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MDD Resolution No. 177 RESOLUTION NO. 177 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT ADOPTING THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT'S INVESTMENT POLICY AND INVESTMENT STRATEGY IN ACCORDANCE WITH THE PUBLIC FUNDS INVESTMENT ACT; AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT: Section l: That the Board of Directors of the Baytown Municipal Development District (the "District") has reviewed the District's Investment Policy and Investment Strategy; and the policy and strategy adopted in Section 2 hereof records any changes made by the Board. Section 2: That the Board of Directors of the Baytown Municipal Development District hereby adopts the District's Investment Policy, including the Investment Strategy, which is attached hereto as Exhibit"A" and incorporated herein for all intents and purposes. Section 3: That the Board of Directors of the Baytown Municipal Development District hereby designates those individuals named in Exhibit A of the Investment Policy as the investment officials of the District who are responsible for the investment of the District's funds consistent with the Investment Policy adopted pursuant to Section 2 of this resolution. Section 4: This resolution shall take effect immediately fro and after its passage by the Board of Directors of the Baytown Municipal Development Distr' INTRODUCED, READ and PASSED, by the affirmativ v e of the Board of Directors of the Baytown Municipal Development District this the 5" da of J uary, 2012. TE . DONCARLOS, P sident AT ST: A, o=_ .Z N_ LETICIA 8C sst ecretary 0�iill n n IiI\\Ovvv��`\ APPROVED AS'pT`OO7FORM: ACIO RAMIREZ, SR., Counsel \\CobfsO I gegal\KmemFilea\City Council\Municipal Development DistricMesolutions\ iNnounry 5Wdop1MDDlnvcslmemPo1icy.doc Exhibit "A" BA YTOWN MUNICIPAL DEVELOPMENT DISTRICT BA YTOWN, TEXAS INVESTMENT POLICY Revised 7/7/11 Baytown Municipal Development District Investment Policy Table of Contents I. Policy 1 II. Scope 1 III. General Objectives A. Safety 1 B. Liquidity 2 C. Yield 2 1V. 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. Internal Controls 4 C. Delivery vs. Payment 5 VI. Suitable and Authorized Investments A. Eligible Investments 5-14 B. Collateral ization 14 C. Existing Investments 15 VII. Investment Parameters A. Diversification 15 B. Maximum Maturities 15 VIII. Investment Strategies 15 IX. Reporting A. Methods 16 B. Performance Standards 16 C. Marking to Market 16 EXHIBITS A -Authorized Investment Officials 17 B - Statement of Ethics and Conflicts of Interest 18 C—Approved Broker/Dealers, Financial Institutions and Investment Pools 19 D—Certification by Business Organization 20 E—Investment Strategy 21-24 Baytown Municipal Development District Investment Policy Baytown Municipal Development District Investment Policy I. Policy It is the policy of the Baytown Municipal Development District(the"MDD")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 the MDD. The MDD will conform to all federal, state and local statutes rules and regulations governing the investment of the MDD's funds. The MDD'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 Iiquidity needs of the portfolio. Not less than annually,the MDD 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. II. Scope This Investment Policy applies to all the investment activities of the MDD. These funds are accounted for in the MDD's Annual Financial Report and include all financial assets of all funds managed for MDD by the City of Baytown, including but not limited to tax revenues, charges for services, bond proceeds and interest income. III. General Objectives The primary objectives, in priority order,of the MDD'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. 1. Credit Risk—The MDD will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by: (a) limiting investments to the safest types of securities; 1 Baytown Municipal Development District Investment Policy (b) pre-qualifying the financial institutions, broker/dealers, intermediaries,and advisers with which the MDD will do business; and (c) diversifying the investment portfolio so that potential losses on individual securities will be minimized 2. Interest Rate Risk—The MDD will minimize the risk that the market value of securities in the portfolio will fail due to changes in general interest rates, by: (d) 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; and (e) 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: 1. A security with declining credit may be sold early to minimize loss of principal; and 2. Liquidity needs of the portfolio require that the security be sold 2 Baytown Municipal Development District Investment Policy 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 terns 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 MDD and the Texas Ethics Commission any material financial interests in financial institutions that conduct business with the MDD. They shall further file a disclosure statement with the Texas Ethics Commission and the MDD 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 the MDD's investment program is granted to the Director of Finance, hereinafter referred to as Investment Officer. This authority is derived from the Local Government Code Chapter 377, 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 3 Baytown Municipal Development District Investment Policy 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, beginning on the first day of the City's fiscal year and consisting of the two (2) consecutive fiscal years after that date, and receive