shall foster goals of economic vitality, neighborhood vitality, infrastructure preservation, provide service to areas lacking service and improve services in areas with deficient services. Evaluation criteria for selecting which capital assets and projects to include for funding shall include the following: • mandatory projects • maintenance projects • efficiency improvement • project provides a new service • policy area projects • extent of usage • project's expected useful life • effect of project on operation and • availability of state/federal maintenance costs grants • elimination of hazards • prior commitments 11 Exhibit B FY 14- 15 VIII. ACCOUNTING, AUDITING, AND FINANCIAL REPORTING A. ACCOUNTING. The Finance Director is responsible for establishing the Chart of Accounts and for recording financial transactions. B. AUDITING. 1. Qualifications of the Auditor. Section 11.16 of the City's Charter requires the City to be audited annually by independent accountants ("auditor'). The CPA firm must demonstrate that it has staff to conduct the City's audit in accordance with generally accepted auditing standards and contractual requirements. The auditor must be licensed by the State of Texas. 2. Responsibility of Auditor to City Council and Finance Committee. The auditor is retained by and is accountable to the City Council. The auditor shall communicate directly with the Finance Committee as necessary to fulfill its legal and professional responsibilities. The auditor's report on the City's financial statements shall be completed within 120 days of the City's fiscal year end. 3. Selection of Auditor. The City shall request proposals for audit services at least once every three years. The City shall select the auditor by May 31, of each year. As required in Section 11.16 of the City Charter, the Auditor is appointed by the Mayor, with approval of the Council. The Certified Public Accountant shall have no personal interest, directly or indirectly, in the financial affairs of the City or any of its officers. 4. Contract with Auditor. The agreement between the independent auditor and the City shall be in form of a written contract. A time schedule for completion of the audit shall be included. 5. Scope of Audit. All general purpose statements, combining statements and individual fund and account group statements and schedules shall be subject to a full scope audit. 6. Publication of Results of Audit. As required by Section 11.16 of the City Charter, notice of the completion of the audit shall be published in a newspaper and copies placed in the office of the Director of Finance and the Huntsville Public Library. A copy will also be available in the office of the City Secretary. C. FINANCIAL REPORTING. 1. External Reporting. As a part of the audit, the auditor shall assist with preparation of a written Comprehensive Annual Financial Report (CAFR) to be presented to the City Council. The CAFR shall be prepared in accordance with generally accepted accounting principles (GAAP) and shall be presented annually to the Government Finance Officers Association (GFOA) for evaluation and consideration for the Certificate of Achievement for Excellence in Financial Reporting. 2. Availability of Reports. The comprehensive annual financial report shall be made available to the elected officials, bond rating agencies, creditors and citizens. 12 Exhibit B FY 14 - 15 3. Internal Reporting. The Finance Department shall prepare internal financial reports, sufficient to plan, monitor, and control the City's financial affairs. IX. INVESTMENTS AND CASH MANAGEMENT A. DEPOSITORY BANK. A Depository Bank shall be selected by the City Council for a two-year period, and may be renewed in accordance with the Public Funds Investment Act. A request for proposal shall be used as the means of selecting a Depository Bank. The Depository Bank shall specifically outline safekeeping requirements. B. DEPOSITING OF FUNDS. The Finance Director shall promptly deposit all City funds with the Depository Bank in accordance with the provisions of the current Bank Depository Agreement and the City Council approved Investment Policies. Investments and reporting shall strictly adhere to the City Council approved Investment Policies. C. INVESTMENT POLICY. All funds shall be invested in accordance with the approved investment policy. Investment of City funds emphasizes preservation of principal. Objectives are, in order, safety, liquidity and yield. A procedures manual shall be approved by the Finance Committee. D. MONTHLY REPORT. A monthly cash and investment report shall be prepared. X. ASSET MANAGEMENT A. FIXED ASSETS AND INVENTORY. A fixed asset of the City is defined as a purchased or otherwise acquired piece of equipment, vehicle, furniture, fixture, capital improvement, infrastructure addition, or addition to existing land, buildings, etc. A fixed asset's cost or value is $5,000 or more, with an expected useful life greater than one year. Improvements and infrastructure values are $25,000 or more in cost with a useful life or extension of five years. B. MAINTENANCE OF PHYSICAL ASSETS. The City will maintain its physical assets at a level adequate to protect the City's capital investment and minimize future maintenance and replacement costs. The budget will provide for the adequate maintenance and the orderly replacement of fixed assets. C. OPERATIONAL PROCEDURES MANUAL. Records shall be purged that do not meet the capitalization criteria and operational procedures shall be in accordance with a fixed asset records procedure manual. D. SAFEGUARDING OF ASSETS. The City's fixed assets will be reasonably safeguarded and properly accounted for. Responsibility for the safeguarding of the City's fixed assets lies with the Department Head in whose department the fixed asset is assigned. E. MAINTENANCE OF RECORDS. The Finance Department shall maintain the records of the City's fixed assets including description, cost, department of responsibility, date of acquisition and depreciation where applicable. Records of land and rights-of-way shall be maintained in the Planning & Development Department. 13 Exhibit B FY 14- 15 F. ANNUAL INVENTORY. An annual inventory of assets shall be performed and accounted for by each department using guidelines established by the Finance Department. Such inventory shall be performed by the Department Head or the designated agent. The Department Head shall use a detailed listing and shall be responsible for a complete review of assigned fixed assets. A signed inventory list shall be returned to the Finance Department. G. INFRASTRUCTURE MAINTENANCE. The City recognizes that deferred maintenance increases future capital costs. Funds shall be included in the budget each year to maintain the quality of the City's infrastructure. Replacement schedules should be developed in order to anticipate this inevitable ongoing and obsolescence of infrastructure. H. SCHEDULED REPLACEMENT OF ASSETS. As a part of the ongoing replacement of assets, the City has established Equipment Replacement Funds. These funds charge the user funds, based on the estimated replacement cost and estimated life of the equipment. The City maintains fleet and computer replacement funds. XI. DEBT MANAGEMENT A. DEBT ISSUANCE. The City shall issue debt when the use of debt is appropriate and specifically approved by the City Council and expenditure of such monies shall be in strict accordance with the designated purpose. B. ISSUANCE OF LONG-TERM DEBT. The issuance of long-term debt is limited to use for capital improvements or projects that cannot be financed from current revenues or resources and future citizens will receive a benefit from the improvement. Debt may be issued for the purposes of purchasing land or rights-of-way and/or improvements to land, street improvements, or construction projects to provide for the general good. For purposes of this policy, current resources are defined as that portion of fund balance in excess of the required reserves. The payback period of the debt will be limited to the estimated useful life of the capital projects or improvements. C. The City shall strive to schedule debt issues to take advantage of the small issuer status designation in regard to Federal Arbitrage laws. D. PAYMENT OF DEBT. When the City utilizes long-term debt financing it will ensure that the debt is financed soundly by realistically projecting the revenue sources that will be used to pay the debt; and financing the improvement over a period not greater than the useful life of the improvement. E. TYPES OF DEBT. 1. General Obligation Bonds (G.O.$). General obligation bonds shall be used only to fund capital assets of the general government, and not used to fund operating needs of the City. General obligation bonds are backed by the full faith and credit of the City as well as the ad valorem tax authority of the City. The term of a bond issue shall not exceed the useful life of the asset(s) funded by the bond issue. General obligation bonds must be authorized by a vote of the citizens of the City of Huntsville. 2. Revenue Bonds (R.B.$). Revenue bonds shall be issued as determined by City 14 Exhibit B FY 14- 15 Council to provide for the capital needs of any activities where the capital requirements are necessary for continuation or expansion of a service which produces revenue and for which the asset may reasonably be expected to provide for a revenue stream to fund the debt service requirements. The term of the obligation may not exceed the useful life of the asset(s) to be funded by the bond issue. 3. Certificates of Obligation (C.O.$). Certificates of obligation may be used in order to fund capital assets. Debt service for C.O.s may be either from general revenues or backed by a specific revenue stream or streams or by a combination of both. C.O.s may be used to fund capital assets where full bond issues are not warranted as a result of the cost of the asset(s) to be funded through the instrument. Infrastructure and building needs may also be financed with Certificates of Obligation, after evaluation of financing alternatives by the City's Financial Advisor. The term of the obligation may not exceed the useful life of the asset(s) to be funded by the proceeds of the debt issue. 