ARTICLE 1.2300 INVESTMENT POLICY [1]

Purpose.

The purpose of this document is to set forth specific investment policy and strategy guidelines for the city in order to achieve the goals of safety, liquidity, yield, and public trust for all investment activity. This investment policy, as approved, is in compliance with the provision of the Public Funds Investment Act of the Texas Government Code Chapter 2256 (PFIA).

Scope.

This investment policy applies to all investment activities of the city. The funds are accounted for in the annual financial report and include the following fund types:

General fund;

Special revenue funds;

Debt service funds;

Capital projects funds;

Proprietary funds;

Any new fund created by the city unless specifically exempted from this policy by the city.

Adoption.

The entity’s governing body shall review and adopt, by ordinance, its investment policies and strategies not less than annually. This policy serves to satisfy the statutory requirement (specifically the Public Funds Investment Act of the Texas Government Code Chapter 2256 “PFIA”) to define, review, and adopt a formal investment policy and strategy.

(Ordinance 1423 adopted 2/4/19)

§ 1.2302 Objectives.

The city shall manage and invest its cash with four objectives, listed in order of priority: safety, liquidity, yield, and public trust. The safety of the principal invested will always remain the primary objective. All investments shall be designed and managed in a manner responsive to the public trust and consistent with state and local law.

The city shall maintain a comprehensive cash management program that includes collection of accounts receivable, vendor payment in accordance with invoice terms, and prudent investment of available cash. Cash management is defined as the process of managing monies in order to ensure maximum cash availability and maximum yield on short-term investment of pooled idle cash.

Safety.

The primary objective of the city’s investment activity is the preservation and safety of principal in the overall portfolio. Each investment transaction shall be conducted in a manner to avoid capital losses, whether they are from securities defaults or erosion of market value.

Liquidity.

The city’s investment portfolio shall be structured such that all obligations can be met in a timely manner. This shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets.

Yield.

The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. “Weighted average yield to maturity” shall be the portfolio performance measurement standard. Return on investment is of secondary importance compared to safety and liquidity.

Public Trust.

All participants in the city’s investment process shall seek to act responsibly as custodians of the public trust. Investment officers shall avoid any transaction or activity that might impair public confidence in the city’s ability to govern effectively.

(Ordinance 1423 adopted 2/4/19)

§ 1.2303 Responsibility and Control.

Investment Committee.

An investment committee, consisting of a city council member appointed by the council, the city manager, city secretary, and the city community development corporation board member appointed by the board shall meet at least annually to review general strategies and to monitor portfolio performance. The investment committee shall include in its deliberation such topics as:

Economic outlook;

Portfolio diversification;

Maturity structure;

Risk considerations;

Authorized broker/dealers;

Independent investment training sources; and

(7)

Target rate of return on the portfolio.

Delegation of Authority and Training.

Authority to manage the city’s investment program is granted to the city secretary who is designated as “investment officer” of the city and is responsible for investment decisions and activities. The investment officer shall establish written procedures for the operation of the investment program, consistent with this investment policy.

In order to ensure the quality and capability of the city’s investment personnel, the city shall provide periodic training in investments through courses and seminars offered by professional organizations and associations. The investment officer and designees responsible for investing the city’s funds shall attend within 12 months after assuming duties and receive not less than 10 hours of instruction, and on a continuing basis, attend not less than 10 hours of instruction in a two-year period. Said instruction shall relate to investment responsibilities described in the PFIA and this policy. Independent sources of investment training shall be approved by the investment committee.

Internal Controls.

The investment officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that:

The cost of a control should not exceed the benefits likely to be derived; and

The valuation of costs and benefits requires estimates and judgments by management.

Accordingly, the investment officer shall establish a process for annual independent review by an external auditor to assure compliance with policies and procedures. The results of this review shall be reported to the governing bodies. The internal controls shall address the following:

Control of collusion.

Separation of transaction authority from accounting and recordkeeping.

Custodial safekeeping.

Avoidance of physical delivery securities.

(E)

Clear delegation of authority to subordinate staff members.

(F)

Written confirmation for telephone (voice) transactions for investments and wire transfers.

(G)

Development of a wire transfer agreement with the depository bank or third party custodian.

(d)

Prudence.

The standard of prudence to be applied by the investment officer shall be the “prudent investor” rule, which states: “Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.” In determining whether an investment officer has 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 the officer had responsibility rather than a consideration as to the prudence of a single investment.

Whether the investment decision was consistent with the written investment policy of the city.

Investment officers, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific security’s credit risk or market price changes, provided that these deviations are reported in a timely fashion and that appropriate action is taken to control adverse developments.