not less than 10 hours of instruction relating to investment responsibilities. The MDD shall provide the training through courses and seminars offered by professional organizations and associations in order to insure the quality and capability of the MDD'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 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: 1. Audited financial statements 2. Proof of Financial Industry Regulatory Authority (FINRA) certification 3. Proof of state registration 4. Completed broker/dealer questionnaire(Exhibit D) 5. Certification by a qualified representative of the firm that the firm has a) received and reviewed the MDD's Investment Policy and b) has implemented reasonable procedures and controls in an effort to preclude investment transactions that are not authorized by the MDD's Investment Policy, except to the extent that this authorization is dependent on an analysis of the makeup of the MDD's entire portfolio or requires an interpretation of subjective investment standards. 4 Baytown Municipal Development District Investment Policy The MDD Board shall at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the MDD. B. Internal Controls — The Investment Officer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the MDD 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: 1. Control of collusion 2. Separation of transaction authority from accounting and record keeping 3. Custodial safekeeping 4. Avoidance of physical delivery securities 5. Clear delegation of authority to subordinate staff members 6. Written confirmation of transactions for investments and wire transfers 7. 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 the MDD's name by a third-party custodian as evidenced by safekeeping receipts. VI. Investments A. Eligible Investments — Assets of the MDD 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,of the 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. 5 Baytown Municipal Development District Investment Policy In order to monitor rating changes in investments acquired with public funds, Investment Officers shall, on at least a monthly basis, verify the ratings of investments currently held by the MDD with either the authorized broker/dealer from which the investment was purchased, or a broker/dealer currently authorized to engage in investment transactions with the MDD. As a condition of engaging in investment transactions with the MDD, brokers/dealers shall, when requested by the MDD's Investment Officer(s), provide said Investment Officers) with written verification of the ratings of investments currently owned by the MDD. The MDD 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) 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; (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, including obligations that are fully guaranteed or insured by the Federal Deposit Insurance Corporation or by the explicit full faith and credit of the United States; (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; (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; 6 Baytown Municipal Development District Investment Policy (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 (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 a combination of cash and obligations described by Section I(a)(i); and (iii) requires the securities being purchased by the MDD or cash held by the MDD to be pledged to the MDD, held in the MDD's name, and deposited at the time the investment is made with the 7 Baytown Municipal Development District Investment Policy MDD or with a third party selected and approved by the MDD; 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. Banker's Acceptance A bankers' acceptance is an authorized investment under this policy if the bankers' acceptance: (i) has a stated maturity of 270 days or fewer from the date of its issuance; (ii) will be, in accordance with its terms, liquidates in full at maturity; (iii) is eligible for collateral for borrowing from a Federal Reserve Bank; (iv) and is accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are related not less than A-1 or P-1 or an equivalent rating by at least one nationally recognized credit rating agency. 8 Baytown Municipal Development District Investment Policy 5. Commercial Paper Commercial Paper is an authorized investment under this policy if the commercial paper: (i) has a stated maturity of 270 days or fewer from the date of its issuance; (ii) is rated not less than A-1 or P-1 or an equivalent rating by at least: (A) two nationally recognized credit rating agencies; or (B) one nationally recognized credit rating agency and is fully secured by an irrevocable letter of credit issued by a bank organized and existing under the laws of the United States or any state. 6. Mutual Funds (a) A no-load money market mutual fund is an authorized investment under this policy if the mutual fund: (i) is registered with and regulated by the Securities and Exchange Commission; (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-I 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; 9 Baytown Municipal Development District Investment Policy (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 5(c) relating to the eligibility of investment pools to receive and invest funds of investing entities. (c) The MDD 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. 