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Approved: May 26, 2009 1. POLICY It is the policy of the County of Otsego to manage public funds in a manner which will provide the highest investment return with maximum security, while meeting the daily cash flow demands of the County and conforming to all State statutes and local resolutions governing the investment of public funds. The intent of the Investment Policy of the County of Otsego is to define the parameters within which the County’s funds are to be managed. The County recognizes its responsibilities with respect to the use and custody of public funds. As a result of changes in the market or State statute, current holdings could exceed the guidelines of this policy. Whenever that occurs, notice will immediately be provided by the Otsego County Treasurer to the Administrator and Budget and Finance Committee and appropriate action taken. The comprehensive policy will define the following: • Scope of policy • Investment objectives • Prudence • Authority • Ethics and conflicts of interest • Authorized financial dealers and institutions • Authorized and suitable investments • Maturities and diversification • Safekeeping of investments • Cash management • Accounting • Internal controls • Investment performance and reporting • Investment Policy adoption Questions regarding this policy should be directed to County of Otsego Office of the County Treasurer (989) 731-7560 County Credit Card County Investment Policy ---PAGE BREAK--- Approved: May 26, 2009 2. STATUTORY REFERENCES Act 20 of the Public Acts of 1943, as amended, MCL 129.91 et seq. 3. SCOPE The Investment Policy applies to all County funds held by the County other than pension funds; deferred compensation funds; and certain funds of the District Court, Friend of the Court, and Social Services. These assets are accounted for in the County’s annual financial report and include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Funds Trust and Agency Funds 4. INVESTMENT OBJECTIVES The following investment objectives, in priority order, will be applied in the management of the County’s funds: Safety. The primary objective of the County’s investment activities is the preservation of capital in the overall portfolio and the protection of investment principal. The County Treasurer will establish investment procedures and strategies to control risks and diversify investments regarding specific security types and individual financial institutions. Diversification. The investments will be diversified by security type and institution in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. Liquidity. The investment portfolio will remain sufficiently liquid to enable the County to meet future operating, capital expenditure, and debt needs which might be reasonably anticipated, and to meet unanticipated needs. Management of Risk. To control risks regarding specific security types, or individual financial institutions, or specific maturity, the county will diversify its investments. Return on Investment. It is the intent of the County to maximize its return on surplus funds by actively investing all available and prudent balances within the guidelines established by State statutes and this Policy. The County recognizes that interest earnings are an important revenue source; however, the priority is safety, liquidity to meet County obligations and then interest earnings. ---PAGE BREAK--- Approved: May 26, 2009 Competitive Environment. An objective of the Investment Policy is to provide for a competitive environment while providing flexibility to the County Treasurer. Competitive concepts include taking bids on investments placed and bank services purchased. 5. PRUDENCE The standard of prudence to be applied by the investment officials shall be the “prudent person rule” and shall be applied in the context of managing an overall portfolio. Under the “prudent person rule”, 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, but for investment, considering the probable safety of their capital as well as the probable revenue to be derived. 6. AUTHORITY The County Treasurer is the custodian of all County funds. By resolution, and in accordance with Act No. 40, Public Acts of Michigan, 1932, as amended, the County Board of Commissioners designates a depository or depositories for County funds. By State statute, the County Treasurer is authorized to invest surplus County funds in the various forms of investments that are permitted by State statutes and that follow the guidelines of this Policy. The County Treasurer shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of the staff of the Treasurer’s Office. The County Treasurer shall complete an investment training course at least once per year. 7. ETHICS AND CONFLICTS OF INTEREST The Treasurer and employees of the Treasurer’s Office, involved in investment activities, shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair (or create the appearance of an impairment on) their ability to make impartial investment decisions. These persons shall disclose to the County Board of Commissioners any material financial interests in financial institutions that conduct business with Otsego County, and they shall further disclose any large personal financial investment positions that could be related to the performance of the County’s portfolio. The Treasurer and the above mentioned employees shall subordinate their personal financial transactions to those of the County, particularly with regard to the time of purchases and sales. ---PAGE BREAK--- Approved: May 26, 2009 8. