ORD 1997-11 - Amend Investment Policies 03-25-1997LDINANCE NO. 97 -11
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
HUNTSVILLE, TEXAS, AMENDING ITS POLICIES FOR INVESTMENTS
TO ALLOW FOR FLEXIBLE REPURCHASE AGREEMENTS TO BE
CONSIDERED AN ELIGIBLE INVESTMENT FOR BOND PROCEEDS;
AND MAKING OTHER PROVISIONS RELATED THERETO.
WHEREAS the Public Funds Investment Act, now Texas Government Code chapter 2256,
requires the City to adopt written investment policies addressing liquidity,
diversification, safety of principal, yield, maturity, and quality and capability of
investment management, with primary emphasis on safety and liquidity; and
WHEREAS the Public Funds Collateral Act, now Texas Government Code chapter 2257,
requires the City to adopt written policies addressing investment securities eligible
to secure deposits of public funds;
WHEREAS Texas Local Government Code Chapter 105 generally authorizes depositories for
municipal funds; and
WHEREAS City Council desires to amend the investment policies it adopted on March 6,
1990, and last amended by City Council minute order on December 12, 1995;
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF
HUNTSVILLE, TEXAS, that:
SECTION 1: The attached City of Huntsville Investment Policy shall be adopted as the policy
of the City regarding investments, investment securities, and depositories.
SECTION 2: This ordinance shall take effect March 25, 1997.
PASSED AND APPROVED on the 25th day of March, 1997.
THE CIT OF HUNTSVI E
William B. Green, Mayor
A ST:
Danna Welter, City Secretary
TO
Bounds, City Attorney
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Shown on the cover and copied with permission of the artist,
Mr. Joseph Polley Paine, is a reproduction of a lithograph he did for
the Huntsville's Bicentennial in 1976.
JOSEPH POLLEY PAINE'S "Early Architecture of Huntsville" is what the artist calls "Documentary art"
Across the top is a reproduction of Boliaert s sketch of Huntsville made in December, 1843. Englishman
William Bollaert came to Texas, at General Sam Houston's invitation, to study the possibility of attracting
immigrants. Bollaert's diary of his visit to Huntsville said, "Three miles brought us to Huntsville, situated on a
pine height. This town was commenced in 1836, but made little progress until 1842 when Mr. MacDonald gave
an impetus to building. On entering the town is observed planters exchange, Gibbs Grocery, Huntsville Hotel...
Mr. MacDonald, besides a very large and comfortable residence, has built a brick store, the upper part devoted
to a Masonic Lodge. A large brick building for girls and boys schools is now building and many other
improvements going on. "
Next in the artwork is the Cumberland Presbyterian Church erected in 1839. The Christian congregation
purchased the property in 1868. The church was located where the Walker County Hardware is now.
The third structure is MacDonald's (sometimes spelled McDonalds) brick store and Masonic Hall. It was
redrawn from an 1844 map of the City.
The Huntsville Academy, also from the map of 1844, is right of the tower. The structure at the left is the
third building used as the Walker County Courthouse. This building, built in 1888, was razed by fire.
The large building facing the right portion of the drawing is the original building in the state prison system.
The building, along with several others in Huntsville, was "remodeled" or "modernized" and the tower was
removed. The building was revamped in 1942.
At the right is the Andrews Female College, a Methodist institution built in 1852, which later became public
school property in 1879 and a frame building was put on the same site.
Built in the 1840's, Henderson Yoakum 's home at Shepherd's Valley was where Yoakum wrote his 'History
of Texas" The history was published in 1855. Dog run style house had a hall through the center 20 feet wide.
On each side of the open hall were two 20 by 20 foot rooms. The sills of the hand -hewn logs were 60 feet long
and three feet thick.
Now known as Old Main, the Sam Houston Normal Institute was dedicated in 1890. (Lost to fire on
February 12, 1982).
The Austin College building behind the Normal institute was dedicated in 1851 as a Presbyterian school.
The Bell Tower shown in Paines Lithograph is now at the Austin College in Sherman, Texas and is rung at
graduation there. This building was the main structure at Sam Houston Normal Institute from 1879 to 1890.
The final structure in the Bicentennial work is Sam Houston's home, "Woodlands" which was built in 1847.
