Document elcerrito_gov_doc_4b1d9fd7d8

AGENDA BILL Agenda Item No. 5(0) Date: February 21, 2012 To: El Cerrito City Council From: Subject: Mary Dodge, Administrative Services Director/City Treasurer Annual Review of Financial Policies ACTION REQUESTED Adopt a resolution approving a revised Comprehensive Financial Policy and Investment Policy and rescinding Resolution 2011-05. BACKGROUND Currently there are two City Council approved policies relating to the City's finances that require an annual review, the Comprehensive Financial Policy and the Investment Policy. Each year the policies are reviewed by city staff and the Financial Advisory Board (F AB) and recommended changes are brought to the City Council for review and approval. The policies were last reviewed by the City Council in February 2011. FINANCIAL POLICY CHANGES Both policies were presented to the FAB at their October 25, 2011 and November 8, 2011 meetings and a final revision was made at the February 13, 2012 meeting. The F AB' s recommendations are shown in "redline" form as Exhibits A and· B to the attached Resolutions. During the 2009 review many changes were made by the F AB, and through the extensive City Council review of the general fund reserve requirements. Since then there have been no policy changes regarding the reserve requirements. The recommendations this year are primarily based on clarification of the language except for two new items in Section 1 of the Comprehensive Financial Policy that are included for the Council's consideration. Due to recent actions and discussions, the F AB recommends inclusion in the Overview and Long Term Financial Planning Section of the Comprehensive Financial Policy direction regarding cash flow monitoring and criteria regarding annexations. These recommendations do not require any new ongoing procedures but are intended to discuss financial areas previously unaddressed in the policy. Also removed from the policies is any reference to the El Cerrito Redevelopment Agency. Since the passage of AB1x26 dissolved all redevelopment agencies as of February 1, 2012, inclusion of the agency is no longer appropriate. Page 1 ---PAGE BREAK--- Agenda Item No. 5(0) FINANCIAL CONSIDERATIONS These policies are intended to provide financial direction to staff and greater assurance to the City Council on the processes and procedures taken to assure financial responsibility of the City. Continuing annual approval of these Financial Policies has been included in these drafts for the purpose of ongoing review and exposure of the policies to the City Council. Reviewed by: Scott Hanin City Manager Attachments: 1. City Resolution Exhibit A - Comprehensive Financial Policy Exhibit B- Investment Policy Page 2 ---PAGE BREAK--- RESOLUTION 2012-XX Agenda Item No. S(D) Attachment 1 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF EL CERRITO TO APPROVE REVISIONS TO THE CALENDAR YEAR 2012 COMPREHENSIVE FINANCIAL POLICY AND INVESTMENT POLICY AND RESCINDING RESOLUTION NO. 2011-05 WHEREAS, the purpose of the Comprehensive Financial Policy and Investment Policy is to provide guidelines for operational and strategic decision making related to financial matters; and WHEREAS, the Comprehensive Financial Policy and Investment Policy was last amended in February 2011 as a part of the annual review, and WHEREAS, the Comprehensive Financial Policy and Investment Policy was reviewed by the Financial Advisory Board at the request of the City Council, and WHEREAS, revisions to both policies as recommended by the Financial Advisory Board and further recommended by City staff have been incorporated in the attached documents. NOW THEREFORE, BE IT RESOLVED that the City Council of the City of El Cerrito hereby approve the revised City of El Cerrito Comprehensive Financial Policy and Investment Policy for Calendar Year 2012 incorporated by reference and attached hereto as Exhibit A and Exhibit B. BE IT FURTHER RESOLVED, that Resolution No. 2011-05 is hereby rescinded. I CERTIFY that at the regular meeting on February 21, 2012 the El Cerrito City Council passed this resolution by the following vote: A YES: Councilmember NOES: Councilmember ABSENT: Councilmember IN WITNESS of this action, I sign this document and affix the corporate seal of the City ofEl Cerrito on February XX, 2012. Cheryl Morse, City Clerk APPROVED: William C. Jones III, Mayor ---PAGE BREAK--- CITY OF EL CERRITO CITY COUNCIL/REDE'/ELOP.4ENT AGENCY SUBJECT: COMPREHENSIVE FINANCIAL POLICY PURPOSE: Agenda Item No. 5(D) Resolution Exhibit A NUMBER: III 4 DATE: January 2012 AUTHORITY: City Council/ Agency Board Resolution Nos. 201!--95 To establish a comprehensive set of financial policies for the City/Agency that will serve as a guideline for operational and strategic decision making related to financial matters. POLICY: The following financial policies are intended to establish a comprehensive set of guidelines for use by the City Council/Agency Board and staff on decision-making that has a fiscal impact. The goal is to maintain the City/Agency's financial stability in order to be able to continually adapt to local, regional and national economic changes. Such policies will allow the City/Agency to maintain and enhance a sound fiscal condition. This financial policy will be reviewed annually by the Financial Advisory Board and any proposed revisions will be submitted to the City Council for their approval to ensure that ft.-the policy remains current aAG-The City's comprehensive financial policies -will be included as partutilized when preparing ef-the Annual Operating Budget-:- and+Ae City's comprehensive financial policies shall be in conformance with all state and federal laws, generally accepted accounting principles (GAAP) and standards of the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). 