HomeMy WebLinkAboutAgenda Report - September 18, 1996 (93)AGENDA TITLE: Annual Investment Policy and Internal Control Guidelines
MEETING DATE: September 18, 1996
PREPARED BY: Finance Director
RECOMMENDED ACTION: The City Council adopt the attached Resolution approving the City's
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. This policy is annually reviewed by the City's audit firm (KPMG Peat Marwick) and has been
found to be in compliance with Government Code.
Additionally, last year the policy was submitted for the first time to the Municipal Treasurers Association
(MTA) for their Investment Policy Certification Program. This program is designed to recognize
outstanding examples of written investment policies throughout the United States and Canada. The main
purpose of the program is to provide professional guidance and assistance in developing or improving
existing investment policies in the public sector. The City's policy received both the award, and
comments from the reviewers for improving the policy. Changes were made to last years policy
(presented in italics in the policy) to incorporate these comments and recommendations into this years
policy. Staff feels confident the policy meets the qualifications again this year for consideration under the
Investment Policy Certification Program.
FUNDING: None.
Vicky McAt ie
Finance Director
APPROVED'
H. Dixon 1plynn - C anger
City of Lodi
TABLE OF CONTENTS
SECTION DESCRIPTION
Page
I 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
3
Banks and Security Dealers
5
Purchase of CD's from Local Institutions
6
Safekeeping and Collaterialization
6
Administration
7
II Internal Controls
General 8
Procedures 9
Treasury Function Responsibilities 10
lII Sample of Investment Forms
Investment Bid Sheet 11
Broker/Dealer Questionnaire 12
IV Glossary 17
City of Lodi
INVESTMENT 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 ofpublic funds. 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. OBJECTIVES
Funds of the City will be invested with the following objectives in priority order,
Safe &:
Safety ofprincipal is the foremost objective of the City of Lodi, followed by liquidity and yield.
Each investment transaction shall seek to first ensure that capital losses are avoided, whether they
be from securities defaults or erosion of market value. To achieve this objective, financial
institutions and broker/dealers will be prequalified and monitored as well as investment instruments
they propose.
Li nidi :
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 on Investments:
The City's investment portfolio will be maintained to achieve a "market average " rate of return
that protects these funds from the effects of inflation and the risks associated with higher returns
while preserving and protecting capital in the overall portfolio.
The "market -average " rate of return targeted to achieve this objective is a return which ranges
between the annual rate of return on 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.
4. DELEGATION OF AUTHORITY
The Treasurer is designated by the authority of the legislative body as the investment officer of the
City 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, resources
shall be allocated to the cash management program. This commitment of resources will include
financial and staffing considerations.
.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.
8. 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 imprudent actions.
9. REPORTING
The Treasurer will submit a monthly investment report to the City Council, in accordance with
Government Code Section 53646, to disclose the following information:
• Type of investment
• Institution
• Date of maturity
• Amount of deposit or cost of the security
+ Current market value of securities with maturity in excess of 12 months
+ Rate of interest
• Performance
10. AUTHORIZED INVESTMENTS
The City will invest surplus funds not required to finance the immediate needs of the City as
provided in California Government Code 53601. 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.
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.
City of Lodi
INVESTMENT POLICY
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.
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.
Maximum
Permitted Investments
Maturity
U.S. Treasury Obligations (Bills, notes and bonds)
5 Years
U.S. Government Agency Securities and Instrumentalities
5 Years
Bankers Acceptances
270 days
Certificates of Deposit
5 Years
Negotiable Certificates of Deposit
5 Years
Commercial Paper
180 days
California State Local Agency Investment Fund
Indefinite
Passbook Deposits
Indefinite
Repurchase Agreements
Not Authorized
Reverse Repurchase agreements
Not Authorized
Mutual Funds
Indefinite
Medium Term Notes
5 Years
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.
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.
Percent of
Diversification by Instrument
Portfolio
U.S. Treasury Obligations (Bills, notes and bonds)
100%
U.S. Government Agency Securities and Instrumentalities
100%
Bankers Acceptances
40%
Certificates of Deposit
100%
Negotiable Certificates of Deposit
100%
Commercial Paper
30%
California State Local Agency Investment Fund
100%
Passbook Deposits
100%
Repurchase Agreements
Not Authorized
Reverse Repurchase agreements
Not Authorized
Mutual Funds
15%
Medium Term Notes
30%
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 $20 million in any one account.
