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HomeMy WebLinkAbout03. Statement of Investment Policy3. Central Contra Costa Sanitary District July 6, 2015 TO: ADMINISTRATION COMMITTEE VIA: ROGER S. BAILEY, GENERAL MANAGER FROM: DAVID HEATH, DIRECTOR OF ADMINISTRATION ®/7�4 SUBJECT: STATEMENT OF INVESTMENT POLICY The California Government Code and industry best practices recommend that the District's Statement of Investment Policy be provided annually for review and approval by the District's Board of Directors. At the February 9th Administration Committee meeting, committee members provided input and proposed revisions to the current District policy. I was unfortunately unable to attend the February meeting and requested the opportunity to revisit the policy with the Board Committee members. I asked Lauren Brant, Managing Director with PFM Asset Management LLC ( PFMAM), to review the District's current policy and provide her comments. Lauren has been providing asset management consulting services to a multitude of public agencies in California the past twenty years and has assisted me in the past with refining and updating the policies of the agencies I have served. She is a respected subject matter expert relative to public agency investment of idle funds and the associated policies which serve as a guide for those investments. She is a member of the Association of Public Treasurers of the United States and Canada's (APTUS &C) Investment Policy Certification Committee and will be attending the meeting to provide her input to the Committee. A redlined draft of the current policy incorporating PFMAM's comments is attached. In brief PFMAM is recommending changes that: (1) incorporate industry best practices; and (2) broaden the types and limits of allowable investment instruments permitted by California Government Code Section 53601 while still adhering to the District's primary objectives of safety and liquidity. Central Contra Costa Sanitary District Investment Policy Review and Update July 6, 2015 — - The PFM Group _ Financial & Investment Advisors Lauren Brant, Managing Director 50 California Street, Suite 2300 San Francisco, CA 94111 (415) 982 -5544 www.pfm.com Purpose of an Investment Policy A written investment policy is the single most important element in a public funds investment program. — Defines primary objectives: safety, liquidity, and yield. — Sets forth types and characteristics of eligible instruments, the investment process, and the management of a portfolio. Improves the quality of decisions and demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield. Adherence to an investment policy signals that an entity is well managed and is earning interest income suitable to its situation and economic environment. -GFOA Creating an Investment Policy Best Practices 2010 © PFM Asset Management LLC 1 Scope of PFMAM's Review At the request of the District, PFM Asset Management LLC ( PFMAM) undertook a comprehensive review of the District's Investment Policy. As part of this process, PFMAM evaluated the Policy's: — Investment objectives and ability to achieve these objectives; — Conformance with California Government Code sections regulating investment of public funds; — Overall clarity; — Incorporation of industry best practices. © PFM Asset Management LLC 2 Summary of PFMAM's Recommendations Updated /Expanded Sections Statement of Objectives Permissible Investments Maturities Diversification Prudence © PFM Asset Management LLC New Sections Ethics and Conflicts of Interest Safekeeping and Custody Policy Considerations 3 District's Current Investment Objectives Liquidity: Ensure that normal cash needs and scheduled extraordinary cash needs can be met. Safety: Safety of the portfolio is the second priority. Return on Investment: Attain a market rate of return, after meeting first two objectives. Addressed in Sections: Statement of Objectives Permissible Investments Bank and Dealers Maturities Diversification Source: CCCSD Investment Policy. Risk Prudence Controls Safekeeping and Custody Performance Evaluation © PFM Asset Management LLC 4 Conformance with California Government Code Representative Government Code sections related to Investments: 53600 -53610 and 53630- 53686: 53600.5. "When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the primary objective of a trustee shall be to safeguard the principal of the funds under its control. The secondary objective shall be to meet the liquidity needs of the depositor. The third objective shall be to achieve a return on the funds under its control." 53601. Permitted Investments 53601.5 Authorized Securities Dealers 53601.6 Prohibited Investments 53604. Sale, Exchange, and Reinvestment of Securities 53607. Delegation of Authority 53646. Optional Quarterly Reporting Requirements. Investment Policies © PFM Asset Management LLC 5 Allowable Investments U.S. Treasuries ✓ Federal Agencies ✓ Municipal Investments Add Money Market Funds Add Bankers' Acceptances ✓ Time Certificates of Deposit ✓ Negotiable Certificates of Deposit ✓ Commercial Paper ✓ Corporate Notes ✓ Local Government Pools Add Local Agency Investment Fund (LAIF) ✓ Supranationals Add Asset - Backed Securities Repurchase Agreements Policy currently limits maturities to 1 year, excepting for Treasuries and agencies. Recommend increasing maximum maturity to 5 years. Policy currently places a 10% issuer maximum on most sectors. Recommend reducing the per issuer limit to 5% for most sectors. © PFM Asset Management LLC 6 Broader Diversification Can Enhance Earnings Potential 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Source: Bloomberg Yield Curves as of July 1, 2015 3 6 1 2 3 5 M m y y y y © PFM Asset Management LLC Maturity 7 Additional Safeguards /Best Practices for the District's Funds Statement of Objectives Prioritize safety of principal as primary objective Prudent Person Explicitly define the "Prudent Person" rule Ethics and Conflicts of Require those involved in the investment process to Interest disclose personal positions that could relate to the performance of the District's portfolio Safekeeping and Custody Address delivery vs. payment, third -party