1. OVERVIEW & LONG-TERM FINANCIAL PLANNING 1.1. The Ten-Year Financial Plan will be prepared at a minimum for the General Fund, Capital Improvements Program and, Integrated Waste Management--aM Redevelopment Agency. The City's Ten-Year Financial Plan is the long-term picture of the City's finances and will be updated annually as part of the annual budget process. Page 1 of 10 ---PAGE BREAK--- 1.2. The City shall seek a balance in the overall revenue structure between more stable revenue sources (e.g. Property Tax and Utility Taxes) and economically sensitive revenue sources Sales Tax). 1.3. The City/Agency shall develop and maintain methods for the evaluation of future development and major fiscal impacts on the City budget. 1.4. The City/Agency shall develop and implement a financial plan to address its funding needs for issues like deferred maintenance and unfunded liabilities. 1.5. The City shall address issues related to cash flow requirements and any short term borrowing requirements on a timely basis. 4-4.-1.6. The City shall require any annexation agreements to have a long- term beneficial financial impact on the City. 2. BUDGET POLICIES 2.1. The City Manager shall prepare a proposed annual budget to be reviewed by the Financial Advisory Board and presented to the City Council/Agency Board within all statutorily prescribed deadlines. The City Council/Agency Board will adopt the budget at a public hearing by June 30 of each year. 2.2. A Budget will be adopted by Resolution of the City Council/Agency Board annually, which will contain the budget amendment process, budget amendment authority, and spending authorities. All departments are responsible for meeting the City/Agency's financial policy goals and ensurl!J.ge the City's long-term financial health. Budget control is maintained at the fund level. The City Manager is authorized to transfer budgeted amounts within departments and within funds. In addition, amendments that are made to authorize spending of increased or new special purpose revenues may be approved by the City Manager. Budget modifications between funds or increases or decreases to a fund's overall budget must be approved by the City Council. 2.3. It is the City/Agency's policy to adopt a balanced General Fund budget where operating revenue is equal to, or exceeds, operating expenditures. In the event a balanced budget is not adopted, due to a deliberate reduction of accumulated fund balance or if the cause of the imbalance is expected to last for no more than one year, as with the case of a one time settlement or large purchase, the planned use of reserves to balance the budget is permitted as long as the reserve is consistent with the amounts described in Section General Fund Balance Reserve Policy. Page 2 of 10 ---PAGE BREAK--- 2.4. The operating budget shall serve as the annual financial plan for the City/Agency. It shall serve as the City/Agency's management plan for implementing goals and objectives of the City Council, Redevelopment Agency, City Manager and departments and will define service levels. 2.5. During the annual budget development process, the existing budget shall be examined to assure removal or reduction of any services or programs that should be eliminated or reduced in cost. 2.6. The annual review process shall include an assessment to determine if funds are available to operate and maintain proposed capital facilities and other public improvements. 2.7. Any year-end operating surpluses will revert to unappropriated balances for use in maintaining reserve levels set by policy and will be available for capital projects and/or one-time expenditures upon approval of the City Council/Agency Board. 2.8. Where practical, the City/Agency's annual budget will include performance measures of workload, efficiency, and effectiveness. 2.9. Revenues: 2.9.1. The City/Agency will estimate annual revenues using an objective, analytical process; specific assumptions will be documented and maintained. Budgeted revenues will be estimated conservatively using accepted standards and estimates provided by the state, other governmental agencies, and/or reliable economic forecasters when available. 2.9.2. Specific revenue sources will not be dedicated for specific purposes, unless required by law or Generally Accepted Accounting Principles (GAAP). All non-tax increment, non-restricted revenues will be deposited in the General Fund and appropriated through the budget process. +Cl* Increment revenues 'Nill be deposited into the Redevelopment Agency. ~2.9.2. On-going revenues will fund on-going expenditures. ~2.9.3. A diversified and stable revenue system will be maintained to the extent possible to protect programs from short-term fluctuations in any single revenue source. 2.1 0. Appropriations: 2.1 0.1. The City/Agency shall, to the extent possible, pay for current year expenditures with current year revenues. Where authorized activities or equipment remain incomplete and/or unpurchased, revenues and/or fund balance may be carried forward at the City Manager's direction to the next fiscal year to support such an activity/purchase. 2.1 0.2. The City/Agency shall avoid budgetary procedures which rely on financial strategies that defer payment of current operating expenses to future years. Page 3 of 10 ---PAGE BREAK--- 2.1 0.3. Department Heads are responsible for ensuring that department expenditures stay within the department's budgeted appropriation. 2.1 0.4. A City Council/Agency Board Resolution is necessary to increase any total fund appropriation where no corresponding revenue offset exists that is restricted for that purpose. 2.1 0.5. The City Manager may adjust appropriations among departments within a fund. 3. GENERAL FUND RESERVE POLICY 3.1. The purpose of the reserve policy is to set aside funds to insure against events that would adversely affect the financial condition of the City and jeopardize the continuation of necessary public services. The reserve is designed to provide adequate cash flow, protect bond ratings, and offset economic downturns and revenue shortfalls. The reserve is also available to provide for one-time funding in the event of an emergency situation such as a natural disaster or unanticipated liability. 