Chapter 5.65
INVESTMENT POLICY AND FUNDS MANAGEMENT
Sections:
5.65.010 Statement of policy and objectives – Introduction.
5.65.020 King County as Treasurer and investment manager
5.65.030 Cascade management of funds with longer-term objectives.
5.65.035 Designation of King County Pool Plus as an Investment Vehicle.
5.65.040 Adoption of Cascade Funds Management Matrix.
5.65.010 Statement of policy and objectives – Introduction.
Cascade Water Alliance (“Cascade”) maintains a cash balance to meet obligations related to operations, capital improvements and replacements, and bond repayment. The following Investment Policy is intended to set forth the framework within which Cascade’s investment activities will be conducted.
In establishing this Investment Policy, Cascade recognizes the traditional relationship between risk and return, and acknowledges that all investments, whether they are for one day or years, involve a variety of risks related to maturity duration, credit, market and other factors. Additionally, a number of types of investments involve intermediaries (counterparties) whose performance (or failure to perform) may affect the value or liquidity of the underlying investment.
Cascade has segregated fund balances consistent with Cascade’s fund accounting and each such fund has unique purposes related to investment, fund access, and scheduled use. These purposes in turn guide the appropriate investment strategy to fulfill those purposes and meet Cascade objectives. [Res. 2019-11 § 1; Res. 2016-21 § 1].
5.65.020 King County as Treasurer and investment manager
Cascade uses King County as its Treasurer and also invests in the King County Investment Pool (“KCIP”). By default, the funds reside in this investment pool and they are available on demand as needed for Cascade’s governmental purposes. The KCIP manages on the order of $6 billion in cash and investments for King County and various local governments, with a typical average maturity of 0.8 to 1.3 years and a structure designed to meet anticipated flows of funds. KCIP has adopted its own investment pool policy (Exhibit A attached) which guides the operation of the pool and its investments. KCIP investments comply with Washington statutory requirements.
As a pool with the noted purpose of funds accessibility, KCIP yields are constrained by the maturity limits and accessibility objective. KCIP has investigated mechanisms for providing alternative investments with longer maturities, with commensurate increases in both yield and risk. As a result, King County has initiated a “Pool Plus” program as an alternate to its investment pool. Pool Plus enables directed funds to be invested for longer maturity, either through a 10 year ladder of maturities or in special cases through an investment strategy directed by the participant. The program is embodied in Section VIII of the King County Investment Policy.
For funds held by King County and invested on behalf of Cascade through KCIP or its Pool Plus alternative, Cascade adopts the King County Investment Policy by reference, as shown in Exhibit A and as subsequently amended or updated by King County. [Res. 2019-11 § 1; Res. 2016-21 § 1].
5.65.030 Cascade management of funds with longer-term objectives.
Cascade also has its own fiscal policies which require maintenance and accumulation of funds for various purposes, some of which have either limited need for near-term access or long-term objectives for investment and future use. In those cases, the investment practices of KCIP may sacrifice yield for liquidity unneeded for those longer-term funds. Cascade may consider direct or contracted outside management of targeted funds to extend maturities and increase related yields. In the event of a decision to enable Cascade direct management of investments or direction of some funds to outside management other than KCIP, Cascade will revise its investment policy to address the management of such funds. Such revision will consider and incorporate the following elements:
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Investment Objectives |
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Performance Goals |
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Authority and Governance |
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Monitoring and Oversight |
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Criteria for Selection of Advisors |
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Ethics and Conflicts of Interest |
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Investment Guidelines and Restrictions |
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Maturity and Liquidity Guidelines |
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Prudence and Risk |
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Strategies to Minimize Investment Expenses |
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Security and Internal Controls |
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Investment Financial Reporting |
[Res. 2019-11 § 1; Res. 2016-21 § 1].
5.65.035 Designation of King County Pool Plus as an Investment Vehicle.
Cascade has considered and hereby adopts the Pool Plus as an appropriate alternative investment mechanism for funds that can tolerate longer term commitments. When qualified funds are selected for investment, Cascade will utilize “Option 1”, which is a ten-year ladder of maturities. This investment alternative has commensurate increases in both yield and risk as compared to the KCIP. Except for roll-over of funds already in the program, the introduction of monies into the Pool Plus program shall require Board review and approval.
While the Pool Plus option remains a part of the King County investment structure, Cascade has reviewed this option in the context of the above guidelines. The decision to implement Pool Plus as a longer-term investment mechanism is based upon the following considerations:
• Investment Objectives – The objectives of Pool Plus are to provide longer-term investments and related yields for funds that can be appropriately committed for the duration of the investment. The investments are limited to US Treasuries or securities and senior debt obligations of US agencies. This is consistent with Cascade’s objective for safe yield enhancement for funds with longer investment horizons. Option 1 offers an average 5-year maturity, which is a reasonable balance of commitment and yield.
• Performance Goals – Investments in Pool Plus are intended to enhance yields as compared to KCIP funds, and investment decisions will weigh yield enhancement against loss of liquidity and increased market value volatility.
• Authority and Governance – The investments allowed are consistent with those authorized in statute for State and municipal governments. Cascade has the authority to implement the Pool Plus option consistent with the JMUSA and authorizing statutes.
• Monitoring and Oversight – Cascade will receive regular reports from King County on its Pool Plus investments comparable to current reporting on funds invested in KCIP.
• Criteria for Selection of Advisors – Cascade has already qualified KCIP as its investment manager. Pool Plus is managed within the same organizational structure.