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
10% minimum
Under 90 days
25% minimum
Under 270 days
50% minimum
Under 1 year
75% minimum
Under 18 months
90% minimum
Under 2 years
95% minimum
Under 5 years
100% minimum
Long -Term 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. BANKS 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.
City of Lodi
INVESTMENT 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 maintain an office in the State of California. This includes primary
dealers or regional dealers that qualify under Securities and Exchange Commission Rule 150-1.
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 PURCHASE 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.
1.3. SAFEKEEPING AND COLLATERIALIZATION
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.
Deposit type securities (i.e., certificates of deposit) will be collateralized. Collateral for time
deposits 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.
City of Lodi
INVESTMENT POLICY
The collateral 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 Deposit
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. ADMINISTRATION
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 Deputy Treasurer. 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. Confirmations
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. Pooled 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.
City of Lodi
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. Objectives
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. General Control Policies
The following policies are to be used to safeguard investments:
• Organization
A description of responsibilities and procedures for the investment of City funds, lines of
authority and reporting requirement will be maintained.
• Personnel
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 securities 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.
City of Lodi
INTERNAL CONTROLS
Reconciliation of records
Regular and timely reconciliation will be made of detailed securities records with the general
ledger control account.
• Performance evaluation
Performance 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
Assigned Responsibilities
a. City Council responsibilities:
• Adoption of City's investment policies by Resolution
• Review and evaluation of investment performance
b. Finance Director/Treasurer duties and responsibilities:
• Formulating, recommending and implementing the City's investment policies.
• 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 collaterialization 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.
c. 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.
City of Lodi
TREASURY FUNCTION RESPONSIBILITIES
FUNCTION RESPONSIBILITIES
1. Recommendations:
• Recommends broker/dealer arrangements Revenue Manager/Deputy Treasurer
• Recommends investments Revenue Manager/Deputy Treasurer
2. Authorization 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/deal arrangements approved by Finance Director/Treasurer _
3. Execution of Investment Transactions Revenue Manager/Deputy Treasurer
4. Recording of Investment Transactions
• Recording of transactions in
Treasurer's records Revenue Manager/Deputy Treasurer
• Recording of transactions in
Accounting records Accounting Manager
5. Safeguarding of assets and records
• Maintenance of Treasurer's records Revenue Manager/Deputy Treasurer
• 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/Deputy Treasurer
• Periodic reviews of collateral Revenue Manager/Deputy Treasurer
• Review and evaluation of performance City Council
6. Preparation of reports Revenue Manager/Deputy Treasurer
7. Periodic review of investment portfolio for
conformance to City's investment policy City's Audit Firm
10
Date:
Transaction
Invest
Recommended Selection
Primary Dealer
Quotes:
Firm
Dealer
Telephone #
Security Type
Price
Maturity Date
I st call date
Yield to Maturity
Purchase Price
Cusip #
Principal
Discount
Accrued Interest
Interest Rate
Interest Perio '
Risk Catagory
Trade Date
Settlement Date
Calculation
Invstmnt.--Fund #
Investment Fund #
Issuer Code
Cert./Acct. #
Term of Days
•es
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. #:
CITY OF LODI
INVESTMENT BID SHEET
Withdraw Invest Sell
Approval:
Finance Director:
Revenue Manager:
Approval Date:
Transaction Date:
Cycle to:
Vicky McAthie
Finance Director_
Accounting Manager
Invest Sell
BROKER/DEALER QUESTIONNAIRE
CITY OF LODI TREASURER'S OFFICE
P. O. Box 3006
Lodi, California 95241
1.
Name:
2
Branch Address:
3.
Telephone No:
4.
Primary Account Representative
Name:
Title:
Telephone #:
5. If your firm a primary dealer in US Government Securities? Y/N
6. Identify the personnel who will be trading with or quoting securities to our agency's
employees:
7
Name Title
Ntl. Headquarters Address:
Corporate Contact:
Phone:
Compliance Officer (Name, Address, Phone):
Telephone #
8. What was your firm's total volume in US Government and Agency securities trading last
calendar year?
12
a
10
Which securities are offered by your firm?
() US Treasury
() US Treasury Notes
() US Treasury Bonds
O Agencies (specify)
( ) Negotiable CDs
() Commercial Paper
() BAs Domestic
() BAs Foreign
() Repurchase Agreements
() Reverse Repurchase Agreements
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 a
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.