3.2. It is a goal of the City to achieve a general fund annual operating reserve of 15°/o, with a minimum of 1 0°/o, of projected General Fund operating expenditures in each fiscal year. As part of the annual budget process, the City Council shall consider a Ten-Year Plan that attempts to maintain the minimum reserve balance of 15o/o. The City Council may adopt a deficit budget to deal with the uses discussed in Section 3.5 so long as the projected reserve does not go below 10% in any year of the Ten-Year Plan. Should the General Fund reserve fall below 1 0°/o, each budget year the City will adopt a plan to restore the reserve percentage to 1 0°/o within five years and 15°/o by the tenth year of the Ten-Year Plan. 3.3. The portion of the reserve below 1 0°/o should be utilized only for a financial emergency (as determined by the City Council), natural disaster or significant unanticipated liability. If this portion of the reserve is utilized for such an event, the Ten-Year Plan presented with the Annual Operating Budget must be developed so that the 10% base threshold is replenished within five years. 3.4. The unreserved fund balance in the Equipment Replacement Fund may be transferred to the General Fund only for a fiscal emergency where the current year revenues have decreased from the prior year or for one-time uses such as natural disasters or unforeseen liabilities. 3.5. The reserves between the 1 Oo/o and 15o/o level are designed to be used by the City to deal with revenue fluctuations that arise as a result of changes in the economy and provide opportunities to maintain services and programs Page 4 of 10 ---PAGE BREAK--- where funding may be difficult. Also, a portion of any operating reserve in excess of 1 Oo/o of annual revenues resulting from the previous fiscal year's operations could be committed to capital improvement projects or used to retire existing debt, fund future liabilities or potential legislative actions, establish or replenish equipment replacement funds, and/or establish or replenish deferred maintenance funds as long as the amount is considered in the adopted Ten-Year Plan to achieve a balance of 15°/o within ten years. 3.6. One-time revenues will not be used to fund ongoing City programs. Any one-time revenue receipt during the· fiscal year should be recognized and recorded in a "non-recurring revenue source" category. One-time revenue windfalls include: sales of city-owned real estate, CaiPERS rebates, lump sum (net present value) savings from debt restructuring, litigation settlement, unexpected revenues, and other similar sources of revenue as designated by the City Council. 4. FINANCIAL REPORTING POLICIES 4.1. Accounting Standards: 4.1.1. The City/Agency's accounting and financial reporting systems shall be maintained in conformance with all state and federal laws, generally accepted accounting principles (GAAP) and standards of the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). The City will make every attempt to implement all changes to governmental accounting practices at the earliest practicable time. 4.2. Annual Audit: 4.2.1. An annual audit will be performed by an independent public accounting firm with an audit opinion to be included with the City/Agency's published Comprehensive Annual Financial Report (CAFR). The CAFR will be submitted annually to the Government Finance Officers Association for peer review with the goal of continuing receipt of the Certificate of Achievement for Excellence in Financial Reporting. 4.2.2. The independent firm will be selected through a competitive bidding process at least once every five years. The contract may be for an initial period of three years with two additional one-year options at the City Council's discretion. The current firm may be allowed to participate in the bid process. The need for rotation of the audit staff or audit firm will be considered in the bid process. The Finance Director will review the qualifications of prospective firms and make a recommendation to the City Council. The audit contract will be awarded by the City Council. 5. OPERATIONAL MANAGEMENT POLICIES Page 5 of 10 ---PAGE BREAK--- 5.1. The City/Agency shall endeavor to avoid committing to new spending for operating or capital improvement purposes until an analysis of all current and future cost implications relating to those programs and projects is completed. 5.2. All departments will participate in the responsibility of meeting policy goals and ensuring long-term financial health. Future service plans and program initiatives will be developed to reflect current policy directives, projected resources and future service requirements. 5.3. Departmental requests for increases in staffing will be thoroughly analyzed; only those that meet adopted program initiatives and policy directives will be considered. To the extent feasible, personnel cost reductions will be achieved through attrition. 5.4. User Fees and Charges and Development Impact Fees: 5.4 Where direct services to users can be measured. as set forth in the Master Fee Schedule. the City should use appropriate fees. charges or assessments rather than general tax funds. All non enterprise user fees and charges will be examined or adjusted annually to determine the direct and indirect cost of service.:. recovery rate. \'Vhere direct services to users can be measured, the City shall consider use of appropriate fees, charges or assessments rather than general tax funds. ~5.4.1. User fees and charges for specialized services shall be established at a level related to the cost of providing such service except where the City Council has determined there is a public benefit to subsidize the service with tax based revenue. The acceptable recovery rate and any associated changes to user fees and charges will be approved by the City Council following public review. ~5.4.2. The City shall may identify the costs associated with new development as a basis for establishing development impact fees-. but +Ra-the long-term benefit of the development to the City/Agency should be considered in establishing such fees. 5.5. Grant Management: 5.5.1. The City shall actively pursue federal, state and other grant opportunities when deemed appropriate. Before accepting any grant, the City shall thoroughly consider the implications in terms of ongoing obligations that will be required in connection with acceptance of said grant and present that report for approval fFem-Qy_the City Council. 