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HomeMy WebLinkAboutAgenda Report - November 3, 2004 E-03AGENDA ITEM E603 &Z�. CITY OF LODI %W COUNCIL COMMUNICATION TM AGENDA TITLE: Adopt resolution approving the City of Lodi annual investment policy and internal control guidelines. MEETING DATE: November 3, 2004 PREPARED BY: Finance Director/Treasurer RECOMMENDED ACTION: That the City Council adopt the attached resolution approving the City of Lodi annual investment policy and internal control guidelines. BACKGROUND INFORMATION: Section 53601 of the California government code requires the City Council to annually review and adopt the City's investment policy. Accordingly, the attached policy is presented for council review and approval. This policy is in compliance with state laws governing the investment of local agency funds and provides internal control guidelines to protect the funds of the City from misappropriation, speculation, and fraud. The City of Lodi policy was certified by the MTA, US&C in 1995 and 1997 and was re -certified in 2000. Additionally, this policy is annually reviewed by the City's audit firm and has been found to be in compliance with Government Code. FUNDING: None. pectfully, James R. Krueger Finance Director/Treasurer Prepared by: Maxine Cadwallader, Revenue Manager/Deputy Treasurer APPROVED: !� Janet Keeter, Interim City Manager RESOLUTION NO. 2004-226 A RESOLUTION OF THE LODI CITY COUNCIL APPROVING THE CITY OF LODI ANNUAL INVESTMENT POLICY AND INTERNAL CONTROL GUIDELINES BE IT RESOLVED that the City Council of the City of Lodi has reviewed and hereby approves the attached City of Lodi Annual Investment Policy and Internal Control Guidelines, which shall be effective this date. Dated: November 3, 2004 I hereby certify that Resolution No. 2004-226 was passed and adopted by the City Council of the City of Lodi in a regular meeting held November 3, 2004, by the following vote: AYES: COUNCIL MEMBERS — Hitchcock, Howard, Land, and Mayor Hansen NOES: COUNCIL MEMBERS — None ABSENT: COUNCIL MEMBERS -- Beckman ABSTAIN: COUNCIL MEMBERS — None SUSAN J. BLACKSTON City Clerk 2004-226 CITY OF LODI INVESTMENT POLICY AND INTERNAL CONTROL GUIDELINES City of Lodi TABLE OF CONTENTS SECTION DESCRIPTION Page Investment Policies Introduction 1 Scope 1 Objectives 1 Delegation of Authority 2 Prudence 2 Ethics and Conflicts of Interest 3 Monitoring and Adjusting the Portfolio 3 Internal Controls 3 Reporting 3 Authorized Investments 4 Banks and Security Dealers 6 Purchase of CD's from Local Institutions 7 Safekeeping and Collateralization 7 Administration 8 II Internal Controls General 9 Procedures 10 Treasury Function Responsibilities 11 III Sample of Investment Forms Investment Bid Sheet 12 Broker/Dealer Questionnaire 13 IV Glossary 17 V Resolution 28 INVESTMENT POLICIES City of Loch 1NVESTMNT POLICY 1. INTRODUCTION The purpose of this policy is to state the City's policies and procedures to be used for the investment of surplus funds in a prudent and systematic manner conforming to all state and local statutes governing the investment of public funds. Safety of principal is given the highest priority. In addition, this statement is intended to formalize investment -related activities to provide the highest investment return with maximum security while meeting daily cash flow demands. 2. SCOPE The investment policy applies to all funds under the direct authority of the Finance Director/City Treasurer of the City of Lodi, including but not limited to the General Fund, Special Revenue Funds, Capital Project Funds, Enterprise Funds, Internal Service Funds and Trust and Agency Funds. All funds are accounted for in the City's Comprehensive Annual Financial Report. This policy is generally applicable to bond proceeds with consideration given to specific provisions of each issuance. 3.OBJECTNES Funds of the City will be invested with the following objectives in priority order: Safety of principal is the foremost objective of the investment program. Investments of the City of Lodi shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. The City of Lodi will diversify its investments by security type and institution. Financial institutions and broker/dealers will be prequalified and monitored as well as investment instruments they propose. Liquidits The investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. This will be accomplished through maturity diversification in accordance with California Government Code 53635 and the State Local Agency Investment Fund with immediate withdrawal provision. City of Lodi INVESTMENT POLICY Return go Invmiments: The City's investment portfolio shall be invested to achieve a "bench marked average" rate of return through economic cycles, that will protect these funds from the effects of inflation and the risks associated with higher returns, as long as it does not diminish the objectives of Safety and Liquidity, while preserving and protecting capital in the overall portfolio. The'bench marked average" rate of return targeted to achieve this objective is the annual rate of return on the one-year U.S. Treasury Bill. Whenever possible and in a manner consistent with the objectives of safety of principal and liquidity, .a yield higher than the "bench marked average" rate of return shall be sought. 4. DELEGWION OF AUTHORITY The Treasurer is designated by the authority of the legislative body as the investment officer of the CitV as provided for in Government Code Section 53607 and is responsible for the investment decisions and activities of the City. The Treasurer will develop and maintain written administrative procedures for the operation of the investment program, consistent with this investment policy. The Treasurer shall hereafter assume full responsibility for such transactions until such time as the delegation of authority is revoked, and shall make a monthly report of such transactions to the legislative body. In order to optimize total return through active portfolio management, daily activity may be delegated to the Revenue Manager/Deputy Treasurer. 