Town of Barnstable, MA Article VII Investment Procedures

[Amended 12-7-2010]

§ 401-53 General policy and objectives.

A. It is the policy of the Town of Barnstable that, giving due regard to the safety and risk of investment, all available funds shall be invested in conformance with legal and administrative guidelines and maximize yields with the minimum of risk and utilization of collateralization when requested.

B. Effective cash management is recognized as essential to good fiscal management. An aggressive cash management and investment policy will be pursued to take advantage of investment interest as a viable revenue source. The Town's portfolio shall be designed and managed in a manner responsive to the public trust and consistent with state and local law. Investments shall be made with the primary objectives of:

(1) Preservation of capital;

(2) Maintenance of sufficient liquidity to meet operating needs;

(3) Security of Town funds and investments;

(4) Diversification of investments to avoid unreasonable or avoidable risks; and

(5) Maximization of return on the portfolio.

C. Massachusetts General Laws, Chapter 44, Section 55B, requires the municipal treasurer to invest all public funds except those required to be kept uninvested for purposes of immediate distribution. The state law further requires that invested funds are to be placed at the highest possible rate of interest reasonably available, taking into account the acceptable levels of safety, liquidity and yield. Therefore, these guidelines are intended to further the objective of securing the highest reasonable return available that is consistent with safety of principal while meeting the daily cash requirements for the operation of the entity's business.

§ 401-54 Investment instruments.

A. Many public investments in Massachusetts are not protected by federal or state law and many investments are uncollateralized. It is the policy of the Town to retain the option to require full collateralization of all Town investments other than obligations of the United States government and its agencies. Certificates of deposit plus accrued interest up to the amount covered by FDIC insurance do not need to be collateralized pursuant to this policy. Collateralization should be held by a third party where possible.

B. The Treasurer may invest in the following instruments:

(1) The Massachusetts Municipal Depository Trust (MMDT), an investment pool for state, local and other independent governmental authorities, is under the auspices of the State Treasurer and currently managed by Fidelity Investments. It invests in bankers acceptances, commercial paper of high quality, bank certificates of deposit, repurchase agreements and United States Treasury Obligations.

(2) United States Treasury notes and bonds: obligations of the United States government issued with a fixed coupon rate and original maturities.

(3) United States agency obligations, provided that such United States agency obligations are backed by the full faith and credit of the federal government.

(4) Bank accounts or certificates of deposit which are fully collateralized through a third party agreement.

(5) Bank accounts and certificates of deposit (CDs) insured by FDIC up to the coverage limit, including CDAR eligible CDs. All bank accounts and CDs in one institution are considered in the aggregate for the insurance coverage limit. In some cases banking institutions carry additional insurance, Depository Insurance Fund (DIF).

(6) Unsecured bank deposits of any kind such as other checking, savings, money market or certificates of deposit accounts at banks that do not fit the above categories. These investments are subject to the following limitations: No more than 5% of an institution's assets and no more than 25% of a municipality's cash may be comprised of unsecured bank deposits. This percentage may be increased for not more than 30 days during times of heavy collection or in anticipation of large payments that will be made by the Town in the near future. These payments may be for items such as debt service payments, assessments or other large authorized expenditures. The institution's creditworthiness will be tracked by Veribanc, or other bank creditworthiness reporting systems. They will be diversified as much as possible and consistent with this policy.

(7) Money market mutual funds that are registered with the Securities and Exchange Commission and referenced in MGL c. 44, § 55.

(8) Common and preferred stock that are listed in the List of Legal Investments pursuant to MGL c. 167, § 15A, and MGL c. 167F, § 3.

(9) Investment grade corporate bonds, with a minimum investment risk rating of A/A2 Standard & Poor's/Moody's at the time of purchase.

(10) Investment funds that are listed in the List of Legal Investments.

(11) Mutual funds that are registered under the Investment Company Act of 1940.

(12) All other items not separately identified here that are listed in the List of Legal Investments.

§ 401-55 Risk tolerance.

A. Credit risk.

(1) "Credit risk" is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

(2) There will be no limit to the amount of United States Treasury and United States Government agency obligations, as they carry "AAA" ratings.

(3) In regards to other investments, the Town will only purchase investment grade securities with a high concentration in securities rated "A" or better.

B. Custodial risk.

(1) The "custodial credit risk" for deposits is the risk that, in the event of the failure of a depository financial institution, a municipality will not be able to recover deposits or will not be able to recover collateral securities that are in possession of an outside party. The custodial risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a municipality will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. For securities not covered by FDIC insurance, the institution should maintain Securities Investor Protection Corporation (SIPC) coverage and sufficient additional insurance to cover the amount of the Town's deposits with that institution.

(2) The Town will review the financial institution's financial statements and the background of the advisor. The institution should have at least $100 million in asset management. The intent of this qualification is to limit the Town's exposure to only those institutions with a proven financial strength, capital adequacy of the firm and overall affirmative reputation in the municipal industry.

(3) Further, all securities not held directly by the Town, will be held in the Town's name and tax identification number by a third-party custodian approved by the Treasurer and evidenced by safekeeping receipts showing individual CUSIP numbers for each security.