4. Tax Anticipation Notes. Tax Anticipation Notes may be used to fund capital assets of the general government or to fund operating needs of the City. Tax Anticipation Notes are backed by the full faith and credit of the City as well as the ad valorem tax authority of the City. The term of a note issue shall not exceed the useful life of the asset(s) funded by the debt issued or seven years whichever is less. 5. Capital Lease. Capital leases may be used to fund capital assets with shorter lives (generally less than 10 years) for vehicles, equipment and software. The term shall not exceed the useful life of the assets. F. METHOD OF SALE. The City shall use a competitive bidding process in the sale of bonds and certificates of obligation unless some other method is specifically agreed to by City Council. G. FINANCIAL ADVISOR. The Finance Committee will recommend to the City Council a financial advisor to oversee all aspects of any bond issue. H. ANALYSIS OF FINANCING ALTERNATIVES. Staff will explore alternatives to the issuance of debt for capital acquisitions and construction projects. These alternatives will include, but not be limited to, 1) grants in aid, 2) use of reserves, 3) use of current revenues, 4) contributions from developers and others, 5) leases, and 6) impact fees. I. DISCLOSURE. Full disclosure of operations shall be made to the bond rating agencies and other users of financial information. The City staff, with the assistance of financial advisors and bond counsel, shall prepare the necessary materials for presentation to the rating agencies, and shall aid in the production of Offering Statements. J. DEBT STRUCTURING. The City will generally issue debt for a term not to exceed 20 years. The City will exceed a 20-year term only upon recommendation of the City's Financial Advisor and in no case shall the term of the debt issue exceed the life of the asset acquired. The repayment schedule shall approximate level debt service unless operational matters dictate otherwise or if market conditions indicate a potential savings could result from modifying the level payment stream. Consideration of market factors, including tax-exempt qualification, and minimum tax alternatives will be given during the structuring of long-term debt instruments. 15 Exhibit B FY 14 - 15 K. FEDERAL REQUIREMENTS. The City will maintain procedures to comply with arbitrage rebate and other Federal requirements. L. BIDDING PARAMETERS. The notice of the sale of bonds will be carefully constructed so as to ensure the best possible bid for the City, in light of the existing market conditions and other prevailing factors. Parameters to be examined include: • Limits between lowest and highest coupons • Coupon requirements relative to the yield curve • Method of underwriter compensation, discount or premium coupons • Use of bond insurance • Call provisions XII.INTERNAL CONTROLS A. WRITTEN PROCEDURES. Wherever possible, written procedures shall be established and maintained by the Finance Department for all functions involving cash handling and/or accounting throughout the City. These procedures shall embrace the general concepts of fiscal responsibility set forth in this policy statement. B. DEPARTMENT HEAD RESPONSIBILITIES. Each Department Head is responsible to ensure that good internal controls are followed throughout the Department, that all Finance Department directives or internal controls are implemented, and that all independent auditor internal control recommendations are addressed. C. COMPUTER SYSTEM/DATA SECURITY. The City shall provide security of its computer system and data files through physical security and appropriate backup procedures. A disaster recovery plan shall be developed by the Information Services Department. Computer systems shall be accessible only to authorized personnel. XIII. RISK MANAGEMENT A. RESPONSIBILITY. A risk manager is responsible for the general risk liability insurance risk management function of the City. Recommendations for deductibles, limits of coverage, etc. shall be presented to the Finance Committee for review. B. EMPLOYEE SAFETY. The City will aggressively pursue opportunities to provide for employee safety. The goal will be to minimize the risk of loss, with an emphasis on regularly scheduled safety programs. C. SELF INSURED HEALTH INSURANCE. A detailed annual report shall be given to the Finance Committee that includes available funds, expected payouts in the plan, reinsurance costs and a rate recommendation. The presentation shall include a proposed budget for a period coinciding with the City's fiscal year. XIV. ROLE OF THE FINANCE COMMITTEE OF CITY COUNCIL The finance committee appointed by City Council upon recommendation of the Mayor shall have responsibilities including: A. Monitoring and recommending changes to the Investment Policy; B. Managing the audit; C. Review of liability insurance coverage's. D. Oversight of budget and finances 16 (Exhibit C) (FY 14-15) CITY OF HUNTSVILLE, TEXAS INVESTMENT & BANKING POLICIES ............................................................ ------- ----------------------------------------------- io/i/zoia (Exhibit C) (FY 14-15) TABLE OF CONTENTS PART I-INVESTMENT POLICY I. Purpose of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. Scope of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 III. Designation of Investment Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 IV. Investment Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 V. Ethics and Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 VI. Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 VII. Market Yield (Benchmark) /Market Price of Investments . . . . . . . . . . 3 VIII. Investment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 IX. Prudence/Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 X. Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 XI. Maximum Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 XII. Purchase Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4-5 XIII. Collateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 XIV. Safekeeping and Custody . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 XV. Internal Control/Compliance Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 XVI. Authorized Financial Dealers and Institutions . . . . . . . . . . . . . . . . . 5 XVII. Authorized Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9 XVIII.Investment Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-11 XIX. Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 XX. Policy Adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 PART II-BANKING SERVICES POLICY I. Establishment of Banking Depository . . . . . . . . . . . . . . . . . . . . . . . 11-12 II. Collateralization Requirements/Safekeeping and Custody . . . . 13-14 PART III-INVESTMENT POLICY-POST EMPLOYMENT BENEFIT PLAN(aka PEB Trust) I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 II. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 III. Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 IV. Investment Guideline for Asset Management . . . . . . . . . . . . . . . . . . 20 V. Performance Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 VI. Investment Manager Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 VII. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Attachment A Glossary Appendix I- State Law List of Authorized Investments 2 (Exhibit C) (FY 14-1S) CITY OF HUNTSVILLE INVESTMENT AND BANKING POLICIES PART I-INVESTMENT POLICY I. PURPOSE OF POLICY This policy is adopted by the City Council to direct and limit the financial affairs of the City of Huntsville. It is the policy of the City of Huntsville to invest public funds in a manner which j will provide the maximum security of principal invested at a reasonable market rate of return, with consideration of the City's risk constraints and cash flow needs. Receipt of a market rate of return will be secondary to the requirements for safety and liquidity. It is the intent of the City to be in compliance with all state and local statutes, including the Texas Public Funds Investment Act. IL SCOPE OF POLICY This policy applies to all funds or financial resources available for investment by the City accounted for in the City of Huntsville, Texas Comprehensive Annual Financial Report and include the General Fund, General Obligation Debt Service Fund, Special Revenue Funds, Enterprise Funds, Permanent Funds, Internal Service Funds, the City's self-funded Health Insurance Fund, and will include any new fund created by the City Council unless specifically exempted by City Council. These policies do not, however,govern funds that are managed under separate investment programs such as retirement funds, pension funds, deferred compensation funds and certain private donations,that are maintained as required by federal and state law, other local policies, or donor stipulations. III. DESIGNATION OF INVESTMENT OFFICERS The authority to manage the City of Huntsville investment program is derived from State Statute, the City Charter, and these investment policies. Management responsibility for the investment program is hereby delegated to the Finance Director, designated as Investment Officer for the City of Huntsville,who shall establish written procedures for the operation of the investment program consistent with this investment policy and shall be responsible for the operation of the investment program consistent with this investment policy. The Director of Finance, under general supervision of the City Manager, shall direct the cash management program of the City. (See City Charter Art. XI). The City Manager and/or Director of Finance may deposit, withdraw, invest, transfer, and manage City funds. The Investment Officer shall report to the Finance Committee of City Council. The Finance Committee, appointed by the Mayor, shall be responsible for monitoring, reviewing and making recommendations regarding the City's investment program to the City Council. The Director of Finance may authorize persons to engage in investment transactions and approve wire transfers used in the process of investing. IV. INVESTMENT TRAINING The Finance Director shall attend investment training on an annual basis that includes education in investment controls, security risks, strategy risks, market risks and general compliance with state law. Not less than once in a two-year period,the investment officer shall receive not fewer than ten hours of instruction relating to investment responsibilities. 3 (Exhibit C) (FY 14-15) V. ETHICS AND CONFLICT OF INTEREST Officers and employees involved in the investment function shall refrain from personal business activity that could conflict with proper execution of the investment program, or that could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the Finance Committee of the City Council any material financial interest in financial institutions that conduct business with the City, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City of Huntsville, particularly with regard to the time of purchases and sales. Investment officers shall comply with Texas Government Code section 2256.005(I) relating to personal business relationships with a business organization offering to engage in an investment transaction with the City of Huntsville. VI. OBJECTIVES The objectives of the City's investment policies are, in order of priority: preservation and safety of principal, liquidity and yield/return on investments. The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. A. Preservation and safety of principal shall be the foremost objective of the City's investment program. Preservation and safety of principal shall be obtained through protection of principal and safekeeping. 