safekeeping, and reporting requirements from custodian Policy Considerations Enact annual review of the Investment Policy © PFM Asset Management LLC 8 PFM Asset Management LLC Independent investment advisor Registered with SEC Over 30 years serving the public sector $56 billion* of public assets under management 200+ investment professionals Significant financial strength Extensive management experience for northern California cities ' As of March 31, 2015. © PFM Asset Management LLC 9 Disclaimer This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. © PFM Asset Management LLC ICI= The PFM Group Financial & Divestment Advisor,= Memorandum To: David Heath, Director of Administration Central Contra Costa Sanitary District ( CCCSD) From: Lauren Brant, Managing Director PFMAssetManagement, LLC (PFMAM) Re: Investment Policy Review 50 California Street 415 982 -5544 Suite 2300 415 982 -4513 fax San Francisco, CA 94111 www.pfm.com June 26, 2015 The purpose of this memorandum is to provide an overview and explanation of proposed changes to the Investment Policy (Policy) of Central Contra Costa Sanitary District (the District). PFMAM is recommending changes that: (1) incorporate industry best practices; and (2) define the types and limits of allowable investment instruments permitted by California Government Code Section 53601 (Code). Our recommendations are summarized below; the attached blue -lined version of the Policy contains all of the suggested changes. Industry Best Practices. In accordance with best practices, we recommend the following sections be included in the Policy: Ethics and Conflicts of Interest, Safekeeping and Custody, and Policy Considerations. In addition, according to best practices, we recommend language in the Statement of Objectives and Prudence sections be expanded. These sections, along with others in the current Policy, help to better define the District's objectives and provide safeguards and protections for CCCSD members and staff. Investment Parameters. We recommend modifying language in the Maturities and Diversification sections to provide additional flexibility in the portfolio to safely increase investment opportunities, as well as additional protections to encourage further diversification of the District's assets. • Maturities Section. We recommend extending the maximum maturity from one year to five years, unless stated otherwise in the Permissible Investments section, in accordance with California Government Code Section 53601 (Code). • Diversification Section. We recommend expanding this section to address diversification by issuer, sector, and maturity. We also recommend deleting the specific issuer maximum in this section, currently stated as 10% per issuer for any asset type excluding Treasuries and I-AIF, and instead addressing this in the Permissible Investment section of the Policy under each investment listed. In addition to moving this information, we recommend the District make the Policy more restrictive by lowering the maximum allowed per issuer to 5 %, excepting for U.S. Treasuries, Federal Agencies, money market funds, Government Pools, and LAIF. � M — PFM' June 26, 2015 Page 2 Modification and Addition of Permissible Investments. In this section we are recommending either changing permitted investment language to match Code or adding investments in accordance with Code. Using permissible investment language in the Policy that matches the language in Code will help provide greater clarity. Increasing the types of permissible investments will help create additional investment opportunities for the District's portfolio. Utilizing a variety of investments in a high- quality portfolio can improve diversification and offer various benefits to the portfolio, including enhanced return. The additional sectors we are recommending are consistent with the District's primary objectives of safeguarding principal, providing sufficient liquidity, and attaining a market rate of return on investments. The attached draft is intended to be the basis of further discussion from which a final policy can be developed based on the District's investment objectives and preferences. We look forward to discussing these recommendations with you and answering any questions you might have. Number: BP 005 Authority: Board of Directors Effective: September 1, 2011 Revised: November 7, 2013 Revised: September 4, 2014 Reviewed: Initiating Dept. /Div.: Finance BOARD POLICY STATEMENT OF INVESTMENT POLICY PURPOSE www.centralsan.org The investment policy of the Central Contra Costa Sanitary District governs the District's temporary investments. Investments will be in compliance with the provisions of but not necessarily limited to California Government Code Section 53601 et sec and other applicable statutes. A separate investment policy governs the District's GASB 45 Trust. This investment policy is embodied in the following eleven fourteen sections: POLICY Statement of Objectives Safety and liquidity are the two primary objectives of the The temporary investment portfolio of the District. The portfolio will be managed to ensure that normal cash needs, as well as scheduled extraordinary cash needs can be met. will be the Investments of the portfolio will be made in a manner that seeks to ensure the preservation of capital in the overall portfolio, safety ef the pertfelie ensuring that the investments could be readily converted to cash if needed without causing a material change in the value of the portfolio. — Lastly, the portfolio will be invested to attain a market average rate of return throughout budgetary and economic cycles taking into account the investment risk constraints liquidity needs and cash flow characteristics of the portfolio. Return on investment is of secondary importance compared to safety and liouidity., afteF meeting the first two previously stated objectives. Permissible Investments BP 005 Page 2 of 7 Within the constraints prescribed by the Government Code of the State of California for permissible investments, the District's investment portfolio will only be invested in the following instruments: United States Treasury Obligations. United States Treasury