HomeMy WebLinkAboutAgenda Report - September 2, 1987 (77)C r
CITY COUNCIL MEETING
SEPTEMBER 2, 1987
APPROVAL OF AN
ANNUAL STATEMENT
OF INVESTMENT
POLICY AND
1NTERCAL CONTROL
GUIDELINES
RES. NO. 87-121 Council was apprised that the California State Legislature.
enacted AB1373 in 1984 requiring local agencies to adopt an
CC -21(a) annual investment policy. The policy was presented to the
City Council after the books were closed to enable staff to
obtain certain benchmark rates of return for the fiscal
year 11986-87.
Following review of the proposed policy and guildelines and
discussion, Council on motion of Mayor Pro Tempore Snider,
Hinchman second, adopted Resolution No. 87-121 adopting an.
annual statement of investment policy and internal control
euidelines.
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OU CIL COMNIUNICATI N
cI- THE CITY COUNCIL
FROM: THE CITY MANAGER'S CFFICE
S:JBJECi: APPROVAL OF AIN AIQNLAL STATEMENT OF INVES-IRE-NT
POLICY AND INTERNAL CONTROL GUIDELINES
September 2, 1987
RECOMMENDED ACTION: That the City Council approve the attached
Resolution adopting an annual investment policy and internal control
guidelines.
BACKGROUND INFORMATION: The California State Legislature enacted
AB1073 in 1984 requiring local agencies to adopt an annual investment
policy.
This policy is presented to the City Council after the books are closed
to enable staff to obtain certain benchmark rates of return for the
fiscal year 1986-87. Page 3 of the attached investment policy
indicates these comparable benchmark rates.
The internal control guidelines have one addition not on previously
adopted guidelines_ During the last year's annual audit, the external
audit firm (Ernst & Whinney) indicated the internal control guidelines
were silent on the issue as to whether the Treasurer has the authority
to delegate responsibilities. I have added Item 7 on the last page tc
provide flexibility and to allow continuity when I am out of the Cite.
obet H. Ho m
Finance Director/Treasurer
RHH/ss
attachments
INVPOLCY/TXTF.06S
RESOLUTION' NO. 87-121
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 investment
policy; and
WHEREAS, the City Council of the City of Lodi wishes to implement
a program of internal controls 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 and internal control
guidelines as set forth herein.
Dated: September 2, 1987
I hereby certify that Resolution No. 87-121 was passed and
adopted by the City Council of the City of Lodi in a regular
meeting held September 2, 1987 by the following vote:
Ayes: Council Members - Hinchman, Reid, Snider $ Olson (Mayor)
Noes: Council Members - None
Absent: Council Members - Pinkerton
Alice M. Reimche
City Clerk
87-121
STATEMENT OF INVESTMENT POLICY
Purpose
This statt--me!-1 is intended to provide guidelines f(,r the
inve=stment of the C?L!''s temporary 'dle cash, under the Prudent Nan
Rule.(I)
Objective
The City's cash maL-gement system is designed to accurately
monitor and forecast expenditures and revenues, thus enabling the City to
invest fun.- to the fullest extent possible. The City strives to obtain
the highest yield obtainable as long as investments meet the criteria for
safety and liquidity.
Policy
The City maintains 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 55600 et seg.).
Securities of the U. S. Government, State of California
or Local Agencies
Local Agency Investment Fund (State Pool)
Certificates of Deposit (time deposits)
Negotiable Certificates of Deposits
Bankers Acceptances
. Commercial Paper
Repurchase Agreements (collateralized by U.S. Treasury
securities)
Passbook Savings Account
. Other that are, or may become, legal investments through
the State of California Government Code and with prior
approval of the City Council
1 Civil ode Section 2261, et seq. states in part . "...in investing for
the benefit of another, a trustee shall exercise the judgement and care,
under the circumstances then prevailing, which maen of prudence, discretion
and intelligence exercise in the management of their own affairs."
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Cri'eria r ectino investments (in order of ericritvl
S , -y
_------� fety an risK ass^ ia1ed with an i.;v;°st^er,t refers to the
loss of principa;, ,Merest oi- a Combira'ic,n of these
The first level of risk control is found in state law which restricts the
particular type of investment permissible for municipalities. The second
level of risk control is reduction of default risk by investing in
instruments 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 instruments 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 is-ued by banks and savings & loan
companies 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 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 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
shall be reconciled monthly with the City's records.
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T
nvestment Controls
The City has developed a System of internal Investment Controls
and a Segregati::n of Responsibilities of Investment Functions (Exhibit A)
in order to assure an adequate systerof internal controi over the
investment function.
