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HomeMy WebLinkAboutAgenda Report - September 7, 1988 (95)C v U N C I L C O M M U N I C A T I O N TO: THE CIT`,.' CC)UNT(IL THE; (_'ITY rS.e'thTr�.GER' S OFFICE COUNCIL MEWING DATE: SEP`i'EMER 7, 1988 RECD IDED, ACTION: That the City Council approve the attacred Resclutlion adopting an annual inve st±nent policy and i ~,ternai control gui delineS . P iCKGRC ND II.'E`O?MATION: The California State Legi.siatuse enacted .AB1073 in 1584 requiring local agencies to adopt an annual L nvestrrtent policy. This policy is presented to the City Council after the books are closed to ena.`)le staff to obtain certain i.)en&mark rates of return for the fiscal year 1987-•88. Page 3 of the attached investment policy indicates these comparable benchmark Tates. There is one ad6itional invesumr—ent instrument requested for approval that has not been on previozzs ly adopted investment policies- Th -is is cn Page 1 and is described as "Money Market Funds." This i-vestxent instrmgrent was authorized by the State Legislature in, January-, 1987 ;:tender Goverment Code Section 53600. The managers of money r-rarket Tums that local agencies invest in rfkiy only purchase those instruments that already exist under Goverment Cc. ,Q Section 53600 and are the same ones the City of Lodi has invested in since our investment policy was adopted in 1984. The restri.ct4-o e of Governatent Code 53600 regarding money market funds are: 1. Zfie money market fund must attain the highest ranking or the highest letter and numerical rating provided by not less than two of the three largest rating services. 2. Have an invest,nent advisor registered w it h the securities and Exchange Coamission with not less than five years experience investing in the securities and obligations as authorized by Government Cade Section 53600, Subdivision (A) to (m) and with assets under management in excess of five hundred. „zillion dollars ($500,000,000) 3. Purchase price of shares shall not include cc rudssions and shall not exceed fifteen percent of the local agency's surplus ,money. . Approval is re(T-jested to invest in authorized money market funds. H. Holm FLiance Director/Treasurer FJ1H/ss Attachrzents INVP0I/ Y/T=.06s -:_?X49kYw.; :.�..:�:�.:a`�i�6,Y;.raf�.ti .;w�.wac ysw.,,..y..:..wr,.o.,e:c.,za,....�.n.�.,.n_:..� ;ax;.;,.�:::+,ronn,.�::.:,.,,..,�a.+ha..:.:e:.tr.,.,.,:>e:a^.�..w.;;::,.�*....,.,.v ......«.:.,........•-..-.•,...__.-.-.._..m......•....,,.n�.•-�...,,.,.,v..a:,w,...*'a''�`�+;kR".`�'�3ia'r2 E=BIT A IMI`L�'RNAL CONTROL GUIDELINE'S SEGREGATION OF TRcASLT?2ER RESPONSIBI?CITIES The follaaing internal control guidelines and segregation of responsibilities of Treasurer functions have been compiled by the California Municipal Treasurers Association, in cooperation cairn the California Municipal Finance Officers Association and the County Treasurers Association, OBJECT IVES OF IPyiERNAL CONTROL internal control is the plan of organization and all the related systems established by the managemlent's objective of ensuring, as far .:5 practicable: . the orderly and efficient conduct of its business, including adherence to managerxe-r; policies . the safeguarding of ac -sets . the prevention or detection of errors and fraud . the accuracy and cc a pleteness of the accounting records . the timely preparation of reliable financial information. LIMITATIONS OF INTERVAL CON"IML No internal control system, however elaborate, can by itself guarantee the achievement of manage --nt's objectives. Internal control can provide only reasonable assurance that the objectives are met, because of its inherent limitatioi,s, including: . management's uLual requirement that a control be cost-effective . the direction of most controls at recurring, rather than unusual, types of transactions . Manan error due to misunderstanding, carelessness, fatigue or distraction . potential for collusion that circunwents controls dependent upon segregation of functions . potential for a person responsible for exercising control abasing that responsibility; a member of management is frequently in a position to override controls which management has set up. urs �� or INTRV3T, CONTROL Elerients of a syste.r. of .inter .4l control are the mans by which an ora-Unization can satisfy the objectives of internal control. The ele,-Lients are: 1. Organization S cific responsibility for the perfo=,ance of duties should be assigned and lines of authority and reporting clearly identified and understood. 