CC Resolution No. 1557 45
RESOLUTION NO. 1557
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BAYTOWN,
TEXAS,APPROVING THE INVESTMENT POLICY AND STRATEGY OF THE
CITY OF BAYTOWN IN COMPLIANCE WITH THE PUBLIC FUNDS
INVESTMENT ACT; AND PROVIDING FOR THE EFFECTIVE DATE
THEREOF.
WHEREAS, the Public Funds hnvestment Act(the"Act")requires that the City Council of
the City of Baytown, as a governing body of an investing entity, adopt a written investment policy
regarding the investment of its funds and funds under its control; and
WHEREAS, an integral part of the investment policy is a separate written investment strategy
describing the investment objectives for each of the funds under the control of the City Council;and
WHEREAS, on the 13th day of September, 2001, the City Council adopted the investment
policy and investment strategies for the City of Baytown; and
WHEREAS, on this the 261h day of September, 2002, and before adopting the policy and
strategies referenced hereinbelow, the City Council conducted its review; NOW THEREFORE
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF BAYTOWN, TEXAS:
Section 1: That in compliance with the Public Funds Investment Act,the City Council of
the City of Baytown,Texas,hereby approves the City of Baytown's Investment Policy and Strategy,
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
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 the 26th day of September, 2002.
/.� G
PETE C. ALFARO,Mayor
ATTEST:
GA Y W. SMITH, City Clerk
APPROVED AS TO FORM:
40 rzez
ACIO RAMIREZ, SRLjeity Attorney
F:Veanene\My Documents\Council\01-02\September\ApprovelnvestmentPolicy&Strategy.doc
CITY OF
BAYTOWN, TEXAS
INVESTMENT POLICY
�ity council Actio
Revised 9/14/00
Revised 9/13/01
Revised 9/26/02
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City of Baytown
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
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City of Baytown
Investment Policy
I. Scope
This investment policy applies to all the investment activities of the City of Baytown,
Texas (City). 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,
including but not limited to tax revenues, charges for services, bond proceeds, interest
income, and loans and funds received by the City where the City performs a custodial
function.
II. General Objectives
The primary objectives, in priority order, of the City'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—The City 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 the City will do
business
• Diversifying the investment portfolio so that potential losses on
individual securities will be minimized
ii. Interest Rate Risk—The City 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
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City of Baytown
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 govenunent 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 maybe 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 City
Manager any material financial interests in financial institutions that
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City of Baytown
Investment Policy Revised September 2002
conduct business with the City. 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 the City'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 internal 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. hi 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
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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 the City 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 — The City 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
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City of Baytown
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 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.
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, the City 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.
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City of Baytown
Investment Policy Revised September 2002
B. Maximum Maturities — To the extent possible, the City shall 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.
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 the City 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 City Council.
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 City Council. Any changes must be approved by the investment
officer and the Finance Committee.
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City of Baytown
Investment Policy Revised September 2002
EXHIBIT A
City of Baytown
Authorized Investment Officials
Donna Sams, Director of Finance
Rhonda L. Young, CPA, Treasurer
Robert Chambers, Controller
Renea Dobbs, Financial Analyst
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City of Baytown
Investment Policy Revised September 2002
EXHIBIT B
City of Baytown
Statement of Ethics and Conflicts of Interest
Investment officials for the City of Baytown 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 City Council to conduct investment transactions with the City of Baytown.
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.
(3) 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.
I do hereby certify that I do not have a personal business relationship with any business
organization approved to conduct investment transactions with the City of Baytown, 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 City of Baytown as of the date of this
statement.
City of Baytown
Investment Officials
Donna Sams, Director of Finance Date
Rhonda L. Young, CPA,Treasurer Date
Robert Chambers, Controller Date
Renea Dobbs,Financial Analyst Date
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City of Baytown
Investment Policy Revised September 2002
EXHIBIT C
City of Baytown
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
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City of Baytown
Investment Policy Revised September 2002
EXHIBIT D
IX. City of Baytown
Certification by Business Organization
date
City of Baytown, Texas
(Attn: Designated Investment official)
P O Box 424
Baytown, TX 77522-0424
Dear Mr/s. (investment official):
This certification is executed on behalf of the City of Baytown, Texas (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.
X. Qualified Representative of the Business Organization
Signed By:
X1.
Name
Title
Date
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City of Baytown
Investment Policy Revised September 2002
EXHIBIT E
INVESTMENT STRATEGY
The City of Baytown's investment portfolio will be designed and managed to ensure that
it will meet all the requirements established by the City of Baytown 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 City of Baytown;
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.
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City of Baytown
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
objective.
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 City of Baytown;
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.
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City of Baytown
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 City of Baytown;
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.
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City of Baytown
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 City of Baytown;
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.
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