5.5.2. The term of Grant funded positions for programs should be clearly identified and presented to the City Council for approval. It is mandatory to disclose if General Fund revenues will be needed to fund a position during QLafter the Grant or program expires. Page 6 of 10 ---PAGE BREAK--- 5.5.3. Grant funding will be considered to leverage City funds. Inconsistent and/or fluctuating grants should not be used to fund ongoing programs. Programs financed with grant monies will be budgeted in separate cost centers, and the service program will be adjusted to reflect the level of available funding. In the event of reduced grant funding, City resources may be substituted only after all program priorities and alternatives are considered. 5.5.4. The cost of aAII externally mandated services for which funding is available shall be fully casted outevaluated, including overhead, to allow for complete reimbursement of expenses. 5.6. Revenue Collection Policy: 5.6.1. The City/Agency will pursue revenue collection and auditing to assure that monies due the City are accurately received in a timely manner. 5.6.2. The City will seek reimbursement from the appropriate agency for State and Federal mandated costs whenever possible. 5.6.3. The City will centralize accounts receivable/collection activities so that all receivables are hand led consistently. 5.6.4. Accounts receivable management and diligent oversight of collections from all revenue sources are imperative. Sound financial management principles include the establishment of an allowance for doubtful accounts. Efforts should shall be made to pursue the timely collection of delinquent accounts. When such accounts are deemed uncollectible, they will be written-off from the financial statements in accordance with established policies. 6. FINANCIAL MANAGEMENT POLICIES 6.1. Staff shall keep City Council/Agency Board apprised of financial opportunities available and shall develop appropriate recommendations. 6.2. All requests for City Council/Agency Board action shall include an analysis of the immediate and future fiscal impact of such action. No appropriation for new or expanded programs or staffing levels shall be approved without identifying the amount and source of available funds. 6.3. All externally mandated services for which funding is available shall be charged to allow for complete reimbursement of expenses including overhead. 6.4. Cash Management Investment: 6.4.1. Cash and investment programs will be maintained in accordance with California Government Code Section 53600 et seq. and the City/Agency's adopted investment policy and will ensure that proper controls and safeguards are maintained. Pursuant to the Investment Policy, the Financial Advisory Board, at least annually.,__yWL -reviews, and the City Council/Redevelopment Agency will affirms, a detailed investment policy. Page 7 of 10 ---PAGE BREAK--- 6.4.2. Reports on the investment portfolio and cash position will be developed and presented to the Financial Advisory Board and the City Council/Redevelopment Agency in conformity with the California Government Code. 6.4.3. Funds will be managed in a prudent and diligent manner with emphasis on safety, liquidity, and yield, in that order. 7. CAPITAL IMPROVEMENT PROJECT POLICIES 7.1. A Ten-year Capital Improvement Plan will be developed and updated annually, including anticipated funding sources. Capital improvement projects are defined as infrastructure or equipment purchases or construction which result in a capitalized asset and have a useful (depreciable) life of two years or more. 7 +Ae-Each Capital Improvement Project will identify, where applicable, current operating maintenance costs and funding streams available to repair and/or replace deteriorating infrastructure and to avoid significant unfunded liabilities. 7.3. The City will develop and implement a post-implementation evaluation of its infrastructures condition on a specified periodic basis, estimating the remaining useful life, and projecting replacement costs. 7 The City shall actively pursue outside funding sources for all Capital Improvement Projects. Outside funding sources, such as grants, shall be used to finance only those Capital Improvement Projects that are consistent with the Ten-year Capital Improvement Project Plan and/or local governmental priorities, and whose operating and maintenance costs will be included in future operating budget forecasts. 7 Capital improvement lifecycle costs will be coordinated with the development of the Operating Budget. Future operating, maintenance and replacement costs associated with new capital improvements will be forecasted, matched to available revenue sources, and included in the Operating Budget. Capital project contract awards will include a fiscal impact statement disclosing the expected operating impact of the project and when such cost is expected to occur. 7 The City/Agency must carefully seek and analyze the appropriate type of financing instrument appropriate for financing capital projects. Several options may be available - general obligation debt, fee-supported debt, fund reserves, tax increment, etc. All debt financing mechanisms shall be carefully considered and analyzed for fiscal benefit and cost effectiveness. Long-term borrowing shall be restricted to projects too large to be financed from current revenues (pay-as-you-go). Where possible, special assessment, revenue or other self-supporting bonds shall be used in lieu of general obligation bonds. Page 8 of 10 ---PAGE BREAK--- 8. DEBT MANAGEMENT POLICIES 8.1. Issuance of Debt: 8.1.1. The City/Agency will not use long-term debt to pay for on-going operations. The use of bonds, certificates of participation or capital leases will only be considered for significant capital and infrastructure improvements. 