5. PRUDENCE The standard of prudence to be applied by the Treasurer will be the "prudent person" standard, which states "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise In the management of their own affairs, not for speculation, but for investments, considering the probable safety of their capital as well as the probable income to be derived". The prudent person standard will be applied in the context of managing the overall portfolio. The Treasurer, acting in accordance with written procedures and exercising due diligence, will not be held personally responsible for a specific security's risk or market price changes, provided that these deviations are reported immediately and that appropriate action is taken to control adverse developments. City of Lodi INVESTMENT POLICY 6 ETHICS AND CONFLICTS OF INTEREST The City Treasurer is governed by The Political Reform Act of 1974 regarding disclosure of material financial interests. The City Treasurer shall refrain from personal business activity that could conflict with proper execution of the investment program or which could impair the ability to make impartial investment decisions. 7. MONITORING AND ADJUSTING THE PORTFOLIO The Treasurer will routinely monitor the contents of the portfolio, the available markets and the relative values of competing instruments, and will adjust the portfolio accordingly. B. INTERNAL CONTROLS The Treasurer will establish a system of written internal controls, which will be reviewed annually by the City's independent audit firm. The controls will be designed to prevent loss of public funds due to fraud, error, misrepresentation, unanticipated market changes or impruderd actions. 9. REPORT04G The Treasurer will submit a quarterly investment report to the City Council, in accordance with Government Code Section 53646, to disclose the following information: • A listing of individual securities held at the end of the reporting period by authorized investment category. • Percentage of the Portfolio represented by each investment category. • Institution in which the funds are invested. • Average life and final maturity of all investments listed. • Coupon, discount or earnings rate. • Par value or cost of the security • Current market value of securities with maturity in excess of 12 months and the source of this valuation. • Ability of the city to meet its expenditure requirements for the next six months or provide an explanation of why sufficient funds will not be available as required by Gov. Code 53646 (b)(3). The quarter#y investment report to the Lodi City Council, acting legislative authority, as required by Government Code Section 53646, will be in addition to the Treasurer's monthly report and accounting of all receipts, disbursements and fund balances. In addition, the investment policy will be submitted to the City Council annually in September. Any changes will be noted and formal adoption in the form of a resolution of the City Council is required. 3 City of Lodi INVESTMENT POLICY 10.AUTHOINZED INVESTMENTS The City will invest surplus funds not required to finance the immediate needs of the City as provided In California Government Code 53601. In selecting authorized investments, consideration must be given to credit ratings and collateralization of applicable instruments. A list of these instruments is provided below. These limitations, diversification and maturity scheduling will depend upon whether the funds being invested are considered short-term or long-term funds. All funds will be considered short-term except those reserved for capital projects (i.e. bond sale proceeds) and special assessment prepayments being held for debt retirement. Pooled Accounts The City of Lodi is authorized, by policy, to invest in The Local Agency Investment Fund (LAIF), a voluntary program created by statute, which began in 1977 as an investment alternative for California's local governments and special districts and continues today under the State Treasurer's Administration. The enabling legislation for the LAIF is Section 16429.1,2,3 of the California Government Code. The LAIFJs part of the Pooled Money Investment Account (PMIA). The PMIA began in 1953 and has oversight provided by the Pooled Money Investment Board (PMIB) and an in-house Investment Committee. The PMIB members are the State Treasurer, Director of Finance, and State Controller. All securities are purchased under the authority of Government Code Section 16430 and 16480.4. The State Treasurer's Office takes delivery of all securities purchased on a delivery versus payment basis using a third party custodian. All investments are purchased at market, and market valuation is conducted monthly. It has been determined that the State of California cannot declare bankruptcy under Federal regulations, thereby allowing the Government Code Section 16429.3 to stand. This Section states that "money placed with the state treasurer for deposit in the LAIF shall not be subject to either: (a) transfer or loan pursuant to Sections 16310, 16312, or 16313, or (b) impoundment or seizure by any state official or state agency." The LAW provides a book entitled "The Local Agency Investment Fund Answer Book" which resides in the City of Lodi Treasurer's office and provides current answers to the following questions, which are required prior to investing in any pooled/fund account: ■ A description of eligible investment securities, and a written statement of investment policy and objectives. ■ A description of interest calculations and how it is distributed, and how gains and losses are treated. 4 City of Loci INVESTMENT POLICY ■ A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. n A description of who may invest in the program, how often, what size deposit and withdrawal are allowed. ■ A schedule for receiving statements and portfolio listing. ■ A fee schedule and when and how it is assessed. ■ Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? Short -Term Portfolio Diversification The City Will diversify use of investment instruments to avoid incurring unreasonable risks, inherent in over investing in specific instruments, individual financial institutions or maturities. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment will be made in any security which at the time of the investment has a term remaining to maturity in excess of five years, unless the City Council has granted express authority to make that investment either specifically or as part of an investment program and approved by the City Council no less than three months prior to the investment. Permitted investments U.S. Treasury Obligations (Bills, notes and bonds) U.S. Government Agency Securities and Instruments Bankers Acceptances Certificates of Deposit Negotiable Certificates of Deposit Commercial Paper California State Local Agency Investment Fund Passbook Deposits Repurchase Agreements Reverse Repurchase agreements Mutual Funds Medium Term Notes Maximum Percent of Maturity Portfolio 5 Years 100% 5 Years 100% 180 days 40% 5 Years 100% 5 Years 30% 270 days 40% Indefinite 100% Indefinite 100% Not Authorized NIA Not Authorized NIA Indefinite 20% 5 Years 30% The City Treasurer will not invest in Repurchase Agreements and Reverse Repurchase agreements. Pooled funds invested for the City by entities such as California State Local Agency Investment Fund, and NCPA may invest in repurchase and reverse repurchase agreements. If repurchase agreements are legal and authorized, by policy, a Master Repurchase Agreement must be signed with the bank or dealer. 