C. Concentration of credit risk.

(1) "Concentration of credit risk" is the risk of loss attributed to the magnitude of a government's investment in a single issuer.

(2) The Town will minimize concentration of credit risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized. In terms of the total amount of Town investments at any point in time, there shall be 10% or less exposure for any one type of security or issuer with the exception of instruments backed by the full faith and credit of the United States Government or bank instruments or investment vehicles fully insured by FDIC or DIF. For more specific information relating to diversification percentages, refer to § 401-56, below.

D. Interest rate risk.

(1) "Interest rate risk" is the risk that changes in interest rates will adversely affect the fair value of an investment.

(2) The Treasurer will manage interest rate risk by managing the duration in the account. For general Town funds, the weighted average days to maturity for the overall Town portfolio should be 365 days or less.

E. Foreign currency risk. "Foreign currency risk" is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit.

§ 401-56 Diversification.

A. Diversification should be interpreted in two ways: in terms of maturity as well as instrument type and issuer. The diversification concept should include prohibition against over-concentration of maturities, as well as concentration in a specific issuer. With the exception of United States Treasury obligations or investments fully collateralized by United States Treasuries or agencies and state pools (MMDT), no more than 10% of the Town's investments or an amount equal to the maximum amount of FDIC and DIF insurance coverage, whichever is greater, shall be invested in a single security issuer.

B. In order to enhance total yield and fulfill the objectives of this policy, the investment management style will be directed towards an active rather than passive portfolio. The following maximum limits are established for the Town's total portfolio:

(1) Certificates of deposit: 50%.

(2) United States Treasury notes/bonds/bills: 100%.

(3) United States agencies: 100%.

(4) Common and preferred stock: 10%.

(5) Investment grade corporate bonds: 10%.

C. In the Town's attempt to obtain its yield objectives, the policies set forth in this section shall be exercised in such a manner as to maintain the liquidity necessary to ensure that the next projected disbursement date and payroll dates are covered.

D. In the event of the creation of a new or previously unavailable type of investment vehicle, upon the recommendation of the Treasurer and upon the written approval of the Town Manager and Finance Director, the Treasurer may invest in such an instrument to the extent permitted by this policy.

§ 401-57 Ethical and prudent action.

A. The Town will establish a system of internal controls over the investment activities of the Town and document such controls in writing.

B. The standard of prudence to be used by the Treasurer shall be the prudent person standard and shall be applied in the context of managing an overall portfolio. The Treasurer, acting in accordance with written procedures and this IPS and exercising reasonable due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that the purchases and sale of securities are carried out in accordance with the terms of this IPS.

C. The Treasurer and Assistant Treasurer shall refrain from any personal activity that may conflict with the proper execution of the investment program or which could impair or appear to impair ability to make impartial investment decisions. Said individuals shall disclose to the Chief Executive Officer any material financial interest in financial institutions that do business with the Town.

D. It is the Town's policy that investment officers perform their duties in accordance with the policies and procedures set forth in this manual and according to the prudent person rule: Investments shall be made with judgment and care under prevailing circumstances which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation but for investment considering the probable income to be derived. The standard of prudence to be used by investment officials shall be the "prudent person" and shall be applied in the context of managing an overall portfolio. Investment officers acting in good faith and in accordance with these policies and exercising due diligence shall be relieved of personal responsibility for an individual security's performance, provided that deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

E. All brokers, dealers and advisors to the Town of Barnstable are required to sign a statement of disclosure as presented in Appendix E.[1]

[1] Editor's Note: Appendix E is included at the end of this chapter.

§ 401-58 Authorization.

The Treasurer has authority to invest municipal funds, subject to the statutes of the Commonwealth of Massachusetts MGL c. 44, §§ 55, 55A and 55B and in accordance with the Town of Barnstable's Investment Policy.

§ 401-59 Investment operating procedures.

The investments of the Town of Barnstable are administered according to an investment program. The program is formulated by the Treasurer. The Treasurer will evaluate the program at least monthly. The investment program is developed by the Treasurer through the following procedures:

A. Evaluate economic and market analyses.

B. Forecast available cash for investment.

C. Formulate and execute strategies concerning:

(1) Asset mix.

(2) Investment instruments.

(3) Maturities.

(4) Target yields.

§ 401-60 Reporting requirements.

A. On a quarterly basis, a report containing the following information will be prepared by the Treasurer and distributed to the Finance Director and/or his/her designee as appropriate. The quarterly report will include the following information, as a minimum requirement:

(1) A listing of the individual accounts held at the end of the reporting period identifying the name of the account, the type of security(ies) and the market value of each account.

(2) A summary of the income earned on a monthly basis and year-to-date basis shall be reported.

(3) A brief statement of general market and economic conditions and other factors that may affect the Town's cash position.

B. Notwithstanding the foregoing, the Treasurer shall immediately bring to the attention of the Finance Director any matter of consequence related to the investment portfolio. Such matters include, but are not limited to, SEC or other federal or state investigations of any entity which is an issuer of an instrument found in the Town's investment portfolio, failure by an entity to pay timely expected dividends, interest payments or other items of value, defaults in the terms or conditions of any investment purchase contract by the issuer of the instrument and any conduct in violation of § 401-57 of this policy.

§ 401-61 through § 401-72. (Reserved)