Chapter 4.28
INVESTMENT POLICY
Sections:
4.28.010 Scope.
4.28.020 Standards of care.
4.28.030 Safekeeping and custody.
4.28.040 Reporting.
4.28.045 External investment management.
4.28.050 General objectives—Pooled investments.
4.28.060 Suitable and authorized investments for pooled investments.
4.28.070 Investment parameters.
4.28.100 General objectives—Permanent fund.
4.28.110 Suitable and authorized investments for the permanent fund.
4.28.120 Assets mix policy.
4.28.130 Policy considerations.
4.28.010 Scope.
A. This chapter applies to the investment of short-term operating funds and longer-term funds, including investment of the Permanent Fund.
B. The city and borough will consolidate cash balances from all funds to maximize investment earnings. The activity described in the previous sentence is sometimes called “pooling of funds,” and the result is sometimes called “pooled funds” or “pooled investments.” Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles.
C. The Permanent Fund investments will be used to maximize the investment earnings and growth of the principal.
(Ord. 01-1650 § 4(B), 2001.)
4.28.020 Standards of care.
The standards of care used for the investments of the city and borough are:
A. Prudence. The standard of prudence to be used by the Finance Director shall be the prudent person standard and shall be applied in the context of managing an overall portfolio. The finance director 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; liquidity is maintained in accordance with this chapter; and the sale of securities is carried out in accordance with the terms of this chapter. 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. The finance director and employees of the city and borough involved in the investment process 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 the finance director shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial or investment positions that could be related to the performance of the investment portfolio. Employees and the finance director shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the city and borough.
C. Delegation of Authority. Authority to manage the investment program is granted to the finance director. Responsibility for the operation of the investment program is hereby delegated to the finance director, 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 references to safekeeping, deliver vs. payment, investment accounting, repurchase agreements, wire transfer agreements, and collateral/depository agreements. No person may engage in an investment transaction except as provided under the terms of this policy and 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 employees.
(Ord. 01-1650 § 4(B), 2001.)
4.28.030 Safekeeping and custody.
A. Authorized Financial Dealers and Institutions.
1. A list will be maintained of financial institutions authorized to provide investment services. In addition, a list also will be maintained of approved security broker/ dealers selected by creditworthiness (e.g., a minimum capital requirement of ten million dollars and at least five years of operation). This may include primary dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).
2. All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following as appropriate:
a. Audited financial statements;
b. Proof of Financial Industry Regulatory Authority (FINRA) certification;
c. Proof of state registration;
d. Completed broker/dealer questionnaire;
e. Certification of having read and understood and agreeing to comply with the city and borough’s investment policy as set out in this chapter.
3. An annual review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by the finance director.
B. Internal Controls.
1. The finance director is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the city and borough are protected from physical 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 the cost of a control should not exceed the benefits likely to be derived and that the valuation of costs and benefits requires estimates and judgments by management.
2. Accordingly, the assembly 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:
a. Control of collusion;
b. Separation of transaction authority from accounting and record keeping;
c. Custodial safekeeping;
d. Avoidance of physical delivery securities;
e. Clear delegation of authority to subordinate staff members;
f. Written confirmation of transactions for investments and wire transfers;
g. Development of a wire transfer agreement with the lead bank and third-party custodian.
C. Delivery vs. Payment.
1. All trades where applicable will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in an eligible financial institution prior to the release of funds. Securities will be held by a third-party custodian as evidenced by safekeeping receipts.
(Amended during 3/15 supplement; Ord. 01-1650 § 4(B), 2001.)
4.28.040 Reporting.
A. Methods. The finance director shall prepare an investment report at least semiannually, including a management summary that provides an analysis of the status of the current investment portfolio and transactions made over the previous six months. This management summary will be prepared in a manner which will allow the city and borough to ascertain whether investment activities during the reporting period have conformed to the investment policy set out in this chapter. The report will be provided to the administrator and the assembly. The report will include the following:
1. Listing of individual securities held at the end of the reporting period;
2. Realized and unrealized gains or losses resulting from appreciation or depreciation by listing the cost and market value of securities (in accordance with Governmental Accounting Standards Board (GASB) requirements);
3. Average weighted yield to maturity of portfolio on investments as compared to applicable benchmarks;
4. Listing of investment by maturity date;
5. Percentage of the total portfolio which each type of investment represents.
B. Performance Standards. The investment portfolio will be managed in accordance with the parameters specified within this policy. A series of appropriate benchmarks shall be established against which portfolio performance shall be compared on a regular basis.
C. Marking to Market. The market value of the portfolio shall be calculated at least semi-annually and a statement of the market value of the portfolio shall be issued at least semi-annually. This will ensure that review of the investment portfolio, in terms of value and price volatility, has been performed consistent with the Government Finance Officers Association (GFOA) Recommended Practice on “Mark-to-Market Reporting for Public Investment Portfolios.” In defining market value, considerations should be given to the GASB Statement 31 or later pronouncements.