(e)

Ethics and Conflicts of Interest.

The city staff involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair the ability to make impartial investment decisions. The city staff shall disclose any material interests in financial institutions that conduct business with the city and they shall further disclose positions that could be related to the performance of the city’s portfolio. The city staff shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the city.

An investment officer of the city who has a personal business relationship [with] the depository bank or with any organization seeking to sell an investment to the city shall file a statement disclosing that personal business interest. An investment officer who is related within the second degree by affinity or consanguinity to an individual seeking to sell an investment to the city shall file a statement disclosing that relationship. A statement required under this subsection must be filed with the Texas Ethics Commission and the governing body of entity.

(Ordinance 1423 adopted 2/4/19)

§ 1.2304 Reporting.

Monthly Reporting.

Within a reasonable time of each month’s end, the investment officer shall prepare an investment report that contains the information required by the PFIA, including a management summary that provides an analysis of the status of the current investment portfolio and transactions made over the last month. This management summary will be prepared in a manner that will allow the city to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report shall be provided to the governing bodies and signed by all investment officers. The report will include the following:

A listing of individual securities held at the end of the reporting period. This list will include the name of the fund or pooled group fund for which each individual investment was acquired.

Cost and market value of all securities (in accordance with Government Accounting Standards Board (GASB) requirements).

Average weighted yield to maturity of portfolio on investments as compared to applicable benchmarks.

Listing of investments by maturity date.

The percentage of the total portfolio that each type of investment represents.

Statement of compliance with the PFIA and this policy.

Annual Report.

The annual investment reports shall be formally reviewed at least annually by an independent auditor and the result of the review reported to the governing bodies by that auditor.

(Ordinance 1423 adopted 2/4/19)

§ 1.2305 Investment portfolio.

Active Portfolio Management.

The city shall pursue an active versus a passive portfolio management philosophy. That is, securities may be sold before they mature if market conditions present an opportunity for the city to benefit from the trade. The investment officer will routinely monitor the contents of the portfolio, the available markets, and the relative value of competing instruments, and will adjust the portfolio accordingly.

Investments.

Assets of the city may be invested in the following instruments; provided, however, that at no time shall assets of the city be invested in any instrument or security not authorized for investment under the act, as the act may from time-to-time be amended. The city is not required to liquidate investments that were authorized investments at the time of purchase.

Suitable and Authorized Investments.

U.S. government obligations, U.S. government agency obligations, and U.S. government instrumentality obligations, which have a liquid market with a readily determinable market value;

Certificates of deposit insured by the Federal Deposit Insurance or its successor or secured by obligations described in subsection (a) above, which are intended to include all direct agency or instrumentality issued mortgage backed securities rated AAA by a nationally recognized rating agency, or by the Public Funds Investment Act of the Texas Government Code Chapter 2256 (PFIA), and that have a market value of not less than the principal amount of the certificates;

Repurchase and reverse repurchase agreements whose underlying purchased securities consist of instruments defined in subsection (a) above and that comply with the requirements of state law;

No-load money market mutual funds regulated by the Securities and Exchange Commission whose portfolios consist only of dollar-denominated securities and that comply with the requirements of state law;

(E)

Investment pools that provide fixed yield, fixed maturity investments, are specifically authorized by the governing body, and that comply with the requirements of state law;

(F)

Local government investment pools, either state-administered or through joint powers statutes and other intergovernmental agreement legislation that seek to maintain a stable dollar asset value, are specifically authorized by the governing body, and that comply with the requirements of state law; and

(G)

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 instrumentalities, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States.

Not Authorized.

The city’s authorized investments options are more restrictive than those allowed by state law. State law specifically prohibits investment in the following investment securities:

Obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal.

Obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest.

Collateralized mortgage obligations that have a stated final maturity date of greater than 10 years.

§ 1.2306 Financial Institution Deposits.

Collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

(Ordinance 1423 adopted 2/4/19)

Depository Bank.

At least every five years a depository bank shall be selected through the city’s banking services procurement process, which shall include a formal request for proposal (RFP) issued in compliance with applicable state law. In selecting a depository, the credit worthiness of institutions shall be considered, and the city secretary shall conduct a comprehensive review of prospective depositories’ credit characteristics and financial history.

