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Resolution-Investment Policy• • A RESOLUTION OF BOARD OF DIRECTORS OF THE BAYTOWN AREA WATER AUTHORITY APPROVING AN INVESTMENT POLICY; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. ****************************************************************************** BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE BAYTOWN AREA WATER AUTHORITY: Section 1: That the Board of Directors of the Baytown Area Water Authority hereby approves and adopts the investment policy, which is attached hereto as Exhibit "A" and incorporated herein for all intents and purposes. Section 2: This resolution shall take effect immediately from and after its passage by the Board of Directors of the Baytown Area Water Authority. INTRODUCED, READ and PASSED, by the affirmative vote of the Board of Directors of the Baytown Area Water Authority this the 1 8m day of September, 2002. ATTEST: ,/1 GAR' ' W. SMITH, Assistant Secretary APPROVED AS TO FORM: NACIO RAMIREZ, S(R.,)General Counsel F:UCaren\Files\BAW A\Resolution\BaytownInvestmatPolicy.doc ROBERT L. GILLETTE, Chairman • BAYTOWN AREA WATER AUTHORITY BAYTOWN, TEXAS INVESTMENT POLICY EXHIBIT A 1 BAWA Board Action Revised 9/26/02 • Baytown Area Water Authority Investment Policy Table of Contents I. Scope 1 II. General Objectives A. Safety 1 B. Liquidity 2 C. Yield 2 III. Standards of Care A. Prudence 2 B. Ethics and Conflicts of Interest 2 C. Delegation of Authority 3 IV. Safekeeping and Custody A. Authorized Financial Dealers and Institutions 3 B. Internal Controls 4 C. Delivery Vs. Payment 4 V. Suitable and Authorized Investments A. Investment Types 4 B. Collateralization 5 VI. Investment Parameters A. Diversification 5 B. Maximum Maturities 6 VII. Reporting A. Methods 6 B. Performance Standards 6 C. Marking to Market 6 VIII. Policy Considerations A. Adoption and Amendments 6 EXHIBITS A - Authorized Investment Officials 7 B - Statement of Ethics and Conflicts of Interest 8 C — Approved Broker/Dealers, Financial Institutions and Investment Pools 9 D — Certification by Business Organization 10 E — Investment Strategy 11 • I. Scope Baytown Area Water Authority Investment Policy This investment policy applies to all the investment activities of the Baytown Area Water Authority (BAWA). These funds are accounted for in BAWA's Annual Financial Report and include all financial assets of all funds managed for BAWA by the City, including but not limited to water revenues, charges for services, bond proceeds, and interest income. II. General Objectives The primary objectives, in priority order, of BAWA's investment activities shall be safety, liquidity, and yield: A. Safety — Safety of the principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to minimize credit risk and interest rate risk. i. Credit Risk — BAWA will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: • Limiting investments to the safest types of securities • Pre -qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which BAWA will do business • Diversifying the investment portfolio so that potential losses on individual securities will be minimized ii. Interest Rate Risk — BAWA will minimize the risk that the market value of securities in the portfolio will fail due to changes in general interest rates, by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity • Investing operating funds primarily in shorter -term securities, money market mutual funds, or similar investment pools • • Baytown Area Water Authority Investment Policy Revised September 2002 B. Liquidity — The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. Furthermore, since all possible cash demands cannot be anticipated, the portfolio shall consist largely of securities with active secondary or resale markets. A portion of the portfolio also may be placed in money market mutual funds or local government investment pools that offer same -day liquidity for short-term funds. C. Yield — The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal • Liquidity needs of the portfolio require that the security be sold III. Standards of Care A. Prudence - The standard of prudence to be used by investing officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this policy. 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 investment, considering the probable safety of their capital as well as the probable income to be derived. B. Ethics and Conflicts of Interest - Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program, or that could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the General Manager any material financial interests in financial institutions • Baytown Area Water Authority Investment Policy Revised September 2002 that conduct business with BAWA. They shall further disclose any large personal financial/investment positions that could be related to the performance of the investment portfolio. See Exhibit B. C. Delegation of Authority - Authority to manage BAWA's investment program is granted to the Director of Finance, hereinafter referred to as investment officer, and derived from the following: City Charter Article VII, Section 67 (9). Responsibility for the operation of the investment program is hereby delegated to the investment officer, who shall act in accordance with established written procedures and intemal controls for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, delivery vs. payment, investment accounting, repurchase