5 City of Lodi INVESTMENT POLICY Diversification by Financial Institution Bankers'Acceptances (Bas) No more than 25% of the total portfolio with any one institution. Certificates of Deposit (CDs) No more than 33% of the total portfolio with any one institution. California State Local Agency Investment Fund No more than $40 million in any one account, effective January 1, 2002. Maturity Scheduling Investment maturities for operating funds shall be scheduled to coincide with projected cash flow needs, taking into account large routine expenditures (payroll, bond payments) as well as considering sizable blocks of anticipated revenue (taxes, franchise fees). Maturities in this category will be timed to comply with the following guidelines: Under 30 days Under 90 days Under 270 days Under 1 year Under 18 months Under 2 years Under 5 years 10% minimum 25% minimum 50% minimum 75% minimum 90% minimum 95% minimum 100% minimum Long -Turn Portfolio Diversification Investments and diversification for the long-term portfolio will be the same as the short-term portfolio. Maturity scheduling will be timed according to anticipated need. For example, investment of capital project funds will be timed to meet contractor payments, usually for a term not to exceed three years. Investment of prepaid assessment funds will be tied to bond payment dates, after cash flow projections are made using a forecasting model which considers prepayment rate, delinquency rate, interest on bonds and income on investments. 11. BANIM AND SECURITY DEALERS The Treasurer will consider the credit worthiness of institutions in selecting financial institutions for the deposit or investment of City funds. These institutions will be monitored to ensure their continued stability and credit worthiness. Investment transactions will only be made with pre -approved financial institutions. Banks will provide their most recent Consolidated Report of Condition ("call report") at the request of the Treasurer. L City of Loci INVESTME61T POLICY The Treasurer will maintain a list of financial institutions authorized to provide investment services. In addition, a list will be maintained of approved security brokers/dealers selected for credit worthiness, who maintains an office in the State of California. This includes primary dealers or regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the Treasurer with the following: • Audited financial statements • Proof of National Association of Security Dealers Certification. • Trading Resolution • Proof of State Registration • Completed broker/dealer questionnaire • Certification of having read the City of Lodi's investment policy and depository contracts An annual review of the financial condition and registration of qualified bidders will be conducted by the Treasurer. The City will not normally use more than three qualified dealer/brokers to obtain bids. 12 PURC14ASE OF CDs FROM LOCAL INSTITUTIONS To the,extent reasonable and within the limits specified above, the Treasurer may purchase a $100,000 Certificates of Deposits from each bank and savings and loan institution located within the corporate limits of the City to promote economic development and as a statement of support for those institutions maintaining an office in Lodi. These investments are limited to those institutions which offer Certificates of Deposit insured by the Federal Deposit Insurance Act and have a Community Reinvestment Act rating of satisfactory or above. To aid in the diversification of the portfolio, Certificates of Deposit of above $100,000 may be purchased from local institutions provided the investment has the safety, liquidity and a rate of return comparable to that offered from LAW at the time the original investment is made. 13. SAFEKEEPING AND COLLATERTION All investment securities purchased by the City will be held in third -party safekeeping by an institution designated as primary agent. The custodian will hold these securities in a manner that establishes the City's right of ownership. The primary agent will issue a safekeeping receipt to the City listing the specific instruments, rate, maturity and other pertinent information. Deposh type securities (i.e., certificates of deposit) will be collateralized. Collateral for time deposks in savings and loans will be held by the Federal Home Loan Bank or an approved Agent of Depository. If collateral is government securities, 110% of market value to the face amount of the deposit is required. Promissory notes secured by first mortgages and first trust deeds used as collateral require 150% of market value to the face amount of the deposit. An irrevocable letter of credit issued by the Federal Home Loan Bank of San Francisco requires 105% of market value to the face amount of the public deposit. 7 City of Lodi INVESTMENT POLICY The colateral for time deposits in banks should be held in the City's name in the bank's Trust Department, or alternately, in the Federal Reserve Bank. The City may waive collateral requirements for deposits which are fully insured up to $100,000 by the Federal Deposk Insurance Corporation (FDIC). The amount of securities placed with an agent of depository will at all times be maintained in accordance with California Government Code 53652. 14. ADMI10STRATION The following administrative policies will be strictly observed: a. Payment All transactions will be executed on a delivery versus payment basis which should be done by the City's safekeeping agent. b. Bid A competitive bid process, when practical, will be used to place all investment purchases. If a specific maturity date is required, either for cash flow purposes or for conformance to maturity guidelines, bids will be requested for instruments which meet the maturity requirement. If no specific maturity is required, a market trend (yield curve) analysis will be conducted to determine which maturities would be most advantageous. c. Wire Transfers All wire transfers will be approved by the Treasurer or Revenue Manager. The City's bank will verify each transaction with a predetermined City employee other than the individual sending the wire transfer. Pre -formatted wire transfers will be used to restrict the transfer of funds with preauthorized accounts only. d. Cordirmations Receipts for confirmation of a purchase of authorized securities should include the following information: trade date; par value; maturity; rate; price; yield; settlement date; description of securities purchased; net amount due; third -party custodial information. Confirmations of all investment transactions are to be received by the Treasurer within three business days. e. Poolled Cash The City will consolidate into one bank account and invest on a pooled concept basis. Interest earnings will be allocated monthly based on current cash balances. L., INTERNAL CONTROLS City of Loci INTERNAL CONTROLS GENERAL Through this system of internal control, the City is adopting procedures and establishing safeguards to prevent or limit the loss of funds invested or held for investment due to errors, losses, misjudgments and improper acts. Internal control procedures are not intended to address every possible situation but are intended to provide a reasonable and prudent level of protection for the City's funds. 