All depository deposits shall be insured or collateralized in compliance with applicable state law. The city reserves the right, in its sole discretion, to accept or reject any form of insurance or collateralization pledged towards depository deposits. Financial institutions serving as the city depositories will be required to sign a depository agreement with the city. The collateralized deposit portion of the agreement shall define the city’s rights to the collateral in case of default, bankruptcy, or closing and shall establish a perfected security interest in compliance with federal and state regulations, including:

The agreement must be in writing;

The agreement has to be executed by the depository and the city contemporaneously with the acquisition of the asset;

The agreement must be approved by the board of directors or designated committee of the depository and a copy of the meeting minutes must be delivered to the city; and

The agreement must be part of the depository’s “official record” continuously since its execution.

The market value of the investments securing the deposit of funds shall be at least equal to 102% of the amount of the deposits of funds reduced to the extent that the deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Securities pledged as collateral shall be held by an independent third party, acceptable to the city, under the provisions of a custodial agreement. The agreement is to specify the acceptable investment securities as collateral, including provisions relating to possession of the collateral, the substitution or release of investment securities, ownership of securities, and the method of valuation of securities.

Certificates of Deposit.

Banks seeking to establish eligibility for the city’s competitive certificate of deposit purchase program shall submit for review annual financial statements, evidence of federal insurance and other information as required by the investment officer.

(Ordinance 1423 adopted 2/4/19)

§ 1.2307 Broker/Dealers.

Securities Dealers.

For brokers and dealers of government securities, the city shall select only those dealers reporting to the Market Reports Division of the Federal Reserve Board of New York, also known as the “primary government security dealers,” unless a comprehensive credit and capitalization analysis reveals that other firms are adequately financed to conduct public business. All securities dealers shall provide the city with references from public entities that they are currently serving. The investment committee shall adopt and annually review a list of qualified brokers authorized to engage in investment transactions with the entity.

All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the following as appropriate:

Audited financial statements;

Proof of National Association of Securities Dealers (NASD) certification;

Proof of state registration;

Completed broker/dealer questionnaire;

(E)

Certification of having read the city’s investment policy signed by a qualified representative of the organization;

(F)

Acknowledgment that the organization has implemented reasonable procedures and controls in an effort to preclude imprudent investment activities arising out of investment transactions conducted between the city and the organization.

Qualified representative means a person who holds a position with a business organization, who is authorized to act on behalf of the business organization, and who is one of the following:

For a business organization doing business that is regulated by or registered with a securities commission, a person who is registered under the rules of the National Association of Securities Dealers;

For a state or federal bank, a savings bank, or a state or federal credit union, a member of the loan committee for the bank or branch of the bank or a person authorized by corporate resolution to act on behalf of and bind the banking institution; or

For an investment pool, the person authorized by the elected officer or board with authority to administer the activities of the investment pool to sign the certification on behalf of the investment pool.

(Ordinance 1423 adopted 2/4/19)

§ 1.2308 Investment Pools.

A thorough investigation of the pool is required prior to investing and on a continual, periodic basis. All investment pools must supply the following information in order to be eligible to receive funds:

The types of investments in which money is allowed to be invested.

The maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool.

The maximum stated maturity date any investment security within the portfolio has.

The objectives of the pool.

The size of the pool.

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.

(12)

The performance history of the pool, including yield, average dollar-weighted maturities, and expense ratios.

(13)

A description of interest calculations and how interest is distributed, and how gains and losses are treated.

An annual review of the financial condition and registration of qualified bidders will be conducted by the investment officer.

(Ordinance 1423 adopted 2/4/19)

§ 1.2309 Safekeeping and Custody.

Insurance or Collateral.

All deposits and investments of the city’s funds other than direct purchases of U.S. treasuries or agencies shall be secured by pledged collateral. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest on the deposits or investments less an amount insured by the FDIC or its successors. Evidence of the pledged collateral shall be maintained by the investment officer. Repurchase agreements shall be documented by a specific agreement noting the collateral pledged in each agreement. Collateral shall be reviewed weekly to assure that the market value of the pledged securities is adequate.

Safekeeping Agreement.

Collateral pledged to secure deposits of the city shall be held by a safekeeping institution in accordance with a safekeeping agreement which clearly defines the procedural steps for gaining access to the collateral should the city determine that its funds are in jeopardy. The safekeeping institution, or trustee, shall be the Federal Reserve Bank or an institution acceptable to the city not affiliated with the firm pledging the collateral. The safekeeping agreement shall include the signatures of authorized representatives of the entities, the firm pledging the collateral, and the trustee.

Collateral Defined.

The city shall accept only the following as collateral:

FDIC (and its successors) insurance coverage.

A bond, certificate of indebtedness, or Treasury Note of the United States, or other evidence of indebtedness of the United States that is guaranteed as to principal and interest by the United States.

Obligations, the principal and interest on which, are unconditionally guaranteed or insured by the state.