13
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 provides 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.
20. What training would you provide to our employees and investment officers?
14
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 guidelines, measure of risk? Include certified documentation
of your capital adequacy as measured by the Federal Reserve standards.
22. Do you participate in the SIPC insurance 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 firm licensed by the State of California as a brokerldealer? Y/N
CERTIFICATION ATTACHED
15
CERTIFICATION
I hereby certify 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 charge 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
16
City of Lodi
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.
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 current 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.
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. It is drawn on a bank by an individual or business seeking to finance domestic or international
trade. The BA is collateralized by commodity products. 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.
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.
17
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 value 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:
Bear 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.
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.
18
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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. Interest rates are set by competitive forces in the marketplace.
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.
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 bides.
COVERAGE RATIO: the ratio of income available to pay a specific obligation versus the total
amount obligated. This is a measure of financial stability.
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.
ce
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 firm. 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: a reduction in the price of a security -- the difference between the selling price of a
security and its face value at maturity when it is selling below face value.
DUE DILIGENCE: exercising of due professional care in the performance of duties.
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.
20
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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.
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.
GINNIE MAE: trade name for the Government National Mortgage Association.
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 bf securities.
21
City of Lodi
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.
LAIF: 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: the ability to convert a security into cash promptly with minimum risk of principal.
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 currently being sold in the market.
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.
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.
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.
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.
22
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 AGENT: 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.
PRINCIPAL: the face or par value of an instrument. It does not include accrued interest.
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: 1) the yield which can be attained on a security based on its purchase price or
its current market price. 2) income earned on an investment, expressed as a percentage of the cost of
the investment.
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
23
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
agreements, whereby they agree to buy the securities and the investor agrees to repurchase them at a
later 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: a service banks offer to customers for a fee, where securities are held in the bank's
vaults for protection.
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.
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 which 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.
24
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 BILL (T -BILL) : obligation of the US government with a maturity of one year or less.
T-bills bear no interest, but are sold at discount.
TREASURY BONDS AND NOTES: obligations of the U. S. government which bear interest. Notes
have maturities of one to seven years, while bonds have longer maturities.
TRUSTEE: a bank designated as the custodian of funds and the official representative for
bondholders.
UNDERWRITER: 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.
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 part, 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.
25
RESOLUTION NO: 96-139
A RESOLUTION OF THE LODI CITY COUNCIL
APPROVING THE ANNUAL INVESTMENT POLICY AND INTERNAL CONTROL GUIDELINES FOR
THE CITY OF LODI
WHEREAS, Section 53601 of the California Government Code requires the City Council to annually review
and adopt the City's Investment Policy; and
WHEREAS, the policy is in compliance with state laws governing the investment of local agency funds; and
WHEREAS, the policy provides internal control guidelines to protect the funds of the City from
misappropriation, speculation, and fraud; and
WHEREAS, the policy is annually reviewed by the City's audit firm and has been found to be in compliance
with Government Code;
NOW, THEREFORE, BE IT RESOLVED, by the Lodi City Council that the City's Annual Investment
Policy and Internal Control Guidelines are hereby reviewed and approved, effective this date.
Dated: September 18, 1996
I hereby certify that Resolution No. 96-139 was passed and adopted by the Lodi City Council in a
regular meeting held September 18, 1996 by the following vote:
Ayes: Council Members - Davenport, Mann, Pennino, Sieglock
and Warner (Mayor)
Noes: Council Members - None
Absent: Council Members - None
Jin ifer t error
Ci y Clerk
96-139
City of Lodi
TABLE OF CONTENTS
SECTION DESCRIPTION
Page
I 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
3
Banks and Security Dealers
5
Purchase of CD's from Local Institutions
6
Safekeeping and Collaterialization
6
Administration
7
II Internal Controls
General 8
Procedures 9
Treasury Function Responsibilities 10
III Sample of Investment Forms
Investment Bid Sheet 11
Broker/Dealer Questionnaire 12
IV Glossary 17
City of Lodi
INVESTMENT 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 ofpublic funds. 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. OBJECTIVES
Funds of the City will be invested with the following objectives in priority order:
Safety:
Safety ofprincipal is the foremost objective of the City of Lodi, followed by liquidity and yield.
Each investment transaction shall seek to first ensure that capital losses are avoided, whether they
be from securities defaults or erosion of market value. To achieve this objective, financial
institutions and broker/dealers will be prequalified and monitored as well as investment instruments
they propose.