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS Depositories. Deposits made by the County with financial institutions consist of checking accounts, savings accounts, and certificates of deposit. It is understood by the County that for FDIC deposit insurance purposes, all funds in deposit form with one financial institution are added together and insured up to a maximum of $250,000 in demand deposits and $250,000 in time deposits regardless of the number of accounts involved. It is the policy of the County to manage the risk by establishing procedures to evaluate the creditworthiness of the financial institutions and to diversify by setting concentration limits for each financial institution where funds are placed in deposit form. The County does not expect to manage this risk by limiting deposits with each financial institution to $250,000. Deposits held in non-interest bearing accounts or low-interest accounts are fully insured regardless of the amount in the account. This full coverage is in effect through December 31, 2009. Depositories shall be selected through the County’s banking services procurement process, which shall include a two year solicitation and review of current vendor pricing and market comparisons, and issued every four years a formal request for proposals. The banking services procurement process shall be managed by the County Treasurer in a manner consistent with the County’s Purchasing Policy and the requirements of Michigan law. The County Treasurer will recommend financial institutions to provide depository services to the County Commission for approval. In selecting depositories, the creditworthiness of institutions shall be considered. The evaluation of the financial institution will be based upon information provided by a service such as the FDIC’s Federal Financial Institutions Examination Council. The evaluation will include the following recommended financial ratios and other relevant data (financial institutions that do not meet all of the criteria will still be considered on an individual basis for some Certificate of Deposit investments): Net income ratio/Net income to earning assets minimum 0.6% Net loan charge off to average loans maximum 1.0% Cash and Treasuries to total deposits minimum 10.0% Net purchased money to earning assets maximum 110.0% Capital to total assets minimum 5.0% Net loans to deposits maximum 80.0% Municipal time deposits to total deposits maximum 20.0% In addition to a ratio analysis, the institution will have been profitable for the past five years. However, if a loss is reported in no more than one year of the past five years, and if the institution remains profitable in the aggregate, the County Treasurer may review the circumstances and approve the institution for the bid list if appropriate. All financial institutions who desire to become qualified bidders for investment transactions must supply the County Treasurer with the following: audited financial statements for the most recent fiscal year and then annually, within 6 months of the year end; certification of having read the County’s Investment Policy and the pertinent State statutes; proof of National Association of Security Dealers certification; and proof of State registration, where applicable. ---PAGE BREAK--- Approved: May 26, 2009 9. AUTHORIZED AND SUITABLE INVESTMENTS The County is empowered by Public Act 20 of 1943 (as amended through June 30, 1997) to invest public funds. In its Investment Policy, the County Board of Commissioners limits the investment authority to the following: 1. Bonds, securities or other obligations of the United States or an agency or Instrumentality of the United States. 2. Certificates of deposit, savings accounts, deposit accounts or depository receipts of a financial institution. The financial institution must be: a. a state or nationally chartered bank or a state or federally chartered savings and loan association, savings bank or credit union b. whose deposits are insured by an agency of the United States government, and c. subject to the laws of the State of Michigan 3. Commercial paper rated at the time of purchase within the two highest classifications by at least two rating services and that mature not more than 270 days after the date of purchase. Not more than 50% of any fund may be invested in commercial paper at any time. 4. Repurchase agreements consisting of bonds, securities, and other obligations of the United States or an agency or instrumentality of the United States. 5. Banker’s acceptances of United States banks. 6. Mutual funds registered under the Federal Investment Company Act of 1940, composed of the investment vehicles described above. The policy includes securities whose net asset value per share may fluctuate on a periodic basis. 7. Obligations described above if purchased through an inter-local agreement under the Urban Cooperation Act of 1967 (for example, the MBIA program). 8. Investment pools organized under the Surplus Funds Investment Pool Act (Public Act 367 of 1982), e.g. bank pools. 10. MATURITIES AND DIVERSIFICATION Liquidity shall be assured through practices ensuring that disbursement, payroll, and bond payable dates are covered through maturing investments or marketable US Treasury issues. ---PAGE BREAK--- Approved: May 26, 2009 It is the policy of the County to diversify its investment portfolio. Assets held in the pooled funds and other investment funds shall be diversified to eliminate the risk of loss resulting from the over concentration of assets in a specific maturity, a specific issuer, or a specific class of securities. In establishing diversification strategies, and within the statutory restrictions, the following guidelines and constraints shall apply: PERCENT OF PORTFOLIO PORTFOLIO ISSUER MATURITY/DURATION INSTRUMENT MIN/MAX MAXIMUM MAXIMUM US Treasuries 15% min. N/A 10 years US Agencies 50% max. 20% 7 years Certificates of Deposit 50% max. 5% net worth 1 year $10 million 10% to 2 years Commercial Paper 50% max. 5% net worth A-I 90 days A-2 60 days Repurchase Agreements 50% max. 10% 60 days Bankers Acceptances 50% max. 10% 184 days Mutual Funds 25% max. 10% N/A Money Market Mutual Funds 50% max. N/A N/A Portfolio Maturity and Limitation Percentages. The average maturity of the portfolio as a whole may not exceed three years. This calculation excludes the maturities of the