1. The City shall control risk of loss due to the failure of a security issuer or guarantor. Such risk shall be controlled by investing in the safest types of securities, by qualifying the financial institution with whom the City will transact, and by portfolio diversification. 2. The City shall also control risks of loss by requiring collateral for depository bank funds to be held by a financial institution separate from the depository bank. B. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. A security may be liquidated to meet unanticipated cash requirements, to redeploy cash into other investments expected to outperform current holdings, or to otherwise adjust the City's portfolio. C. Yield/Return on Investments. The City of Huntsville investment portfolio is designed with the objective of attaining a rate of return throughout budgetary and economic cycles commensurate with the City of Huntsville investment risk constraints and the cash flow characteristics of the portfolio. Investments, other than the overnight cash concentration account, shall be made in permitted obligations at yields equal to or greater than the bond equivalent yield on United States Treasury obligations of comparable maturity. VII. MARKET YIELD(BENCHMARK) The market yield benchmark shall be a yield equal to the bond equivalent yield on United States Treasury obligations of comparable maturity. If selling a security prior to a fixed date maturity at a gain or loss, the investment officers shall notify the Finance Committee of City Council at its next meeting. The City shall monitor the 4 (Exhibit C) (FY 14-15) market price of investments as of the end of each month through reports provided by brokers and/or the use of a purchased service or available software. VIII. INVESTMENT STRATEGIES The City of Huntsville shall generally invest funds with the intent to hold to maturity. Investment selection shall be based on legality, appropriateness, liquidity, and risk/return considerations. Monies designed for immediate expenditure should be passively invested to allow for liquidity to pay upcoming disbursements, (payroll, debt service payments, payables, etc.), and allow for structuring the investment portfolio on a "laddered" basis. The City of Huntsville maintains portfolios that utilize four specific investment strategies designed to address the unique characteristics of the fund groups represented in the portfolios: A. Operating Funds have as their primary objective the assurance that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure that will experience minimal volatility during economic cycles. The weighted average days to maturity of these funds shall be less than 365 days and shall be calculated using the stated final maturity date for each security. B. Debt Service Funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligations on the required payment date. Securities purchased shall not have a stated final maturity date that exceeds the debt service payment date. C. Debt Service Reserve Funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund from securities with a low degree of volatility. In addition to the bond ordinance specific to an individual bond issue, which sets out investment parameters, securities shall have a maturity of less than five years. Investments shall be limited to obligations of the United States or its agencies and instrumentalities or in approved investment pools. D. Special Projects or Special Purpose Fund portfolios will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held should not exceed the estimated project completion date. A singular repurchase agreement may be utilized if disbursements are allowed in the amount necessary to satisfy any expenditure request. This investment structure is commonly referred to as a flexible repurchase agreement. IX. PRUDENCE/STANDARD OF CARE Investments shall be made with the judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. In determining whether the City's investment officers have exercised prudence with respect to an investment decision, the determination shall be made taking into consideration, the investment of all funds, or funds under the City's control, over which they have responsibility rather than a consideration as to the prudence of a single investment, and whether the investment decision is consistent with this investment policy. X. DIVERSIFICATION The City of Huntsville will diversify its investments by security type and institution. With the exception of U.S. Treasury securities and authorized pools, no more than 50% of the total 5 (Exhibit C) (FY 14-15) investment portfolio will be invested in a single security type or with a single financial institution. Diversification will also include terms of maturity as well as instrument type and issue. Investments shall not exceed more than 20% of the capitalization of the financial institution other than the main depository. Bond proceeds may be invested in a single security or investment which exceeds the City's diversification limits if the Investment Officer, with concurrence of the Finance Committee, determine that such an investment is necessary to comply with Federal arbitrage restriction or to facilitate arbitrage record keeping and calculation. XI. MAXIMUM MATURITIES In order to stabilize yield for budgeting purposes, the City shall maintain a portion of its investments in obligations with maturities greater than one year. No investment shall be made with a maturity greater than five years without express authority of the Finance Committee of the City Council. In determining the amount of investment longer than one year, cash flow and unallocated reserve funds will be evaluated. The maximum dollar-weighted average maturity allowed based on the stated maturity date for the portfolio shall not exceed 2 years. XII. PURCHASE PROCEDURES A. The City may, without further bidding, utilize any program established through the Texas Inter-local Cooperation Act that invests in funds authorized by the Public Funds Investment Act; or purchase certificates of deposit or other approved securities through its primary depository bank. When possible, other investments should be made after competitive bids are solicited. Competitive bids may be solicited orally, in writing, electronically, or in any combination of these methods. An offer worksheet shall be kept for each bid transaction showing the name of dealer/bank contacted, amount of principal to be invested, yield quoted, type of investment, fund designation, maturity date, issue date, length of time invested, and cusip number. Purchase of a security shall not be made at a price that exceeds the existing market value of the security. The delivery shall be made under normal and recognized practices in the securities and banking industries, including the book entry procedure of the Federal Reserve Bank. The deposit shall be held in the name of the City of Huntsville and shall be evidenced by a trust receipt of the bank with which the securities are deposited. XIII. COLLATERALIZATION Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse) agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be at least 102% of the market value of principal and accrued interest. The City chooses to limit collateral to obligations of the United States or its agencies and instrumentalities, and direct obligations of the State of Texas or its agencies and instrumentalities. Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. Collateral substitution is allowed. XIV. SAFEKEEPING AND CUSTODY All security transactions, including collateral for repurchase agreements entered into by the City of Huntsville shall be conducted on a delivery vs. payment(DVP) basis. Securities shall be held by a third party custodian. Safekeeping receipts shall be required. 6 (Exhibit C) (FY 14-15) XV. INTERNAL CONTROL/COMPLIANCE AUDIT A system of internal controls shall be established. As part of the City's annual audit, an independent auditor shall review internal controls, investment practices, investment performance, quarterly reports prepared by the investment officers and the result of the review shall be reported to the Finance Committee of the City Council. A compliance audit of management control on investments and adherence to investment policies is to be included. XVI. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The City Council shall approve at least three broker/dealers upon recommendation of the Finance Committee for use by the designated investment officers. The broker/dealers may include primary dealers and regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule). The selection process shall include a proposal process with potential broker/dealers providing a completed broker/dealer questionnaire, certification of having read the City of Huntsville investment policy, proof of National Association of Security Dealers certification and proof of state registration. The selected broker/dealers must provide a written instrument certifying that they have received and reviewed the City's Investment Policy and acknowledge that the business organization has implemented reasonable procedures and control, in an effort to preclude investment transactions conducted between the entity and the organization that are not authorized by the City's Investment Policy. An investment officer may not buy any securities from a firm that has not filed this instrument. An annual review of the financial condition and registrations of qualified bidders is to be conducted by the City Manager or Finance Director and a current audited financial statement is required to be on file for each broker/dealer that conducts transactions with the City. The Finance Committee shall review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. XVII. AUTHORIZED INVESTMENTS The City of Huntsville may invest only in the safest type of securities and in accordance with Texas state law (Appendix I). There are two general categories of authorized investments for the City of Huntsville: (1) investments which the designated investment officers may invest without prior approval from the Finance Committee; and, (2) investments that require prior Finance Committee approval. A. Authorized investments that do not require prior approval of Finance Committee: 1. Obligations of, or Guaranteed by, Governmental Entities: a. obligations of the United States or its agencies and instrumentalities; b. direct obligations of the State of Texas or its agencies and instrumentalities, C. other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and [its] instrumentalities; (Exhibit C) (FY 14-15) d. obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent. e. The following are not authorized investments under this section: 1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage- backed security collateral and pays no principal; 2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; 3) collateralized mortgage obligations that have a stated final maturity date greater than 10 years; and 4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 2. Certificates of Deposit: Certificates of deposit issued by state and national banks, or a savings bank or credit union that are: a. guaranteed or insured by the Federal Deposit Insurance Corporation, or comparable insurance entities or their successors; or b. secured in any other manner and amount provided by law for deposits of the City. C. secured through an authorized broker in accordance with the Public Funds Investment Act(PFIA). B. Authorized investments requiring prior approval of the Finance Committee: 1. Collateralized Mortgage Obligations (CMOs) directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States. The stated maturity date cannot be greater than 10 years and the interest rate cannot be determined by an index that adjusts opposite to the changes in a market index. 