HomeMy WebLinkAboutAgenda Report - October 16, 1985 (45)STATEv� OF INVESTMENT
POLICY AND IN'T'ERNAL COWPOL
GUIDELINES ADOPTED
CI'T'Y COUNCIL MEETING
OBER 16, 1985
RES. NO. 25-144 Council was advised that AB 1073 was passed by
the State Legislature and signed into law by
the Governor on September 17, 1984. This bill
requires City Treasurers to suhmi.t an annual
written investment policy to their respective
legislative bodies.
City Finance Director/Treasurer Robert H. Holm
presented for Council's review his
reccniwndation for the City of Lod.i's investment
policy and Internal Control Guidelines and
Segregation of Treasurer's Responsibilities
which were prepared on recd mandation of the
City auditors.
-"WNCIL C(3A1?1 UNICrA.TI-N
TO THE CITY C0UNCIL DATE NO_
FROM: THE CITY MANAGER'S OFFICE October 10, 1985
SUBJECT: RESOLUTION ADOPTING A STAMENT OF INVESTMENT POLICY AND INTEP.NAL CONTROL GUIDELINES
AB1073 was passed by the State Legislature and signed into
law by the Governor on September 17, 1984. This bili requires
Treasurers to submit an annual written investment policy to their
respective legislative bodies. Attached are my recommendations for
the City of Lodi's investment policy, which was reviewed at the
October Ist Shirtsleeve Council meeting.
Also attached is the Internal Control Guidelines and
Segregation of Treasurer's Responsibilities which I prepared upon
the recommendation of our auditors. This item was also reviewed
at the October 1st Shirtsleeve meeting.
I respectfully request the adoption of the attached
resolution which will meet the requirements of State law and the
: recommendations of the City's auditors.
Respectfully,
Robert H. Holm
Finance Director
City Treasurer
CITY OF LOD I
RESOLUTION NO. 85-144
RESOLUTION ADOPTING A STATEMEOF INVESTMaqT POLICY
•M INTERML CONTROLINTERGUIDELINES
WHEREAS, recent legislation enacted by the Legislature of the
State of California requires the adoption by cities of an investment
4 policy; and
I
WHEREAS, the City Council of the City of Lodi wishes to
t 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: October 16, 1985
I hereby certify that Resolution No. 85-144
was passed and adopted by the City Council
of the City of Lodi in a regular meeting held
October 16, 1985 by the following vote:
Ayes: Council Members - Olson, Pinkerton,
Reid, Snider, and
Hinctman (Mayor)
Noes: Council Members - None
Absent: Council Members - None
Alice M. Re�n�f�
City Clerk
CITY OF LODI
STATEMENT OF INVESTMENT POLICY
Purpose
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's cash management system is designed to accurately
monitor and forecast expenditures 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 in4estments 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 53600 et seq.).
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 Code 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 men of prudence discretion
and intelligence exercise in the management of their own affairs."
Criteria for Selecting Investments (in order of priority)
1. SAFETY
Safety and risk associated with an investment refers to the
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 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 creditworthy.
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 issued 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 g
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 =t
self imposed constraints. It does not speculate, purchase stocks or
corporate bonds. It does not deal in reverse repurchase agreements unless s._<
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, brokers/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.
- 2 -
Investment Controls
The City has developed a System of Internal Investment Controls
and a Segregation of Responsibilities of Irvestment Functions (Exhibit A)
in order to assure an. adequate system of internal control 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 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.
-Investment Performance Evaluation
Performance evaluation should include certain benchmark measures
of rate of return. Benchmarks used for 1984-85, with average market rate
of return and Lodi's comparison, are as follows.
Benchmark Measures
90 -day U.S. Treasury Bills
Federal Fund Rate
Merrill Lynch Ready Asset
(Money Market Fund)
Local Agency Investment Fund
City of Lodi
- 3 -
1984-85 Averacre Return
8.70%
9.26%
9.41%
10.80%
10.42%
EXHIBIT A
INTERNAL CONTROL GUIDELINES
SEGREGATION OF TREASURER RESPONSIBILITIES
The following internal control guidelines and segregation of
responsibilities of treasurer functions have been compiled by the
California Municipal Treasurers Association, in cooperation with the
California Municipal Finance Officers Association and the County
Treasurers Association.
OBJECTIVES OF INTERNAL 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 management policies
. the safeguarding of assets
. the prevention or defection 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.
ELEMENTS OF INTERNAL CONTROL
Elements of a system of internal control are the means by which
an organization can satisfy the ob;ectives of internal control. The
elements are:
1. Organization
Specific responsibility for the performance of duties should
be assigned and lines of authority and reporting clearly identified and
understood.
2. Personnel
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 or fraud.
In particular, the functions that should be considered when evaluation
segregation 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 commensurate with the nature and significance of the
transactions. Delegation of authority to authorize transactions should be
handled very carefully.
3. Controls Over an Accounting_ System
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 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-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.
SEGREGATION OF RESPONSIBILITIES OF THE TREASURER FUNCTIONS
CITY OF LODI
Function Responsibility-
Authorization
esponsibility
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 transactions:
. Recording of investment
transactions in tYLe
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
f.;records
...............................Treasurer
7. Safeguarding of Assets and
Records:
x
. Reconciliation of -=
Treasurer's records to
the Accounting records.............Finance
Department Secretary
. Reconciliation of
Treasurer's records to
bank statements and:
safekeeping records..................Revenue/Collection Technician
. Recording interest
received
Technician.
...........................Revenue/Collection
. Review of: (a) financial institution's
financial 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.
collateral should be
performed..... ...................Treasurer
6. Management's periodic review
f
of the investment portfolio:_
as prepared by the Treasurer-'
- key areas which should be
reviewed are investment;
types, purchase price,
f r;
market values, maturity
dates and investment yields
as well as conformance to
stated investment policy ..............Independent
Auditors
_ 4
EXHIBIT A
CITY OF LODI
STATEMENT OF INVESTMENT POLICY
Purpose
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's cash management system is designed to accurately
monitor and forecast expenditures 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 liquidity.
Policy F
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
_4
Section 53600 et see,.).
-
. Securities of the U. S. Government, State of California
or Local AgenciesJ`=
. Local Agency Investment Fund (State Pool)
=
. Certificates of Deposit (time deposits
Negotiable Certificates of Deposits
r =>
. Bankers Acceptances;.'
. Commercial Paper
. Repurchase Agreements (collateralized by U.S. Treasury
3
securities)
=_
. Passbook Savinqs 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 Code Section 2261, et seq. szuLes in part ..in investing for
the benefit of another, a trustee shall exercise the judgement and 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 (in order of priorit
1. SAFETY
Safety and risk associated with an investment refers to the
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 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 creditworthy.
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 issued 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, brokers/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.
Investment Controls
The City has developed a System of Internal Investment Controls
and a Segregation of Responsibilities of investment Functions in order to
assure an adequate system of internal control 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 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.
Investment Performance Evaluation
Performance evaluation should include certain benchmark measures
of rate of return. Benchmarks used for 1984-85, with average market rate
of return and Lodi's comparison, are as follows.
Benchmark Measures 1984-85 Average Return
90 -day U.S. Treasury Bills 8.70%
Federal Fund Rate 9.26%
Merrill Lynch Ready Asset 9.41%
(Money Market Fund)
Local Agency Investment Fund 10.80%
City of Lodi 10.42%
-3-