CC Resolution No. 1266 2 446
RESOLUTION NO. 1266
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BAYTOWN,
TEXAS, APPOINTING AN INVESTMENT OFFICER AND AN ALTERNATE
INVESTMENT OFFICER RESPONSIBLE FOR THE INVESTMENT OF THE
FUNDS OF THE CITY OF BAYTOWN; ADOPTING AN INVESTMENT
POLICY; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF.
WHEREAS, through House Bill 2459, the Legislature recently
amended Section 2256 . 005 of the Texas Government Code which requires
the City of Baytown to designate one or more officers or employees of
the City of Baytown as an investment officer to be responsible for
the investment of its funds; and
WHEREAS, House Bill 2459 also requires the City of Baytown to
adopt an investment policy detailing an investment strategy for each
of the funds under the City of Baytown' s control; and
WHEREAS, such investment policy must describe the investment
objectives for each particular fund using the following priorities in
order of importance : (i) understanding of the suitability of the
investment of the financial requirements of the entity; (ii)
preservation and safety of principal; (iii) liquidity; (iv)
marketability of the investment if the need arises to liquidate the
investment before maturity; (v) diversification of the investment
portfolio; and (vi) yield; and
WHEREAS, the Finance Committee has received and reviewed the
attached investment policy, which meets the new statutory
requirements imposed by House Bill 2459 as well as all other
statutory requirements applicable to such investment policy; NOW
THEREFORE
BE IT R$SOLVED BY THE CITY COUNCIL OF THE CITY OF BAYTOWN,
TEXAS :
Section 1 : That the City Council of the City of Baytown,
Texas, appoints L. M. Daws, Treasurer, as an investment officer, and
Donna Sams, Controller, as an alternate investment officer, to be
responsible for the investment of the funds of the City of Baytown.
Section 2 : That the City Council of the City of Baytown,
Texas, adopts the Investment Policy, which is attached hereto as
Exhibit "A" and incorporated herein for all intents and purposes .
2447 a
Section 3 : This Resolution shall take effect immediately
from and after its passage by the City Council of the City of Baytown.
INTRODUCED, READ and PASSED by the affirmative vote of the City
Council of the City of Baytown this 14th day of December, 1995 .
PETE C. ALFAIrO, Mayor
ATTEST :
EILEEN P . HALL, City Clerk
APPROVED AS TO FORM:
ACIO RAMIREZ, S . , City Attorney
c:\klhll\resolution\investofficer.res
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CITY OF BAYTOWN
INVESTMENT POLICY
September 1, 1995
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Investment Policy Revised9/01/95
1.0 Policv
It is the policy of the City of Baytown, Texas (City) to invest public funds in a manner which
will provide the highest return with the maximum security while meeting the daily cash flow
demands of the City and conforming to all state and local statutes governing the investment
of public funds.
2.0 Scone
This investment policy applies to all the investment activities of the City of Baytown, Texas.
These funds are accounted for in the City's Comprehensive Annual Financial Report and
include: All financial assets of all funds managed by the City but not limited to receipt of Tax
Revenues, Charges for Services,Bond Proceeds, Interest Incomes, Loans and Funds received
by the City where the City performs a custodial function.
3.0 Prudence
Investments shall be made with judgement 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.
3.1 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 appropriate action is taken to control
adverse developments.
4.0 Objectives
The primary objectives, in priority order, of the City's investment activities shall be:
4.1 Safety- Safety of the principal is the foremost objective of the investment program.
Investments of the City shall be undertaken in a manner that seeks to ensure the
preservation of capital in the overall portfolio. To attain this objective, diversification
is required in order that potential losses on individual securities do not exceed the
income generated from the remainder of the portfolio.
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Investment Policy Revised9/01/95
4.2 Liquidity-The City's investment portfolio will remain sufficiently liquid to enable the
City to meet operating requirements that might be reasonably anticipated.
4.3 Return of Investments - The City's investment portfolio shall be designed with the
objective of attaining a rate of return throughout budgetary and economic cycles,
commensurate with the City's investment risk constraints and cash flow characteristics
of the portfolio.