4.28.045 External investment management.
A. The city and borough of Sitka may, upon approval of the assembly, contract with external entities for professional investment management services.
B. All contracts entered into pursuant to this section shall comply with Title 3, Procurement, and this chapter, as applicable.
C. All contracts entered into pursuant to this section shall provide that (1) all trades of securities will be con ducted through third-party brokerage entities unaffiliated with and independent of the investment management service provider; (2) all trades of securities will be settled by third-party financial entities unaffiliated with and independent of the investment management service provider; and (3) all securities will be held under a separate custody agreement by a third-party custodian unaffiliated with and independent of the investment management service provider.
(Ord. 17-26 § 4, 2017.)
4.28.050 General objectives—Pooled investments.
The primary objectives, in priority order, of investment activities shall be safety, liquidity and yield:
A. Safety. Safety of 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 mitigate credit risk and interest rate risk:
1. Credit Risk. The city and borough will minimize credit risk, the risk of loss due to the failure of the security issuer or backer, by:
a. Limiting investment to the safest types of securities;
b. Pre-qualifying the financial institutions, broker/dealers, intermediaries, or advisers with which the city and borough will do business;
c. Diversifying the investment portfolio so that potential losses on individual securities will be minimized.
2. Interest Rate Risk. The city and borough will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates, by:
a. 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;
b. 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 (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio also may be placed in money market mutual funds or local government investments pools which 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 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.
3. Liquidity needs of the portfolio require that the security be sold.
(Ord. 01-1650 § 4(B), 2001.)
4.28.060 Suitable and authorized investments for pooled investments.
A. As investment types consistent with the GFOA Policy Statement on State and Local Laws Concerning Investment Practices, the following investments are permitted by this chapter for pooled investments and are those defined by state and local law where applicable:
1. United States government obligations, United States government agency obligations, and United States 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, bankers’ acceptances and commercial paper, rated in the highest tier (e.g., A-1, P-1, F-1 or D-l or higher) by a nationally recognized rating agency;
3. Investment-grade obligations of state and local governments and public authorities;
4. Repurchase agreements whose underlying purchased securities consist of United States Treasury securities;
5. Money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities; and
6. Local government investment pools, either state-administered or through joint powers statutes and other intergovernmental agreement legislation.
B. Authorized investments are as follows:
1. United States Treasury securities;
2. Bankers’ acceptances;
3. Debt securities of the city and borough;
4. Repurchase Agreements. All investments in repurchase agreements must be fully collateralized at one hundred and two percent of the amount of the investment with United States Treasury securities held in trust under a custody and safekeeping arrangement at a third party financial institution. In addition, a master repurchase agreement must be executed for each separate co-party with whom an investment in a repurchase agreement is made;
5. Corporate Debt Securities. Investments in short-term and long-term debt securities must be rated AA- or better by a nationally recognized rating firm;
6. Real Estate Mortgage Investment Conduits (REMIC) securities classified as pass-through mortgage securities. Investments made in REMICs are restricted to obligations issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), or Federal Home Loan Mortgage Corporation (FHLMC);
7. Commercial Paper. Investments made in short term commercial promissory notes (commercial paper) must be rated Al/P1 or better by a nationally recognized rating firm. In addition, the long term credit rating of the issuing organization must be at A- or better.
8. Certificates of Deposit. Investment made in certificates of deposit must be made with banks which are members of the Federal Deposit Insurance Corporation (FDIC) and must be insured by the FDIC up to an aggregate of one hundred thousand dollars. Any investments made in certificates of deposit over an aggregate amount of one hundred thousand dollars with any financial institution insured by the FDIC must be collateralized at one hundred and two percent of the amount of the investment with United States Treasury securities held in trust under a custody and safekeeping arrangement at a third party financial institution;
9. Debt Securities of State and Local Governmental Entities. Investments in debt securities must be rated AA- or better by a nationally recognized rating firm;
10. Money Market Mutual Funds. Investments made in money market mutual funds must be made with funds which invest in securities not otherwise prohibited by this policy. Such funds must maintain a stable one dollar share price at all times;
11. Shares of the Alaska Municipal League Investment Pool (AMLIP). An amount not to exceed ten percent of the total pooled investments may be invested in shares of the Alaska Municipal League investment pool.
C. Investment restrictions and prohibited financial transactions. Investments of the pooled investments of the city and borough are restricted, as follows:
1. Investments in any security with a variable or floating interest rate are prohibited.
2. Investments may not be invested in securities which are termed “Private Placements.”
3. If a debt security which was of an acceptable credit rating at the time of purchase has the rating subsequently downgraded at a later date, the debt security can be retained in the portfolio as long as the revised credit rating is not lower than one grade below the minimum allowable credit rating for purchase. If such a security is subsequently downgraded again, or placed on credit watch for further downgrade, it will be reviewed by the investment committee to determine the action needed to prevent further losses by said security.
4. The finance director may not participate in any financial transactions or practices which would have the effect of leveraging the portfolio. These prohibited financial transactions and practices include purchasing on margin, borrowing money for the expressed purpose of investing, and engaging in reverse repurchase agreements.