agreements, wire transfer agreements, and collateral/depository agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. (See Exhibit A) No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the investment officer. The investment officer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate activities of subordinate officials. IV. Safekeeping and Custody A. Authorized Financial Dealers and Institutions —The investment officer will maintain a list (See Exhibit C) of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness who are authorized to provide investment services in the State of Texas. These may include "primary" dealers or regional dealers that qualify under the Public Funds Investment Act Section 2256.002 (10), as "Qualified Representatives". No public deposit shall be made except in a qualified public depository as established by state laws. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the investment officer with the following as appropriate: • Audited financial statements • Proof of National Association of Securities Dealers (NASD) certification • Proof of state registration • Completed broker/dealer questionnaire • Certification of having read and understood and agreeing to comply with the City's investment policy An annual review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by the investment • Baytown Area Water Authority Investment Policy Revised September 2002 officer. A current audited financial statement is required to be on file for each financial institution and broker/dealer in which BAWA invests. B. Internal Controls — The investment officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the investment officer shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points: • Control of collusion • Separation of transaction authority from accounting and record keeping • Custodial safekeeping • Avoidance of physical delivery securities • Clear delegation of authority to subordinate staff members • Written confirmation of transactions for investments and wire transfers • Development of a wire transfer agreement with the lead bank and third party custodian C. Delivery vs. Payment — All trades where applicable will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in an eligible financial institution prior to the release of funds. Securities will be held by a third -party custodian as evidenced by safekeeping receipts. V. Suitable and Authorized Investments A. Investment Types — BAWA is empowered by statute to invest in the following types of securities: • Obligations of the United States or its agencies and instrumentalities • Direct obligations of the State of Texas or its agencies and instrumentalities • Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities • Obligations of states, agencies, counties, cities and other political subdivisions of any state rated as to investment quality by a • Baytown Area Water Authority Investment Policy Revised September 2002 nationally recognized investment rating firm not less than A or its equivalent • Certificates of deposit issued by a state or national bank, savings bank, or a state or federal credit union domiciled in this state and is (1) guaranteed or insured by the FDIC or its successor or the National Credit Union Share Insurance Fund or its successor; (2) secured by obligations that are described in Section 2256.009(a) of the Texas Public Funds Investment Act. • Fully collateralized direct repurchase agreements having a defined termination date, secured by obligations described in this section, pledged with a third party selected or approved by the city, and placed through a primary government securities dealer, as defined by the Federal Reserve, or a bank domiciled in this state • SEC registered, no-load money market mutual fund with a dollar - weighted average portfolio maturity of 90 days or less, whose assets consist exclusively of obligations that are described in Section 2256.009(a) of the Texas Public Funds Investment Act and whose investment objectives include seeking to maintain a stable net asset value of $1 per share, and provides the City with a prospectus and other information required by the Securities Exchange Act of 1934 or the Investment Company Act of 1940. • Local government investment funds or pools, authorized by the state for municipality participation, with a minimum rating of AAA or AAA-m or no lower than investment grade with a weighted average maturity no grater than ninety (90) days • Other investment instruments that are approved by the state for municipality participation B. Collateralization — Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse) agreements. In order to anticipate market changes and provide a level of security for all funds, the Collateralization level will be one hundred two percent (102%) of market value of principal and accrued interest. Collateral will be held by an independent third party with whom BAWA has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to BAWA and retained. The right of collateral substitution is granted. VI. Investment Parameters A. Diversification — The investments shall be diversified by security type and institution. With the exception of U.S. Treasury securities and authorized pools, BAWA will diversify the entire portfolio to comply with the investment strategy; however, in no case shall any single investment transaction be more than five -percent (5%) of the entire portfolio. Baytown Area Water