7. Guaranteed Investment Contracts (a) A collateralized guaranteed investment contract is an authorized investment for bond proceeds under this policy if the guaranteed investment contract: (i) has a defined termination date; (ii) is secured by direct and unsubordinated obligations described by Section 2256.009(a)(1) of the Act, excluding those obligations described by Section 2256.009(b) of the Act, in an amount at least equal to the amount of bond proceeds invested under the contract; and (iii) is pledged to the MDD and deposited with the MDD or with a third party selected and approved by the MDD. (b) Bond proceeds, other than bond proceeds representing reserves and funds maintained for debt service purposes, may not be invested 10 Baytown Municipal Development District Investment Policy under this policy in a guaranteed investment contract with a term of longer than five years from the date of issuance of the bonds. (c) To be eligible as an authorized investment: (i) the MDD Board must specifically authorize guaranteed investment contracts as an eligible investment in the order, ordinance, or resolution authorizing the issuance of bonds; (ii) the MDD must receive bids from at least three separate providers with no material financial interest in the bonds from which proceeds were received; (iii)the MDD must purchase the highest yielding guaranteed investment contract for which a qualifying bid is received; (iv)the price of the guaranteed investment contract must take into account the reasonably expected drawdown schedule for the bond proceeds to be invested; and (v) the provider must certify the administrative costs reasonably expected to be paid to third parties in connection with the guaranteed investment contract. 8. Investment Pools (a) The MDD may invest its funds and funds under its control through an eligible investment pool if the MDD 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. An investment pool may invest its funds in money market mutual funds to the extent permitted by and consistent with Subchapter A of the Texas Government Code, Chapter 2256 and the investment policies and objectives adopted by the investment pool. (b) To be eligible to receive funds from and invest funds on behalf of the MDD under this section, an investment pool must furnish to the Investment Officer or other authorized representative of the MDD 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; 11 Baytown Municipal Development District Investment Policy (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 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 the MDD under this section, an investment pool must furnish to the Investment Officer or other authorized representative of the MDD: (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; 12 Baytown Municipal Development District Investment Policy (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 MDD; (I) the yield and expense ratio of the pool, including a statement regarding how yield is calculated; (J)the portfolio managers of the pool; and (K) any changes or addenda to the offering circular. (d) The MDD 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 the MDD 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. In addition to the requirements of the 13 Baytown Municipal Development District Investment Policy Investment Policy and any other forms of reporting, a public funds investment pool created to function as a money market mutual fund shall report yield to its investors in accordance with regulations of the federal Securities and Exchange Commission applicable to reporting by money market funds. (g) To be eligible to receive funds from and invest funds on behalf of the MDD 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. (h) To maintain eligibility to receive funds from and invest funds on behalf of the MDD 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. (i) If the investment pool operates an Internet website, the information in a disclosure instrument or report described in Subsections (b), (c)(2), and (0 of Texas Government Code Chapter 2256, Subchapter A, Section 2256.016 must be posted on the website. 0) To maintain eligibility to receive funds from and invest funds on behalf of the MDD, an investment pool must make available to the MDD an annual audited financial statement of the investment pool in which the MDD has funds invested. (k) If an investment pool offers fee breakpoints based on fund balances invested, the investment pool in advertising investment rates must include either all levels of return based on the breakpoints provided or state the lowest possible level of return based on the smallest level of funds invested. B. Collateralization — Col lateral 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 14 Baytown Municipal Development District Investment Policy security for all funds, the Collateral ization level will be one hundred two percent(102%)of market value of principal and accrued interest. Likewise, all time and demand deposits in excess of FDIC or NCUA insurance levels shall be collateralized to a minimum of 102%of principal and accrued interest. The depository shall be responsible for maintaining collateral ization margins. Collateral will be held in the MDD's name by an independent third party with whom the MDD has a current custodial agreement approved by the Council and executed under the terms of FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act) as amended. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the MDD and retained. The right of collateral substitution is granted, subsequent to the review and approval of an authorized City of Baytown Investment Officer. 