5.0 Delegation of Authority_
Authority to manage the City's investment program is derived from the following: City
Charter Article VII, Section 67 (9). Management responsibility for the investment program
is hereby delegated to the Director of Finance, who shall establish written procedures for the
operation of the investment program consistent with this investment policy. Procedures
should include reference to: safekeeping, PSA repurchase agreements, wire transfer
agreements, banking service contracts and collateral/depository agreements. Such procedures
shall include explicit delegation of authority to persons responsible for investment
transactions. No person may engage in an investment transaction except as provided under
the terms of this policy and the procedures established by the Director of Finance. The
Director of Finance shall be responsible for all transactions undertaken and shall establish a
system of controls to regulate activities of subordinate officials.
6.0 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 of the investment program, or which could
impair their ability to make impartial investment decisions. Employees and investment
officials shall disclose to the City Manager any material financial interests in financial
institutions that conduct business within this jurisdiction, and further disclose any large
personal financial/investment positions that could be related to the performance of the City,
particularly with regard to the time of purchases and sales.
7.0 Authorized Financial Dealers
The Director of Finance will maintain a list 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 Securities and Exchange Commission Rule 15C3-1 (uniform net capital
rule). No public deposit shall be made except in a qualified public depository as established
by state laws.
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All financial institutions and broker/dealers who desire to become qualified bidders for
investment transactions must supply the Director of Finance with the following: audited
financial statements,proof of national association of securities dealers certification, trading
resolution,proof of state registration, completed broker/dealer questionnaire, certification
of having read City's investment policy and depository contract.
An annual review of the financial condition and registrations of qualified bidders will be
conducted by the Director of Finance. A current audited financial statement is required to be
on file for each financial institution and broker/dealer in which the City invests.
8.0 Authorized and Suitable Investments
The City is empowered by statute to invest in the following types of securities:
8.01 obligations of the United States or its agencies and instrumentalities;
8.02 direct obligations of the State of Texas or its agencies;
8.03 other obligations, the principal of and interest on which are unconditionally
guaranteed or insured by the State of Texas or the United States or its agencies and
instrumentalities;
8.04 obligations of states, agencies, counties, cities and other political subdivisions of any
state having been rated as to investment quality by a nationally recognized investment
rating firm and having received a rating of not less than A or its equivalent;
8.05 certificates of deposit issued by state and national banks domiciled in this state;
8.06 fully collateralized direct repurchase agreements having a defined termination date,
secured by obligations described by subsection 8.01-8.04 of this section, pledged with
a third party selected or approved by the political entity, and placed through a primary
government securities dealer, as defined by the Federal Reserve, or a bank domiciled
in this state;
8.07 certificates of deposit issued by savings and loans associations domiciled in this state;
8.08 SEC registered, no load money market mutual fund with a dollar weighted average
portfolio maturity of 120 days or less whose assets consist exclusively of the
obligations that are described by subsection 8.01-8.04 of this section and whose
investment objectives include seeking to maintain a stable net asset value of$1 per
share;
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8.09 local government investment funds or pools, authorized by the state for municipality
participation;
8.10 other investment instruments that are approved by the state for municipality
participation.
9.0 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 always be held by an independent third party with whom the City has a current
custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be
supplied to the City and retained. The right of collateral substitution is granted.
10.0 Safekeeping and Custody
All security transactions, including collateral for repurchase agreements, entered into by the
City shall be conducted on a delivery-versus-payment (DV?) basis. Securities will be held
by a third party custodian designated by the Director of Finance and evidenced by safekeeping
receipts.
11.0 Diversification
The City will diversify its investments by security type and institution. With the exception of
U.S. Treasury securities and authorized pools, the City will diversify the entire portfolio to
comply with the investment strategy; however, in no case shall any single investment
transaction be more that five percent (5%) of the entire portfolio.
12.0 Maximum Maturities
To the extent possible, the City will attempt to match its investments with anticipated cash
flow requirements. Unless matched to a specific cash flow, the City will not directly invest
in securities maturing more than five (5) years from the date of purchase.