Authority Investment Policy Revised September 2002 B. Maximum Maturities — To the extent possible, BAWA shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, BAWA will not directly invest in securities maturing more than five (5) years from the date of purchase. VII. Reporting A. Methods — The investment officer shall prepare an investment report at least quarterly, including a management summary that provides an analysis of the status of the current investment portfolio and transactions made over the last quarter. This management summary will be prepared in a manner consistent with the requirements of Section 2256.023 (Internal Management Reports) of the PFIA, and that will allow BAWA to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report should be provided to the investment officer and the BAWA Board of Directors. B. Performance Standards — The investment portfolio shall be managed in accordance with the objectives specified in this policy (safety, liquidity, yield). The portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. The basis used by the investment officer to determine whether market yields are being achieved shall be the three (3) month U.S. Treasury Bill. C. Marking to Market — The market value of the portfolio shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least quarterly. VIII. Policy Considerations A. Adoption and Amendments— This policy shall be adopted by resolution of the BAWA Board of Directors. Any changes must be approved by the investment officer and the BAWA Board of Directors. • Baytown Area Water Authority Investment Policy Revised September 2002 EXHIBIT A Baytown Area Water Authority Authorized Investment Officials Donna Sams, Director of Finance Rhonda L. Young, CPA, City of Baytown Treasurer Robert Chambers, City of Baytown Controller Renea Dobbs, City of Baytown Financial Analyst • Baytown Area Water Authority Investment Policy Revised September 2002 EXHIBIT B Baytown Area Water Authority Statement of Ethics and Conflicts of Interest Investment officials for the Baytown Area Water Authority shall refrain from personal business relationships with business organizations that could conflict with the proper execution of the investment program, or which could impair their ability to make partial investment decisions. This would only apply to personal business relationships with business organizations that have been approved by the Board of Directors to conduct investment transactions with the Baytown Area Water Authority. An investment official is considered to have a personal business relationship with a business organization if: (1) The investment official owns 10 percent or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business. (2) Funds received by the investment official from the business organization exceed 10 percent of the investment official's gross income for the previous year. The investment official has acquired from the business organization during the previous year investments with a book value of $2,500 or more for the personal account of the investment official. (3) I do hereby certify that I do not have a personal business relationship with any business organization approved to conduct investment transactions with the Baytown Area Water Authority, nor am I related within the second degree by affinity or consanguinity, as determined under Chapter 573, to an individual seeking to sell an investment to the Baytown Area Water Authority as of the date of this statement. Baytown Area Water Authority Investment Officials Donna Sams, Director of Finance Date Rhonda L. Young, CPA, Date City of Baytown Treasurer Robert Chambers, Date City of Baytown Controller Renea Dobbs, Date City of Baytown Financial Analyst Baytown Area Water Authority Investment Policy Revised September 2002 EXHIBIT C Baytown Area Water Authority Approved Broker/Dealers, Financial Institutions and Investment Pools Broker/Dealers First Southwest Asset Management Coastal Securities Wachovia Securities Duncan -Williams, Inc. Public Depositories Southwest Bank of Texas (Primary) Investment Pools TexPool TexSTAR • Baytown Area Water Authority Investment Policy Revised September 2002 EXHIBIT D Baytown Area Water Authority Certification by Business Organization (date) Baytown Area Water Aurhority C/O City of Baytown, Texas (Attn: Designated Investment official) P 0 Box 424 Baytown, TX 77522-0424 Dear Mr/s. (investment official): This certification is executed on behalf of the Baytown Area Water Authority (the Investor) and , (the Business Organization) pursuant to the Public Funds Investment Act, Chapter 2256, Texas Government Code, (the Act) in connection with investment transactions conducted between the Investor and Business Organization. The undersigned Qualified Representative of the Business Organization hereby certifies on behalf of the Business Organization that: 1. The undersigned is a Qualified Representative of the Business Organization offering to enter an investment transaction with the Investor (Note: as such terms are used in the Public Funds Investment Act, chapter 2256, Texas Local Government Code) and; 2. The Qualified Representative of the Business Organization has received and reviewed the Investment Policy furnished by the Investor and; 3. The Qualified Representative of the Business Organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the Business Organization and the Investor that are not authorized by the