Artist Paine was assisted in his research by Mrs. Josephine Bush, keeper of the books in the Thomason
Room of the Sam Houston State University Library.
TABLE OF CONTENTS
PART I - INVESTMENT POLICY
I. Purpose of Policy .................... ..............................2
II. Scope of Policy ....._ s ............... ............................._2
III. Designation of Investment Officers ..... ............................... 2
IV. Investment Training ................. ............................... 2
V. Ethics and Conflict of Interest ......... ............................... 3
VI. Objectives ......................... ..............................3
VII. Market Yield (Benchmark) ........... ............................... 4
VIII. Investment Strategies ................ ............................... 4
1X. Prudence /Standard of Care ............ ............................... 5
X. Diversification ...................... ..........................:...5
)I. Maximum Maturities ................ ............................... 5
XII. Purchase Procedures ................. ..............................6
)UII. Collateralization .................... ............................... 6
)(IV. Safekeeping and Custody .............. ..............................6
XV. Internal Control/Compliance Audit ..... ............................... 6
XVI. Authorized Financial Dealers and Institutions ............................ 6
XVII. Authorized Investments .............. ............................... 7
XVIII. Investment Pools .................... .............................11
XIX. Reporting .......................... .............................13
XX. . Policy Adoption ..................... .............................13
PART II - BANKING SERVICES
I. Establishment of Banking Depository .. ............................... 14
II. Collateralization Requirements/Safekeeping and Custody ................. 15
Glossary..................... ............. .............................17
Appendix I - State Law List of Authorized Investments
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.
Ii. 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, Hotel/Motel Tax Special Revenue Fund, the Capital Projects
Funds, the Water and Sewer Fund, the Sanitation Fund and the City's self-funded Health
Insurance Fund. 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 City Manager and Finance Director,
designated as Investment Officers for the City of Huntsville, who shall be responsible for
procedures and 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. (5= City Charter Art. XI). The City Manager
and/or Director of Finance may deposit, withdraw, invest, transfer, and manage City funds.
The Investment Officers 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 Finance Director and City Manager 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.
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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.
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.
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 out perform current holdings, or to otherwise
adjust the City's portfolio.
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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.
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 be
of high quality, with short- to intermediate -term maturities.
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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 high 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 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
Officers, 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.
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XII. PURCHASE PROCEDURES
A. The City may, without fiurther bidding, utilize any program established through the
Texas Interlocal 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.
Other investments should be made after competitive bids, when possible, 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.
X 1H. 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 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.
XV. INTERNAL CONTROL /COMPLI44,NCE 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, and the reporting system. 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 150 -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 throughly reviewed the City's Investment Policy and have implemented
reasonable procedures and control in an effort to preclude imprudent investment activities
arising from investment transactions. 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 and a current audited financial statement is required to be on file for each
broker /dealer that conducts transactions with the City.
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The City of Huntsville may invest only in the safest type of securities and in accordance
with Texas state law (Appendix 1). There are two general categories of investments for the
City of Huntsville: (1) authorized investments which the designated investment officers may
invest without prior approval from the Finance Committee; and, (2) authorized 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;
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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 and
loan association domiciled in Texas that are:
a. guaranteed or insured by the Federal Deposit Insurance Corporation,
or comparable insurance entities or their successors; or
b. secured by governmental obligations that are described in Texas
Government Code section 2256.009(x), including mortgage backed
securities directly issued by a federal agency or instrumentality that
have a market value of not less than the principal amount of the
certificates, but excluding those mortgage backed securities of the
nature described by section 2256.009(b); or
C. secured in any other manner and amount provided by law for deposits
of the City.
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B. Authorized investments requiring prior approval of the Finance Committee:
1. Collateralized Mortgage Obligations (CMO's) 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 can not be greater than 10 years and the interest rate
can not 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.
A fully collateralized repurchase agreement is an authorized investment if
the 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
term of the authorized investments acquired must mature not later than the
expiration date stated in the reverse security repurchase agreement.
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3. Bankers' Acceptances
A bankers' acceptance is an authorized investment if the bankers'
acceptance: (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 the commercial paper 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 regulated by the Securities and Exchange
Commission; (2) has a dollar - weighted average stated maturity of 90
days or fewer; and (3) 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
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
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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. 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:
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1. the types of investments in which money is allowed to be invested;
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. the objectives of the pool;
5. the size of the pool;
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 safekeep the pool's assets;
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;
11. the requirements to be satisfied for an entity to deposit funds in and withdraw
funds from the pool 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.