8.1.2. New debt issues, and refinancing of existing debt, must be analyzed for compatibility within the City/Agency's overall financial planning within the Ten-Year Financial Plan. The review shall include, but not be limited to, cash flow analysis and the maintenance of the City/Agency's bond rating. Annual debt service shall not produce an adverse impact upon future operations. 8.1.3. Debt financing should not exceed the useful life of the infrastructure improvement with the average (weighted) bond maturities at or below twenty years. 8.1.4. Total debt will not exceed two percent (2o/o) of the total assessed value of property in the City and General Fund Debt Service will not exceed 5% of operational appropriations. 8.2. Credit Rating: 8.2.1. The City/Agency will seek to maintain and, if possible, improve its current bond rating(s) in order to minimize costs and preserve access to credit. 8.2.2. It is the City/Agency's goal to acquire an AAA/Aaa credit rating from all three major rating agencies. The City/Agency may pay the bond insurance which is considered as part of the rating, however, the rating agency will evaluate the structure of the bond to validate the bond rating. The factors that contribute to a high rating include the City/Agency's financial management practices, low debt levels, budgetary and fiscal controls, and accountability. To support this policy, the City/Agency will continue to maintain its position of full financial disclosure and proactive fiscal planning. 9. EQUIPMENT REPLACEMENT FUND 9.1. The City shall maintain a dedicated fund to provide for replacement of vehicles and certain equipment. Unreserved fund balance will be available for transfer to the General Fund only in the event of a fiscal emergency as described in Section 3.4. 9.2. Vehicle replacement will be accomplished through the use of an amortization methodology structure. The rates will be revised annually to Page 9 of 10 ---PAGE BREAK--- ensure that charges to operating departments are sufficient for operation and replacement of vehicles and other capital equipment. Replacement costs will be based upon equipment lifecycle and anticipated inflation. 10. ENTERPRISE FUNDS 1 0.1. All Enterprise Funds user fees will be examined annually to ensure that they recover all direct and indirect costs of service, provide for capital improvements and maintenance, and maintain adequate reserves. 1 0.2. Rate increases shall be approved by the City Council following formal noticing and a public hearing. Rate adjustments will be based on the projected expenditures in the Ten-Year Financial plan. Page 10 of 10 ---PAGE BREAK--- CITY OF EL CERRITO AND Agenda Item No. 5(D) Resolution Rxhihit R EL CERRITO REDEVELOP~1ENT i\:GENCY 2012 INVESTMENT POLICY FY 2010 ll 1.0 POLICY It is the policy of the City of El Cerrito ("City") anci the El Cerrito Redevelop1nent 1\gency l\gency", Vlhich vvrith the City shall be refened to herein collectively as the '"City") to invest public funds in a manner which provides for safety of principal while providing sufficient liquidity to cover the City's short and long term needs while generating the appropriate yield. All investment activity will conform to the California Government Code, Sections 53601 through 53659. In accordance with Section 53646 of the California Government Code, the Treasurer may annually render to the City Council a statement of investment policy and the policy will have been previously reviewed by the Financial Advisory Board. 2.0 SCOPE This investment policy applies to all financial assets of the City and f_cgency as accounted for in the City of El Cerrito's Comprehensive Annual Financial Report. Policy statements included in this document focus on the City's pooled funds, but will also apply to all other funds under the Treasurer's control unless specifically exempted by statute or ordinance. This policy includes, but is not limited to the following funds: a. General Fund b. Enterprise Funds c. Capital Project Funds d. Debt Service Funds e. Special Revenue Funds f. Internal Service Funds g. Trust and Agency Funds h. Retirement Agency Funds 1. Any new funds created by the City Council This policy specifically exempts any City or lA.Lgency bond proceeds in the possession of a trustee or fiscal agent. These bond proceeds shall be invested in accordance with the requirements and restrictions outlined in the bond documents. This policy does not apply to any lending program of the City or the 2A.Lgency. Page 1 of 11 ---PAGE BREAK--- 3.0 PRUDENCE City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy All persons authorized to make investment decisions for the City of El Cerrito are trustees and therefore fiduciaries subject to the prudent person rule. The standard of prudence to be used by City of El Cerrito fiduciaries is the "Prudent Investor" Standard found in the California Government Code Section 53600.3.!. and shall be applied in the context oftnanaging the overall portfolio. The fiduciaries are, the City Manager, City Treasurer and City Council,, acting within the intent and scope of the Investment Policy and other written procedures, and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported to the City Council in a timely manner and the fiduciaries take appropriate action is taken to control adverse developments. 4.0 OBJECTIVE The objective of the investment portfolio is to meet the City's short and long-term cash flow needs. To achieve this objective, the portfolio will be structured to provide, in priority order, safety of principal, liquidity and return on investment. 