Investor's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the investor's entire portfolio or requires and interpretation of the subjective investment standards. Qualified Representative of the Business Organization Signed By: Name Title Date • Baytown Area Water Authority Investment Policy Revised September 2002 EXHIBIT E INVESTMENT STRATEGY The Baytown Area Water Authority's investment portfolio will be designed and managed to ensure that it will meet all the requirements established by the Baytown Area Water Authority investment policy and the Public Funds Investment Act. The overall investment strategy outlined in the investment policy has been further refined in this investment strategy statement by the following fund types. Operating Funds: Operating Funds generally have greater cash flow needs than other funds types. The operating fund portfolio may consist of any approved investment type with the understanding that the financial requirements of the operating funds will dictate the maturity dates of the investment. At utmost importance is the preservation and safety of the investment principal. Additionally each investment will be viewed for its liquidity and marketability of the investment if the need arises to liquidate the investment before maturity. The final determining factors for the investment strategy will be the diversification of the investment portfolio and the yield of the investment. To achieve short-term needs of one (1) to one hundred and eighty (180) days, funds will be invested in approved investment pools. For longer -term needs of six (6) months to five (5) years, funds will be invested in approved investments with objectives prioritized as follows: 1) understanding the suitability of the investment to the financial requirements of the Baytown Area Water Authority; 2) preservation and safety of principal; 3) liquidity; 4) marketability of the investment if the need arises to liquidate the investment before maturity; 5) diversification of the investment portfolio; and 6) yield. • Baytown Area Water Authority Investment Policy Revised September 2002 • INVESTMENT STRATEGY (Continued) Debt Service Funds: The debt service requirements are usually semi-annual, thus allowing the investment strategy to mirror debt obligation payment dates. The strategy for debt service funds allows greater flexibility since the actual requirements are known into the future. Investments will still meet the adopted policies; however, planning maturity dates to match debt requirement dates will be the primary obj ective. The investment instruments will be primarily in approved investment types with maturities at six or twelve months established to match debt requirement dates. Shorter -term investment may be used to meet these objectives and longer -term investments may be used when fund balance reserves exceed one year's debt service requirements. To achieve this strategy the following objectives are prioritized to evaluate investment opportunities: 1) understanding the suitability of the investment to the financial requirements of the Baytown Area Water Authority; 2) preservation and safety of principal; 3) yield; 4) marketability of the investment if the need arises to liquidate the investment before maturity; 5) diversification of the investment portfolio; and 6) liquidity. • Baytown Area Water Authority Investment Policy Revised September 2002 • INVESTMENT STRATEGY (Continued) Capital Improvement Funds: Bond proceeds can be invested over the life of the project; however, the exact disbursement of the funds is not always known. The investment objective of the capital improvement funds is to schedule maturities to maximize investment earnings while preserving principle. The key to an effective strategy is to be aware of the project needs and match maturities to the period funds are needed. The investment objective for capital projects funds is still to match investment maturities with funding needs. As short-term needs are recognized investment maturities will be moved into approved investment pools to meet financial requirements. Longer -term needs will be invested with the following objectives as prioritized for capital improvement funds: 1) understanding the suitability of the investment to the financial requirements of the Baytown Area Water Authority; 2) preservation and safety of principal; 3) diversification of the investment portfolio; 4) yield; 5) liquidity; and 6) marketability of the investment if the need arises to liquidate the investment before maturity. • Baytown Area Water Authority Investment Policy Revised September 2002 INVESTMENT STRATEGY (Continued) Reserve Funds: Certain reserve funds have been established as required by bond covenants. The investment objective is to invest reserve funds to the extent that maturities are established to the limit of the investment policy or to the end of the bond requirements whichever is shorter. The overall investment strategy for reserve funds will not rely on investment pools; however, the use of pools is not prohibited. Longer -term investment objectives are prioritized as follows: 1) understanding the suitability of the investment to the financial requirements of the Baytown Area Water Authority; 2) diversification of the investment portfolio; 3) preservation and safety of principal; 4) yield; 5) liquidity; and 6) marketability of the investment if the need arises to liquidate the investment before maturity. •