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BAWA Resolution No. 2008-02 RESOLUTION NO. 2008-02 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN AREA WATER AUTHORITY ADOPTING THE BAYTOWN AREA WATER AUTHORITY'S 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 acknowledges that it has reviewed the investment policy and investment strategies and that the written instrument adopted in Section 2 hereof records any changes made to either the investment policy or investment strategies. Section 2: That the Board of Directors of the Baytown Area Water Authority hereby adopts its investment policy, which is attached hereto as Exhibit "A" and incorporated herein for all intents and purposes. Section 3: 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 20jh day of February, 2008. PETER BUENZ, resident ATTES : ELUVIN KN UF, Interi ssistant Secretary APPROVED AS TO FORM: C76NACIO RAMIREZ, eneral Counsel Et'Karcn`.j'i Irz`RA W 1`Rcwlution'200StAJolst DrvcsUncntl'olicy.doc Baytown Area Water Authority Bay town, Texas INVESTMENT POLICY r AWA Board Actio Revised 9/18/02 Revised 9/17/03 Revised 9/15/04 Revised 9/21/05 Revised 2/15/06 Revised 2/20/08 F.XN�IT A Baytown Area Water Authority Investment Policy Table of Contents I. Policy I II. Scope I III. General Objectives A. Safety I B. Liquidity 2 C. Yield 2 IV. Standards of Care A. Prudence 2 B. Ethics and Conflicts of Interest 3 C. Delegation of Authority 3 D. Training 3 V. Safekeeping and Custody A. Authorized Financial Dealers and Institutions 4 B. Intemal Controls 4 C. Delivery Vs. Payment 5 VI. Suitable and Authorized Investments A. Eligible Investments 5 B. Collateralization 11 VII. Investment Parameters A. Diversification 12 B. Maximum Maturities 12 VIll. Investment Strategies 12 IX. Reporting A. Methods 12 B. Performance Standards 13 C. Marking to Market 13 EXHIBITS A - Authorized Investment Officials 14 B - Statement of Ethics and Conflicts of Interest 15 C—Approved Broker/Dealers, Financial Institutions and Investment Pools 16 D—Certification by Business Organization 17 E— Investment Strategy 18 Baytown Area Water Authority Investment Policy Revised February 2008 Baytown Area Water Authority Investment Policy I. Policy It is the policy of the Baytown Area Water Authority("BAWA") to administer and invest its funds in a manner that will preserve the principal and maintain the liquidity while meeting the daily cash flow requirements of BAWA. BAWA will conform to all federal, state and local statutes rules and regulations governing the investment of BAWA's funds. BAWA's policy is to hold investments to maturity, however, securities may be sold in order to minimize the potential loss of principal on a security whose credit quality has declined; to swap into another security which would improve the quality, yield or target duration of the portfolio; or to meet unanticipated liquidity needs of the portfolio. Not less than annually, the BAWA board shall adopt a written instrument by resolution stating that it has reviewed the Investment Policy and investment strategies and that the written instrument so adopted shall record any changes made to the Investment Policy or investment strategies. H. Scope This investment policy applies to all the investment activities of BAWA. These funds are accounted for in BAWA's Comprehensive 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. III. 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 1 Baytown Area Water Authority Investment Policy Revised February 2008 • 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 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 IV. 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. 2 Baytown Area Water Authority Investment Policy Revised February 2008 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 BAWA and the Texas Ethics Commission any material financial interests in financial institutions that conduct business with BAWA. They shall further file a disclosure statement with the Texas Ethics Commission and BAWA that includes 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. This authority is derived from House Bill 967, Section I IA & B, Section 12A(3), and the City of Baytown 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. D. Training - Investment Officials shall attend at least one investment training session within 12 months after taking office or assuming duties, and shall attend an investment training session not less than once in a two- year period and receive not less than 10 hours of instruction relating to investment responsibilities. BAWA shall provide the training through courses and seminars offered by professional organizations and associations in order to insure the quality and capability of BAWA's investment personnel making investment decisions in compliance with Public Funds Investment Act (PFIA). Professional organizations and associations that may provide investment training included the Government Treasurer's Organization of Texas, the University of North 3 Baytown Area Water Authority Investment Policy Revised February 2008 Texas, the Government Finance Officers Association of Texas, or the Texas Municipal League. V. Safekeeping and Custody A. Authorized Financial Dealers and Institutions The investment officer will maintain a list of financial institutions and security broker/dealers authorized to provide investment services (Exhibit Q. These may include "primary" dealers or regional dealers. 