1. ObjecOves These procedures and policies are established to ensure: • the orderly and efficient conduct of investment practices, including adherence to investment policies • the safeguarding of surplus cash • the prevention or detection of errors and fraud • the accuracy and completeness of investment records • the timely preparation of reliable investment reports 2. Gener9l Control Policies The following policies are to be used to safeguard investments: • Ortonization A d6scription of responsibilities and procedures for the investment of City funds, lines of authority and reporting requirement will be maintained. • PerWonnel Only qualified and assigned personnel will be authorized to approve investment transactions; make and liquidate investments; maintain investment records; and maintain custody of negotiable instruments. Personnel assigned responsibility for the investment of City surplus funds will maintain their professional qualifications by continued education and membership in professional associations. • Segregation of functions No one having general ledger functions will have responsibility for the investment of City funds. • Safekeeping All s*curities are to be held in the name of the City of Lodi. The City will contract with a third party, usually a bank, to provide custodial services and securities safekeeping. Although a cost is involved, the risk of losing physical securities outweighs the fees involved. Preference should be given to custodial services which include reporting services as part of their service, including marking the portfolio to market value, performance evaluation and internal reporting. 9 City of Lodi INTERNAL CONTROLS • Reconpiliation of records Regular and timely reconciliation will be made of detailed securities records with the general ledger control account. Performance evaluation Perfatmance statistics will be maintained and reported monthly as provided in the Investment Policies. The indices to be used is the rate of return for the one-year U.S. Treasury Bill and the annual rate of return for the Local Agency Investment Fund (LAIF) managed by the State Treasurer's Office. PROCEDURES 1. Assigr*d Responsibilities a. City Council responsibilities: • Adoption of City's investment policies by Resolution • Re%4ew and evaluation of investment performance b. Finance Director/Treasurer duties and responsibilities: s Formulating, recommending and implementing the City's investment policies. s Approves all investment transactions prior to execution of any transaction. • Approves broker/dealer arrangements. c. Revenue Manager/Deputy Treasurer duties and responsibilities: • Recommends broker/dealer arrangements • Recommends investments • Executes investment transactions • Maintains records of all investment transactions • Prepares monthly investment report for City Council review • Prepare fiscal year end investment reports for City's independent audit firm review • Review's financial condition of the City's depositories (banks) at least annual for compliance with collateralization requirements under government code and financial condition and reports results to City Treasurer. d. Accounting Manager duties and responsibilities: • Maintains general ledger control account and duplicate records of investment transactions. • Verifies investment records and reconciles detailed securities records with general ledger control accounts. e. City's independent audit firm. • Will review the City's investment policies and procedures and make appropriate recommendations and findings as to compliance and steps to be taken to improve internal controls. 10 of Lodi TREASURY FUNCTION RESPONSIBILITIES FUNCTION RESPONSIBILITIES 1. Recommendations: • Recommends broker/dealer arrangements Revenue Manager/Dep.Treas. • Recommends investments Revenue Manager/Dep. Treas. 2. Authorkation of Investment Transactions • Formal investment policy prepared by Finance Director/Treasurer • Formal investment policy approved by City Council • Investment transactions approved by Finance Director/Treasurer • Broker/deaf arrangements approved by Finance Director/Treasurer 3. Executhn of Investment Transactions Revenue Manager/Dep. Treas. 4. Recording of Investment Transactions • Recording of transactions in Treasurer's records Revenue Manager/Dep. Treas. • Recording of transactions in Accounting records Accounting Manager 5. Safeguarding of assets and records • Mair+enance of Treasurer's records Revenue Manager/Dep. Treas. • Reconciliation of Treasurer's records to accounting records Accounting Manager • Review of (a) financial institution's financial condition, (b) safety, liquidity, and potential yields of investment instruments, and (c) reputation and financial condition of investment brokers Revenue Manager/Dep. Treas. • Periodic reviews of collateral Revenue Manager/Dep. Treas. • Review and evaluation of performance City Council 6. Preparation of reports Revenue Manager/Dep. Treas. 7. Periodio review of investment portfolio for conforMance to City's investment policy City's Audit Firm 11 SAMPLE INVESTMENT FORMS CITY OF LODI Cycle to: INVESTMENT BID SHEET James R Krueger Date: Finance Director__ Transaction Accounting Manager Recommended Selection Primary Dealer Quotes: Firm Dealer Telephone # Security Type Price Maturity Date Ist call date Yield to Maturity Purchase Price Cusip # Principal Discount Accrued Interest Interest Rate Interest Peri( Risk Catagory Trade Date Settlement Date Calculation Invstmnt.