Liquidity:
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 on Investments:
The City's investment portfolio will be maintained to achieve a "market average" rate of return
that protects these funds from the effects of inflation and the risks associated with higher returns
while preserving and protecting capital in the overall portfolio.
The "market -average " rate of return targeted to achieve this objective is a return which ranges
between the annual rate of return on 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.
4. DELEGATION OF AUTHORITY
The Treasurer is designated by the authority of the legislative body as the investment officer of the
City 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 responsibilityfor 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, resources
shall be allocated to the cash management program. This commitment of resources will include
financial and staffing considerations.
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.
2
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.
S. 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 imprudent actions.
9. REPORTING
The Treasurer will submit a monthly investment report to the City Council, in accordance with
Government Code Section 53646, to disclose the following information:
• Type of investment
• Institution
• Date of maturity
• Amount of deposit or cost of the security
• Current market value of securities with maturity in excess of 12 months
• Rate of interest
• Performance
10. AUTHORIZED INVESTMENTS
The City will invest surplus funds not required to finance the immediate needs of the City as
provided in California Government Code 53601. 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.
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.
City of Lodi
INVESTMENT POLICY
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.
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.
Maximum
Permitted Investments
Maturity
U.S. Treasury Obligations (Bills, notes and bonds)
5 Years
U.S. Government Agency Securities and Instrumentalities
5 Years
Bankers Acceptances
270 days
Certificates of Deposit
5 Years
Negotiable Certificates of Deposit
5 Years.
Commercial Paper
180 days
California State Local Agency Investment Fund
Indefinite
Passbook Deposits
Indefinite
Repurchase Agreements
Not Authorized
Reverse Repurchase agreements
Not Authorized
Mutual Funds
Indefinite
Medium Term Notes
5 Years
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.
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.
Percent of
Diversification by Instrument
Portfolio
U.S. Treasury Obligations (Bills, notes and bonds)
100%
U.S. Government Agency Securities and Instrumentalities
100%
Bankers Acceptances
40%
Certificates of Deposit
100°/a
Negotiable Certificates of Deposit
100%
Commercial Paper
30%
California State Local Agency Investment Fund
100%
Passbook Deposits
100%
Repurchase Agreements
Not Authorized
Reverse Repurchase agreements
Not Authorized
Mutual Funds
15%
Medium Term Notes
30%
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 $20 million in any one account.
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
10% minimum
Under 90 days
25% minimum
Under 270 days
50% minimum
Under 1 year
75% minimum
Under 18 months
90% minimum
Under 2 years
95% minimum
Under 5 years
100% minimum
Long -Term 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. BANKS 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.
City of Lodi
INVESTMENT 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 maintain an office in the State of California. This includes primary
dealers or regional dealers that qualify under Securities and Exchange Commission Rule 150-1.
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 PURCHASE 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.
13. SAFEKEEPING AND COLLATERIALIZATION
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.
Deposit type securities (i.e., certificates of deposit) will be collateralized. Collateral for time
deposits 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.
City of Lodi
INVESTMENT POLICY
The collateral 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 Deposit
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. ADMINISTRATION
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 Deputy Treasurer. 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. Confirmations
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 -parry custodial information. Confirmations of all
investment transactions are to be received by the Treasurer within three business days.
e. Pooled 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.
City of Lodi
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. Objectives
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. General Control Policies
The following policies are to be used to safeguard investments:
• Organization
A description of responsibilities and procedures for the investment of City funds, lines of
authority and reporting requirement will be maintained.
• Personnel
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 securities 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.
City of Lodi
INTERNAL CONTROLS
• Reconciliation of records
Regular and timely reconciliation will be made of detailed securities records with the general
ledger control account.
Performance evaluation
Performance 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
Assigned Responsibilities
a. City Council responsibilities:
• Adoption of City's investment policies by Resolution
• Review and evaluation of investment performance
b. Finance Director/Treasurer duties and responsibilities:
• Formulating, recommending and implementing the City's investment policies.
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 collaterialization 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.