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(Exhibit D) • Certification by a qualified representative of the firm that the firm has a) received and reviewed BAWA's Investment Policy and b) has implemented reasonable procedures and controls in an effort to preclude investment transactions that are not authorized by BAWA's Investment Policy, except to the extent that this authorization is dependent on an analysis of the makeup of BAWA's entire portfolio or requires an interpretation of subjective investment standards. The BAWA board shall at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with BAWA. B. Internal Controls—The investment officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of BAWA 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: 4 Baytown Area Water Authority Investment Policy Revised February 2008 • 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 and collateral will be held in BAWA's name by a third-party custodian as evidenced by safekeeping receipts. VI. Investments A. Eligible Investments — Assets of BAWA may be invested in the following instruments described below. All of these investments are authorized by Chapter 2256 of the Government Code (Public Funds Investment Act). An investment that requires a minimum rating under this section does not qualify as an authorized investment during the period the investment does not have the minimum rating. BAWA shall take all prudent measures consistent with this Investment Policy to liquidate an investment that does not have the minimum rating. 1. Obligations of, or Guaranteed by Governmental Entities (a) Except as provided by Subsection (b), the following are authorized investments under this subchapter: i (i) obligations, including letters of credit, of the United States or its agencies and instrumentalities; (ii) direct obligations of this state or its agencies and instrumentalities; (iii) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; 5 Baytown Area Water Authority Investment Policy Revised February 2008 (iv) other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities; (v) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; and (b)The following are not authorized investments under this section: (i) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage- backed security collateral and pays no principal; (ii) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; (iii) collateralized mortgage obligations that have a stated final maturity date of greater than 10 years; and (iv) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. 2. Certificates of Deposit and Share Certificates A certificate of deposit is an authorized investment under this subchapter if the certificate is issued by a state or national bank domiciled in this state, a savings bank domiciled in this state, or a state or federal credit union domiciled in this state and is: (i) guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor; (ii) secured by obligations that are described by Section l(a), including mortgage backed securities directly issued by a federal agency or instrumentality that have a market value of not less than the principal amount of the certificates, but excluding those mortgage backed securities of the nature described by Section 1(b); or 6 Baytown Area Water Authority Investment Policy Revised February 2008 (iii) secured in any other manner and amount provided by law for deposits of the investing entity. 3. Repurchase Agreements (a) A fully collateralized repurchase agreement is an authorized investment under this subchapter if the repurchase agreement: (i)has a defined termination date; (ii) is secured by obligations described by Section 1(a)(i); and (iii) requires the securities being purchased by BAWA to be pledged to BAWA, held in BAWA's name, and deposited at the time the investment is made with BAWA or with a third party selected and approved by BAWA; and (iv) is placed through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this state. (b) In this section, "repurchase agreement" means a simultaneous agreement to buy, hold for a specified time, and sell back at a future date obligations described by Section 1(a)(i), at a market value at the time the funds are disbursed of not less than the principal amount of the funds disbursed. The term includes a direct security repurchase agreement and a reverse security repurchase agreement. (c) Notwithstanding any other law, the term of any reverse security repurchase agreement may not exceed 90 days after the date the reverse security repurchase agreement is delivered. (d) Money received by an entity under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the term of the authorized investments acquired must mature not later than the expiration date stated in the reverse security repurchase agreement. 