13.0 Internal Control
The Director of Finance in conjunction with the City's annual audit, shall perform or cause
to have performed a compliance audit of management controls on investments and adherence
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Investment Policy Revised 9/01/95
to the entity's established investment policies. This review will provide internal control by
assuring compliance with policies and procedures.
14.0 Performance Standards
The investment portfolio shall be designed with the objective of obtaining a rate of return
throughout budgetary and economic cycles, commensurate with the investment risk
constraints and cash flow needs.
14.1 Market Yield (Benchmark) - The City's investment strategy is active. Given this
strategy the basis used by the Director of Finance to determine whether market yields
are being achieved shall be the three (3) month U.S. Treasury Bill.
15.0 Reporting
The Director of Finance is charged with the responsibility of including a market report on
investment activity and returns in the City's Financial Report. Reports will include
performance, market sector breakdown, number of trades, interest earnings, etc.
16.0 Investment Policy Adoption
The City's investment policy shall be adopted by resolution of the City's legislative authority.
The policy shall be reviewed annually by the Finance Committee and any modification thereto
must be approved by the City's legislative authority.
GLOSSARY
AGENCIES: Federal agency securities.
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust
company. The accepting institution guarantees payment of the bill, as well as the issuer.
BID: The price offered by a buyer of securities. (When you are wiling wcuritioa,you aak for a bid.) See Offer.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity evidenced by a
certificate. Large-denomination CD's are typically negotiable.
COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to
secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public
monies.
COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual financial
report for the City of Baytown. It includes combined statements for each individual fund and account
group prepared in conformity with GAAP. It also includes supporting schedules necessary to
demonstrate compliance with finance-related legal and contractual provisions, extensive introductory
material, and a detailed Statistical Section.
COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on
the bond's face value. (b)A certificate attached to a bond evidencing interest due on a payment date.
DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling
for his own account.
DEBENTURE: A bond secured only by the general credit of the issuer.
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery
versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with
an exchange of money for the securities. Delivery versus receipt is delivery of securities with an
exchange of a signed receipt for the securities.
DISCOUNT: The difference between the cost price of a security and its maturity when quoted at
lower than face value. A security selling below original offering price shortly after sale also is
considered to be at a discount.
DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a
discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills.
DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent
returns.
FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to
various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers,
farm cooperatives, and exporters.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures
bank deposits, currently up to $100,000 per deposit.
FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is
currently pegged by the Federal Reserve through open-market operations.
FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings
and loan associations. The Federal Home Loan Banks play a role analogous to that played by the
Federal Reserve Banks vis-a-vis member commercial banks.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA was
chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing and Urban Development
(HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie
Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation's
purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate
mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and
guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the
Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the
New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a
rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding
purchases and sales of Government Securities in the open market as a means of influencing the
volume of bank credit and money.
FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and
consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about
5,700 commercial banks that are members of the system.
TREASURY BOND: Long-term U.S. Treasury securities having initial maturities of more than 10
years.
TREASURY NOTES: A non-interest bearing discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to mature in three months, six months or twelve
months.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that
member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of
indebtedness to liquid capital of 15 to 1; also call net capital rule and net capital ratio. Indebtedness
covers all money owed to a firm, including margin loans and commitments to purchase securities, one
reason new public issues are spread among members of underwriting syndicates. Liquid capital
includes cash and assets easily converted into cash.
YIELD: The rate of annual income return on an investment, expressed as a percentage. (a)
INCOME YIELD is obtained by dividing the current dollar income by the current market price for
the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any
premium above par or plus any discount from par in purchase price, with the adjustment spread over
the period from the date of purchase to the date of maturity of the bond.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae):
Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage
bankers, commercial banks, savings and loan associations, and other institutions. Security holder is
protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the
FHA, VA or FMHM mortgages. The tern "passthroughs" is often used to describe Ginnie Maes.
LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a
substantial loss of value. In the money market, a security is said to be liquid if the spread between
bid and asked prices is narrow and reasonable size can be done at those quotes.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from
political subdivisions that are placed in the custody of the State Treasurer for investment and
reinvestment.
