Chapter 4.10
INVESTMENT OF BOROUGH FUNDS

Sections:

4.10.010    Investment policy.

4.10.020    Investment objectives.

4.10.030    Standards of care.

4.10.040    Safekeeping and custody of securities.

4.10.050    Internal controls for the investment function.

4.10.060    Suitable and authorized investments.

4.10.070    Collateralization.

4.10.080    Portfolio diversification.

4.10.090    Investment reporting.

4.10.100    Qualifications of financial institutions.

4.10.110    Placement of borough investments.

4.10.120    Procurement code not applicable.

4.10.130    Appeal.

4.10.140    Investment advisory committee.

4.10.150    Definitions.

4.10.160    Emergency powers.

4.10.170    Records retention.

4.10.180    Interpretation and construction.

Prior Legislation – Ord. No. 1049.

4.10.010 Investment policy.

This investment policy applies to the investment activities of the Ketchikan Gateway Borough, except for its retirement system fund, which is organized and administered by the state of Alaska, and the deferred compensation program which are selected and administered with other agencies. All financial assets of other funds, including the general fund, the capital project funds, the debt service funds, the special revenue funds, and other funds that may be created from time to time, will be administered in accordance with the provisions of these policies. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.010.]

4.10.020 Investment objectives.

(a)    Legality. Conformance with federal, State, and other legal requirements.

(b)    Safety. Investments of the Ketchikan Gateway Borough shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in order that potential losses in the value of individual securities do not over time exceed the income and gains generated from the remainder of the portfolio.

(c)    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 (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale market (dynamic liquidity). A portion of the portfolio also may be placed in money market mutual fund or local government investment pools which offer same-day liquidity for short-term funds.

(d)    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. The core of investments are 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;

(2)    A security swap would improve the quality, yield or target duration in the portfolio; or

(3)    Liquidity needs of the portfolio require that the security be sold.

Funds held for future capital projects shall be invested in securities that reasonably can be expected to produce enough income to offset inflationary construction cost increases. However, such funds never shall be exposed to market price risks or default risks that would jeopardize the assets available to accomplish their stated objective. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.020.]

4.10.030 Standards of care.

(a)    Prudence. The standard of prudence to be used by investment 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 this 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 liquidation and the sale of securities are carried out in accordance with the terms of the policy.

(b)    Conflict of Interest. Officers and employees involved in the investment process shall comply with provisions of Chapters 2.20, 2.55, and 3.40 KGBC. They shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interest in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of their entity.

(c)    Delegation of Authority. Management responsibility for the investment program is hereby delegated to the finance director, who shall establish written procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the finance director. The finance director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. [Ord. No. 1228, §1, 9-3-02; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.030.]

4.10.040 Safekeeping and custody of securities.

The borough manager is authorized to appoint a financial institution as attorney-in-fact with authority to transfer registered securities into the name of any nominee maintained by the financial institution in order to provide safekeeping of borough investments. The financial institution selected for safekeeping may make use of other custodians and depositories to hold borough investments in the name of a nominee maintained by the financial institution or by any such custodian or depository.

To the extent securities must be pledged as collateral by KGBC 4.10.070 for certificates of deposit or other deposits in a bank or savings and loan association in excess of insurance issued by the Federal Deposit Insurance Corporation, such collateral shall be held directly by the borough or held by a third-party custodial bank agent for the borough. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.040.]

4.10.050 Internal controls for the investment function.

(a)    The finance director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the Ketchikan Gateway Borough 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.

(b)    Accordingly, the finance director 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; and

(7)    Development of a wire transfer agreement with the lead bank and third-party custodian. [Ord. No. 1228, §1, 9-3-02; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.050.]