2. Personnel Perscnnei should have capabilities ccnnensurate with their responsibilities. Personnel selection and training policies together with the quality and quantity of supervision are thus important. 3_ Segregation of Functions Segregation of inccrnpatible functions reduces the risk that a person is in a position both to perpetrate and conceal errors or fraud in the normal coarse of duty. If two parts of a transaction are handled by different people, collusion is necessary to conceal errors or fraud. in particular, the functions that should be considered when evaluating se,rregation of functions are authorization, execution, recording, custody of assets and performing reconciliations. 4. Authorization All transactions should be authorized by an appropriate responsible individual. The responsibilities and limits of authorization should be clearly delineated. The individual or group authorizing a specific transaction or granting general authority for transactions should be in a position corarkensurate with the nature and significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully. 5. Controls Over an Accounting System Controls over an accounting system include the procedures, both manual and IDP, carried out independently to ascertain that recorded transactions are canplete, valid, authorized and properly recorded. 6. Safeguarding of Assets and Records Controls should be in place to prevent and detect loss, theft or deterioration of assets, In addition, safeguards are necessary to prevent the loss or destruction of records and documentation. These controls would involve custodial controls which are designed to prevent or detect unauthorized access to or use of assets and records and accountability controls which compare accounting records to assets to determine whether recorded assets exist and are properly recorded in accordance with generally accepted accounting principals (G.A.A.P.). 7. Management These are the controls exercised by management including day -today supervision ,'overall supervisory controls, inanagement review of significant transactions , managem�-nt review of accounts and comparison thereof to budgets, management review of the adequacy of internal control and the internal audit function. )...--i.ip6 2+.-rH.�-sa+.- b C �w 'T"�. ,. � ...F^'.•1� `C .. ✓4 ..+'ort-� EiM1.?r� 1r.M-.ti--�.+.e.» �.e�4tau.3u�...47ynyy'y.Y.� £ `a.6 � �;`7t r SEGRECA`?'IO�i OF RESPONSIBILITIES OF `1?aE TREASURER FUWTIONS rTrMI M. r /Znr sporsibil itry 1. Authorization of investrent transacticns . Formai investment policy should be - prepared by. ......................TreasurEr - submitted to......................City Ccuncil . Investrnent transactions should be approved by...............Treasurer 2. Execution of investT nt Assistant Finance Director .:ice transactions..........................Revenue/Col?ections Technician 3. Timely recording of investment transactions= Recording of investment transactions in the Treasurer's records.................Finance DeparYi7nent Secretarz . Recording of investment transactions in the accounting records ................. Senior Account Clerk 4. Verification of investment, i.e., match broker confirmation to Treasurer's records...............................Treasurer - 3 - -Function 5. Safeguarding, of Assets and Records: Responsibility . Reconciliation of Treasurer's records to the Accounting records ..............Finance Departrent Secretary Reconciliation of Treasurers records to bank statements and safekeeping records.................Revenue/Collections Technician . Recording interest received............................Revenue/Collections Technician . Review of: (a) financial institution's financial condition .................Treasurer (b} safety, liquidity and potential yields of investment instrtm3ents.........................Treasurer and (c) reputation and financial condition of investme:-it Brokers/Dealers .....................Treasurer . Periodic reviews of collateral should be performed..........................Treasurer 6. Management's periodic review of the investment portfolio as prepared by the Treasurer - key areas %-;hich should be reviewed are investment types, purchase price, market values, maturity dates and investment yields as well as conformance to stated investment policy..............Independent Auditors 7. To achieve the objectives of internal control, the Treasurer may delegate or transfer any of the above responsibilities except those of City Council. CITY OF LODI SSTAT":*�T£U OF INVES'P'•ENIT POLICY T>1 ,,--.,.