2. Repurchase Agreements "Repurchase agreement" means a simultaneous agreement to buy, hold for a specified time, and sell back at a future date obligations described by Texas Government Code section 2256.009(a)(1), at a market value at the time the funds are disbursed of not less than the principal amount of the funds disbursed. The term includes a direct security repurchase agreement and a reverse security repurchase agreement. The primary dealer and the City of Huntsville must sign a Master Repurchase Agreement which details acceptable types of collateral; the standard for collateral custody and control; the collateral valuation and initial margin, accrued interest, a requirement of marking to market, and margin call; the method of transmitting security income; and, the condition for agreement termination and acceptable methods for delivery of securities and collateral. A fully collateralized repurchase agreement is an authorized investment if the 8 (Exhibit C) (FY 14-15) repurchase agreement has a defined termination date, is secured by obligations described by Texas Government Code section 2256.009(a)(1), and, requires the securities being purchased by the City to be pledged to the City, held in the City=s name, and deposited at the time the investment is made with the City or with a third party selected and approved by the City, and is placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in Texas. Notwithstanding any other law, the term of any reverse security repurchase agreement may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the i term of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. 3. Banker's Acceptances A banker's acceptance is an authorized investment if: (a)has a stated maturity of 270 days or fewer from the date of its issuance; (b)will be, in accordance with its terms, liquidated in full at maturity; (c) is eligible for collateral for borrowing from a Federal Reserve Bank; and (d) is accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less than A-1 or P-1 or an equivalent rating by at least one nationally recognized credit rating agency. 4. Commercial Paper Commercial paper is an authorized investment if it has a stated maturity of 270 days or fewer from the date of its issuance and is rated not less than A-1 or P-1 or an equivalent rating by at least two nationally recognized credit rating agencies or one nationally recognized credit rating agency and is fully secured by an irrevocable letter of credit issued by a bank organized and existing under the laws of the United States or any state. 5. Mutual Funds a. A no-load money market mutual fund is an authorized investment if (1) the mutual fund is registered with and regulated by the Securities and Exchange Commission; (2) provides the investing entity with a prospectus and other information required by the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) or the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.); (3) has a dollar-weighted average stated maturity of 90 days or fewer; and (4) includes in its investment objectives the maintenance of a stable net asset value of$1 for each share. b. In addition to a no-load money market mutual fund permitted as an authorized investment in Subsection (a), a no-load mutual fund is an authorized investment under this subchapter if the mutual fund: 1) is registered with the Securities and Exchange Commission; 2) has an average weighted maturity of less than two years; 3) is invested exclusively in obligations approved by this 9 (Exhibit C) (FY 14-15) subchapter; 4) is continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent; and 5) conforms to the requirements set forth in Texas Government Code sections 2256.016(b) and (c) relating to the eligibility of investment pools to receive and invest funds of investing entities. C. The City is not authorized by this section to: 1) invest in the aggregate more than 80 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in money market mutual funds described in Subsection (a) or mutual funds described in Subsection(b),either separately or collectively; 2) invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in mutual funds described in Subsection(b); 3) invest any portion of bond proceeds, reserves and funds held for debt service, in mutual funds described in Subsection(b);or 4) invest its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund described in Subsection (a) or (b) in an amount that exceeds 10 percent of the total assets of the mutual fund. C. Effect of Loss of Required Rating An investment that requires a minimum rating under this subchapter does not qualify as an authorized investment during the period the investment does not have the minimum rating. The City shall take all prudent measures that are consistent with its investment policy to liquidate an investment that does not have the minimum rating. XVIII. INVESTMENT POOLS A. The City may invest in eligible investment pools as defined by the Public Funds Investment Act, which meet criteria outlined in chapter Texas Government Code section 2256.016 and section 2256.019. The Council shall authorize participation in the pool by resolution or ordinance. B. The City must receive from the pool an offering circular or other similar disclosure instrument that contains, at a minimum,the following information: 1. a description of eligible investment securities; 2. the maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool; 3. the maximum stated maturity date any investment security within the portfolio has; 4. a written statement of investment policy and objectives; 5. the size of the pool; 10 (Exhibit C) (FY 14-15) 6. the names of the members of the advisory board of the pool and the dates their terms expire; 7. the custodian bank that will safe keep the pool's assets; a description of how the securities are safeguarded (including the settlement process) and how often the securities are priced; 8. whether the intent of the pool is to maintain a net asset value of one dollar and the risk of market price fluctuation; 9. whether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment; 10. the name and address of the independent auditor of the pool and how often the program is audited; 11. the requirements to be satisfied for an entity to deposit funds in and withdraw funds from the pool including how often and what size deposits and withdrawals are allowed, and any deadlines or other operating policies required for the entity to invest funds in and withdraw funds from the pool; and; 12. the performance history of the pool, including yield, average dollar-weighted maturities, and expense ratios; 13. a description of interest calculations and how it is distributed and how gains and losses are treated; 14. a schedule for receiving statements and portfolio listings; 15. an explanation of whether reserves, retained earnings, etc. are utilized by the pool; 16. a fee schedule, including when and how it is assessed; 17. an explanation of whether the pool is eligible and/or will it accept bond proceeds. C. To maintain eligibility to receive funds from and invest funds on behalf of an entity under this chapter, an investment pool must furnish to the investment officer or other authorized representatives of the entity: 1. investment transaction confirmations; and 2. a monthly report that contains, at a minimum,the following information: a. the types and percentage breakdown of securities in which the pool is invested; b. the current dollar-weighted average maturity, based on the stated maturity date, of the pool; C. the current percentage of the pool=s portfolio in investments that have stated maturities of more than one year; d. the book value versus the market value of the pool=s portfolio, using amortized cost valuation; e. the size of the pool; f. the number of participants in the pool; 11 (Exhibit C) (FY 14-15) g. the custodian bank that is safekeeping the assets of the pool; h. a listing of daily transaction activity of the entity participating in the pool; i. the yield and expense ratio of the pool; j. the portfolio managers of the pool; and k. any changes or addenda to the offering circular. I D. The City by contract may delegate to an investment pool the authority to hold legal title as custodian of investments purchased with its local funds. E. "Yield" shall be calculated in accordance with regulations governing the registration of open-end management investment companies under the Investment Company Act of 1940, as promulgated from time to time by the Federal Securities and Exchange Commission, XIX. REPORTING Not less than quarterly, the Finance Director shall prepare and submit to the City Council a written report of investment transactions for the preceding reporting period. The report shall describe in detail the investment position of the City on the date of the report, and state compliance of the investment portfolio, as it relates to the investment strategy and investment policies. The report shall contain a summary statement prepared in compliance with generally accepted accounting principles of each pools fund group that states the beginning market value for the reporting period, additions and changes to the market value during the period, the ending market value for the period, a comparison to the benchmark bond equivalent yield or United States Treasury obligation of comparable maturity and fully accrued interest for the reporting period. The report shall state the book value, market value, and maturity date of each separately invested asset as of the beginning and end of the reporting period by the type of security and fund type invested. The fund for which each individual investment was acquired shall be reported. The report shall be presented to the Council and shall be signed by the Finance Director within 21 days after the end of the period. On a monthly basis, the Finance Director shall provide to the City Council, in summary form, a report showing by fund,total cash, monies in investment pools and securities by type and maturity date, and a summary of interest earnings. XX. POLICY ADOPTION The City of Huntsville investment policy shall be adopted by ordinance of the City Council. The policy shall be reviewed annually by the Finance Committee, and any modifications made thereto must be approved by the City Council. Annually, City Council shall adopt a resolution or include in the budget ordinance information stating that it has reviewed the investment policy and investment strategies. The resolution/ordinance shall record any changes made to the investment policy or investment strategies. PART II-BANKING SERVICES POLICY The City Council shall approve a financial institution/institutions to act as a depository bank for a two year period. I. ESTABLISHMENT OF BANKING DEPOSITORY A. The City Council shall select a bank, credit union or savings association as its primary depository for normal banking transactions. In addition, the City may designate one or more other depositories for investment transactions. 