4.10.060 Suitable and authorized investments.

(a)    Borough moneys shall be invested only in the following instruments. The equity position will emphasize large capitalization, U.S.-based companies, defined as market capitalization in excess of $5,000,000,000. However, a defined allocation may be invested in non-U.S.-based (international) companies (subsection (a)(9) of this section) and small capitalization companies (subsection (a)(8) of this section) or mutual funds that invest in international and small capitalization companies. All securities purchased by the borough, and all other borough investments, must meet the capital requirements through the following investment types:

(1)    U.S. government obligations, U.S. government agency obligations and U.S. government instrumentality obligations which have a liquid market with a readily determinable market value;

(2)    Certificates of deposit and other evidences of deposit at financial institutions, and commercial paper rated in the highest tier (e.g., A-1, P-1, F-1, or D-1 or higher) by a nationally recognized rating agency;

(3)    Investment-grade obligations of U.S. corporations, state and local governments and public authorities;

(4)    Repurchase agreements whose underlying purchased securities consist of the foregoing;

(5)    Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities;

(6)    Local government investment pools, either state-administered or through joining powers statutes and other intergovernmental agreement legislation;

(7)    Mutual funds whose investments are limited to U.S. government securities or treasury securities;

(8)    A majority of the equity position will be invested in common stock issued by U.S. corporations with market capitalization in excess of $5,000,000,000 at time of purchase which trade on NASDAQ or New York Stock Exchange. A maximum of 10 percent of the equity allocation may be invested in mutual funds that invest in small capitalization companies or individual companies whose market capitalization is less than $1,000,000,000. Small capitalization is defined as $1,000,000,000 or less;

(9)    A maximum of 10 percent of the equity allocation may be invested in international mutual funds or individual companies that are non-U.S.-based.

(b)    No person shall invest borough moneys in any instrument which is not listed in subsection (a) of this section. This prohibition includes, but is not limited to, investment of borough moneys in any mutual fund, except as otherwise provided in subsections (a)(5), (a)(7), (a)(8), and (a)(9) of this section; common or preferred stock except as otherwise provided in subsection (a)(8) of this section; precious metal; zero coupon bond; option contract; futures contract or negotiable instrument with a variable interest rate. [Ord. No. 1880 §1, 3-11-19; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.060.]

4.10.070 Collateralization.

Where allowed by state law and in accordance with the Government Finance Officers’ Association (GFOA) recommended practice on the collateralization of public deposits, full collateralization will be required on nonnegotiable certificates of deposit.

Repurchase agreements shall be consistent with the GFOA recommended practice on repurchase agreements. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.070.]

4.10.080 Portfolio diversification.

(a)    Borough investments shall be diversified within each portfolio component to minimize the risk of loss resulting from overconcentration of investments in a specific maturity, a specific issuer, a specific class of security or a specific financial institution. Administrative procedures shall be adopted to implement this section.

(b)    At no time shall the total value of borough moneys invested in repurchase agreements, certificates of deposit and/or other deposits with a single financial institution, including interest which will be payable to the borough at the maturity of each investment, exceed 30 percent of the total principal value of the entire borough investment portfolio. The short-term investments authorized by KGBC 4.10.100 shall not be included in calculating compliance with this 30 percent limitation.

(c)    To the extent securities must be pledged as collateral by KGBC 4.10.070 for certificates of deposit or other deposits in a bank or savings and loan association in excess of insurance issued by the Federal Deposit Insurance Corporation, such collateral shall be held directly by the borough or held by a third-party custodial bank agent for the borough. A custodial and safekeeping bank may hold both the borough’s money and the securities purchased or pledged, for the time necessary to accomplish delivery of either or both.

(d)    The Ketchikan Gateway Borough will limit its maximum final stated maturities to five years unless specific authority is given to exceed. To the extent possible, the borough will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the borough will not directly invest in securities maturing more than five years from the date of purchase.

(e)    Reserve funds may be invested in securities exceeding five years if the maturity of such investments are made to coincide as nearly as practicable with the expected use of funds. The ability of investing these types of funds should be disclosed to the legislative body including appropriate time restrictions disclosed, if any apply. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.080.]