- _ o This statement is intended to provide guidelines for the investment of the City's temporary idle cash under the Prudent Man Rule. (1) Objective The City':: cash management system is designed to accurately monitor and forecast ek-penditures and revenues, thus enabling the City to invest funds to the fullest extent possible. The City strives to obtain the highest yield obtainable as long as investments meet the criteria for safety and liruidity. Policv The City maintains a pooled cash concept for investment purposes. Interest earnings are allocated according to average daily cash in each Fund., Investments may 1-- mad� n tiZe tollo�-.ing iristrtrrents as allowed under current legislation of the State of California (Governrr:ent Code Section 53600 et seq.). . Securities of the U. S. Government, State of California or Local Agencies . Local Agency Investment FtLnd (State Pool! . Certificates of Deposit (time deposits) . Negotiable Certificates of Deposits . Bankers Acceptances . Commercial Paper . Nlcnvy Market Funds �Repurcbase Agreemnts (collateralized by U.S. Treasury securities) . Passbook Savings Account . Other that are, or :nay become, legal investments through the State of California Govern-wnt Code and with prior approval of the City Council (1) Cavil Code Section 2261, et seg. states in part , "...in investing for the benefit of another, a trustee shall exercise the judgatent and care, under the c .rcunstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs." _ 1 _ } Criteria for Selecting Investnents (in order of priority) 1. Safety Safety and risk associated with an investment refers to tf-,e potential loss of principal, interest or a combination of these amounts. The first level of risk control is found in state law which restricts the particular type of investment perp.ussible for municipalities. The second level of risk control is reduction of default risk by investing in inst:rtunents that appear, upon examination, to be the most credit worthy. The third level of risk control is reduction of market risk by investing Ln instrt.0 . is that have maturities coinciding with dates of disbursement, thereby eliminating risk of loss froar,. a forced sale. The City of Lodi only invests in those instrLm-ents that are considered very safe. 2. Liquidity Liquidity, refers to the ability to easily "cash in" at any time with a minimal risk of losing some portion of principal or interest. Maturities of time certificates issued by banks and savings & loan ccnpanies are selc :ted in anticipation of disbursement needs. portions of or the total amount invested with the Local Agency Investment Fund can be withdrawn in a 24-hour period. 3. Yield Yield is the potential dollar earnings an inves-.zrent can provide and is also described as the rate of return. The City attempts to obtain the highest yield possible when selecting an investment provided the criteria for safety and liquidity are met. Policy.' Constraints The City operates its investment program with m y state and self imposed constraints. It does not speculate, purchase stocks or corporate bonds. It does not deal in reverse repurchase agreements unless specifically authorized by Council, The portfolio is carefully monitored to assure prudent manag—anent. Safekeepi_ttq All sett ri.ties that may be purchased, including collateral from repurchase agreements from brokers, broker/dealers or banks, are transferred to the C.ity's designated bank. The City's designated bank sends to the City a statement of what is being safekept which shall be reconciled monchly with the City's records. - 2 - ` r�, moi-'?3OE M -3j Y ..� Investment Controls The City has developed a System of Internal Investment Controls and a Segregation_ of Responsibilities of Investment Functions (Exhibit A) in order to assure an adecnrate system of internal control over the investment function. A Finance Department Investment Ccandttee has been developed to ensure controls are in order and prudent investment procedures are fol.lawed. Members of the Ccanuttee are as follows: Finance Director/Treas»rer Assistant Finance Director Rever_ue/Collections Technician and Tlor��r+nwrt- Ccrrczt�rc� 1=P-s4=e,1t k -e -p x- -s Annually, the Treasurer w i 11 submit a Statement of Investment Policy to the City Council for their approval. Monthly, the Treasurer shall subunit a report to the City Council and City Manager showing the type of investirient, institution, date of maturity, amount of deposit, market value of ail securities with a maturity of over twelve months, rate of interest, specify in detail each investment made in repurchase agreements and other such data as may be required by the City. Investment Audit Annually, there shall be an external audit of the City's investment program to assure compliance with investment policy and controls. Inva&Wv.