• Ethics and Conflicts of Interest – There are no apparent issues related to Pool Plus.
• Investment Guidelines and Restrictions – The investments allowed are restricted to high quality Federal securities and are more restricted than the KCIP portfolio. The allowed investments fully conform with statutory requirements. The Option 1 ladder structure provides a balance of maturity extension and progressive access to funds that mitigates some risks of access and market volatility.
• Maturity and Liquidity Guidelines – The maturity structure is a simple 10 year ladder of maturities. Funds are intended to be held to maturity. Cascade could request advance liquidation of investments, but subject to approval by the King County Finance Director, acceptance of any market losses, and potential termination of access to Pool Plus.
• Prudence and Risk – Cascade will identify and designate funds eligible for and consistent with the longer-term commitment of Pool Plus. Cascade will also establish its strategy for access to and departure from this option consistent with the terms of the program. Separately, Cascade will establish procedures for oversight and funds transfer to ensure that funds with required minimum balances, such as bond reserves, are replenished in timely fashion in order to maintain compliance with bond covenants.
• Strategies to Minimize Investment Expenses – Pool Plus offers the same administrative cost structure as the KCIP, which is very favorable as compared to Cascade or third-party administration of the limited funds that Cascade has available. In this regard, Pool Plus is the preferred strategy to minimize investment expenses.
• Security and Internal Controls – Pool Plus is managed under the same structure as the KCIP, with similar security, internal controls and oversight.
• Investment Financial Reporting – Pool Plus will introduce increased volatility in market value of related investments. King County will report the account status based on fair market value consistent with GASB Statement No. 31. Cascade will similarly report its investment value based on this report. [Res. 2019-11 § 1].
5.65.040 Adoption of Cascade Funds Management Matrix.
On November 30, 2021, the Board adopted and updated the Cascade Funds Management Matrix guiding the management and planning of fund balances for Cascade’s financial resources. Hereafter, the Board shall update this Matrix as part of the biennial budget process and thereafter the Matrix will be removed from this section and will be found in the biennial budget resolution.
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Fund / Purpose |
Target (2022*) |
Minimum (2022*) |
Maximum (2022*) |
Causes of Deviation |
Response to Replenish Deficiency |
Response to Draw Down Surplus |
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Operating Fund |
50 days of budgeted operating expense ($4.3m) plus funding accruals for major cyclical expenses such as sediment removal and system plans ($0.3m) |
45 days of budgeted operating expense ($4.0m) plus funding accruals for major cyclical expenses such as sediment removal and system plans ($0.3m) |
75 days of budgeted operating expense ($6.7m) plus funding accruals for major cyclical expenses such as sediment removal and system plans ($0.3m) |
1) Variations in revenues, expenses or transfers 2) Rate Smoothing |
Continue rate planning to target fund balance, contingent on 5-year rate smoothing (max. of 5 years to recover) |
Budgeted transfers to construction fund, contingent on requirements for projected 5-year rate smoothing |
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Rate Stabilization Fund |
5% of budgeted operating revenues (excluding RCFCs) ($2.1m) |
4% of budgeted operating revenues (excluding RCFCs) ($1.7m) |
7% of budgeted operating revenues (excluding RCFCs) ($2.9m) |
1) Fund earnings 2) Use of RSF 3) Delayed or reduced transfers from Operating Fund |
Continue rate planning to target fund balance, contingent on 5-year rate smoothing (max. of 5 years to recover) |
No additions to fund; if excess is projected for more than 5 years, budget transfer to construction (subject to meeting coverage policy) |
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Construction Fund |
No specific target except to provide adequate funds for ongoing construction projects and obligations ($7.5m) |
$6.0m based on January capital payment due to TPU |
Long-term CIP funding needs as determined by the Board |
1) Project costs in excess of budget 2) Delay in bond proceeds or other funding sources |
1) Transfer from WSDF, Operating or other funds 2) Debt issuance |
1) Debt Retirement 2) Reduce capital funding from RCFCs 3) Transfer to other funds including WSDF |
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Bond Fund: Reserve Account |
Maximum annual debt service ($4.4m) |
Maximum annual debt service requiring reserve ($4.4m) |
Maximum annual debt service requiring reserve ($4.4m) |
Deficit in bond repayment draws down reserve account |
Immediate transfer from Operating Fund |
Transfer to Bond Debt Service Account |
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Bond Fund: Debt Service Account |
Accrued principal and interest on outstanding bonds ($5.8m) (12/31/21) |
Accrued principal and interest on outstanding bonds ($5.8m) (12/31/21) |
Accrued principal and interest on outstanding bonds ($5.8m) (12/31/21) |
Inadequate or delayed transfer of funds from Operating or other Funds |
Immediate transfer from Operating or other Funds |
Reduce transfers from Operating or other Funds until target restored |
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Water Supply Development Fund (WSDF) |
Determined by capital funding strategy for future supply projects ($5.0m) |
Determined by capital funding strategy for future supply projects ($5.0m) |
Determined by capital funding strategy for future supply projects ($6.0m) |
Inadequate or delayed transfer of funds, reduced earnings, or changes in fund targets |
Budgeted increases in transfers from Operating and Construction Funds to meet capital funding strategy |
Budgeted reductions in transfers from Operating and Construction Funds, transfers to other funds, or distribution to Members per resolution |
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* 2022 estimates are based on adopted 2022 budget and financial requirements as of July 12, 2021. |
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[Res. 2022-06 § 4; Res. 2021-12 § 1; Res. 2016-22 § 1].