--Fund # Investment Fund # Issuer Code Cert./Acct. # Term of Days ME(Month end in advance) AE (Month end in arrears) M (Monthly in advance) AM (Monthly in arrears) QE (Quarter end) S (Semi-annual Actual) SC (Semi -Annual Equal) MA (Maturity) MD(Maturity Discount) LAIF BALANCE Comments: Conf. #: invest wttnaraw invest Sell Invest Sell Approval: Finance Director Revenue Manager: Approval Date: Transaction Date: 12 BROKERMEALER QUESTIONNAIRE CITY OF LODI TREASURER'S OFFICE P. O. Box 3006 Lodi, Caldomia 95241 2 Branch Address: 3. Telephone No: 4. Primary Account Representative Name: Title: Telephone #: 5. Is your firm a primary dealer in US Government Securities YIN 6. Identify the personnel who will be trading with or quoting securities to our agency's employees: Name Title Telephone # 7. Ntl. Headquarters Address: Corporate Contact: Phone: Compliance Officer (Name, Address, Phone): 8. What was your firm's total volume in US Government and Agency securities trading last calendar year? 9. Which: securities are offered by your firm? O US Treasury (} US Treasury Notes () US Treasury Bonds () Agonies (specify) 13 {) Negotiable CDs O Commercial Paper () BAs Domestic O BAs Foreign {) Repurchase Agreements () Reverse Repurchase Agreements 10. List your personnel who have read the City of Lodi Treasurer's Investment Policy 11. Please identify your public -sector clients in our geographical area who are most comparable to our government With which you currently do business. 12. Have any of your clients ever sustained a loss on a securities transaction arising from misunderstanding or misrepresentation of the risk characteristics of the instrument? If so, please explain. 13. Have any of your public -sector clients ever reported to your firm, its officers or employees, orally or in writing, that they sustained a loss exceeding 10% of the original purchase price in a single year on any individual security purchased through your firm? Explain. 14. Has your firm ever been subject to a regulatory or state/federal agency investigation for alleged improper, fraudulent, disreputable or unfair activities related to the sale of securities? Have any of your employees ever been so investigated? Explain. 15. Has a public sector client ever claimed in writing that your firm or members of your firm were responsible for investment losses? 16. Please include samples of research reports that your firm regularly prgvides to public -sector clients. 17. Please explain your normal delivery process. Who audits these fiduciary systems? 18. Please provide certified financial statements and other indicators regarding your firm's capitalization. 19. Describe the capital line and trading limits that support/limit the office that would conduct business with our government. 14 20. What training would you provide to our employees and investment officers? 21. Has your firm consistently complied with the Federal Reserve Bank's capital adequacy guidelines? As of this date, does your firm comply with the guidelines? Has your capital position every fallen short? By what factor (1.5x, 2x, etc.) Does your firm presently exceed the capital adequacy guidellines, measure of risk? Include cert'i ied documentation of your capital adequacy as measured by the Federal Reserve standards. 22. Do you participate in the Securities Investor Protection Corporation (SI PC) insurance fund program? If not, why? 23. What portfolio information do you require from your clients? 24. What reports, confirmations and paper trail will we receive? 25. Enclose a complete schedule of fees and charges for various transactions. 26. How many and what percentage of your transactions failed last month? Last year? 27. Describe the precautions taken by your firm to protect the interest of the public when dealing with governmental agencies as investors. 28. Is your fine licensed by the State of California as a broker/dealer? Y/N CERTIFICATION ATTACHED 15 CERTIFICATION I hereby certillyy that I have personally read the latest adopted resolution of investment policies and objectives of the City of Lodi Treasurer and the California Government Codes pertaining to the investments of the City of Lodi, and have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of Lodi. All sales personnel will be routinely informed of the City of Lodi's investment objectives, horizon, outlook, strategies and risk constraints whenever we are so advised. We pledge to exercise due diligence in informing the City of Lodi of all foreseeable risks associated with financial transactions conducted with our firm. I attest to the accuracy of our responses to your questionnaire. SIGNED TITLE DATE COUNTERSIGNED DATE (Person in chOrge of government securities operations) NOTE: Completion of Questionnaire is only part of the City of Lodi's Certification process and DOES NOT guarantee that the applicant will be approved to do business with the City of Lodi. On this day of 19 before me the undersigned Notary Public, personally appeared () personally known to me ( ) proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) subscribed to the within instrument, and acknowledged that executed it. State of County of WITNESS my hand and official seal. Notary's Signature fC GLOSSARY City of Lod GLOSSARY OF COMMONLY USED FINANCIAL TERMS AGENT: an agent is a firm or individual, which executes orders for others or acts on behalf of others (the principal). The agent is subject to the control of the principal and does not have title to the principal's property. The agent may charge a fee or commission for this service. AGENCIES: federal agency securities and/or Government-sponsored enterprises. AGREEMENT: an agreement is an arrangement or understanding between individual traders to honor market quotes within predetermined limits on dollar amount and size. AMORTIZATION: a straight-line reduction of debt by means of periodic payments sufficient to meet currertt interest charges and to pay off the debt at maturity. ARBITRAGE: a technique used to take advantage of price differences in separate markets. This is accomplished by purchasing securities, negotiable instruments or currencies in.one market for immediate sale in another market at a better price. ASKED: the price at which securities are offered. AT THE MARKET: a trading term for the buying or selling of securities at the current market price rather than at a predetermined price. BANKERS ACCEPTANCE (BA): a bearer time draft for a specified amount payable on a specified date. An individual or business seeking to finance domestic or international trade draws it on a bank. Commodity products collateralize the BA. Sale of goods is usually the source of the borrower's repayment to the bank. The bank finances the borrower's transaction and then often sells the BA on a discount basis to an investor. At maturity, the bank is repaid and the investor holding the BA receives par value from the bank. BASIS PRICE: price expressed in yield -to -maturity or the annual rate of return on the investment. BEAR MARKET: a period of generally pessimistic attitudes and declining market prices. (Compare: Bull market) BELOW THE MARKET: a price below the current market price for a particular security. BID AND ASKED OR BID AND OFFER: the price at which an owner offers to sell (asked or offer) and the price at which a prospective buyer offers to buy (bid). It is often referred to as a quotation or a quote. The difference between the two is called the spread. 