(Amended during 3/15 supplement; Ord. 01-1650 § 4(B), 2001.)
4.28.070 Investment parameters.
A. Diversification. The investments shall be diversified by:
1. Limiting investments to avoid over-concentration in securities from a specific issuer or business sector (excluding United States Treasury securities);
2. Limiting investment in securities that have higher credit risks;
3. Investing in securities with varying maturities;
4. Continuously investing a portion of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations.
B. Maximum Maturities.
1. To the extent possible, the city and borough shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the city and borough will not directly invest in securities maturing or having an average life of ten years or longer from the date of purchase or in accordance with state and local statutes and ordinances. The city and borough shall adopt weighted average maturity or life limitations of five years, consistent with the investment objectives.
2. Reserve funds and other funds with longer-term investment horizons may be invested in securities exceeding ten years if the maturity of such investments are made to coincide as nearly as practicable with the expected use of funds. The intent to invest in securities with longer maturities shall be disclosed in writing to the assembly.
3. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds such as local government investment pools (LGIPs), money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations.
(Ord. 01-1650 § 4(B), 2001.)
4.28.100 General objectives—Permanent fund.
The investment objective is to grow the principal of the permanent fund to provide an ever increasing income stream to the Sitka general fund in perpetuity as outlined in Section 11.16 of the Home Rule Charter of the City and Borough of Sitka. The permanent fund investment policy embraces the total return concept. The following formula summarizes the factors involved in the permanent fund investment program: Real assets growth rate equals total investment return less inflation less transfers to general fund. The primary objectives, in priority order, of investment activities shall be growth, income and safety:
A. Growth. The permanent fund should provide for growth of the fund through investment in assets that have the probability of appreciating in value.
B. Income. The permanent fund should produce sufficient current and continuing income from investment returns to support the transfers to the general fund. The formula for transfers to the general fund is documented in Subsections 11.16(b) and (c) of the Home Rule Charter of the City and Borough of Sitka.
C. Safety. The finance director shall place sufficient limitations on risks associated with the implementation of the total return objectives through the diversification across asset categories and the setting of specific quality standards.
(Ord. 01-1650 § 4(B), 2001.)
4.28.110 Suitable and authorized investments for the permanent fund.
A. Authorized investments in the permanent fund are as follows:
1. The authorized investments listed in Section 4.28.060(B) for pooled investments.
2. Mutual funds which are invested in corporate equity securities. The equity securities within the mutual funds will be broadly diversified across all sectors.
3. Exchange traded funds (ETFs).
B. Investment Restrictions and Prohibited Financial Transactions. Investments of the permanent fund are restricted as follows:
1. Investments in any security with a variable or floating interest rate are prohibited.
2. Investments may not be invested in securities which are termed “Private Placements.”
3. If a debt security which was of an acceptable credit rating at the time of purchase has the rating subsequently downgraded at later date, the debt security can be retained in the portfolio as long as the revised credit rating is not lower than one grade below the minimum allowable credit rating for purchase. If such a security is subsequently downgraded again, or placed on credit watch for further downgrade, it will be reviewed by the investment committee to determine the action needed to prevent further losses by the security.
4. The mutual funds will be reviewed by the investment committee semiannually to assure that the funds match the benchmarks set for each category.
5. The finance director may not participate in any financial transactions or practices which would have the effect of leveraging the portfolio. These prohibited financial transactions and practices include purchasing on margin, borrowing money for the expressed purpose of investing, and engaging in reverse repurchase agreements.
4.28.120 Assets mix policy.
The management of the Sitka Permanent Fund shall employ a total return investment strategy in its choice of investments for the permanent fund and shall have discretion to change the asset mix and composition of the portfolio to maximize return, subject to the following broad restrictions:
A. The overall benchmark percentage of equities contained in mutual funds, or exchange traded funds, owned by the permanent fund shall be sixty-five percent of the total market value of the fund and shall fall within a range of fifty-five to seventy-five percent of the total market value of the fund.
B. The overall benchmark percentage of debt and cash equivalent investments owned by the permanent fund shall be thirty-five percent of the total market value of the fund and shall fall within a range of twenty-five to forty-five percent of the total market value of the fund.
C. Sub-allocations within asset classes shall be determined by the investment committee, as necessary and appropriate, and shall be recommended to the assembly for adoption by resolution.
D. No prohibited investments as defined and set forth in Section 4.28.110 shall be made.
4.28.130 Policy considerations.
A. Exemption. Any investment currently held that does not meet the guidelines of this policy shall be exempted from the requirement of this policy. At maturity or liquidation, such monies shall be reinvested only as provided by this policy.
B. Amendments. The investment policy shall be reviewed on an annual basis. Any changes must be approved by the assembly of the city and borough.
C. Transition Plan. The finance director using prudent methods will gradually move toward the target asset mix over a three-year period. The transition will be reviewed by the investment committee semi-annually.
(Ord. 01-1650 § 4(B), 2001.)