4.10.090 Investment reporting.

The finance director shall prepare an investment report at least quarterly, including a management summary that provides an analysis of the status of the current portfolio and transactions made over the last quarter. This management summary will be prepared in a manner which will allow the Ketchikan Gateway Borough to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report should be provided to the borough manager, the borough assembly, and any other participants. The report will include the following:

(a)    Listing of individual securities held at the end of the reporting period.

(b)    Realized and unrealized gains or losses resulting from appreciation or depreciation by listing the cost and market value of securities over one year duration that are not intended to be held until maturity (in accordance with Government Accounting Standards Board requirements).

(c)    Average weighted yield to maturity of portfolio on Ketchikan Gateway Borough’s investments as compared to applicable benchmarks.

(d)    Listing of investments by maturity date.

(e)    Percentage of total portfolio which each type of investment represents. [Ord. No. 1228, §1, 9-3-02; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.090.]

4.10.100 Qualifications of financial institutions.

(a)    The borough shall maintain a roster of financial institutions qualified to bid on borough investments, called the qualified bidders list. If the investment is a repurchase agreement, certificate of deposit or other deposit, the financial institution in which moneys are invested must be on the qualified bidders list. If the investment is a direct purchase of a security (other than a repurchase agreement, certificate of deposit or other deposit), either directly from the issuer or through an intermediary institution from which the borough takes delivery of the security, the financial institution must be on the qualified bidders list.

(b)    Administrative procedures shall be implemented under which financial institutions interested in becoming included on the qualified bidders list may apply for inclusion. The procedures may restrict the times at which applications will be received, but must provide at least one opportunity to apply for inclusion per year. Financial institutions which meet the criteria established under subsection (c) of this section may be added to the qualified bidders list at any time without utilizing the application procedure.

(c)    Administrative procedures shall be implemented for evaluating financial institutions for inclusion on the qualified bidders list. Such procedures shall require financial institutions to provide such records, reports and information as the borough shall require, and shall be designated to evaluate the financial institution’s ability to meet the objectives of the borough’s investment program, pursuant to KGBC 4.10.020. The administrative procedures shall require an analysis of the credit characteristics, capitalization, management policies, financial history, client references and other relevant information concerning the credit worthiness and competitiveness of each financial institution. A financial institution shall be placed on the qualified bidders list, if, after such analysis, it is determined that the financial institution is able to meet the objectives of the borough’s investment program. The procedures shall also require financial institutions on the qualified bidders list to submit such records, reports and information as the borough shall require, and also require that all financial institutions on the qualified bidders list be evaluated for continued retention on such list at least annually. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.100.]

4.10.110 Placement of borough investments.

(a)    Because of rapid fluctuations in interest rates, and the brief period of availability of some securities, bids may be solicited, received and accepted, either orally or in writing. Solicitation, receipt and acceptance of bids over the telephone are authorized. In order for a bid to be responsive, it must meet all of the specifications and requirements of the bid solicitation, and must be received by the borough at or before the date and time specified in the bid solicitation. The borough shall not consider nonresponsive bids.

(b)    The borough shall award a bid to the financial institution whose bid best fulfills the investment objectives contained in KGBC 4.10.020, considering the borough investment portfolio as a whole; meets the bid specifications; and complies with all other restrictions and limitations contained in this chapter and the administrative procedures adopted under this chapter.

(c)    All securities transferred to or from the borough, except securities pledged as collateral, shall be transferred using the delivery versus payment method. All securities pledged to the borough as collateral shall be actually received by a custodial bank designated by the borough, before borough funds are transferred to the financial institution with which the borough is investing. The borough may require financial institutions to deliver collateral to a custodial bank prior to bidding on borough investments.