12 (Exhibit C) (FY 14-15) B. The City's primary banking depository shall have a branch located in the City. C. Not more than four weeks and not less than one week before the City Council considers applications for its depository, the City shall publish at least once in the City's official newspaper a notice of the meeting at which applications are to be received. D. A bank, credit union or savings association desiring to be selected as the city depository must deliver its application to the City Secretary on or before the time stated in the notice. The application shall be accompanied by an affidavit disclosing conflicts of interest, if any, that apply to the selection of the depository. The City's Finance Committee may, as directed by City Council, review the applications and prepare a recommendation regarding the selection of depositories for Council. I E. The City Council may, after considering the application and the recommendation, if any, of its staff and/or Finance Committee: 1. select as city depositories one or more banks, credit unions or savings associations that offer the most favorable terms and conditions for the handling of the municipal funds; or 2. reject any or all of the applications. F. The City shall retain the right to withdraw any municipal funds deposited in a depository that are not immediately required to pay obligations of the City and invest those funds as outlined in these Investment and Banking Policies. G. The Director of Finance shall immediately deposit in the depository to the credit of the City any money received. H. Except as provided for wire transfers to other depositories or ACH transfers,the funds of the City may be paid out of a depository only on the checks of the City. I. Checks must be signed by the Mayor and either the City Manager or Finance Director. A facsimile signature may be used by the Mayor and/or City Manager. J. Checks must be authorized by the Mayor, City Manager, or Finance Director. K. No check shall be drawn on a special fund created to pay bonded indebtedness other than to pay principal or interest on the indebtedness, or to invest the fund as provided by these polices or law. L. All checks shall be payable by the depository at its place of business. M. The Director of Finance may, with approval of Council, pay a bond, coupon, or other indebtedness of the City at a place other than the depository if by its terms the indebtedness is payable on maturity at the other location. IL COLLATERALIZATION REQUIREMENTS/SAFEKEEPING AND CUSTODY A. All public funds held in a checking account or time deposit at a bank or other depository shall be secured by eligible security. An eligible security means: 13 (Exhibit C) (FY 14-15) 1. a surety bond; 2. investment securities (obligations of the United States or its agencies and instrumentalities); or 3. ownership or beneficial interest (but not merely an option contract to j purchase or sell)any authorized investment. B. The market value of the collateral shall equal at least 102% of the cash value of a repurchase agreement. Otherwise, market value of the investment securities used as collateral should be at least equal to the deposits of public funds increased by the amount of any accrued interest and reduced by the extent of insurance through an agency of the United States. C. Safekeeping 1. A depository for the City may deposit investment securities pledged to secure deposits of public funds with a custodian that the City has approved as a custodian and that is either: a. a state or national bank domiciled in the State of Texas and which has a capital stock and permanent surplus of not less than$5 million. b. the Texas Treasury Safekeeping Trust Company; or C. a Federal Reserve Bank or its branches. 2. The securities shall be held in trust by the custodian to secure the deposit of public funds of the City in the depository pledging the securities. 3. On receipt of the investment securities, the custodian shall immediately, by book entry or otherwise, identify on its books and records the pledge of the securities to the City and shall promptly issue and deliver to the Director of Finance of the City trust receipts for the securities pledged. The security evidenced by the trust receipts is subject to inspection by the City or its agents at any time. 4. A custodian holding in trust investment securities of a depository may deposit the pledged securities with a permitted institution. These securities shall be held by the permitted institution to secure funds deposited by the City in the depository pledging the securities. On receipt of the securities, the permitted institution shall immediately issue to the custodian an advice of transaction or other document evidencing the deposit of the securities. When the pledged securities held by a custodian are deposited, the permitted institution may apply book entry procedures to the securities. The records of the permitted institution shall at all times reflect the name of the custodian depositing the pledged securities. The trust receipts the custodian issues to the City shall indicate that the custodian has deposited with the permitted institution the pledged securities held in trust for the depository pledging the securities. 5. The custodian shall maintain separate, accurate, and complete records relating to the pledged investment securities and all transactions relating to the pledged investment securities. D. The Director of Finance shall inform its depositories of significant changes in the amount or activity of public funds reasonably in advance of such changes. 14 (Exhibit C) (FY 14-15) Part 3 Investment Policy - City of Huntsville Post-Employment Benefit Plan (aka "City of Huntsville PEB Trust') 15 (Exhibit C) (FY 14-15) Section 1 INTRODUCTION The City of Huntsville Post Employment Benefit Plan (the "Plan"), a retirement plan qualified under Internal Revenue Code Section 115, provides retirement benefits to eligible employees of City of Huntsville. The assets of the Plan are held in a tax-exempt trust for the benefit of the Plans' participants and beneficiaries. The objective of the Plan is to provide employees with a source of retirement income from accumulated contributions and investment returns. The Pension Plan Finance Committee (the "Finance Committee") is responsible for overseeing and monitoring the investment of the Plans' assets. It will generally be responsible for: A. Promulgating the Plans' Investment Policy Statement. B. Selecting the investment funds in which the Plans' assets will be invested and/or the investment managers who will be responsible for investing the Plans' assets. C. Reviewing and making changes in the investment funds and/or investment managers for compliance with the Investment Policy Statement. D. Making revisions to the Investment Policy Statement to reflect changing conditions within the Plans or the investment environment or to make it more effective. The Finance Committee is authorized to retain professional investment advisory services to provide advice with respect to the investment and monitoring of the Plans' assets under the guidance of the Finance Committee. This Investment Policy Statement is intended to set forth the general policies that the Finance Committee will apply in selecting, monitoring and modifying the investments and/or investment managers for the Plans. While the Finance Committee intends for this Investment Policy Statement to assist the Finance Committee in satisfying its fiduciary duties and in making prudent investment decisions, no investment results or performance is, or can be, guaranteed; and no such guarantee is intended. 16 (Exhibit C) (FY 14-15) Section 2 PURPOSE This Investment Policy Statement contains guidelines regarding the investment of the assets held in trust for the Plan to assist the members of the Finance Committee in effectively selecting, monitoring and evaluating the investments and/or investment managers for the Plan. The purposes of this Investment Policy Statement are to: A. Set forth the investment objectives, policies and guidelines, which the Finance Committee judges to be appropriate and prudent, in consideration of the needs of the Plan. B. Establish the criteria against which the investments and/or the investment management organizations selected by the Finance Committee are to be measured. C. Set forth the target asset mix for the investment of the Plans' assets. D. Serve as a review document to guide the Finance Committee's ongoing oversight of the investment of the Plans' assets. 