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 average dollar- weighted 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;
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;
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j. the portfolio managers of the pool; and
k. any changes or addenda to the offering circular.
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
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 that indicates the beginning and ending
market value 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 jointly signed by the Finance Director and City Manager 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.
PART II - BANKING SERVICES
The City Council shall approve a financial institution /institutions to act as a depository bank for a
two year period.
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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.
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.
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.
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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.
II. 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:
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
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.
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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.
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GLOSSARY
ACH: Automated Clearing House.
AGENCIES: Federal agency securities.
ASKED: The price at which securities are
offered.
BANKERS' ACCEPTANCE (BA): A draft
or bill of exchange accepted by a bank or trust
company. The accepting institution
guarantees payment of the bill, as well as the
issuer.
BID: The price offered by a buyer of
securities. (When you are selling securities,
you ask for a bid.) See Offer.
BOND PROCEEDS: Proceeds from the sale
of bonds, notes, and other obligations issued
by an entity, and reserves and funds
maintained by an entity for debt service
purposes.
BOOK VALUE: The face or par value of an
investment plus accrued interest or minus
amortization or accretion.
BROKER: A broker brings buyers and sellers
together for a commission.
CERTIFICATE OF DEPOSIT (CD): A
time deposit with a specific maturity
evidenced by a certificate. Large -
denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of
deposit or other property which a borrower
pledges to secure repayment of a loan. Also
refers to securities pledged by a bank to secure
deposits of public monies.
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COLLATERALIZED MORTGAGE
OBLIGATIONS (CMOs): Debt obligations
collateralized by pools of mortgages. The
collateral can consist of conventional whole
loans or agency - backed securities such as
GNMAs, FNMAs or FHLMCs. The monthly
cash flow generated from the pool is
transformed into a series of securities with
differing average lives and maturities. CMOs
are issued by investment banks, commercial
banks, the FNMA and the FHLMC. The
issuer takes a higher yielding security and
carves it up into different classes with lower
interest rates and shorter maturities.
COMMERCIAL PAPER: Commercial
Paper consists of short-term note issues by
large corporations. Maturity is 270 days or
less. There is no explicit coupon rate and
interest is figured on a discount basis in the
same manner as for Treasury Bills.
COMPREHENSIVE ANNUAL
FINANCIAL REPORT (CAFR): The
official annual report for the City of
Huntsville. It includes five combined
statements for each individual fund and
account group prepared in conformity with
GAAP. It also includes supporting schedules
necessary to demonstrate compliance with
finance- related legal and contractual
provisions, extensive introductory material,
and a detailed Statistical Section.
COUPON: (a) The annual rate of interest that
a bond's issuer promises to pay the
bondholder on the bond's face value. (b) A
certificate attached to a bond evidencing
interest due on a payment date.
CUSIP NUMBER: A unique nine-digit
identification number permanently assigned
by the Committee on Uniform Securities
Identification Procedures to each publicly
traded security at the time of issuance. If the
security is in physical form, the CUSIP
number is printed on its face.
DEALER: A dealer, as opposed to a broker,
acts as a principal in all transactions, buying
and selling for his own account.
DEBENTURE: A bond secured only by the
general credit of the issuer.
DELIVERY VERSUS PAYMENT: There
are two methods of delivery of securities:
delivery versus payment and delivery versus
receipt Delivery versus payment is delivery
of securities with an exchange of money for
the securities. Delivery versus receipt is
delivery of securities with an exchange of a
signed receipt for the securities.
DISCOUNT: The difference between the cost
price of a security and its maturity when
quoted at lower than face value. A security
selling below original offering price shortly
after sale also is considered to be at a
discount.
DISCOUNT SECURITIES: Non-interest
bearing money market instruments that are
issued a discount and redeemed at maturity for
full face value, e.g. U.S. Treasury Bills.
DIVERSIFICATION: Dividing investment
funds among a variety of securities offering
independent returns.
St.T
FEDERAL CREDIT AGENCIES: Agencies
of the Federal government set up to supply
credit to various classes of institutions and
individuals, e.g. S & L's, small business
firms, students, farmers, farm cooperatives,
and exporters.
FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC): A federal agency
that insures bank deposits.
FEDERAL FARM CREDIT BANKS
(FFCB): The Federal Farm Credit tanks
Consolidated Systemwide Bonds are
obligations of the 37 Farm Credit Banks. The
Farm Credit Administration which is an
independent agency of the U.S. Government
supervises the Farm Credit System.
FEDERAL FUNDS RATE: The- rate of
interest at which Fed funds are traded. This
rate is currently pegged by the Federal
Reserve through open-market operations.
FEDERAL HOME LOAN BANKS
(FHLB): The institutions that regulate and
lend to savings and loan associations. The
Federal Home Loan Banks play a role
analogous to that played by the Federal
Reserve Bank vis-a-vis member commercial
banks.
FEDERAL HOW LOAN MORTGAGE
CORPORATION (FHLMC): The Federal
Home Loan Mortgage Corporation, also
known as Freddie Mac, is an agency of the
Federal Government. The Participation
Certificates (PC) issued by Freddie Mac are
full faith and credit obligations of an agency
of the U.S. Government. In that all loans
purchased by Freddie Mac are either FHAIVA
mortgages originated by members of the
Federal Home Loan Bank System or other
HUD-approved mortgages.
FEDERAL NATIONAL MORTGAGE
ASSOCIATION {FNMA OR FANNIE
MAE): FNMA, like GNMA was chartered
under the Federal National Mortgage
Association Act in 1938. FNMA is.a federal
corporation working under the auspices of the
Department of Housing and Urban
Development (HUD). It is the largest single
provider of residential mortgage funds in the
United States. Fannie Mae, as the corporation
is called, is a private stockholder -owned
corporation. The corporation's purchases
include a variety of adjustable mortgages and
second loans, in addition to fixed -rate
mortgages. FNMA's securities are also highly
liquid and are widely accepted. FNMA
assumes and guarantees that all security
holders will receive timely payment of
principal and interest.
FEDERAL OPEN MARKET
COMMITTEE (FOMC): Consists of seven
members of the Federal Reserve Board and
five of the twelve Federal Reserve Bank
Presidents. The President of the New York
Federal Reserve Bank is a permanent member,
while the other Presidents serve on a rotating
basis. The Committee periodically meets to
set Federal Reserve guidelines regarding
purchases and sales of Government Securities
in the open market as a means of influencing
the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The
central bank of the United States created by
Congress and consisting of seven member
Board of Governors in Washington, D.C., 12
regional banks and about 5,700 commercial
banks that are members of the system.
FINANCIAL INSTITUTIONS: As used in
these policies also refers to Security
Broker/Dealers doing business with the City.
FUNDS: Public funds in the custody of a
local government that the investing entity has
authority to invest.
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION '(GNMA
OR GINNIE MAE): Securities influencing
the volume of bank credit guaranteed by
GNMA and issued by mortgage bankers,
commercial banks, savings and loan
associations, and other institutions. Security
holder is protected by full faith and credit of
the U.S. Government. Ginnie Mae securities
are backed by the FHA, VA or FMHM
mortgages. The term "passthroughs" is often
used to describe Ginnie Maes.
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INVESTMENT POOL: An entity created
under this code to invest public funds jointly
on behalf of the entities that participate in the
pool and whose investment objectives in order
of priority are (a) preservation and safety of
principal; (b) liquidity; and (c) yield.
LIQUIDITY: A liquid asset is one that can
be converted easily and rapidly into cash
without a substantial loss of value. In the
money market, a security is said to be liquid if
the spread between bid and asked prices is
narrow and reasonable size can be done at
those quotes.
LOCAL GOVERNMENT INVESTMENT
POOL (LGIP): The aggregate of all funds
from political subdivisions that are placed in
the custody of the State Treasurer for
investment and reinvestment.
MARKET VALUE: The price at which a
security is trading and could presumably be
purchased or sold. In the Texas State Statutes
market value is defined as the face or par
value of an investment multiplied by the
premium or discount quoted on the valuation
date.
A
MASTER REPURCHASE AGREEMENT:
A written contract covering all future
transactions between the parties to repurchase -
reverse repurchase agreements that establishes
each party's rights in the transactions. A
master agreement will often specify, among
other things, the right of the buyer - lender to
liquidate the underlying securities in the event
of default by the seller- borrower.