17 City of Lodl GLOSSARY OF COMMONLY USED FINANCIAL TERMS BOND: an interest-bearing security issued by a corporation, government, governmental agency or other body, which can be executed through a bank or trust company. A bond is a form of debt with an interest rate, maturity, and face value, and is usually secured by specific assets. Most bonds have a maturity of greater than one year, and generally pay interest semiannually. BOND ANTICIPATION NOTE (BAN): short-term notes sold by states and municipalities to obtain interim financing for projects which will eventually be financed by the sale of bonds. BOND DISCOUNT: the difference between a bond's face value and a selling price, when the selling price is lower than the face value. BOND RATING: the classification of a bond's investment quality. (See: Rating). BOND RESOLUTION: a legal order or contract by a governmental unit to authorize a bond issue. A bond resolution carefully details the rights of the bondholders and the obligation of the issuer. BOOK VALUE: the amount at which a security is carried on the books of the holder or issuer. The book volue is often the cost, plus or minus amortization, and may differ significantly from the market value. BROKER: a middleman who brings buyers and sellers together and handles their orders, generally charging a commission for this service. In contrast to a principal or a dealer, the broker does not own or take a position in securities. BULL MARKET: a period of generally optimistic attitudes and increasing market prices. (Compare: gear Market). BUYERS MARKET: a market where supply is greater than demand, giving buyers an advantage in purchase price and terms. CALL: an option to buy a specific asset at a certain price within a particular period. CALLABLE: a feature which states a bond or preferred stock may be redeemed by the issuer prior to maturity under terms designated prior to issuance. CALL DATE: the date on which a bond may be redeemed before maturity at the option of the issuer. CALLED BONDS: bonds redeemed before maturity. CALL PREMIUM: the excess paid for a bond or security over its face value. 18 City of Lod GLOSSARY OF COMMONLY USED FINANCIAL TERMS CALL PRICE: the price paid for a security when it is called. The call price is equal to the face value of the security, plus the call premium. CALL PROVISION: the call provision describes the details by which a bond may be redeemed by the issuer, in whole or in part, prior to maturity. A Security with such a provision will usually have a higher interest rate than comparable, but noncallable securities. CAPITAL GAIN OR LOSS: the amount that is made or lost, depending upon the difference between the sale price and the purchase price of any capital asset or security. CAPITAL MARKET: the market in which buyers and sellers, including institutions, banks, governments, corporations and individuals, trade debt and equity securities. CASH SALE: a transaction calling for the delivery and payment of the securities on the same day that the transaction takes place. CERTIFICATE OF DEPOSIT (CD): debt instrument issued by a bank that usually pays interest. Institutional CD's are issued in denominations of $100,000 or more. Maturities range from a few weeks to several years. Competitive forces in the marketplace set interest rates. COLLATERAL: securities or other property, which a borrower pledges for the repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COLLATERAL NOTE: a promissory note, which specifically mentions the collateral, pledged by the borrower for the repayment of an obligation. COMMERCIAL PAPER: short-term obligations with maturities ranging from 2 to 270 days issued by banks, corporations, and other borrowers to investors with temporarily idle cash. Such instruments are unsecured and usually discounted, although some are interest bearing. COMMISSION: the brokers or agent's fee for purchasing or selling securities for a client. COUPON: the annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. COVENANT: a pledge in the bond resolution or indenture of the issuing government to perform in a way that may benefit the bondholders, or to refrain from doing something that might be disadvantageous to them. COVER: the spread between the winning bid (or offer) and the next highest bid (or the next lowest offer). It is useful as a basis for evaluation of the bids. COVERAGE RATIO: the ratio of income available to pay a specific obligation versus the total amount obligated. This is a measure of financial stability. 19 City of Loch GLOSSARY OF COMMONLY USED FINANCIAL TERMS CREDIT ANALYSIS: a critical review and appraisal of the economic and financial condition of a government agency or corporation. The credit analysis evaluates the issuing entity's ability to meet its debt obligations and the suitability of such obligations for underwriting or investment. CURRENT MATURITY: amount of time left to the maturity of an obligation. DEBENTURE: a bond secured by the general credit of the issuer rather than being backed by a specific lien on property as in mortgage bonds. DEBT COVERAGE: this term is normally used in connection with revenue and corporate bonds. It indicates the margin of safety for payment of debt, reflecting the number of times by which earnings for a certain period of time exceed debt payable during the same period. DEBT LIMIT (OR CEILING): the maximum amount of debt that can legally be acquired under the debt -incurring power of a state or municipality. DEBT SERVICE: interest and principal obligation on an outstanding debt. This is usually for a one-year period. DEFAULT: failure to pay principal or interest promptly when due. DELIVERY VERSUS PAYMENT: securities industry procedure, common with institutional accounts, whereby delivery of securities sold is made to the buying customer's bank in exchange for payment, usually in the form of cash. (Institutions are required by law to require "assets of equal value" in exchange for delivery.) Also called Cash on Delivery. DERIVATIVE: contracts written between a City and a counter party such as a bank, insurance company or brokerage firms. Their value is derived from the value of some underlying assets such as Treasury Bonds or a market index such as LIBOR. Derivatives are used to create financial instruments to meet special market needs. Two contrasting reasons for the use of derivatives are: 1) to limit risk or transfer it to those willing to bear it; and, 2) to speculate about future interest rates and leverage in hope of increasing returns. DISCOUNT: the difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DIVERSIFICATION: dividing investment funds among a variety of securities offering independent returns. DUE DILIGENCE: exercising of due professional care in the performance of duties. 