City of Lodi
TREASURY FUNCTION RESPONSIBILITIES
FUNCTION RESPONSIBILITIES
1. Recommendations:
• Recommends broker/dealer arrangements Revenue Manager/Deputy Treasurer
• Recommends investments Revenue Manager/Deputy Treasurer
2. Authorization 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/deal arrangements approved by Finance Director/Treasurer
3.. Execution of Investment Transactions Revenue Manager/Deputy Treasurer
4. Recording of Investment Transactions
• -Recording of transactions in
Treasurer's records Revenue Manager/Deputy Treasurer
• Recording of transactions in
Accounting records Accounting Manager
5. Safeguarding of assets and records
• Maintenance of Treasurer's records Revenue Manager/Deputy Treasurer
• 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/Deputy Treasurer
• Periodic reviews of collateral Revenue Manager/Deputy Treasurer
• Review and evaluation of performance City Council
6. Preparation of reports Revenue Manager/Deputy Treasurer
7. Periodic review of investment portfolio for
conformance to City's investment policy City's Audit Firm
10
Date:
Transaction
Recommended Selection
Primary Dealer
Quotes:
Firm
Dealer
Telephone #
Security Type
Price
Maturity Date
1 st call date
Yield to Maturity
Purchase Price
Cusip #
Principal
Discount
Accrued Interest
Interest Rate
Interest Perio ***
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. #:
CITY OF LODI
INVESTMENT BID SHEET
Invest Withdraw invest
Approval:
Finance Director:
Revenue Manager:
Approval Date:
Transaction Date:
11
Cycle to:
Vicky McAthie
Finance Director
Accounting Manager
Sell Invest Sell
BROKERIDEALER QUESTIONNAIRE
CITY OF LODI TREASURER'S OFFICE
P. O. Box 3006
Lodi, California 95241
1.
Name:
2
Branch Address:
3.
Telephone No:
4.
Primary Account Representative
Name:
Title:
Telephone #:
5.
6.
If your firm a primary dealer in US Government Securities? YIN
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?
12
a
10.
Which securities are offered by your firm?
() US Treasury
() US Treasury Notes
() US Treasury Bonds
() Agencies (specify)
() Negotiable CDs
() Commercial Paper
() BAs Domestic
() BAs Foreign
() Repurchase Agreements
() Reverse Repurchase Agreements
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 a
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.
13
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 provides 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.
20. What training would you provide to our employees and investment officers?.
14
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 guidelines, measure of risk? Include certified documentation
of your capital adequacy as measured by the Federal Reserve standards.
22. Do you participate in the SIPC insurance 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 firm licensed by the State of California as a broker/dealer? Y/N
CERTIFICATION ATTACHED
15
CERTIFICATION
I hereby certify 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 charge 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
County of
WITNESS my hand and official seal.
Notary's Signature
16
City of Lodi
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.
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 current 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.
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. It is drawn on a bank by an individual or business seeking to finance domestic or international
trade. The BA is collateralized by commodity products. 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.
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.
17
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 value 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:
Bear 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.
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.
18
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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. Interest rates are set by competitive forces in the marketplace.
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.
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 bides.
COVERAGE RATIO: the ratio of income available to pay a specific obligation versus the total
amount obligated. This is a measure of financial stability.
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.
R
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 firm. 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: a reduction in the price of a security -- the difference between the selling price of a
security and its face value at maturity when it is selling below face value.
DUE DILIGENCE: exercising of due professional care in the performance of duties.
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.
20
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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.
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.
GINNIE MAE: trade name for the Government National Mortgage Association.
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 anew issue of securities is put on the market.
ISSUER: any corporation or governmental unit which borrows money through the sale of securities.
21
City of Lodi
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.
LAIF: 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: the ability to convert a security into cash promptly with minimum risk of principal.
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 currently being sold in the market.
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.
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.
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.
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.
22
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 AGENT: 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.
PRINCIPAL: the face or par value of an instrument. It does not include accrued interest.
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: 1) the yield which can be attained on a security based on its purchase price or
its current market price. 2) income earned on an investment, expressed as a percentage of the cost of
the investment.
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, BBS, 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
23
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
agreements, whereby they agree to buy the securities and the investor agrees to repurchase them at a
later 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: a service banks offer to customers for a fee, where securities are held in the bank's
vaults for protection.
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.
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 which 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.
24
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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 BILL (T -BILL) : obligation of the US government with a maturity of one year or less.
T-bills bear no interest, but are sold at discount.
TREASURY BONDS AND NOTES: obligations of the U. S. government which bear interest. Notes
have maturities of one to seven years, while bonds have longer maturities.
TRUSTEE: a bank designated as the custodian of funds and the official representative for
bondholders.
UNDERWRITER: 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.
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 part, 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.
041