(d)    The borough shall maintain records of the specification of all bid solicitation, and the contents of all responses thereto, including the date and time each such response was received. The borough shall also prepare a record of the final decision made with respect to each solicitation for bids, together with a brief explanation of the reasons for such decision. The borough shall prepare such written records not later than one business day following the day on which the borough takes final action with respect to each bid transaction. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.110.]

4.10.120 Procurement code not applicable.

Procurement of investment services shall be as provided in KGBC 4.10.110. The provisions of Chapters 11.10 through 11.35 KGBC relating to procurement and contracting shall not apply to this chapter or to the procurement of investment services pursuant to this chapter. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.120.]

4.10.130 Appeal.

(a)    A financial institution may appeal an action of the borough taken under KGBC 4.10.110 and 4.10.120 to the investment advisory committee only by filing a written notice of appeal, stating the reasons therefor, with the borough manager not more than 10 days following the date of the action appealed. The committee shall consider the matters presented by the financial institution, borough records of the transaction and any other available information, and may but is not required to hold a hearing on the matter. If the committee finds that the financial institution has established by clear and convincing evidence that the action appealed violated the provisions of this chapter or the administrative procedures adopted hereunder, the committee shall grant the appeal. Otherwise, the committee shall deny the appeal. Not more than 30 days following the date on which the financial institution files the appeal, the committee shall provide the financial institution with written notice of its decision on the appeal stating the reasons for such decision. The borough or the financial institution may appeal the decision of the investment advisory committee to the borough assembly. Administrative procedures shall be adopted to implement this section.

(b)    The borough manager may investigate and consider informal complaints concerning borough investments, but such complainant shall not be entitled to receive the remedies provided above.

(c)    The borough manager may suspend action with respect to any financial institution or any borough investment, including the investment which is the subject matter of an appeal, during the pendency of the appeal.

(d)    If a financial institution’s appeal of a decision not to add it, to remove it, or to add another financial institution to the qualified bidders list is granted, its sole remedy shall be inclusion of itself on the qualified bidders list, or removal of another financial institution from the list, as applicable. If a financial institution’s appeal regarding failure to consider its bid or failure to award the bid to such financial institution is granted, the financial institution’s sole remedy shall be payment by the borough to the financial institution of the costs actually incurred by the financial institution in preparing its bid. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.130.]

4.10.140 Investment advisory committee.

There shall be a standing committee under KGBC 2.10.140(b) to serve as the investment advisory committee, which shall consist of the borough manager, the borough assistant manager, the finance director and two appointed members of the borough assembly. The investment advisory committee shall meet no less than once per fiscal year and more frequently at the call of the borough manager or at the direction of the borough assembly to determine general strategies and monitor results. The investment advisory committee shall include in its deliberations such topics as: economic outlook, portfolio diversification and maturity structure, potential risks to the government’s funds, authorized depositories, brokers and dealers, and the target rate of return on the investment portfolio. The committee shall hear appeals of the borough manager’s action taken under KGBC 4.10.110 and 4.10.120, as specified in KGBC 4.10.130. [Ord. No. 1228, §1, 9-3-02; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.140.]

4.10.150 Definitions.

“Actively traded” means securities which are regularly bought and sold on the secondary market on a daily basis and for which price information is available on a regular basis in the Wall Street Journal.

“Bank” means an institution which is chartered or otherwise authorized to conduct business as a bank by, and regulated by, an agency of the United States government or of any state, which is insured by the Federal Deposit Insurance Corporation, and which maintains a main or branch office within the Unites States on a regular and permanent basis.

“Certificate of deposit” means a negotiated security instrument or depository agreement.

“Financial institution” means a bank, savings and loan association, or securities dealer.

“Immediate family” of a person means:

(1)    The spouse of the person;

(2)    A regular member of the person’s household;

(3)    A child, including a stepchild and an adoptive child, of the person and the spouse of any such child;

(4)    A parent, sibling, grandparent, aunt, or uncle of the person; and

(5)    A parent or sibling of the person’s spouse.