notes bonds bills, or certificates of indebtedness or those Bills ^^d Notes and for which the full faith and credit of the United States are pledged for the payment of principal and interest. • United States Government Agency Issues Federal agency or United States government- sponsored enterprise obligations participations or other instruments, including those issued by or fully guaranteed as to Principal and interest by federal agencies or United States government sponsored enterprises. • Municipal Investments Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue - producing property owned controlled or operated by the state or by a department board agency, or authority of the state Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue - producing property owned controlled or operated by a state or by a department board agency, or authority of any of the other 49 states, In addition to California Eligible obligations shall be rated in category "A" or its equivalent or better by a nationallv recognized statistical rating organization National Recognized Statistical Rating Organization (NRSRO) No more than 5% shall be Invested in any single issuer. • Money Market Funds Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. See. 80a -1 et sea) That invest in the securities and obligations as authorized by California Government Code 53601 subdivisions (a) to (k) inclusive and subdivisions (m) to (q) inclusive and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630) To be eligible for investment pursuant to this subdivision, these companies shall either: i. Attain the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs: ii. Retain an investment advisor registered or exempt from registration with the Securities and Exchange commission with not less than five years' experience managing money market Comment [PFM11: Rating requirement not in California Government Code (Code). Issuer maximum not in Code. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIR BP 005 Page 3 of 7 mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). A maximum of 20% of the District's portfolio may be invested in mono market funds. No more than 10% of the District's portfolio may be invested in any one fund. Bankers' Acceptances, otherwise known as bills of exchange or time drafts, drawn on and accepted by a commercial bank., whish are eligible Purchases of bankers' acceptances shall not exceed 180 days' maturity or 40% of the District's moneys that may be invested pursuant to this section However, no more than 5% of the District's moneys may be invested in the bankers' acceptances of any one commercial bank pursuant to this section • Collateralized Certificates of Deposit issued by a Federal or State chartered bank or a Federal or State chartered savings and loan association. Time certificates of deposit shall meet the requirements for deposit under Government Code Section 53635 et seg. The District Finance Manager, for deposits up to the current FDIC insurance limit may waive collateral requirements if the institution insures its deposits with the Federal Deposit Insurance Corporation (FDIC) Fully insured time certificates of deposit placed through a deposit placement service shall meet the requirements under Code Section 53601.8. Negotiable Certificates of Deposit issued by a nationally or state - chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code) a state or federal credit union or by a federally licensed or state - licensed branch of a foreign bank Purchases of negotiable certificates of deposit shall not exceed 30% of the District's moneys that may be invested pursuant to this section and not more than 5% may be invested in anv single issuer. Eligible negotiable certificates of deposit shall be rated in category "A" or its equivalent or better by a NRSRO. Commercial Paper of prime quality of the highest ranking or of the highest letter and number rating as provided for by a NRSRO The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (a) or paragraph (b): a) The entity meets the following criteria: (i) Is organized and operating in the United States as a general corporation. (ii) Has total assets in excess of limited to GGFPE)FatieRs with assets eve five hundred million Comment [PFM2]: Code says 30% maximum per issuer. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIF. Comment [PFM3]: Rating requirement not in Code. Isser limit not in Code. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIF. BP 005 Page 4 of 7 dollars - $500,000,0001. (iii) Has debt other than commercial paper, if any, that is rated "A" or higher by a NRSRO b) The entity meets the following criteria: (i) Is organized within the United States as a special purpose corporation trust or limited liability company. (ii) Has program wide credit enhancements including but not limited to, over collateral ization, letters of credit or surety bond (iii) Has commercial paper that is rated "A -1" or higher, or the equivalent by a NRSRO. Eligible commercial paper shall have a maximum maturity of 270 days or less. The District may invest no more than 25% of their moneys in eligible commercial paper and no more than 5% of the outstanding commercial paper of any single issuer. Medium Term Notes, defined as all corporate and depository institution debt securities with-ef a maximum of five years maturity, issued by U--S: corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States Notes eligible for investment under this subdivision shall be rated "A" or better by an NRSRO Purchases of medium -term notes shall not include other instruments authorized by this section and shall not exceed 30% of the District's moneys that may be Invested pursuant to this section. No more than 5% of the District's total Investment portfolio may be invested in the debt of any one corporation .of any FedeFal OF State depositary 'REititUtieR. • Government Pools. Shares of beneficial interest issued by a joint powers authority organized pursuant to California Government Code Section 6509.7 that invests in securities and obligations authorized by California Government Code 53601 subdivisions (a) to (q) inclusive Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria: i. The adviser is registered or exempt from registration with the Securities and Exchange Commission ii. The adviser has not less than five years of experience investing In the securities and obligations authorized in California Government Code 53601 subdivisions (a) to (q) inclusive iii. The adviser has assets under management in excess of five hundred million dollars ($500,000,000). Local Agency Investment Fund of the State of California. Investment in LAIF may not exceed the current LAW limit and should be reviewed periodical[V. Comment [PFM4]: Issuer maximum is 10% in Code. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIR Comment [PFMS]: Issuer maximum not in Code. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIR BP 005 Page 5 of 7 IV • Supranationals defined as United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally -guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation or Inter - American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States Suoranationals shall be rated "AA" or its equivalent or better by a NRSRO _Purchases of supranationals may not exceed 30% of the District's Investment portfolio and no more than 5% may be invested in any single Issuer. Bank and Dealers The District will use the services of the Treasurer's Office of the County of Contra Costa which will transact the District's investment decisions in compliance with the requirements described in this investment policy. The County Treasurer's Office will execute the District's investments through such brokers, dealers and financial institutions as are approved by the County Treasurer, and through the State Treasurer's Office for investment in the Local Agency Investment Fund. Maturities To the extent possible, the District shall attempt to match its investments with anticipated cash flow requirements Unless stated otherwise in this Policy or approval made by the District's executive body, the maximum maturity of the District's eligible Investments will not exceed five years T4:- i c}rn may. V. Diversification The District's investments shall be diversified b • Limiting investments to avoid over concentration in securities from a specific issuer or sector. • Limiting investments in securities that have higher credit risks • Investing in securities with varying maturities • Continuously investina a portion of the portfolio in readily available funds such as local government investment pools or money market funds to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. Comment [PFM6]: Issuer maximum not included in Code. District's Policy, prior to revisions, had a maximum 10% per issuer limit in all sectors excepting Treasuries and LAIR BP 005 Page 6 of 7 VI. Risk Credit and market risks will be minimized through adherence to the list of permissible investments, a limit on maximum maturities, and the limitation on the total investment in a single issuer. VII. Delegation and Authority The District Finance Manager will be responsible for investment transactions which should be made in accordance with this investment policy and within the internal controls described in Section IX. VIII. Prudence Prudent judgment must be exercised by the District Finance Manager and all investment staff responsible for investment transactions undertaken in accordance with this investment policy. The standard of prudence to be applied by the investment officer shall be the `prudent person" rule: "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." The prudent person rule shall be applied in the context of managing the overall portfolio IX. Ethics and Conflicts of Interest _Officers and employees 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 abilitv to _make impartial decisions. Employees and investment officials shall disclose any material interests 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 the District. BP 005 Page 7 of 7 __ Controls The District Finance Manager will establish subsidiary accounting records of each investment which will enable the determination of income earned monthly and through maturity, and the balancing of the principal amounts to a control account in the general ledger. Internal control procedures require the Finance Manager to sign all transactions, which are then countersigned by the General Manager. Such internal controls are to be reviewed by the District's independent auditors annually. XI. Safekeeping and Custody All investment transactions will be executed on a delivery versus payment basis. Securities will be held in safekeeping by a third party custodian designated by the District The custodian will be required to provide timer (written or on -line) confirmation of receipt and monthly position and transaction reports. Reporting The District Finance Manager will annually render a statement of investment policy to the Board of Directors. Also, annually, the GASB 45 Trust Investment Policy will be brought before the Board. -The Finance Manager will submit a monthly report to the District's General Manager and Board of Directors showing the type of investment, issuer, date of maturity, par (or face), dollar amount invested, current market value of all securities, and the source of this same valuation, and a statement of compliance of the portfolio with the investment policy. Performance Evaluation A performance evaluation will be completed by the District's independent auditors every year, commencing with the 2004 -2005 fiscal year, to determine whether the investment objective of achieving a market - average rate of return is being realized. In determining the market - average rate of return, the average return, of three -month U.S. Treasury Bills will be used as a comparison. The weighted average of the portfolio will be calculated each month and compiled to determine the annual yield. Results of the comparison between the District's portfolio and the three -month Treasury -Bill benchmark will be reported to the Board annually. This policy shall be reviewed on an annual basis Any changes must be approved by the investment officer and any other appropriate authority, as well as the individual(s) charged with maintaining internal controls