4. Mutual Funds (a) A no-load money market mutual fund is an authorized investment under this subchapter if the mutual fund: (i) is registered with and regulated by the Securities and Exchange Commission; 7 Baytown Area Water Authority Investment Policy Revised February 2008 (ii) provides the investing entity with a prospectus and other information required by the Securities Exchange Act of 1934 (15 U.S.C. Section 78a et seq.) or the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.); (iii) has a dollar-weighted average stated maturity of 90 days or fewer; and (iv) includes in its investment objectives the maintenance of a stable net asset value of$1 for each share. (b) In addition to a no-load money market mutual fund permitted as an authorized investment in Subsection (a), a no-load mutual fund is an authorized investment under this subchapter if the mutual fund: (i) is registered with the Securities and Exchange Commission; (ii) has an average weighted maturity of less than two years; (iii) is invested exclusively in obligations approved by this subchapter; (iv) is continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent; and (v) conforms to the requirements set forth in Sections 5(b) and (c) relating to the eligibility of investment pools to receive and invest funds of investing entities. (c) BAWA is not authorized by this section to; (i) invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, in mutual funds described in Subsection (b); (ii) invest any portion of bond proceeds, reserves and funds held for debt service, in mutual funds described in Subsection(b); or (iii) invest its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund described in Subsection (a) or (b) in an amount that exceeds 10 percent of the total assets of the mutual fund. 8 Baytown Area Water Authority Investment Policy Revised February 2008 5. Investment Pools (a) BAWA may invest its funds and funds under its control through an eligible investment pool if the BAWA Board by rule, order, ordinance, or resolution, as appropriate, authorizes investment in the particular pool. An investment pool shall invest the funds it receives from entities in authorized investments permitted by this subchapter. (b) To be eligible to receive funds from and invest funds on behalf of BAWA under this section, an investment pool must furnish to the investment officer or other authorized representative of BAWA an offering circular or other similar disclosure instrument that contains, at a minimum, the following information: (i) the types of investments in which money is allowed to be invested; (ii) the maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool; (iii) the maximum stated maturity date any investment security within the portfolio has; (iv) the objectives of the pool; (v)the size of the pool; (vi) the names of the members of the advisory board of the pool and the dates their terms expire; (vii) the custodian bank that will safekeep the pool's assets; (viii) whether the intent of the pool is to maintain a net asset value of one dollar and the risk of market price fluctuation; (ix) whether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment; (x) the name and address of the independent auditor of the pool; (xi) the requirements to be satisfied for an entity to deposit funds in and withdraw funds from the pool and any deadlines or other 9 Baytown Area Water Authority Investment Policy Revised February 2008 operating policies required for the entity to invest funds in and withdraw funds from the pool; and (xii)the performance history of the pool, including yield, average dollar-weighted maturities, and expense ratios. (c) To maintain eligibility to receive funds from and invest funds on behalf of BAWA under this section, an investment pool must furnish to the investment officer or other authorized representative of the BAWA: (i) investment transaction confirmations, and (ii) a monthly report that contains, at a minimum, the following information: (A) the types and percentage breakdown of securities in which the pool is invested; (B) the current average dollar-weighted maturity, based on the stated maturity date, of the pool; (C) the current percentage of the pool's portfolio in investments that have stated maturities of more than one year; (D) the book value versus the market value of the pool's portfolio, using amortized cost valuation; (E) the size of the pool; (F) the number of participants in the pool; (G) the custodian bank that is safekeeping the assets of the pool; (H) a listing of daily transaction activity of the entity participating in the pool; (I)the yield and expense ratio of the pool; (J) the portfolio managers of the pool; and (K)any changes or addenda to the offering circular. 10 Baytown Area Water Authority Investment Policy Revised February 2008 (d) BAWA by contract may delegate to an investment pool the authority to hold legal title as custodian of investments purchased with its local funds. (e) In this section, "yield" shall be calculated in accordance with regulations governing the registration of open-end management investment companies under the Investment Company Act of 1940, as promulgated from time to time by the federal Securities and Exchange Commission. (f) To be eligible to receive funds from and invest funds on behalf of BAWA under this section, a public funds investment pool created to function as a money market mutual fund must mark its portfolio to market daily, and, to the extent reasonably possible, stabilize at a $1 net asset value. If the ratio of the market value of the portfolio divided by the book value of the portfolio is less than 0.995 or greater than 1.005, portfolio holdings shall be sold as necessary to maintain the ratio between 0.995 and 1.005. (g) To be eligible to receive funds from and invest funds on behalf of BAWA under this section, a public funds investment pool must have an advisory board composed: (i) equally of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for a public funds investment pool created under Chapter 791 and managed by a state agency; or (ii) of participants in the pool and other persons who do not have a business relationship with the pool and are qualified to advise the pool, for other investment pools. 