A bond of the state or of a county, city or other political subdivision of the state having been rated as investment grade (investment rating no less than “A” or its equivalent) by a nationally recognized rating agency with a remaining maturity of ten (10) years or less.

(d)

Subject to Audit.

All collateral shall be subject to inspection and audit by the investment officer or the city’s independent auditors.

(e)

Delivery vs. Payment.

Treasury bills, notes, bonds, repurchase agreements and government agencies’ securities shall be purchased using the delivery vs. payment method. That is, funds shall not be wired or paid until verification has been made that the correct security was received by the trustee. The security shall be held in the name of the city or held on behalf of the city. The trustee’s records shall assure the notation of the city’s ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the city.

(Ordinance 1423 adopted 2/4/19)

§ 1.2310 Investment Strategy.

The city’s basic investment strategy for all financial assets is to preserve principal. In order to achieve that objective, the city shall invest in securities with limited credit risk and with maturities that do not exceed anticipated cash flow requirements.

The objective of liquidity stems from the need of the city to maintain available cash balances sufficient to cover outlays. Since the timing and amount of some financial disbursements are not predictable, fund-type strategies shall adjust for the uncertainty of projected cash flows.

It is also the strategy of the city to diversify its investment portfolios. Whenever practical, assets held in the portfolio shall be diversified to minimize the loss resulting from one concentration of assets in a specific maturity, issuer, or class of security.

(d)

The city funds shall seek to achieve a competitive yield appropriate for each fund-type. A comparably structured treasury security portfolio shall represent the minimum yield objective. Yield objectives shall at all times be subordinated to the objectives of safety and liquidity. Tax-exempt debt proceeds shall be invested to maximize the interest earnings retained by the city while at the same time fully complying with all applicable state laws and federal regulations.

(e)

The investment officer will ensure that marketability maintained in the fund-type portfolios is sufficient to reasonably assure that investments could be liquidated if cash needs occur prior to the maturity date of the investments.

(f)

The city groups investment instruments into “fund-type investment categories” for specific investment strategy considerations, designed to address the unique characteristics of the fund groups represented in the portfolios with respect to maturity limits, diversity, and liquidity. All security-specific restrictions shall be measured at the time of purchase and based on portfolio book value.

(g)

The fund-types are:

Short Term/Operating Funds.

Investment strategies for operating funds and commingled pools containing operating funds have as their primary objective to assure 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. This may be accomplished by purchasing high quality, short-to-medium term securities that will complement each other in a laddered or barbell maturity structure. The dollar weighted average maturity may not exceed one year and the maximum maturity of an individual investment shall not exceed two years. To further offset the risk of unpredictable events, investment pools and money market mutual funds are appropriate options to maintain liquidity.

Debt Service Funds.

These funds are specifically defined in terms of amount, size and cash flow need. Bond document covenants may require that these funds be maintained with a third party financial institution or paying agent. In such instances, the city may contract with such parties to operate in the capacity of investment advisor. An investment advisory contract must be approved by the governing body in compliance with state law. The investment advisor will be confined to the particular instruments and parameters specified as appropriate for this type of funds and the applicable bond documents.

The primary investment strategy for debt service funds is to match investment maturities with debt service payment requirements. The securities need not have an active secondary market. Securities purchased shall not have a stated final maturity date that exceeds the next unfunded debt service payment date.

Debt Service Reserve Funds.

The primary investment strategy for debt service reserve funds is to provide emergency funds to meet debt service requirements. Since these investments may be subject to arbitrage regulations, the secondary investment strategy is to attempt to maximize the amount of retained interest earnings. Securities should be of high quality and, except as may be required by the bond ordinance specific to an individual issue, of short-to-intermediate term maturities. The maximum maturity of an individual investment shall not exceed the lesser of ten years, the call date of the bonds, the maturity date of the bonds, or any applicable restriction in the bond documents.

Special Purpose/Capital Project Funds.

Fund balances designated for capital or special projects may be scheduled for expenditure separate from the flow of operating funds. Bond proceeds (which may be subject to the arbitrage rebate regulations) are a main source for capital project funds. As with operating funds, the primary investment strategy is to assure that anticipated cash flows are matched with adequate investment liquidity. The maximum weighted average maturity of capital project funds shall not exceed two years. The maximum maturity of an individual investment shall not exceed the estimated project completion date or three years. To further offset the risk of unpredictable events, investment pools and money market mutual funds are appropriate options to maintain liquidity.

Bond proceeds subject to the arbitrage regulation may necessitate an altered investment strategy under some market conditions. Investment selection for these funds may be dependent on market conditions, cash flow needs, and state law and federal legislation compliance.