MATURITY: The date upon which the
principal or stated value of an investment
becomes due and payable.
MONEY MARKET: The market in which
securities are traded that have one year or less
until their maturity.
MONEY MARKET MUTUAL FUNDS: A
mutual fund with investments that mature
within one year.
MUTUAL FUNDS: A type of investment
company that pools investments from
participants to purchase a portfolio and give to
investors fractional ownership of the created
portfolio. A mutual fund redeems investors'
shares at the net asset value of the shares.
NATIONAL ASSOCIATION OF
SECURITIES DEALERS (NASD): A trade
association that helps regulate the
performance of the over- the - counter securities
market.
NET ASSET VALUE (PER SHARE): The
value of the securities underlying one share in
the investment company.
NO -LOAD MONEY MARKET MUTUAL
FUND: A mutual fund that imposes no initial
sales charges or fees.
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OFFER: The price asked by a seller of
securities. (When you are buying securities,
you ask for an offer.) See Asked and Bid.
OPEN MARKET OPERATIONS:
Purchases and sales of government and certain
other securities in the open market by the New
York Federal Reserve Bank as directed by the
FOMC in order to influence the volume of
money and credit in the economy. Purchases
inject reserves into the bank system and
stimulate growth of money and credit; sales
have the opposite effect. Open market
operations are the Federal Reserve's most
important and most flexible monetary policy
tool.
PORTFOLIO: Collection of securities held
by an investor.
PRIMARY DEALER: A group of
government securities dealers who , submit
daily reports of market activity and positions
and monthly financial statements to the
Federal Reserve Bank of New York and are
subject to its informal oversight. Primary
dealers include Securities and Exchange
Commission (SEC)- registered securities
broker - dealers, banks, and a few unregulated
firms.
PRUDENT PERSON RULE: An investment
standard. In some states the law requires that
a fiduciary, such as a trustee, may invest
money only in a list of securities selected by
the custody state- -the so- called legal list. In
other states the trustee may invest in a security
if it is one which would be bought by a
prudent person of discretion and intelligence
who is seeking a reasonable income and
preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES:
A financial institution which does not claim
exemption from the payment of any sales or
compensating use or ad valorem taxes under
the laws of this state, which has segregated for
the benefit of the commission eligible
collateral having a value of not less than its
maximum liability and which has been
approved by the Public Deposit Protection
Commission to hold public deposits.
RATE OF RETURN: The yield obtainable
on a security based on its purchase price or its
current market price. This may be the
amortized yield to maturity on a bond the
current income return.
RATING AGENCY: A nationally
recognized investment rating firm including
Moodys and Standard & Poors that assigns a
rating to a debt issue.
REPURCHASE AGREEMENT (RP OR
REPO): A holder of securities sells these
securities to an investor with an agreement to
repurchase them at a fixed price on a fixed
date. The security "buyer" in effect lends the
"seller" money for the period of the
agreement, and the terms of the agreement are
structured to compensate him for this. Dealers
use RP extensively to finance their positions.
Exception: When the Fed is said to be doing
RP, it is lending money, that is, increasing
bank reserves. State Statute defines
repurchase agreement as a simultaneous
agreement to buy, hold for a specific time, and
sell back at a future date obligations described.
in State Statute Section 2256.009 a(1)
(obligations of the United States or its
agencies and instrumentalities) 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
repurchase agreement.
REVERSE REPURCHASE
AGREEMENT: See Repurchase Agreement.
SAFEKEEPING: A service to customers
rendered by banks for a fee whereby securities
and valuables of all types and descriptions are
held in the bank's vaults for protection.
,SEC RULE 15C3 -1: See Uniform Net
Capital Rule.
P-4a
SECONDARY MARKET: A market made
for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES & EXCHANGE
COMMISSION: Agency created by
Congress to protect investors in securities
transactions by administering securities
legislation.
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.
4
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.
YIELD: The rate of annual income return on
an investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the
current dollar income by the current market
price for the security. (b) NET YIELD or
YIELD TO MATURITY is the current
income yield minus any premium above par or
plus any discount from par in purchase price,
with the adjustment spread over the period
from the date of purchase to the date of
maturity of the bond.
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APPENDIX I
TEXAS STATE LAW
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