“International bank” means a bank as defined in this chapter, and any other institution chartered or otherwise authorized to provide banking services by the government of any foreign country, or political subdivision thereof, whether or not said institution maintains an office within the United States.

“Long-term funds” means those funds specifically identified by the assembly as funds which are not projected to be required or expended within five years. This would include, but is not limited to, funds which are appropriated to a perpetual reserve or “permanent” fund.

“Money market mutual fund” means a mutual fund which maintains a constant share price regardless of market fluctuations and which has an average maturity of its entire portfolio of 60 days or less.

“Operating funds” means those funds received as tax revenues and other revenues which are required for ongoing borough operations and are likely to be expended within one year.

“Reserve funds” means those funds not designated for current expenditure, but which may be expended within five years.

“Savings and loan association” means an institution chartered or otherwise authorized to do business as a savings and loan association by, and regulated by, an agency of the United States government or of any state, and insured by the Federal Savings and Loan Insurance Corporation, which maintains a main or branch office within the United States on a regular and permanent basis.

“Securities dealer” means a person, partnership, corporation or other entity licensed by the Securities and Exchange Commission to deal in secondary financial markets, which is a member of the New York Stock Exchange, and which maintains a main or branch office within the United States on a regular and permanent basis.

“U.S. government agency” or “instrumentality securities” means securities issued by the Export-Import Bank of the United States, Farmers Home Administration, Federal Farm Credit Consolidated System-Wide Securities, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Housing Administration (FHA), Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), Small Business Administration (SBA), Student Loan Marketing Association (SLMA), Tennessee Valley Authority (TVA), or United States Postal Service.

“U.S. Treasury securities” means bills, notes and bonds issued directly by the United States Treasury through the Federal Reserve System, and guaranteed by the full faith and credit of the United States government. [Ord. No. 1880 §2, 3-11-19; Ord. No. 1688A, §2, 11-4-13; Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.150.]

4.10.160 Emergency powers.

Notwithstanding any other provision of this chapter or this code, if the borough manager determines that a reasonable possibility exists that the principal and interest of a borough investment are not adequately secured for any reason, the borough manager may take any or all of the following actions in order to protect the principal and interest of such borough investments:

(a)    Rescind or otherwise terminate the investment without regard to interest or other penalties which may arise because of such action;

(b)    Demand from the financial institution additional or substitute collateral;

(c)    Demand from the financial institution additional or substitute safekeeping measures;

(d)    Notify state or federal regulatory agencies of the nature and reasons for such insecurities and seek assistance in remedying the insecurity;

(e)    Temporarily deviate from the requirements of KGBC 4.10.100 and 4.10.110 relating to the qualified bidders list and the placement of borough investments, and the provisions of KGBC 4.10.080 relating to portfolio diversification;

(f)    Take any other action which the borough manager deems reasonably necessary to protect the security of the principal and interest of borough investments. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.160.]

4.10.170 Records retention.

The borough shall maintain all borough records required by this chapter for three (3) years, unless otherwise required by state or federal law. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.170.]

4.10.180 Interpretation and construction.

This chapter represents the maximum amount of authority and discretion which the borough manager may utilize in investing borough moneys. However, nothing in this chapter shall be construed to prohibit the borough manager from adopting standards, rules, policies and procedures which are more restrictive than those contained in this chapter. The enumeration in this chapter of instruments which are authorized for borough investments shall not be construed as requiring the borough manager to invest in all, or any particular, instrument contained in such list at any given time. The borough manager may invest in some or all such instruments as he/she deems appropriate. Similarly, the enumeration of instruments which are acceptable as collateral for borough investments shall not be construed as requiring the borough manager to accept all, or any particular, instrument contained in such list at any given time. The borough manager may accept some of the instruments, and reject others, in his/her discretion. [Ord. No. 1167, §1, 1-15-01. Code 1974 §40.11.180.]