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, the MDD 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, the MDD shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the MDD will not directly invest in securities maturing more than five (5) years from the date of purchase. VIII. Investment Strategies The MDD 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. The MDD maintains a pooled fund group that is an aggregation of the majority of MDD funds including tax receipts, enterprise fund revenues, fine and fee revenues, as well as some, but not all, bond proceeds, and grants. This 15 Baytown Municipal Development District Investment Policy portfolio is maintained to meet anticipated daily cash needs for MDD operations, capital projects and debt service. In order to ensure the ability of the MDD 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 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 MDD to ascertain whether investment activities during the reporting period have conformed to the Investment Policy. The report should be provided to the MDD 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 MDD Board. 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 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. 16 Baytown Municipal Development District Investment Policy EXHIBIT A Baytown Municipal Development District Authorized Investment Officials Louise Richman, City of Baytown Director of Finance Carl C. Currie, City of Baytown Controller Brent Yowell, City of Baytown Treasurer Meghan Lair Reed, City of Baytown Financial Analyst 17 Baytown Municipal Development District Investment Policy EXHIBIT B Baytown Municipal Development District Statement of Ethics and Conflicts of Interest Investment officials for the Baytown Municipal Development District 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 Municipal Development District. 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 1 do not have a personal business relationship with any business organization approved to conduct investment transactions with the Baytown Municipal Development District, 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 Municipal Development District as of the date of this statement. City of Baytown Investment Officials Louise Richman Date City of Baytown Director of Finance Carl C.Currie Date City of Baytown Controller Brent Yowell Date City of Baytown Treasurer Meghan Lair Reed Date City of Baytown Financial Analyst 18 Baytown Municipal Development District Investment Policy EXHIBIT C Baytown Municipal Development District Approved Broker/Dealers, Financial Institutions and Investment Pools Broker/Dealers Rice Financial Products Company UBS Financial Services, Inc. Cantor Fitzgerald Mutual Securities, Inc. Wells Fargo Brokerage Services, LLC First Southwest Asset Management Coastal Securities Duncan-Williams, Inc. Morgan Stanley Public Depositories JP Morgan Chase,NA (Primary) Investment Pools TexPool TexSTAR 19 Baytown Municipal Development District Investment Policy EXHIBIT D Baytown Municipal Development District Certification by Business Organization date Baytown Municipal Development District C/O City of Baytown,Texas (Attn: Designated Investment official) P 0 Box 424 Baytown,TX 77522-0424 Dear Mr/s. (investment official): This certification is executed on behalf of the Baytown Municipal Development District (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 agrees, on behalf of the Business Organization to comply with its requirements under the Investment Policy and; 3. The Qualified Representative of the Business Organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the Business Organization and the Investor that are not authorized by the Investor's Investment Policy, except to the extent that this authorization is dependent on an analysis of the makeup of the investor's entire portfolio or requires and interpretation of the subjective investment standards. Qualified Representative of the Business Organization Signed By: Name Title Date 20 Baytown Municipal Development District Investment Policy EXHIBIT E INVESTMENT STRATEGY It is the policy of the Baytown Municipal Development District (the "MDD") that, giving due regard to the safety and risk of investments,all funds shall be invested at all times in conformance with State and Federal statutes, applicable trust agreements or related bond document requirements, the MDD's adopted Investment Policy and this Investment Strategy. The MDD's portfolio shall be designed and managed in a manner responsive to the public trust and consistent with the Investment Policy. In accordance with the Public Funds Investment Act, the MDD Investment Strategies establish maximum maturities and maximum dollar-weighted average maturity limits for each portfolio and address the priorities for those funds(in order of priority): • Suitability of the investment to the financial requirements of the MDD and the particular Fund Type; • Preservation and safety of principal; • Liquidity; • Marketability of the investment if the need arises to liquidate the investment prior to maturity; • Diversification of the investment portfolio; and • Yield. Effective investment strategy development coordinates the primary objectives of the MDD's Investment Policy and cash management procedures with investment security risk/return analysis to enhance interest earnings and reduce investment risk. The MDD intends to generally utilize a buy and hold I strategy but will evaluate more active strategies, such as swaps or outright sales of securities, for incremental income when appropriate. The structure of the portfolio(s) will be primarily dependent upon the continuing cash flow requirements of the funds