underlying securities of a repurchase agreement. Limitation percentages of the portfolio are measured from the date the securities are acquired. US Treasuries. US Treasuries are debt obligations, such as bills, notes and bonds, of the U.S. government. When you buy a Treasury security, you are lending money to the federal government for a specified period of time. The County Treasurer may invest in negotiable direct obligations of the US Government. Such securities will include, but not limited to the following: Treasury cash management bills, notes, bonds, and zero strips. At least 15% of the portfolio must be in direct government securities or repurchase agreements. The maximum length to maturity of any direct investment in government obligations is ten years, except for the underlying securities of the repurchase agreements (see Repurchase Agreements). US Agencies. US Agency/Federal Agency Bonds are bonds that do not include those issued by the U.S. Treasury or municipalities. They include such agencies as Fannie Mae, Freddie Mac, Sallie Mae and the Federal Home Loan Banks. The County Treasurer may invest in Federal Agencies. Such securities may include but not limited to the Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB), and Federal Farm Credit Bank (FFCB). No more than 50% of the portfolio may be in Federal Agency securities or repurchase agreements involving Federal Agency securities. There shall be a maximum of 20% of the portfolio in any one agency security. The ---PAGE BREAK--- Approved: May 26, 2009 maximum stated maturity for an investment in Federal Agency securities is seven years from the date of purchase. Certificates of Deposit. A Certificate of deposit (CD) is a debt instrument issued by banks. CDs may be purchased only from financial institutions which qualify under Michigan law and are consistent with Opinion No. 6168, Opinions of the Attorney General (1982). Purchases of certificates of deposit are further restricted to financial institutions which have been evaluated for creditworthiness and meet the ratios stated in Section VI of this Policy. As a general guideline, certificates of deposit in any one financial institution are to be combined with all funds in deposit form with the financial institution to meet a maximum test of 5% of net worth with an overall maximum of $10 million in any one financial institution. A maximum of 10% of the portfolio may be invested in negotiable certificates of deposit with a maturity date range of 366 to 730 days and with interest paid semiannually. All other CD investments must not exceed a maximum maturity of 365 days. Commercial Paper. Commercial paper investments are short-term loans to corporations. Investments in commercial paper are restricted to those which have, at the time of purchase, the top two investment ratings (A-I/P-I or A-2/P-2) by either Standard and Poor’s and/or Moody’s or like ratings established by not less than two standard rating services. Commercial paper held in the portfolio which subsequently receives a reduced rating shall be closely monitored and sold immediately if the principal invested may otherwise be jeopardized. No more than 50% of the portfolio or 50% of any one fund may be in commercial paper. The maximum per issuer is 5% of the net worth of the issuer. The maximum maturity for A-I/P-I paper is 90 days and 60 days for A-2/P-2 paper or subject to evaluation by the County Treasurer for a longer period of time. Repurchase Agreements. Repurchase agreements are agreements between two parties whereby one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price. The County Treasurer may invest in repurchase agreements comprised only of those investment instruments as authorized with Sections VII and VIII of this Policy. All firms with whom the County enters into repurchase agreements will have in place and executed a Master Repurchase Agreement with the County (to include guidelines for safety). No more than 50% of the portfolio may be in repurchase agreements with a maximum of 10% per issuer. The maximum length to maturity is 60 days from the date of the agreement. Bankers Acceptances. A bankers acceptance is a short term debt instrument guaranteed by a bank, and sold through a brokerage company to investors. The County Treasurer may invest in bankers acceptances (BA’s) or United States banks which are eligible as defined by the Federal Reserve; from institutions who long-term debt is rated at least A or equivalent by Moody’s or Standard and Poor’s. A maximum of 50% of the portfolio may be directly invested in BA’s. A maximum of 10% of the portfolio may be invested with any one issuer. The maximum length to maturity of any BA’s investment is 180 days. Mutual Funds. Mutual funds represent an investment company designed to pool the funds of smaller investors and place them under professional management. The County Treasurer may invest in fixed income mutual funds composed of investment vehicles which are legal for direct investment by local units of government in Michigan and are consistent with Opinion No. 6776, Opinions of the ---PAGE BREAK--- Approved: May 26, 2009 Attorney General (1993) and are within the limitations of this Policy. The securities underlying the mutual fund must be rated at least A or better by either Moody’s or Standard and Poor’s or be from institutions whose long-term debt rating is AAA or better. A maximum of 25% of the portfolio may be invested in fixed-income mutual funds. A maximum of 10% of the portfolio may be invested with any one fund. Money Market Mutual Funds. Money market mutual funds trade in short-term, low-risk securities, such as certificates of deposit and U.S. Treasury notes. Permitted investments include money market mutual funds or pooled funds organized under State statute such as the Surplus Funds Investment Pool Act and the Intergovernmental Corporation Act which are composed of investment vehicles which are legal for direct investment by local governments in Michigan. A maximum of 50% of the portfolio may be invested in money market mutual funds. 