17 (Exhibit C) (FY 14-15) Section 3 INVESTMENT OBJECTIVES It is the intention of the Finance Committee to build and maintain the Plans' trust through employer contributions that satisfy legal requirements and investment returns. The Finance Committee expects that the amount of investment income plus capital appreciation from the Plans' trust combined with contributions to the trust will exceed the amount of pension payments. Over shorter periods, the Finance Committee understands that at times investment income plus capital appreciation plus contributions to the trust may, in total, be less than the amount of pension payments. Because of the long-term nature of the Plans' obligations, the Finance Committee's intent is to consider the following goals in managing the trust: A. Long-term (i.e., five years and more) performance objectives; B. Maintenance of cash reserves sufficient to pay benefits under the Plan; and C. Achievement of the highest long-term rate of return practicable without taking excessive risk that could jeopardize the Plans' funding policy or subject the Plans' sponsors to undue funding volatility. The specific investment performance objective is for the trust to achieve a rate of investment return over any five-year period that both: A. Meets or exceeds the Plans' actuarial interest rate assumption, B. Exceeds by 2% the rate of inflation (as measured by the Consumer Price Index for all Urban Consumers), C. Exceeds the return of the following custom market index: 0% cash, 38% S&P 500, 8% Russell 2000 index, 8% Russell Midcap index, 21% EAFE index, and 25% Barclays Capital Aggregate Bond index. In carrying out the foregoing policy and objectives, the trust will be invested in accordance with the guidelines set forth in Section 4. 18 (Exhibit C) (FY 14-15) Section 4 INVESTMENT GUIDELINES FOR ASSET MANAGEMENT The assets of the Plans will be invested in a manner consistent with generally accepted standards of fiduciary responsibility. The Finance Committee will act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Finance Committee will discharge its duties with respect to the investment of the trust solely in the interest of the participants and beneficiaries of the Plan. The Finance Committee will select appropriate investment alternatives using the following criteria: A. The Finance Committee may select investment managers from one or more of the following: 1) Mutual fund management companies; 2) Banks; 3) Registered investment advisory firms; and 4) Insurance companies. B. Each investment manager must clearly articulate for the Finance Committee the investment strategy that will be followed and document that the strategy has been successfully adhered to over time. C. Each investment manager must be able to provide for the Finance Committee historical quarterly performance numbers calculated on a time-weighted basis and reported net of all fees. D. Each investment manager must provide for the Finance Committee volatility measurements so that an appropriate risk/return profile can be evaluated. E. Each investment manager must be able to provide for the Finance Committee information on its history, key personnel, fee schedules and expenses, and current investment exposure. F. A City of Huntsville designated Investment Officer may change the Target Allocation and ranges and shall report any change to the Finance Committee The Finance Committee recognizes that the trust's long-term investment performance will be greatly affected by the mix of the asset 19 (Exhibit C) (FY 14-15) classes in which it is invested; accordingly, because of the policy and objectives stated in Section 3, the trust's asset allocation will favor equity investments. Specifically, the Finance Committee has identified the following asset classes to be appropriate for investment by the trust. In addition, the Finance Committee has defined the following ranges to be used as parameters of investment percentages the Plans' assets: RANGE MINIMUM MAXIMUM TARGET Fixed Income Assets: 20% 30% 25% Large cap 33% 43% 38% Mid cap 3% 13% 8% Small cap 3 /0 13 /0 8% o 0 International 16% 26% 21% 0 0 Cash/Money Market Assets 0% 5/0 0% Total 100% Managers that manage a separate account for the trust shall have full discretion over portfolio investment decisions, subject to the following guidelines and restrictions. To the extent that commingled or mutual fund vehicles are utilized, the investment policies of those vehicles are the operative documents established herein: A. Investment managers will be delegated full discretion to exercise all voting rights including, but not limited to, voting proxies. B. For purposes of the foregoing, real estate, and securities convertible to common stock shall be classified as equity assets; money held by an insurance company in its general account shall be classified as fixed income assets 20 (Exhibit C) (FY 14-15) C. Each investment manager will diversify each asset class appropriately and will seek to moderate volatility and risk as is appropriate for the asset class. The investment manager will not invest in commodities, private placements, or letter stock. The investment manager will not engage in non-covered short sales or margin trading. Transactions consisting of the purchase or sale of futures or options contracts may be permitted to the extent that they are used to diversify or equitize the portfolio and not used as speculative investments. Speculative investment in these derivatives is not permitted without the previous written approval of the Finance Committee. D. The investment manager must ensure, to the extent practicable, that all equity transactions (whether agency or principal) are executed at competitive rates and all fixed income transactions are competitively bid and must explain in writing to the Finance Committee the reasons for any unusually high transaction costs. E. The investment manager, when practicable, will disclose to the Finance Committee any significant change in the investment manager's personnel, organization, ownership, or asset management policy or method. 21 (Exhibit C) (FY 14-15) Section 5 PERFORMANCE EVALUATION The investment performance of the individual investments and/or investment managers will be monitored quarterly and reviewed at least annually relative to the objectives and guidelines described herein. The investment performance evaluations may include performance analyses and comparisons with the appropriate indices and investment fund universes. The Finance Committee does not expect to respond to short-term investment developments, recognizing that the accumulation of value for eventual retirement benefit payout is generally a long-term objective and that investment competence must be measured over a complete market cycle. The Finance Committee, nevertheless, may act on interim qualitative judgments. Qualitative factors which will be reviewed on an ongoing basis include any fundamental changes in a manager's investment philosophy, organizational structure, financial condition (including any significant changes in total assets under management), personnel and fee structure. The Finance Committee has established as one of its investment fund and/or investment manager selection criteria that, as a general proposition, over a complete market cycle, each of the Plans' investment funds and/or investment managers should typically rank in the upper half of the universe of all active investment funds and/or active managers in the same asset class with similar investment objectives. Performance Review The investment options will be reviewed at least annually. Among other things, the performance review of the investment options may include the following: A. The measurement of investment returns. B. A comparison of investment returns to their appropriate benchmarks. C. A ranking of investment returns within their appropriate universes. D. The measurement of risk. E. An assessment of each investment's adherence to the stated policies and objectives. 22 (Exhibit C) (FY 14-15) Termination of Investment Options Reasons for considering replacing an investment and/or investment manager may include, but are not limited to: A. Significant under-performance relative to the appropriate benchmark. B. Significant under-performance relative to the appropriate universe average. C. Significant change in risk(increase or decrease). D. Change or loss of key personnel, relative to the significance of the particular investment. E. Significant increase or decrease in assets under management. F. A change in business practices. G. A change in investment style or discipline. H. Failure to alert the Finance Committee to pertinent changes, lawsuits or regulatory violations. I. Investing in non-approved securities. J. Identification by the Finance Committee of a more suitable investment option. Other Review The Investment Policy Statement will be reviewed at least annually to determine the continued appropriateness of the Investment Policy Statement in achieving the stated purpose. However, it is not expected that the Investment Policy Statement will change frequently. In particular, short-term changes in the financial markets will not require adjustments to the Investment Policy Statement. A review of the program concerning the diversity of options, the use of options, the growth of the program and any strategic planning concerning demographics will also be conducted periodically. The Finance Committee will receive a report on investment performance quarterly. Investment performance and results will be presented annually to the Council. 23 I (Exhibit C) (FY 14-15) Section 6 INVESTMENT MANAGER SELECTION The assets of the Plan are invested under the supervision of the Finance Committee. The Finance Committee has chosen to select investment managers from the following asset classes. In addition the Finance Committee has established an investment objective for each asset class and established appropriate benchmarks and universes to be used to evaluate the investment options. The Finance Committee understands that the indexes selected have no fees associated with their returns and the universe average is net of the fees of the underlying funds. The investment options are not required to exceed their benchmarks and universes every quarter, but are used as a basis for judging the appropriateness of the investment option selected over a full market cycle. The asset class, objective, benchmark and comparative universe are outlined in Attachment A. 24 (Exhibit C) (FY 14-15) Section 7 DEFINITIONS The following terms will have the following meanings: Investment Manager "Investment manager" means the asset manager or managers expressly authorized and empowered to cause its portion of the trust to be invested and reinvested in its sole discretion(but governed by the provisions of this Investment Policy Statement) within the asset class or classes for which it is employed to manage. Investment Return "Investment return" means investment income and realized and unrealized gains and losses, all net of investment fees and expenses. Market Cycle For purposes of this Investment Policy Statement a"market cycle" will be defined as a market peak-to-trough-to-peak(or a trough-to-peak-to- trough). Rate of Return "Rate of return"means the annual rate of investment return. Investment Officer "Investment Officer" refers to the council or charter designated officials with the responsibility of investing City funds. Investment officers are required to meet educational requirements under the Public funds