represented. The portfolio(s)will reflect both the short and long term needs of the funds. A limited liquidity buffer will be maintained to cover any unanticipated cash needs,where appropriate. With a more active position, maturity selections may be extended to gain incremental income or adjust portfolios to economic and market conditions. It is recognized that more active management may increase the overall weighted average maturity of the portfolios due to additional volatility. The MDD's Investment Officer(s)shall monitor and evaluate the ongoing economic environment and incorporate market information from reliable sources as well as current and anticipated MDD financial conditions when prudently implementing these strategies. Anticipated changes in the MDD's investment strategy shall be reported to the Board of Directors as part of the quarterly investment reporting. The MDD expects, but is not required by law, to consolidate and commingle funds from similar type funds or all funds in an attempt to maximize investment earnings. Investment income by fund will be recognized and allocated on a monthly basis based on respective fund balances for the period in accordance with generally accepted accounting principles. 21 Baytown Municipal Development District Investment Policy FUND TYPE IDENTIFICATION Each major fund type has varying cash flow requirements and liquidity needs. Therefore,specific strategies shall be implemented considering the fund type's unique requirements. The MDD funds shall be analyzed and invested according to the following major fund types: a. Capital Improvement Funds Capital Improvement funds have cash needs dependent upon anticipated construction,acquisition and payment schedules. Funds include: Construction Fund,Capital Improvement Fund. b. Debt Service Funds Debt Service funds are structured to provide for debt service payments for the issued bonds. The expenditures are strictly scheduled and occur normally in six month intervals. Funds include: Bond Interest Accounts and Bond Principal Accounts. C. Liquidity Buffer Accounts Liquidity funds are to assure the MDD's liquidity for anticipated and unanticipated needs within one month. A liquidity buffer is needed in all but debt service funds which have well-defined and unalterable liabilities. INVESTMENT STRATEGY BY TYPE In order to minimize market risks or principal loss due to interest rate fluctuations, investment maturities and portfolio structures will be limited by the anticipated cash flow requirements of the various fund types. The general Investment Strategies are established by fund type. The use of liquidity buffers in fund types is to provide for unanticipated liabilities. a. Capital Improvement Funds Capital Improvement Funds are designed to meet anticipated needs for construction and certain fixed liabilities, are primarily funded by bond proceeds and should have reasonably predictable draw down schedules. Investment maturities will generally follow the anticipated cash flow requirements. Investment pools and money market mutual funds shall provide readily available funds generally equal to one month's anticipated cash flow needs. The portfolio(s) must be based upon the anticipated schedules but also provide for changing schedules and cash needs and to minimize the effect of market fluctuations. As such they require a laddered portfolio based on known needs and a liquidity buffer to provide for unanticipated needs. Securities with active and efficient secondary markets of high-credit quality with no perceived default risk are to be used. A single flex repurchase agreement may be utilized, and structured to satisfy expenditure requests. The flex may be used effectively to manage against falling interest rates and protect against negative arbitrage. 22 Baytown Municipal Development District Investment Policy U.S. tax and arbitrage regulations require competitive market rates. The portfolio(s) will be structured in such a way as to avoid negative arbitrage on bond proceeds and will comply with all arbitrage provisions. For Capital Improvement Funds that have an arbitrage yield, achieving a positive spread to the applicable arbitrage yield is the desired objective. If the arbitrage yield is not applicable, then current market conditions will determine the portfolio structure and strategy. At no time shall the investment maturities of a fund exceed the anticipated expenditure schedule. The maximum maturity limits shall reflect the then-current expenditure plan for the proceeds. b. Debt Service Funds Debt Service funds are structured to provide for debt service payments for the issued bonds. The expenditures are strictly scheduled and occur normally in six month intervals. The portfolio(s) will utilize high credit quality securities with no perceived credit risk to meet those demands and assure liquidity if needed. The maximum maturity for the investments in these portfolios will be one year and every known debt service date shall be fully funded before extensions are made. The maximum dollar weighted average maturity will be six months to fulfill these obligations. C. Liquidity Buffer Accounts A liquidity buffer,dependent in size upon then—current economic conditions and MDD cash flow needs, shall be maintained in Capital Improvement Funds to meet immediate cash needs of at least one month and provide for reasonable, unanticipated liabilities. The maximum maturity of these liquid invested funds should be one day. These funds may be invested in money market mutual funds, local government pools,or in a depository overnight sweep. 23