20 City of Loci GLOSSARY OF COMMONLY USED FINANCIAL TERMS FACE VALUE: the principal amount owed on a debt instrument. It is the amount on which interest is computed and represents the amount that the issuer promises to pay at maturity. FANNIE MAE: trade name for the Federal National Mortgage Association. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): federal agency established in 1933 that guarantees (within limits) funds on deposit in member banks and performs other functions such as making loans to or buying assets from members banks to facilitate mergers or prevent failures. FEDERAL FUNDS RATE: the rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. FEDERAL HOME LOAN BANKS (FHLB): 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 FHLBs 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 OMEN MARKET COMMITTEE (FOMC): consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: the central bank of the United States created by Congress and consisting of 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. FIDUCIARY: an individual or group, such as a bank or trust company, which acts for the benefit of another party or to which certain property is given to hold in trust, according the trust agreement. FISCAL YEAR: an accounting or tax period comprising any twelve-month period. The City's fiscal year starts July 1. 21 City of Loci GLOSSARY OF COMMONLY USED FINANCIAL TERMS FREDDIE MAC: trade name for the Federal Home Loan Mortgage Corporation. FULL FAITH AND CREDIT: the unconditional guarantee of the United States government backing a debt for repayment. GENERAL OBLIGATION BONDS (GO's): bonds secured by the pledge of the municipal issuer's full faith and credit, usually including unlimited taxing power. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term "pass-through" is often used to describe Ginnie Maes. HOLDER: the person or entity, which is in possession of a negotiable instrument. INDEBTEDNESS: the obligation assumed by a borrower, guarantor, endorser, etc. to repay funds which have been or will be paid out on the borrower's behalf. INDENTURE: a written agreement used in connection with a security issue. The document sets the maturity date, interest rate, security and other terms for both the issue holder, issuer and, when appropriate, the trustee. INTEREST RATE: the interest payable each year on borrowed funds expressed as a percentage of the principal. INVESTMENT: use of capital to create more money, either through income-producing vehicles or through more risk -oriented ventures designed to result in capital gains. INVESTMENT PORTFOLIO: a collection of securities held by a bank, individual, institution, or government agency for investment purposes. IRREVOCABLE LETTER OF CREDIT: instrument or document issued by a bank guaranteeing the payment of a customer's drafts up to a stated amount for a specified period. It substitutes the bank's credit for the buyer's and eliminates the seller's risk. This arrangement cannot be changed or terminated by the one who created it without the agreement of the beneficiary. ISSUE PRICE: the price at which a new issue of securities is put on the market. ISSUER: any corporation or governmental unit, which borrows money through the sale of securities. 22 City of Lod GLOSSARY OF COMMONLY USED FINANCIAL TERMS JOINT AND SEVERAL OBLIGATION: a guarantee to the holder in which the liability for a bond or note issue may be enforced against all parties jointly or any one of them individually so that one, several or all may be held responsible for its payment. LAIR trade name for California State Local Agency Investment Fund. LEGAL INVESTMENT: a list of securities in which certain institutions and fiduciaries may invest as determined by regulatory agencies. LEGAL OPINION: an opinion concerning the legality of a bond issue, usually written by a recognized law firm specializing in the approval of public borrowings. 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. MARKETABILITY: the measure of ease with which a security can be sold in the secondary market. MARKET ORDER: an order to buy or sell securities at the prevailing bid or ask price on the market. MARKET VALUE: the price at which a security is trading and could presumably be purchased or sold. MARKET VS. QUOTE: quote designates the current bid and ask on a security, as opposed to the price at which the last security order was sold. MASTER REPURCHASE AGREEMENT: a written contract covering all future transactions between the parties to repurchase ---reverse repurchase agreements that establishes each party's rights in the transactions. A master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the event of default by the seller -borrower. MATURITY: the date that the principal or stated value of debt instrument becomes due and payable. It is also used as the length of time between the issue date and the due date. MONEY MARKET: the market in which short-term debt instruments (bills, commercial paper, bankers` acceptances; etc.) are issued and traded. MORTGAGE BOND: a bond secured by a mortgage on property. The value of the property used as collateral usually exceeds that of the mortgage bond issued against it. 23 City of Lol GLOSSARY OF COMMONLY USED FINANCIAL TERMS NEGOTIABLE: a term used to designate a security, the title to which is transferable by delivery. Also used to refer to the ability to exchange securities for cash or near -cash instruments. NO PAR VALUE: a security issued with no face or par value. NON-NEGOTIABLE: a security whose title or ownership is not transferable through a simple delivery or endorsement. (See: Negotiable.) OBLIGATION: a responsibility for paying back a debt. OFFER: the price of a security at which a person is willing to sell. OFFERING: placing securities for sale to buyers. The offering usually states the price and terms. OPEN MARKET OPERATIONS: purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Resorve's most important and most flexible monetary policy tool. PAR VALUE: the stated or face value of a security expressed as a specific dollar amount marked on the face of the security; the amount of money due at maturity. Par value should not be confused with market value. PAYING ANENT: the agency, usually a commercial bank, which dispenses the principal and interest payable on a maturing issue. PORTFOLIO: the collection of securities held by an individual or institution. PREMIUM: the amount by which the price paid for a security exceeds the par value. Also, the amount that must be paid over the par value to call an issue before maturity. PRIMARY DEALER: a group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -registered securities broker-dealers, banks, and a few unregulated firms. PRINCIPAL: the face or par value of an instrument. It does not include accrued interest. 