4.1 Safety Safety of principal is the foremost objective of the City of El Cerrito. All investments of the City shall be undertaken in a manner that ensures the preservation of capitat in the overall portfolio. Each investment transaction shall seek to ensure that capital losses are avoided, whether from issuer default, broker/dealer default, or erosion of market value. The City shall seek to preserve principal by mitigating the two types of risk: credit risk and market risk. 4.1.1 Credit Risk Credit risk is the risk of loss due to failure of the issuer to repay an obligation and shall be mitigated by investing in only the highest qualityhigh quality credits investtnents and by diversifying the investment portfolio so that the failure of any one issuer would not unduly jeopardize the City's fiscal status. 4.1.2 Market Risk Market risk is the risk of market value fluctuations due to overall changes in the general level of interest rates and shall be mitigated by structuring the portfolio so that securities mature at the same time major expenditures occur, eliminating the need to sell securities prior to their maturity. The taking of short positiont;;, thatpositions, which is, selling securities the City does not own is Page 2 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy prohibited. It is explicitly recognized herein, however, that in a diversified portfolio, occasional measured losses are inevitable and must be considered within the context of overall investment return. 4.2 Liquidity The City's investment portfolio will be structured to provide sufficient liquidity to meet the operating requirements of the City of El Cerrito. The City of El Cerrito will attempt to match its investments with anticipated cash flow requirements whenever possible. The maximum maturity of any one security, unless otherwise restricted by the California Government Code, is limited to five years. The portfolio's weighted average maturity shall be limited to three years. 4.3 Return on Investment State law requires that the objective of return on investment be subordinate to the objectives of safety and liquidity. Employees should also seek the best return on investments while satisfying the concerns of safety and liquidity. Therefore, the Treasurer shall seek to achieve a return on the funds under their-City control throughout all economic cycles, taking into consideration the City of El Cerrito's investment risk constraints and cash flow requirements. 5.0 DELEGATION OF AUTHORITY Pursuant to Section 53601 of the California Government Code, the City Council as the legislative body of the City of El Cerrito has primary responsibility for the investment of all funds in the City treasury. As authorized under Section 53607 of the California Government Code, the City Council hereby delegates its authority to invest or reinvest the funds of the City, and to sell or exchange securities so purchased, to the City Treasurer who shall assume full responsibility for all such transactions until such time as this delegation of authority may be revoked by the City Council. In the City Treasurer's absence the City Manager is authorized to perform any required such transactions. 5.1 Investment Procedures The City Treasurer shall establish written investment policy procedures for the operation of the investment program consistent with this policy. The procedures should include reference to safekeeping, wire transfer agreements, banking service contracts and collateral/depository agreements. 6.0 ETHICS AND CONFLICT OF INTEREST Elected officials, officers and employees of the City who make investment decisions will refrain from any activity that could conflict with the proper Page 3 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy execution of the investment program or which could impair their ability to make impartial investment decisions. Employee actions will be in accordance with this policy, California Government Code Sections 1090 et seq, 87100 et seq., other applicable Government Code Sections or future Council actions. 7.0 AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS The City of El Cerrito shall transact business only with commercial banks, savings and loans, credit unions, and investment securities broker/dealers. The broker/dealers must be primary dealers regularly reporting to the Federal Reserve Bank of New York or regional broker/dealers that qualify under the Securities and Exchange Commission Rule ~ 15c3-1 (uniform net capital rule). Selection of financial institutions and broker/ dealers authorized to do business with the City shall be at the oole-discretion of the City Treasurerfiduciaries. The Treasurer will maintain a list of financial institutions authorized to provide investment services to the City. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the Treasurer with audited financial statement from the three most recent years, at least three references from other California Local agencies, a completed Broker/dealer questionnaire and a statement certifying that the institution has reviewed the California Government Code Section 53600 et seq. and the City's Investment Policy. The certification will state that the financial institution or broker/dealer and all invest1nents presented to the Treasurer \vill be in compliance with the applicable State Code and the City Investrnent Policy. The Treasurer shall determine if the Financial Institutions are adequately capitalized, make markets in securities appropriate to the City's needs and are recommended by other local agency portfolio managers. The Treasurer will conduct an annual review of the financial condition of all qualified institutions. Additionally, their current financial statements are required to be on file. 8.0 AUTHORIZED INVESTMENTS The City is authorized by California Government Code Section 53600 et seq. to invest in the following types of securities: 8.1 United States Treasury Bills, Bonds, and Notes, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest. There is no limitation as to the percentage of the portfolio that can be invested in this category. The maximum term shall be five years. 