- apt PerfQ=awe Evaluation Performar_ce evaluation should include certain benchmark measures of rate of return. Benchmarks used for 1987-88, with average market rate of return and Lodi's =nparlson, are as follows: Betwhmark Measttws 90 -day U.S. Treasury Bills Federal Fund Rate Merrill Lynch Ready Asset (Money Market Fund) Local Age=} lriwabmnt F=d 19$7-88 Average Yield 5.95% 6.37% 6.45% 7.7.7.%, City of Lodi 7.163 - 3 - RESOLUTION NO. 88-128 A RESOLUTION ADOPTING AN ANNUAL STATEMENT OF INVESTMENT POLICY AND INTERNAL CONTROL GUIDELINES WHEREAS, legislation enacted by the Legislature of the State of California requires the adoption by cities of an annual investinent policy; and W ERFAS, the City Council of the City of Lodi v;ishes to implement a program of internal controis by which the City's investment program shall be administered; NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Lodi hereby adopts an Investment Policy, attached hereto as Exhibit A and incorporated herein by reference; FURTHER, RESOLVED, that the City Council of the City of Lodi hereby adopts Internal Control Guidelines, attached hereto as Exhibft B and incorporated herein by reference. Dated: September 7, 1988 I hereby certify that Resolution No. 88-128 was passed and adopted by the City Council of the City of Lodi in a regular meeting held September 7, 1988 by the following y.ote: Ayes : Council Members - Hinchman, Olson, Reid, Snider and Pinkerton (I'layor) Noes : Council Members - None Absent: Council Members - None Alice M. Re7mche City Clerk CITY OF LODI STAT YEINT OF rn'VESZi11124 r POLICY Pureese This statement is intended to provide guidernes for the i-n'vesu ert of the City *s temporary idle cash under the Prudent Man Rule. (1) Objective The City's cash r. ,nagement system is designed to accurately monitor aiid forecast e,�„nditures and revenues, thus enabling the City to invest funds to the fullest extent possible. The City strives to obtain the highest yield obtainable as long as invest -rents meet the criteria for safety and liquidity. Policy The City maintai?s a pooled cash concept for investment purposes. Interest earnings are allocated according to average daily cash in each Fund. Investments may be made in the following instruments as allowed under current legislation of the State of California (Government Code Section 53600 et seq.). . Securities of the U. S. Goverment, State of California or Local Agencies . Local Agency Investment Fund (State Pool) . Certificates of Deposit (time deposits) . Negotiable Certificates of Deposits . Bankers Acceptances . Ccnanercial Paper . Abney Market Funds . Repurchase Agreements (collateralized by U.S. Treasury securities) . Passbook Savings Account . O t h e r that are, or may beccake-, legal investments through the State of California Government Code and with prior approval of the City Council (1) Civil Code Section 2261, et seq. states in part , ".. ,in investing for the benefit of another, a trustee shall exercise the judgment anc'_ care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs." .Criteria for Selecting Investments tin order of priority) L�afety Safety End risk associate6 with an investment refers to the potential loss of principal, interest or a ccWbination of these amounts. The sf- level or` risk control is found in state law which restricts the pax -titular type of investment permissible for municipalities. Tone second level of risk control .is reduction of default risk by investing in LnstrL)ents that appear, upon examination, to be the most credit worthy. The third level of risk control is reduction of market risk by investing in instruments that have maturities coinciding with dates of disbursement, thereby eliminating risk of loss from a forced sale. The City of Lodi only invests in those 4Ir StrMr -ntS that are considered - -ry safe. 2. Liquidity Liquidity refers to the ability to easily "cash in" at any time with a min -'meal risk of losing some portion of principal or interest. Maturities of time certificates issued by banks and savings & loan ccxrpanies are selected in anticipation of disbursement needs. portions of or the total amount invested with the Local Agency Investment Fund can be withdrawn in a 24 --hour period. 