HomeMy WebLinkAboutAgenda Report - November 19, 1986 (79)CITY QOUNrIL MEETING 4001L
NOV 03ER 19, 1986
CITY'S ANNUAL
INVESTMENT POLICY
AND INTERNAL CONTROL
GUIDELINES APPROVED
RES. NO. 86-171 Council was reminded that AB 1073 passed by the State
Legislature and signed by the Governor on September 17., 1984
CC -21(a) requires Municipal Treasurers to submit an annual written
investment policy to their respective legislative bodies.
Council adopted Resolution No. 86-173 - A Resolution Adopting
an Annual Statement of Investment Policy and Internal Control
Guidelines pursuant to the aforementioned legislation.
---1W 'CIL. COT UNICAT)Mti
TO THE CITY COUNCIL DATE NO.
FROM, THE CITY .MANAGER'S. OFFICE : Novembi r 19T 19$6 „ • . E
iUBJECT: Resolution Adopting the City's Annual Investment Policy and Internal
''Control Guidelines
RECOMMENDED ACTION: I respectfully request the adoption of ne
attached reso ution which meets the requirements of State law.
BACKGROUND INFORMATION: AB1073, passed by the State Legislature and
signed y the Governor on September 17, 1984, requires Municipal
Treasurers to submit an annual written investment policy to their
respective legislative bodies.
Attached, hereto, is my recommendation for the City's investment policy
and, also, internal control guidelines for Council's review.
The only changes from last year's policy and guidelines are indicated
on page (3),"Investment Performance Evaluation." This change updates
the comparison of average yields from 1984-85 to 1985-86.
Robert lm
Finance Director/Treasurer
RHH/ss
Attachments
CC86/171/TXTF.06S
RESOLUTION NO. 86-171
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: November 19, 1986
I hereby certify that Resolution No. 86-171
was passed and adopted by the City Council
of the City of Lodi in a regular meeting held
November 1P, 1986, by the following vote:
Ayes: Council Members - Olson, Pf.nkerton,
Snider and Reid
(Mayor)
Noes: Council Members - None
Absent: Council Members - Hinchman
AliceBM:_9eimche
City Clerk
86-171
Ob ective
The City's cash management system is designee 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
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
Civil ,o a ection 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."
i
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Criteria for Seiectin4 Investments fin order of ariorit
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. Li uidity
Tquidity 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 liquiditX 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.
Safe��kee ingg
�Cll 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.
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Investment Controls
e ty has developed a System of Internal Investment Controls
and a Segregation of Responsibilities of Investment 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
An ly there shall be an external audit of the City's
investment program to assure compliance with investment policy and
controls.
Investment Performance Evaluation
Performance eva uation should include certain benchmark measures
of rate of return. Benchmarks used for 1985-86, with average market rate
of return and Lodi's comparison, are as follows.
Benchmark Measures 1985-86 Average Yield
90 -day U.S. Treasury Bills 6.53%
Federal Fund Rate 7.01%
Merrill Lynch Ready Asset 7.22%
(Money Market Fund)
Local Agency Investment Fund 9.30%
City of Lodi
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8.02%
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 "lsnicipai Treasurers Association, in cooperation with the
California municipal Finance Officers Association and the County
Treasurers Association.
5
A
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 :.ts business, including
fadherence to management policies
. the safeguarding of assets
. the prevention or detection of errors and fraud
. the accuracy and completeness of the accounting records
. the timely preparation of reliaole 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 CONTROL
Elements of a system of internal control are the means by wh:.ch
an organization can satisfy the objectives 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.
S. 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.
_9_
SEGREGATION OF RESPONSIBILITIES OF THE TREASURER FUNCTIONS
CITY OF LODI
Function Responsibility
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1.
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: ...... i ..................
Revenue/Collection Technician
3.
Timely recording of
investment transactions:
. Recording of investment
a
transactions in the
7
Treasurer's records .................Finance
Department Secretary
s'
. Recording of investment
transactions in the
accounting records..................Senicr
Account Clerk
A.
Verification of investment,
i.e., match broker
confirmation to Treasurer's
records..... ........................Treasurer
3
t
2
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Function Responsibility
5. Safeguarding 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 records................Revenue/Collection Technician
. Recording interest
received...........................Revenue/Collection Technician
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
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
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r
r
Function Responsibility
5. Safeguarding 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 records................Revenue/Collection Technician
. Recording interest
received...........................Revenue/Collection Technician
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
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
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