8.2 Obligations issued by United States Government Agencies such as, but Page 4 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy not limited to the Federal Farm Credit Bank (FFCB), the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation the Federal National Mortgage Association (FNMA), the Student Loan Marketing Association (SLMA), the Government National Mortgage Association (GNMA) and the Tennessee Valley Authority (TVA). United States Government Agency securities with call features are also authorized. There is no limitation as to the percentage of the portfolio that can be invested in this category. The maximum term shall be five years. 8.3 Bills of exchange or time drafts drawn on and accepted by a commercial bank, otherwise known as Banker's Acceptances. Purchases in this category may not exceed 180 days to maturity nor exceed 30% of the cost value of the portfolio. 8.4 Commercial Paper of prime quality and ranked P 1 by Moody's Investor Services, A1 by Standard and Poor's or F1 by Fitch Financial Services Inc., issued by a corporation organized and operating in the U.S. as a general corporation and having assets in excess of $500 million and having an or better rating on its long term debt as provided by Moody's, Standard and Poor's or Fitch. Purchases of eligible commercial paper may not exceed 270 days to maturity. Purchases of commercial paper may not exceed 1 0 percent of the cost value of the portfolio nor represent more than 1 0 percent of the outstanding paper of an issuing corporation. Total combined corporate debt (Commercial Paper and Medium Term Notes) may not exceed 20 percent of the cost value of the portfolio. 8.5 Negotiable Certificates of Deposit issued by a nationally or state- chartered bank or a state or federal savings institution or credit union. Securities eligible for purchase in this category shall be rated or better by Moody's, Standard and Poor's or Fitch. Purchases of Negotiable Certificates of Deposit shall not exceed 30 percent of the cost value of the portfolio nor exceed a five-year term. 8.6 Medium Term Notes (MTNs) issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. MTN s eligible for investment in this category must be rated or better by Moody's, Standard and Poor's or Fitch. Investments in this category will be limited to a five-year maximum maturity and may not exceed 10 percent of the cost value of the portfolio. Total combined corporate debt (Commercial Paper and Medium Term Notes) may not exceed 20 percent of the cost value of the portfolio. Page 5 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy 8. 7 Shares of beneficial interest issued by diversified management companies that are Money Market Funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940. These funds must either have attained the highest rating/ranking by at least two of the three largest nationally recognized rating services. Investments in this category will not exceed 5 percent of the portfolio.:. Lmd there is no final1naturity. 8.8 State Pool - Local Agency Investment Fund (LAIF). This fund was established by the State Treasurer for the benefit of Local agencies under California Government Code Section 16429.1. The City may invest in the LAIF up to the maximum amount permitted by State law. The maximum amount of $4 0 1nillion per accoant for both the City and the Redevelopment Agency has consistently been higher than the entire portfolio, but the requirement to maintain diversity prevents the entire portfolio from residing in a LAIF account. Purchase of investments will take into account the need for liquidity offered by LAIF for operational purposes, as well as the need for portfolio diversification. 8.9 Time Certificates of Deposit collateralized in accordance with the California Government Code Sections 53652 and 53653, may be purchased by the City from banks or savings and loan associations or credit unions. Purchases in this category will not exceed 5 years to maturity nor 30 percent of the cost value of the portfolio. Purchases in a single institution will not exceed 1 0 percent of the cost value of the portfolio. 8.10 Derivative Securities are those securities that derive their value from another asset or index. Investments in derivative securities will be made using the Prudent Investor Rule and will be limited to federal agency callable issues. Purchases in this category will not exceed 1 0% of the cost value of the portfolio. 8.11 Prohibited Investments. Investments not described herein are ineligible investments. The City shall not invest any funds in inverse floaters, range notes, or interest only strips that are derived from a pool of mortgages in accordance with California Government Code Section 53601.6. With the exception of callable agencies, any security that derives its value from another asset or index is prohibited. In addition, the City shall not invest any funds in any security that could result in zero interest accrual ifheld to maturity. 9.0 INVESTMENT POOLS/MUTUAL FUNDS A thorough investigation of any pooled investments or money market mutual fund is required prior to investing City funds. A due diligence review will be Page 6 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy performed on all money market mutual funds and pooled investment funds on a continued basis. As outlined in section 8.7 of this policy, investments in mutual funds are restricted to money market mutual funds and must meet the experience and asset requirements as stated. Treasury staff The fiduciaries will continually monitor the funds to ensure the maintenance of those ratings/requirements. Reports on the performance of the Pooled Money Investment Account/LAIF can be found on the California State Treasurer's web site as well as the Investment Board report, historical rates/costs and market valuations. These reports shall be reviewed by the Treasurer each month as part of the due diligence review. 