11. SAFEKEEPING OF INVESTMENTS Investment securities purchased by the County shall be held in third-party safekeeping by an institution designated as primary agent. The County Treasurer, with the approval of the Board of Commissioners, will execute a third-party safekeeping agreement with the primary agent. Such agreement will include details as to responsibilities of each party; provision for delivery vs. payment; notification of transactions; safekeeping and transactions costs; and procedures in case of wire failure or other unforeseen mishaps including liability of each party. Safekeeping procedures and agreements should follow the Governmental Accounting Standards Board (GASB) guidelines for risk categories I or II. Investment securities not included in the third-party safekeeping procedure include certificates of deposit, mutual funds, direct purchases of commercial paper, and banker’s acceptances. 12. CASH MANAGEMENT The County’s policy regarding cash management is based upon the realization that there is a time- value to money. Temporarily idle cash should be invested in accordance with the County’s Investment Policy. Accordingly, the County’s financial team consisting of the County Administrator, County Treasurer, Finance Director, and Accounting Director shall cause to be prepared written cash management procedures which shall include, but not limited to, the following: Receipts. All moneys due the County shall be collected as as possible. Moneys that are received shall be deposited in an approved financial institution no later than the next business day after receipt by County departments or as may be deposited by written policy. Amounts that remain uncollected after a reasonable length of time shall be subject to any available legal means of collection. Disbursements. Any disbursements to suppliers of goods or services or to employees for salaries and wages shall be contingent upon an available budget appropriation and the required prior approvals as ---PAGE BREAK--- Approved: May 26, 2009 stated in the County’s general policies. The payment of County funds should be through controlled disbursements to maximize investment opportunities, however, payment should be made timely. Cash forecast. At least annually, cash forecast shall be prepared using expected revenue sources and items of expenditure to project cash requirements over the fiscal year. The forecast shall be updated from time to time to identify the probable inevitable balances that will be available. Pooling of cash. Except for cash in certain restricted and special accounts, the County Treasurer shall pool cash of various funds to maximize investment earnings. Distribution of interest. Investment interest shall follow principal. Interest on the pooled funds shall be distributed based upon the average balance of the specific General Ledger fund and the average interest yield of the pool. Certain General Ledger funds that receive funding from the General Fund are exempt from the interest distribution and the interest is given to the General Fund. Allocation of service charges. Unless otherwise specified by the financial institution, service charges shall follow principal. Service charges on the pooled funds shall be distributed based upon the average balance of the specific General Ledger fund and the average service charge of the pool. 13. ACCOUNTING The County maintains its records on the basis of funds and account groups, each of which is considered a separate accounting entity. All investment transactions shall be recorded in the various funds of the County in accordance with generally accepted accounting principles as promulgated in Statement No. 31 of the Government Accounting Standards Board (GASB). Accounting treatment will include: • Investments will be carried at fair value in the balance sheet or other statements of financial position. • Fair value is the amount at which an investment could be exchanged in a current transaction between willing parties. • The method used to determine fair value will be quoted market prices. • The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of investments. • Realized gains and losses on investments that had been held in more than one fiscal year and sold in the current year are included as a change in the fair value of investments reported in the prior year(s) and the current year. • All investment income, including changes in the fair value of investments shall be recognized as revenue in the operating statement. ---PAGE BREAK--- Approved: May 26, 2009 14. INTERNAL CONTROLS The County Treasurer shall abide by a system of established internal controls, documented in writing, which is designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by investment officers of the County. Internal control procedures are subject review with regard to appropriateness and compliance during the annual independent audit process. 15. INVESTMENT PERFORMANCE AND REPORTING The County Treasurer shall submit to the Board of Commissioners through the Budget and Finance Committee on a quarterly basis, a report which summarizes the County’s investment of surplus funds for the preceding year, describes the County’s existing investment holdings, examines the County’s future fiscal needs, and proposes investment strategy for the coming quarter. The report should also examine the performance of the portfolio for the previous quarter. 16. INVESTMENT POLICY ADOPTION The County’s Investment Policy is a comprehensive policy covering the statutory responsibilities of the County Treasurer and the County Board of Commissioners. The Policy shall be adopted by the County Board of Commissioners. The Policy shall be reviewed on an annual basis by the Budget and Finance Committee of the Board. Modifications made at that time or when necessitated by State statutory revision must be approved by the County Board of Commissioners.