1 (h) To maintain eligibility to receive funds from and invest funds on behalf of BAWA under this section, an investment pool must be continuously rated no lower than AAA or AAA-m or at an equivalent rating by at least one nationally recognized rating service. B. Collateralization — Collateral ization 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 Collateral ization level will be one hundred two percent (102%)of market value of principal and accrued interest. Collateral will be held in BAWA's name 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. 11 Baytown Area Water Authority Investment Policy Revised February 2008 C. Existing Investments— Any investment currently held that does not meet the guidelines of this policy, but were authorized investments at the time of purchase, is not required to be liquidated. VII. 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. 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. VIII. Investment Strategies BAWA maintains separate portfolios for individual funds or groups of funds that are managed according to the terms of this Policy and the corresponding investment strategies listed in Exhibit E. The investment strategy for portfolios established after the annual Investment Policy review and adoption will be managed in accordance with the terms of this Policy and applicable agreements until the next annual review when a specific strategy will be adopted. BAWA participates in a pooled fund group, maintained by the City, that is an aggregation of BAWA's and the majority of City funds including tax receipts, enterprise fund revenues, fine and fee revenues, as well as some, but not all, bond proceeds, and grants. This portfolio is maintained to meet anticipated daily cash needs for BAWA and City operations, capital projects and debt service. In order to ensure the ability of BAWA to meet obligations and to minimize potential liquidation losses, the dollar-weighted average stated maturity of the Investment Pool shall not exceed 2 years. The objectives of this portfolio are to ensure safety of principal; ensure adequate investment liquidity; limit market and credit risk through diversification; and attain the best feasible yield in accordance with the objectives and restrictions set for in this Policy. IX. Reporting • Methods — The investment officer shall prepare an investment report at least quarterly, including a management summary that provides an 12 Baytown Area Water Authority Investment Policy Revised February 2008 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 BAWA Board. An independent auditor shall formally review the quarterly reports prepared under this section at least annually, and that auditor shall report the results of the review to the BAWA Board. • 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. • Marking to Market — The market value of the portfolio shall be calculated at least monthly and a statement of the market value of the portfolio shall be issued at least quarterly. The market value of each investment shall be obtained from a source such as the Wall Street Journal, a reputable brokerage firm or security pricing service and reported on the investment reports. 13 Baytown Area Water Authority Investment Policy Revised February 2008 EXHIBIT A Baytown Area Water Authority Authorized Investment Officials Rhonda Daugherty, CPA, City of Baytown Director of Finance Andrea S. Deaton, Assistant Director of Finance Renea Dobbs, City of Baytown Treasurer 14 Baytown Area Water Authority Investment Policy Revised February 2008 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. (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 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 In s ment Officia -0o- Rhonda Daugherty, CP Date City of Baytown,Direct r of Finance Andrea S. Deaton, Date City of Baytown,Assistant Director of Finance a-ao-OF { Renea Dobbs, Date City of Baytown,Treasurer 15 Baytown Area Water Authority Investment Policy Revised February 2008 EXHIBIT C Baytown Area Water Authority Approved Broker/Dealers,Financial Institutions and Investment Pools Broker/Dealers First Southwest Asset Management Coastal Securities Duncan-Williams, Inc. UBS Financial Services, Inc. Public Depositories JP Morgan Chase, NA (Primary) Investment Pools TexPool TexSTAR 16 Baytown Area Water Authority Investment Policy Revised February 2008 EXHIBIT D Baytown Area Water Authority Certification by Business Organization date Baytown Area Water Authority CIO City of Baytown,Texas (Attn: Designated Investment official) P0 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. Quati ied Representative of the Business Organization Signed By: Name Title Date 17 Baytown Area Water Authority Investment Policy Revised February 2008 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. 18 Baytown Area Water Authority Investment Policy Revised February 2008 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 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. 19 Baytown Area Water Authority Investment Policy Revised February 2008 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. i 20 Baytown Area Water Authority Investment Policy Revised February 2008 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 i investment before maturity. i I 21