Investment Act. This Statement of Investment Policy approved by the City Council of the City of Huntsville. Date: Approved by: 25 (Exhibit C) (FY 14-15) Attachment A A. Fixed Income Options Asset Class Objective Benchmark Universe Cash/Cash The investment objective of the The 3-Month Treasury Bill is N/A Equivalents Cash Option is to provide the benchmark. capital preservation. Intermediate Bond The investment objective of the The Barclays Capital The Bond Option selected will Bond Option is to provide Aggregate Bond Index is the be compared to a universe of income with a minor focus on benchmark. Intermediate-Term Bond capital growth. mutual funds. B. High Yield Bond Fund Asset Class Objective Benchmark Universe High Yield Bond The investment objective of the The Barclays Capital High The High Yield Bond Option High Yield Bond Fund is to Yield Bond Index is the will be compared to a seek high current income, benchmark. universe of High Yield Bond assuming greater risks mutual funds. including:Credit Risk,Default Risk,Interest Rate Risk, Liquidity Risk,Economic Risk, and Company Risk. C. Equity Options - Domestic Asset Class Objective Benchmark Universe Large The investment objective of The S&P 500 Index is the The investment option Capitalization the Stock Index option is to benchmark. The investment selected will be compared to Blend track the performance and risk options will be compared to a universe of Large of the Standard&Poor's 500 the return and the risk of the Capitalization Blend mutual index. benchmark. funds. Large The investment objective of The Russell 1000 Value Index The Large Capitalization Capitalization the Large Capitalization is the benchmark. The Value Option will be Value Style Value Option is to provide investment option selected compared to a universe of long-term growth of capital will be compared to the return Large Capitalization Value primarily using domestic large and the risk of the benchmark. mutual funds. capitalization securities with a value oriented style of management. Large The investment objective of the The Russell 1000 Growth The investment option Capitalization Large Capitalization Growth Index is the benchmark. The selected will be compared to a Growth Style Option is to provide long-term investment option will be universe of Large growth of capital primarily compared to the return and the Capitalization Growth mutual using domestic large risk of the benchmark,net of funds,net of investment capitalization securities with a investment management fees. management fees. growth oriented style of management. 26 (Exhibit C) (FY 14-15) Asset Class Objective Benchmark Universe Mid Capitalization The investment objective of the The Russell Mid-cap Value The investment option Value Style Mid Capitalization Value Index is the benchmark. The selected will be compared to a Option is to provide long-term investment option will be universe of Mid-capitalization growth of capital primarily compared to the return and the Value mutual funds. using domestic mid risk of the benchmark. capitalization securities with a value-oriented style of management. Mid Capitalization The investment objective of the The Russell Mid-cap Index is The investment option Blend Style Mid Capitalization Blend the benchmark. The selected will be compared to a Option is to provide long-term investment option will be universe of Mid Capitalization growth of capital primarily compared to the return and the Blend mutual funds. using domestic mid risk of the benchmark. capitalization securities with a blend of value and growth oriented styles of management. Mid Capitalization The investment objective of the The Russell Mid-cap Growth The investment option Growth Style Mid Capitalization Growth Index is the benchmark. The selected will be compared to a Option is to provide long-term investment option will be universe of Mid Capitalization growth of capital primarily compared to the return and the Growth mutual funds. using domestic mid risk of the benchmark. capitalization securities with a growth-oriented style of management. Small The investment objective of the The Russell 2000 Value Stock The investment option Capitalization Small Capitalization Value Index is the benchmark. The selected will be compared to a Value Style Option is to provide long-term investment option will be universe of Small growth of capital primarily compared to the return and the Capitalization Value mutual using domestic small-cap risk of the benchmark. funds. securities with a value oriented style of management. Small The investment objective of the The Russell 2000 Stock Index The investment option Capitalization Small Capitalization Blend is the benchmark. The selected will be compared to a Blend Style Option is to provide long-term investment option will be universe of Small growth of capital primarily compared to the return and the Capitalization Blend mutual using domestic small-cap risk of the benchmark. funds. securities with a blend of value and growth oriented styles of management. Small The investment objective of the The Russell 2000 Growth The investment option will be Capitalization Small Capitalization Growth Stock Index is the benchmark. compared to a universe of Growth Style Option is to provide long-term The investment option Small Capitalization Growth growth of capital primarily selected will be compared to mutual funds. using domestic small-cap the return and the risk of the securities with a growth benchmark. oriented style of management. 27 (Exhibit C) A Equity Options—Non U.S. Asset Class Objective Benchmark Universe International The investment objective of the The Morgan Stanley/Capital The investment option Stock International Stock Option is to International(MSCI)Europe, selected will be compared to a provide long-term growth of Australia and Far East universe of International capital primarily using (EAFE)Stock Index or the Stock mutual funds. securities of companies located MSCI All Country World outside of the United States. Index ex.US(ACWI ex US) will be the benchmark. The investment option will be compared to the return and the risk of the benchmark. Emerging Markets The investment objective of the The Morgan Stanley/Capital The investment option Stock Emerging Markets Stock International(MSCI) selected will be compared to a Option is to provide long-term Emerging Markets Stock universe of Emerging Market growth of capital primarily Index is the benchmark. The Stock mutual funds. using securities of companies investment option will be located in emerging countries. compared to the return and the risk of the benchmark. [Exhibit Cl GLOSSARY ACH: Automated Clearing House. cash flow generated from the pool is transformed into a series of securities with AGENCIES: Federal agency securities. differing average lives and maturities. CMOs are issued by investment banks, commercial ASKED: The price at which securities are banks, the FNMA and the FHLMC. The issuer offered. takes a higher yielding security and carves it up into different classes with lower interest rates BANKERS= ACCEPTANCE (BA): A draft or and shorter maturities. bill of exchange accepted by a bank or trust company. The accepting institution guarantees COMMERCIAL PAPER: Commercial Paper payment of the bill, as well as the issuer. consists of short-term note issues by large corporations. Maturity is 270 days or less. BID: The price offered by a buyer of securities. There is no explicit coupon rate and interest is (When you are selling securities, you ask for a figured on a discount basis in the same manner bid.) See Offer. as for Treasury Bills. BOND PROCEEDS: Proceeds from the sale of COMPREHENSIVE ANNUAL FINANCIAL bonds, notes, and other obligations issued by an REPORT (CAFR): The official annual report entity, and reserves and funds maintained by an for the City of Huntsville. It includes five entity for debt service purposes. combined statements for each individual fund and account group prepared in conformity with BOOK VALUE: The original acquisition cost GAAP. It also includes supporting schedules of an investment plus or minus the accrued necessary to demonstrate compliance with amortization or accretion. finance-related legal and contractual provisions, extensive introductory material, and a detailed BROKER: A broker brings buyers and sellers Statistical Section. together for a commission. COUPON: (a) The annual rate of interest that a CERTIFICATE OF DEPOSIT (CD): A time bond=s issuer promises to pay the bondholder deposit with a specific maturity evidenced by a on the bond=s face value. (b) A certificate certificate. Large-denomination CD=s are attached to a bond evidencing interest due on a typically negotiable. payment date. COLLATERAL: Securities, evidence of CUSIP NUMBER: A unique nine-digit deposit or other property which a borrower identification number permanently assigned by pledges to secure repayment of a loan. Also the Committee on Uniform Securities refers to securities pledged by a bank to secure Identification Procedures to each publicly traded deposits of public monies. security at the time of issuance. If the security is in physical form, the CUSIP number is printed COLLATERALIZED MORTGAGE on its face. OBLIGATIONS (CMOs): Debt obligations collateralized by pools of mortgages. The DEALER: A dealer, as opposed to a broker, collateral can consist of conventional whole acts as a principal in all transactions, buying and loans or agency-backed securities such as selling for his own account. GNMAs, FNMAs or FHLMCs. The monthly [Exhibit C1 DEBENTURE: A bond secured only by the FEDERAL HOME LOAN BANKS (FHLB): general credit of the issuer. The institutions that regulate and lend to savings and loan associations. The Federal Home Loan DELIVERY VERSUS PAYMENT: There are Banks play a role analogous to that played by two methods of delivery of securities: delivery the Federal Reserve Bank vis-a-vis member versus payment and delivery versus receipt. commercial banks. Delivery versus payment is delivery of securities FEDERAL HOME LOAN MORTGAGE with an exchange of money for the securities. CORPORATION (FHLMC): The Federal Delivery versus receipt is delivery of securities Home Loan Mortgage Corporation, also known with an exchange of a signed receipt for the as Freddie Mac, is an agency of the Federal securities. Government. The Participation Certificates (PC) issued by Freddie Mac are full faith and DISCOUNT: The difference between the cost credit obligations of an agency of the U.S. price of a security and its maturity when quoted Government. In that all loans purchased by at lower than face value. A security selling Freddie Mac are either FHA/VA mortgages below original offering price shortly after sale originated by members of the Federal Home also is considered to be at a discount. Loan Bank System or other HUD-approved mortgages. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are FEDERAL NATIONAL MORTGAGE issued a discount and redeemed at maturity for ASSOCIATION (FNMA OR FANNIE full face value, e.g. U.S. Treasury Bills. MAE): FNMA, like GNMA was chartered under the Federal National Mortgage DIVERSIFICATION: Dividing investment Association Act in 1938. FNMA is a federal funds among a variety of securities offering corporation working under the auspices of the independent returns. Department of Housing and Urban Development (HUD). It is the largest single provider of FEDERAL CREDIT AGENCIES: Agencies residential mortgage funds in the United States. of the Federal government set up to supply Fannie Mae, as the corporation is called, is a credit to various classes of institutions and private stockholder-owned corporation. The individuals, e.g. S & L=s, small business firms, corporation=s purchases include a variety of students, farmers, farm cooperatives, and adjustable mortgages and second loans, in exporters. addition to fixed-rate mortgages. FNMA=s securities are also highly liquid and are widely FEDERAL DEPOSIT INSURANCE accepted. FNMA assumes and guarantees that CORPORATION (FDIC): A federal agency all security holders will receive timely payment that insures bank deposits. of principal and interest. FEDERAL FARM CREDIT BANKS FEDERAL OPEN MARKET COMMITTEE (FFCB): The Federal Farm Credit Banks (FOMC): Consists of seven members of the Consolidated Systemwide Bonds are obligations Federal Reserve Board and five of the twelve of the 37 Farm Credit Banks. The Farm Credit Federal Reserve Bank Presidents. The President Administration which is an independent agency of the New York Federal Reserve Bank is a of the U.S. Government supervises the Farm permanent member, while the other Presidents Credit System. serve on a rotating basis. The Committee periodically meets to set Federal Reserve FEDERAL FUNDS RATE: The rate of interest guidelines regarding purchases and sales of at which Fed funds are traded. This rate is Government Securities in the open market as a currently pegged by the Federal Reserve through means of influencing the volume of bank credit open-market operations. and money. 2 [Exhibit Cl FEDERAL RESERVE SYSTEM: The central MASTER REPURCHASE AGREEMENT: bank of the United States created by Congress A written contract covering all future and consisting of seven member Board of transactions between the parties to repurchase- Governors in Washington, D.C., 12 regional reverse repurchase agreements that establishes banks and about 5,700 commercial banks that each party=s rights in the transactions. A master are members of the system. agreement will often specify, among other FINANCIAL INSTITUTIONS: As used in things, the right of the buyer-lender to liquidate these policies also refers to Security the underlying securities in the event of default Broker/Dealers doing business with the City. by the seller-borrower. FUNDS: Public funds in the custody of a local MATURITY: The date upon which the government that the investing entity has principal or stated value of an investment authority to invest. becomes due and payable. GOVERNMENT NATIONAL MORTGAGE MONEY MARKET: The market in which ASSOCIATION (GNMA OR GINNIE securities are traded that have one year or less MAE): Securities influencing the volume of until their maturity. bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings MONEY MARKET MUTUAL FUNDS: A and loan associations, and other institutions. mutual fund with investments that mature within Security holder is protected by full faith and one year. credit of the U.S. Government. Ginnie Mae securities are backed by the FHA,VA or FMHM MUTUAL FUNDS: A type of investment mortgages. The term "passthroughs" is often company that pools investments from used to describe Ginnie Maes. participants to purchase a portfolio and give to INVESTMENT POOL: An entity created investors fractional ownership of the created under this code to invest public funds jointly on portfolio. A mutual fund redeems investors= behalf of the entities that participate in the pool shares at the net asset value of the shares. and whose investment objectives in order of priority are (a) preservation and safety of NATIONAL ASSOCIATION OF principal; (b) liquidity; and(c)yield. SECURITIES DEALERS (NASD): A trade association that helps regulate the performance LIQUIDITY: A liquid asset is one that can be of the over-the-counter securities market. converted easily and rapidly into cash without a substantial loss of value. In the money market, a NET ASSET VALUE (PER SHARE): The security is said to be liquid if the spread between value of the securities underlying one share in bid and asked prices is narrow and reasonable the investment company. size can be done at those quotes. NO-LOAD MONEY MARKET MUTUAL LOCAL GOVERNMENT INVESTMENT FUND: A mutual fund that imposes no initial POOL(LGIP): The aggregate of all funds from sales charges or fees. political subdivisions that are placed in the OFFER: The price asked by a seller of custody of the State Treasurer for investment securities. (When you are buying securities,you and reinvestment. ask for an offer.) See Asked and Bid. MARKET VALUE: The current face or par OPEN MARKET OPERATIONS: Purchases value of an investment multiplied by the net and sales of government and certain other selling price of the security as quoted by a securities in the open market by the New York recognized market pricing source quoted on the Federal Reserve Bank as directed by the FOMC valuation date. in order to influence the volume of money and credit in the economy. Purchases inject reserves 3 [Exhibit C] into the bank system and stimulate growth of committee for the bank or branch of the bank or money and credit; sales have the opposite effect. a person authorized by corporate resolution to Open market operations are the Federal act on behalf of and bind the banking institution; Reserve=s most important and most flexible or (C) for an investment pool, the person monetary policy tool. authorized by the elected official or board with authority to administer the activities of the PORTFOLIO: Collection of securities held by investment pool to sign the written instrument an investor. on behalf of the investment pool. PRIMARY DEALER: A group of government RATE OF RETURN: The yield obtainable on a securities dealers who submit daily reports of security based on its purchase price or its current market activity and positions and monthly market price. This may be the amortized yield financial statements to the Federal Reserve Bank to maturity on a bond the current income return. of New York and are subject to its informal RATING AGENCY: A nationally recognized oversight. Primary dealers include Securities investment rating firm including Moody's and and Exchange Commission (SEC)-registered Standard & Poor's that assigns a rating to a debt securities broker-dealers, banks, and a few issue. unregulated firms. REPURCHASE AGREEMENT (RP OR PRUDENT PERSON RULE: An investment REPO): A holder of securities sells these standard. In some states the law requires that a securities to an investor with an agreement to fiduciary, such as a trustee, may invest money repurchase them at a fixed price on a fixed date. only in a list of securities selected by the custody The security "buyer" in effect lends the "seller" state--the so-called legal list. In other states the money for the period of the agreement, and the trustee may invest in a security if it is one which terms of the agreement are structured to would be bought by a prudent person of compensate him for this. Dealers use RP discretion and intelligence who is seeking a extensively to finance their positions. reasonable income and preservation of capital. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing bank QUALIFIED PUBLIC DEPOSITORIES: A reserves. State Statute defines repurchase financial institution which does not claim agreement as a simultaneous agreement to buy, exemption from the payment of any sales or hold for a specific time, and sell back at a future compensating use or ad valorem taxes under the date obligations described in State Statute laws of this state, which has segregated for the Section 2256.009 a (1) (obligations of the benefit of the commission eligible collateral United States or its agencies and having a value of not less than its maximum instrumentalities) at a market value at the time liability and which has been approved by the the funds are disbursed of not less than the Public Deposit Protection Commission to hold principal amount of the funds disbursed. The public deposits. term includes a direct security repurchase agreement and a reverse repurchase agreement. QUALIFIED REPRESENTATIVE: A person who holds a position with a business REVERSE REPURCHASE AGREEMENT: organization, who is authorized to act on behalf See Repurchase Agreement. of the business organization, and who is one of the following: (A) for a business organization SAFEKEEPING: A service to customers doing business that is regulated by or registered rendered by banks for a fee whereby securities with a securities commission, a person who is and valuables of all types and descriptions are registered under the rules of the National held in the bank=s vaults for protection. Association of Securities Dealers; (B) for a state or federal bank, a savings bank, or a state or SEC RULE 15C3-1: See Uniform Net Capital federal credit union, a member of the loan Rule. 4 [Exhibit C] investment, expressed as a percentage. (a) SECONDARY MARKET: A market made for INCOME YIELD is obtained by dividing the the purchase and sale of outstanding issues current dollar income by the current market following the initial distribution. price for the security. (b)NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par or plus any SECURITIES & EXCHANGE discount from par in purchase price, with the COMMISSION. Agency created by Congress adjustment sread over the period od from the date to protect investors in securities transactions by of purchase to the date of maturity of the bond. administering securities legislation. SEPARATELY INVESTED ASSET: An account or fund of a state agency or local government that is not invested in a pooled fund group. STATE AGENCY: An office, department, commission, board, or other agency that is part of any branch of state government, an institution of higher education, and any nonprofit corporation acting on behalf of any of those entities. TREASURY BILLS: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: A non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months or one year. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker- dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. 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