10.0 COLLATERALIZATION California Government Code, Sections 53652 et seq., specifies the types and levels of collateral for public funds on deposit above the FDIC insurance amounts. The collateral requirements apply to both active bank deposits (checking and savings accounts) and inactive bank deposits (non-negotiable certificates of deposit) and must be maintained for all the City's bank deposits 11.0 SAFEKEEPING AND CUSTODY All securities held by the City of El Cerrito shall be held in safekeeping by a third party bank trust department acting as agent for the City under the terms of the custody agreement executed by the bank and the City, and shall be evidenced by safekeeping receipts. All securities will be received and delivered using standard delivery-versus-payment (DVP) procedures. Investments in the State Pool or money market mutual funds are undeliverable and are not subject to delivery or third party safekeeping. 12.0 DIVERSIFICATION The City of El Cerrito will diversify its portfolio by investment type, issuer, maturity dates and broker/dealer. Limits for security types are set forth in Section 8.0 of this document. 13.0 INTERNAL CONTROLS The City Treasurer has developedwill rnaintain a system of internal controls to ensure compliance with investment procedures of the City and Redevelopment Agency of the City of El Cerrito and the California Government Code and these controls will be audited annually by the City's external audit firm. 14.0 REPORTING Page 7 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy The Council may request that the Treasurer render a report to the City Council. The report shall include the type of investment, issuer, maturity date, par and cost/book values of all securities, investments and monies held by the City of El Cerrito. It shall also include the rate of interest, the current market value as of the report date and the source of the valuation. The report shall state compliance-of !he portfolio te-vvith the Investment policy as well as the California Government Code and it shall state the City's ability to meet its estimated expenditures for the next six months or provide an explanation as to why sufficient n1oney is not available and what actions are being done to correct the deficiencv. 15.0 INVESTMENT POLICY REVIEW AND ADOPTION The City of El Cerrito's investment policy will continue to be reviewed and adopted by the City Council annually, even if not required by California Government Code 53646. Prior to the annual submission to the City Council the Investment Policy will be reviewed by the Financial Advisory Board and the Board~s comments will be presented to the City Council for their its consideration. 16.0 GLOSSARY AGENCIES: Federal agency securities and/or Government sponsored enterprises. BANKERS ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution, as vvell as the issuer, guarantees payment of the bill~, as Vlell as the issuer. 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. Time certificates of deposit are collateralized in accordance with the State code. Large-denomination CD' s are typically negotiable and non- collateralized. 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. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. 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 of the securities. Page 8 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy DERIVATIVES: Financial instruments whose return profile is linked to or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or financial contracts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. 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, currently up to $250,000 per deposit. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLB is to liquefy the housing related assets of its members who must purchase stock in their district Bank. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): 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 RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. FIDlJCIARY An individual in whmn another has placed the utn1ost trust and confidence to manage and protect property or n1oney. The relationship wherein one person has an obligation to act for other's benefit. 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 US Government. Ginnie Mae securities are backed by the mortgages, including FHA and VA mortgages. The term "pass-throughs" is often used to describe Ginnie Maes. Page 9 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy ISSUER: A legal entity that has the power to issue and distribute securities. Issuers include corporations, municipalities, foreign and domestic governments and their agencies, and investment trusts. 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. POOLED MONEY INVESTMENT FUND (LAIF): The aggregate of all funds from political subdivisions that are placed in the custody of the County or State Treasurer for investment and reinvestment. The State of California's pool is known as the Local Agency Investment Fund, or LAIF. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. PORTFOLIO: Collection of securities and investments held by an investor. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and 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. 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. RATE OF RETURN: For fixed-rate securities, it is the coupon or contractual dividend rate divided by the purchase price which is also the current yield. 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. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C301: See Uniform Net Capital Rule. Page 10 of 11 ---PAGE BREAK--- City of El Cerrito and El Cerrito Redevelopment Agency Investment Policy TREASURY BILLS: A non-interest bearing discount security issued by the US Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term coupon-bearing US Treasury securities issued as direct obligations of the US Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term coupon-bearing US Treasury securities issued as direct obligations of the US Government and having initial maturities from two to 10 years. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as non-member broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15: 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: Income Yield is obtained by dividing the current dollar income by the current market price for the security; 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. Page 11 of 11