MARKET VALUE: The price at which a security is trading and could presumably be purchased
or sold.
MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions
between the parties to repurchase--reverse repurchase agreements that establishes each party's rights
in the transactions. A master agreement will often specify, among other things, the right of the buyer-
lender to liquidate the underlying securities in the event of default by the
seller-borrower.
MATURITY: The date upon which the principal or stated value of an investment becomes due and
payable.
MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper,
bankers' acceptances, etc) are issued and traded.
OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an
offer.) See Asked and Bid.
OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities
in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to
influence the volume of money and credit in the economy. Purchases inject reserves into the bank
system and stimulate growth of money and credit; sales have the opposite effect. Open market
operations are the Federal Reserve's most important and most flexible monetary policy tool.
PORTFOLIO: Collection of securities held by an investor.
PRIMARY DEALER: A group of government securities dealers who submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve Bank of New
York and are subject to its informal oversight. Primary dealers include Securities and Exchange
Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms.
PRUDENT PERSON RULE: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state-
-the so-called legal list. In other states the trustee may invest in a security if it is one which would
be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and
preservation of capital.
QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption
from the payment of any sales or compensating use or ad valorem taxes under the laws of this state,
which has segregated for the benefit of the commission eligible collateral having a value of not less
than its maximum liability and which has been approved by the Public Deposit Protection Commission
to hold public deposits.
RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current
market price. This may be the amortized yield to maturity on a bond the current income return.
REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to
an investor with an agreement to repurchase them at a fixed price on a fixed date. The security
"buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the
agreement are structured to compensate him for this. Dealers use RP extensively to finance their
positions. Exception: When the Fed is said to be doing RP, it is lending money, that is, increasing
bank reserves.
SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and
valuables of all types and descriptions are held in the bank's vaults for protection.
SECONDARY MARKET: A market made for the purchase and sale of outstanding issues
following the initial distribution.
SECURITIES& EXCHANGE COMMISSION: Agency created by Congress to protect investors
in securities transactions by administering securities legislation.
SEC RULE 15C3-1: See Uniform Net Capital Rule.
TREASURY BILLS: A non interest bearing discount security issued by the U.S. Treasury to
finance the national debt. Most bills are issued to mature in three, six, twelve months.
INVESTMENT STRATEGY STATEMENT
The City of Baytown maintains portfolios which utilize four specific investment
strategy considerations, designed to address the unique characteristics of the fund
groups represented in the investment portfolios.
A. OPERATING FUNDS AND COMMINGLED POOLS CONTAINING OPERATING
FUNDS
Investment strategies for operating funds and commingled pools
containing operating funds have as their primary objective to assure
that anticipated cash flows are matched with adequate investment
liquidity. The secondary objective is to create a portfolio structure
which will experience minimal volatility during economic cycles. This
may be accomplished by purchasing quality, short-to medium-term
securities which will complement each other in a laddered or barbell
maturity structure.
B. DEBT SERVICE FUNDS
Investment strategies for debt service funds shall have as the primary
objective the assurance of investment liquidity adequate to cover the
debt service obligation on the required payment date. Securities
purchased shall not have a stated final maturity date which exceeds
the debt service payment date.
C. DEBT SERVICE RESERVE FUNDS
Investment strategies for debt service reserve funds shall have as the
primary objective the ability to generate a dependable revenue stream
to the appropriate debt service fund from securities with a low degree
of volatility. Except as may be required by the bond ordinance
specific to an individual issue, securities should be of high quality,
with short-to intermediate-term maturities. Volatility shall be further
controlled through the purchase of securities carrying the highest
coupon available, within the desired maturity and quality range,
without paying a premium, if at all possible. Such securities will tend
to hold their value during economic cycles.
D. SPECIAL PROJECTS OR SPECIAL PURPOSE FUNDS
Investment strategies for special projects or special purpose fund
portfolios will have as their primary objective to assure that
anticipated cash flows are matched with adequate investment
liquidity. These portfolios should include at least 10% in highly liquid
securities to allow for flexibility and unanticipated project outlays.
The stated final maturity dates of securities held should not exceed
the estimated project completion date.