3. Yield Yield is the potential dollar earnings an investment can provide and is also described as the rate cf return. 'Ihe City attempts to obtain the highest yield possible when selecting an investment provided the criteria for safety and liquidity are P --t. Policy Constraints The City operates its investment program with many state and self imposed constraints. It does not speculate, purchase stocks or corporate bonds. It does not deal in .reverse repurchase agreements unless specifically authorized by Council, The portfolio is carefully monitored to assure prudent management. Safekeeping All securities that may be purchased, including collateral from repurchase agreements from brokers, broker/dealers or banks, are transferred to the City's designated bank. The City's designated bank sends to the City a monthly statement of what is being safekept which s h a 11 be reconciled monthly with the C i t y' s records. Investment Controls The City has reveloped a System of �rternal investment Controls and a Segregation of Responsibilities of investnent Functions (Exhibit A) in order to assure an adequate system of internal control over the investment function. A Finance Department Investment Ccarraittee has h-een developed to ensure controls are Li crder and prudent investment procedures are followed. Menbers of the Cannittee are as follov.s: Finance Director/Treasurer Assistant Finance Director Revenue/Collections Technician and Department Secretary Investment Reports Annually, the Treasurer will s,iksnit a Statement of Investment Policy to the City Council for their approval. Monthly, the Treasurer shall suLYmit a report to the City Council and City Manager showing the type of investment, institution, date of matuxity, amount of deposit, market value of all se�--t rities with a maturity of over twelve mo�,tl�s, rate of interest, specify it detail each investment made in repurchase agreements and other �: .�ch data as may be required by the City. Investment Audit Annually, there shall be an external audit of the City's investment program to assure ccopliance with i_.:vPsturant policy and controls. Investment Performance Evaluation Performance evaluation should include certain benchmark measures of rate of return. Benchmarks used for 1987-88, with average market rate of return and Lodi's ecmparison, are as follows: Benchmark Measures 90 -day U.S. Treasury Rills Federal Fund Rate Merrill Lynch Ready Asset (Money Market Fund) 1987-88 Average Yield 5.95% 6.87% 6.45% Local Agency Investment Fund 7.77% City of Lodi - 3 - 7.16% EXHIBIT A INMERNP.I, CChNgMl, GUIUELMMS SEGREC ATION OF TREASLRER RF..iIYJi�TSiBILI CIES 'ihe following internal control guidelines and segregation of responsibilities of Treasurer functions have been dompiled by the California Municipal Treasurers Association, in cooperation with the California Municipal Finance Officers Association and the County measurers Association. O&TEt'PIVrS OF TMERNAL CONTROL Internal control is the plan of organization and all the related systems established by the management`s objective of ensuring, as far as practicable: . the orderly and efficient conduct of its business, including adherence to manager-z-&-ent policies the safeguarding of assets . the prevention or detection of errors and fraud . the accuracy and ccopleteness of the accounting records the timely preparation of reliable financial information. LIYJTATIONS OF LN'TUVAL CGNTROL. No internal control system, however elaborate, can by itself guarantee the achievement of management's objectives. Internal control can provide only re -a --n.; ble assixaa ce- Lk,at the objectives are met, because of its inherent limitations, includi_Tig: . management's usual requirement that a control be cost-effective . the direction of most controls at recurring, rather than unusual, types of transactions . human error due to misunderstanding, carelessness, fatigue or distraction . potential for collusion that circ-am<rents controls dependent upon segregation of functions . potential for a person respJnsible for exercising control abusing that responsibility • a member of management is frequently in a position to override controls which management has set up. Ell .'MEW S OF INI'E'.RNA.L, OONTROL Sleeients of a system of .internal control are the means by Mach an oirjanization can satisfy the objectives of internal control. The elt,trents are: 1. Organization Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and to ,Oerstood . 