A Finance Department Investment Committee has been developed to ensure
controls are in order and prudent investment procedures are followed.
Members of the Committee are as follows:
Finance Director/Treasurer
Assistant Finance Director
Revenue & Collection Technician and
Department Secretary
Investment Reports
Annually, the Treasurer will submit a statement of Investment
Policy to the City Council for their approval. Monthly, the Treasurer
shall submit a report to the City Council and City Manager showing the
type of investment, institution, date of maturity, amount of deposit,
market value of all securities with a maturity of over 12 mionths, 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 com-liance with investment policy and
controls.
Investment Performance Evaluation
Performance evaluation should include certain benchmark measures
of rate of return. Benchmarks used for 1986-87, with average market rate
of return and Lodi's comparison, are as follows:
Benchmark Measures 1986-87 Average Yield
90 -day U.S. Treasury Sills 5.53%
Federal Fund Rate 6.35%
Merrill Lynch Ready Asset 5.63%
(Money Market Fund)
Local Agency investment Fund 7.52%
City of Lodi
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6.73%
EXHIBIT A
?i,TE,ti{ C.C'iVTtCsL GUIDELINES
SEGREGATION OF TREASURER RESPONSIBILITIES
The follow ng internal control guidelines and segregation of
responsibilities of Treasurer functions have been compiled by the
California Municipal Treasurers Associatic,, in cooperation with the
California Municipal Finance Officers Association and the County
Treasurers Association.
V BucCTiVEC OF INTERNIAL CONTROL
Internal control is the plan of organization and ,�11 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 management pclicies
the safeguarding of assets
the prevention or detection of errors and fraud
the accuracy and completeness of the accounting records
the timely preparation of reliable financial information.
LIMITATIONS OF INTERNAL CONTROL
No internal control system, however elaborate, can by itself
guarantee the achievement of management's objectives. Internal control
can provide only reasonable assurance that the objectives are met, because
of its inherent limitations, including:
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 circumvents controls dependent
on segregation of functions
potential for a person responsible for exercising control
abusing that responsibility; a member of management is
frequently in a position to override controls which
management has set up.
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ELEMENTS OF iNTERNAL COMTROL
ElementsYo.f a system of internal control are the means by \vhich
an c rgana t i c n Car c -F�� - o; JeQ+„yes it te—na: cot -rG.-
el emie rats are.
4. Organ _a -o,n
Specfic responsibility for the performance of duties
should be assigned and lines of authority and reporting clearly identified
and understood.
2. Person ,el
Personnel should have capabilities commensurate 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 incompatible functions reduces the risk that
a person is in a position both to perpetrate and conceal errors or fraud
in the normal course of duty. If two parts of a transaction are handled
by different people, collusion is necessary to conceal errors cr 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
Alltransactionsshould 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 commensurate with the nature and significance of the
transactions. Delegation of authority to authorize transactions should be
handled very carefully.
5. Controls Over an Accounting S�stem
Controls over an accounting system include the procedures,
both manual and EDP, carried out independently to ascertain that recorded
transactions are complete, valid, authorized and properly recorded.
6. Safeguarding of Assets and Records
Controls should be to place to prey:?nt 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-to-day supervision, overall supervisory controls, management review of
significant transactions, management review of accounts and comparison
thereof to budgets, management review of the adequacy of internal control
and the internal audit function.
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SEGREGATION OF RrSPGivSi6iL;T:ES THE TrEi�Si'riER + 3 � t�;�S
C`i
r
�urCt'on ResDon`ibi— `
I. Authorization of investment
transactions:
Formal investment policy
should be
- prepared by.......................Treasurer
- submitted to......................City Council
Investment transactions
should be approved by...............Treasurer
2. Execution of investment Assistant Finance Director AND
transactions:.........................Revenue/Collection Technician
3. Timely recording of
investment transac,ions:
Recording of investment
transactions in the
Treasurer's records.................Finance Department Secretary
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.
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Fun_t�on Resaonsibilit
5. SafeQuarding of Assets and
Records:
Reconciliation of
Treasurer's records to
the Accounting records..............Finance Department Secretary
Reconciliation of
Treasurer's records to
bank statements and
safekeeping rec,,•ds.................Revenue/Collec'--ion Technician
Recording interest
received............................Revenue/Collection Technician
Review of: (a) financial institution's
finai;ial condition .................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
co Nlateral should he
performed...........................reasurer
6. Management's periodic review
of the investment portfolio
as prepared by the Treasurer
- key areas which 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.
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INVESTST/TXTF.06S