24 City of Loi GLOSSARY OF COMMONLY USED FINANCIAL TERMS PRUDENT MAN RULE: an investment standard established in 1630. It states that a trustee who is investing for another should behave in the same way as a prudent individual of discretion and intelligence who is seeking a reasonable income and preservation of capital. QUOTATION (QUOTE): the highest bid to buy or the lowest offer to sell a security in any market at a particular time. RATE OF RETURN: the yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income returns. RATING: the designation used by investors' services to rate the quality of a security's creditworthiness. Moody's ratings range form the highest Aaa, down through Aa, A, Baa, Ba, B, etc., while Standard and Poor's ratings range from the highest AAA, down through AA, A, BBB, BB, B, etc. REFINANCING: rolling over the principal on securities that have reached maturity or replacing them with the sale of new issues. The object may be to save interest costs or to extend the maturity of the loan. REGISTERED BOND: a bond whose principal and/or interest is payable only to that person or organization which is registered with the issuer. This form is not negotiable and it can be transferred only when endorsed by the registered owner. REPURCHASE AGREEMENT (REPO): agreement between a seller and a buyer, usually of U.S. Government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. The attraction of repos is the flexibility of maturities that makes them an ideal place to "park" funds on a very temporary basis. Dealers also arrange reverse repurchase agreements, whereby they agree to buy the securities and the investor agrees to repurchase them at a lader date. REVENUE ANTICIPATION NOTES (RAN): short-term notes sold in anticipation of receiving future revenues. The notes are to be paid from the proceeds of those revenues. REVENUE BOND: a state or local bond secured by revenues derived from the operations of specific public enterprises, such as utilities. Such bonds are not generally backed by the taxation power of the issuer unless otherwise specified in the bond indenture. SAFEKEEPING: service banks offer to customers for a fee, where securities are held in the bank's vaults for protection. 25 City of Lodi GLOSSARY OF COMMONLY USED FINANCIAL TERMS SECONDARY MARKET: a market made for the purchase and sale of outstanding issues following th® initial distribution. SECURED DEPOSIT: bank deposits of state or local government funds which, under the laws of certain jurisdictions, must be secured by the pledge of acceptable securities. SECURITIES: investment instruments such as bonds, stocks and other instruments of indebtedness or equity. SECURITIE$ & EXCHANGE COMMISSION: agency created by Congress to protect investors in securities transactions by administering securities legislation. SERIAL BOND: bonds of the same issue, which have different maturities, coming due over a number of years rather than all at once. This allows the issuer to retire the issue in small amounts over a long period of time. SETTLEMENT DATE: date by which an executed order must be settled, either by buyer paying for the securities with cash or by a seller delivering the securities and receiving the proceeds of the sale for them. SINKING FUND: a reserve fund set aside over a period of time for the purpose of liquidating or retiring an obligation, such as a bond issue, at maturity. SPECIAL ASSESSMENT BONDS: bonds that are paid back from taxes on the property that is benefiting from the improvement being financed. The issuing governmental entity agrees to make the assessments and earmark the tax proceeds to repay the debt on these bonds. SPREAD: the difference between two figures or percentages. For example, it may be the difference between the bid and asked prices of a quote, or between the amount paid when bought and the amount received when sold. TAX ANTICIPATION NOTES (TAN): short-term notes issued by states or municipalities to finance current operations in anticipation of future tax collections which would be used to repay the debt. TAX-EXEMPT BONDS: interest paid on municipal bonds issued by state and local governments or agencies is usually exempt from federal taxes, and in some cases, the state and/or local taxes. The interest rate paid on these bonds is generally lower than rates on non- exempt securities. TERMS: the conditions of the sale or purchase of a security. TREASURY SILL (T -BILL) : a non-interest bearing discount security issued by the U.S. Treasury to finance the rational debt. Most bills are issued to mature in three months, six months, or one year. 26 City of LocO GLOSSAIV OF COMMONLY USED FINANCIAL TERMS TREASURY BONDS: long-term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: medium-term coupon -bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. TRUSTEE: a bank designated as the custodian of funds and the official representative for bondholders. UNDERW FRTER: a dealer bank or other financial institution, which arranges for the sale and distribution of a large batch of securities and assumes the responsibility for paying the net purchase price. UNIFORM NET CAPITAL RULE: securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one -reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. YIELD: the annual rate of return on an investment, expressed as a percentage of the investment. YIELD CURVE: graph showing the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from the shortest to the longest available. The resulting curve shows if short-term interest rates are higher or lower than long-term rates. For the most pmt, the yield curve is positive (short-term rates are lower), since investors who are willing to tie up their money for a longer period of time usually are compensated for the extra risk they are taking by receiving a higher yield. 27