2. Personnel Personnel should have capabilities cc:rn'ensurate with trleir rr;_�nsi_bilities. Personnel selection and training policies together with th,�cnlality and quantity of supervision are thus ir-i orrtant. 3. Segregation of Functions Segregation of incanpati.ble functions reduces the risk that a person is in a position both to perpetrate and conceal errors or fraud in the ror:nal course of duty. If two parts of a transaction axe handled by different people, collusion is necessary to conceal errors or fraud. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, custody of assets and performing reconciliations. 4. Authorization All transactions should be authorized by an appropriate res.onsible individual, The responsibilities and li.*nits of authorization should be clearly delineated. The individual or group authorizing a specific transaction or granting general authority for transactions should be in a position cxTriensurate with the nature and significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully. S. Controls over an Accounting System Controls over an accounting system include -the procedures, both manual and IDP, carried out independently to ascertain that recorded transactions are complete, valid, authorized and properly recorded. 6. Safeguarding of Assam and Records Controls should be in place to prevent and detect loss, theft or deterioration of assets. In addition, safeguards are necessary to prevent the loss or destruction of records and documentation. These controls would involve custodial controls which are designed to prevent or detect unauthorized access to or use of assets and records and accountability controls which ccrnpare accounting records ro assets tc, determine whether recorded assets exist and are properly recorded in accordance with generally accepted accounting principals (G.A.A.P.). 7. Management These are the controls exercised by nonager,-ent including day—to-day supervision, overall supervisory controls, management review of significant. transactions, management review of accounts and conparison thereof to budgets, management review of the adequacy of internal control and the internal audit function. 2 'i PopWX.''w%%" '_"OCA'wCe1:u"YU' Wit-':il"w SiOiYat(\+:51'% 3iC6':'a'l3ii� W•aWpmwb*[S.h;f"7iVnti'.1km."�4'Aiv"tiiLS4HtiMd:dA.Y$fi.WSi:<::i'B:GNLYHago w,A.i4a'%J.u.dMmn'ex..Nni*4u4.aa:4.'e'4.%.L."'A++`�•�ii�SX�$15m]%A'-W;YO.0wG^Jr' AttN u L&4..'m' nYWSVPobe11"4.iK SEGREGATION OF RESPONSIBILITIES Oe TFC TREASURER FUNCTIONS C_TTY OF LODI Function tion Responsibility I . h ithorization cf investment transactions. . Formal investment policy should be - prepared by ....................... Treasurer - submitted to.....................City Council . Investmex�t transactions should be approved by...............Treasurer 2. Execution of investment Assistant 'Finance Director AND transactions :......................... Revenue/Collections Technician 3. Timely recording of investment transactions: . Recording of investment transactions in the Treasurer's records................Finance Department Secretary . Recording of investment transactions in the accounting records.................Senior Account Clerk nxict i(.-Im Req-)onsi.bi l i ty 5. Safeguarding of Assets and Records: Reconciliation of Treasurer's records to the Accounting records .............. Finance Depar-unent Secretase . Reconciliation of Treasurer's records to bank :t.:.t.-Yents and safe;,ccping records.................Revenue/Collections Technician . Recording interest received ............................ Revenue/Collections Technician Review of: (a) financial institution's financial coridition. ................Treasurer (b) safety, liquidity and potential yields of investment instruments ........................ .Treasurer and (c) reputation and financial condition of investment Brokers/Dealers .....................Treasurer . Periodic reviews of collateral should be performed..........................Treasurer 6. Management's periodic review of the investment portfolio as prepared by the Treasurer - key areas which should be reviewed are investment tyres, purchase price, market values, maturity dates and investment yields as loll as conformance to stated investment policy..............Independent Auditors 7. To achieve the objectives of internal control, the Treasurer may delegate or transfer any of the above responsibilities except those of City Council. - 4 - :.-iNVESTST/TXTF..06S l w ..-.._ . _, ___._. _—�_..__ __.. ':.('e' w. �':.. Y': N.: i�•'1. .. /,.yam• ;.1.: �.. ,•ac: ;s:• .. ..... ...... . .. .. ...... . - ..�. _, b a ,.... ... .i ... 7 1. �. .