2023-10-18 Item 08F Treasurer's Annual Report June 30, 2023 and Investment PolicyAGENDA REPORT
City Council
MEETING
DATE:
October 18, 2023
PREPARED
BY:
Alexis Angelini
Finance Analyst
DEPARTMENT
DIRECTOR:
Teresa S. McBroome
DEPARTMENT: Finance CITY
MANAGER:
Pamela Antil
SUBJECT:
Treasurer’s Annual Report for the Fiscal Year Ended June 30, 2023 and Investment Policy
RECOMMENDED ACTION:
That City Council take the following actions:
1) Receive and file the Treasurer’s Report for the Fiscal Year Ended June 30, 2023; and
2)Adopt Resolution No. 2023-114, titled “A Resolution of the City Council of the City of
Encinitas, California, Approving the Statement of Investment Policy for the Fiscal Year
2023-24, and Delegating the Authority to Invest City Funds to the Treasurer” (Attachment
1).
ENVIRONMENTAL CONSIDERATIONS:
The action being considered by the City Council is exempt from the California Environmental
Quality Act (CEQA) because it is not a “project” under Section 15378(b)(5) of CEQA Guidelines.
The action involves an organizational or administrative activity of government that will not result
in the direct or indirect physical change in the environment.
This item does not relate to the Climate Action Plan.
STRATEGIC PLAN:
This item aligns with the Fiscal Stewardship and Effective City Services element of the City’s
Strategic Plan.
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FISCAL CONSIDERATIONS:
There is no direct fiscal impact associated with this report. Investment earnings in the pooled
investment fund for FY 2022-23 were $2,398,989, of which $1,049,311 were allocated to the
General Fund. Investment earnings exceeded the budgeted amount of $1,245,435 by $1,153,554
or by $649,311, in the General Fund.
BACKGROUND:
The City’s adopted Investment Policy (Section XVI) requires the City Treasurer to report
investment positions and results of the Pooled Investment Fund and the Investment of Bond
Proceeds and Cash Held with Fiscal Agent to the City Council annually at a public meeting.
Section XVII requires that the Investment Policy be reviewed and adopted at least annually,
regardless of whether there are any proposed changes to the Policy. Staff is recommending minor
and administrative changes to the policy this year.
The following information is included in this agenda report and the related attachments:
Detailed reports on the Pooled Investment Fund of the City for FY 2022-23 (Attachment
2)
Summary report for the investment of bond proceeds and cash held with fiscal agent
(Attachment 3)
Investment Policy Redlined (Attachment 4)
Investment Policy (Attachment 1; Exhibit A)
ANALYSIS:
Pooled Investment Fund Report
The Annual Investment Report for the Pooled Investment Fund (Attachment 2) is produced via
the City’s SymPro investment-tracking software and includes the following separate reports,
which together are intended to address all significant aspects of the City’s Investment Program.
i Portfolio Summary
i Portfolio Details
i Investments by Issuer
i Activity Report
i Interest Earnings Summary
i Interest Earnings
i Purchases Report
i Accrued Interest
i Realized Gain/Loss
i Unrealized Gain/Loss
i Cash and Investments by Fund
As of June 30, 2023, the book value (purchase price of securities as recorded on the City’s books)
of the Pooled Investment Fund was $145.4 million and the average weighted yield to maturity was
2.49 percent. The current market value of the City’s portfolio is $140,435,664 which results in an
unrealized loss of $4,918,226 or 3.38 percent, when compared to the book value or purchase
value of the City’s portfolio of $145,353,890. This is due to interest rates generally increasing in
2023-10-18 Item #08F Page 2 of 97
Fiscal Year 2022-23. Since the City intends to hold all investments until maturity, the unrealized
loss will not become a realized loss. The following table compares the Pooled Investment Fund
statistics for the last four quarters.
As stated in Section IV of the City’s investment policy, the investment objectives for the City’s
portfolio in priority order are: 1. safety of principal; 2. liquidity of funds; and 3. return on
investments. In order to achieve those objectives, the investment policy also defines (a) maximum
allocations of the portfolio by security type, (b) liquidity sufficiency and (c) return on investment
benchmarks. The charts below provide graphical information about portfolio investment
allocation, liquidity and performance compared to various benchmarks.
FY 2022-23 June 30, 2023 March 31, 2023 Dec. 31, 2022 Sep. 30, 2022
Book Value 145,353,890$ 132,180,626$ 129,743,266$ 116,194,740$
Market Value 140,435,664$ 128,516,434$ 125,375,418$ 111,473,499$
Unrealized Gain/(Loss)(4,918,226)$ (3,664,192)$ (4,367,848)$ (4,721,241)$
Unrealized Gain/Loss as % of Book Value (3.38%)(2.77%) (3.37%) (4.06%)
Effective Rate of Return 1.98%1.81%1.57%1.42%
Average Yield To Maturity 2.49%2.39%2.09%1.53%
Average Maturity (Years)1.58 1.66 1.21 1.44
Investment Earnings Year to Date 2,398,989$ 1,581,898$ 882,449$ 412,347$
2023-10-18 Item #08F Page 3 of 97
The U.S. Treasury Coupon Securities are issued by the U.S. Government and carry the full faith
and credit of the U.S. Government and are considered to be the safest investments. The Federal
Agency Coupon Securities are issued by the Federal National Mortgage Association, Federal
Home Loan Bank and Federal Farm Credit. This diversity of issuers provides additional security.
Although the Federal Agency securities are rated AA+, they continue to be regarded as among
the safest securities in the global market. The remaining funds are in the California Local Agency
Investment Fund (LAIF), California Asset Management Program (CAMP), the San Diego County
Investment Pool, and Certificates of Deposit and Money Market Funds with US Bank as Trustee
and a US Bank Checking Account. LAIF is a program created by State statute that began in 1977
as an investment alternative for California's local governments and special districts. All securities
in LAIF are purchased under the authority of Government Code Sections 16430 and 16480.4. All
funds invested in LAIF are essentially available overnight and provide the City with liquidity for
City operations. LAIF has not been assigned a rating by Moody’s or Standard and Poor’s.
The City’s investment portfolio complied with the City’s investment policy because it adhered to
the required allocations by investment type.
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Liquidity is important to the City, and it is critical that funds are available when needed in order to
meet the City’s day-to day operations, large CIP program and debt service program. The portfolio
is currently very liquid with 33.75 percent available overnight and an additional 8.94 percent of
securities available within 180 days. Best management practices recommend that agencies have
six months of cash needs of their portfolio liquid. The weighted average maturity of the entire
portfolio is 1.58 years. The City utilizes a laddered maturity investment strategy in that as
securities mature, new investments are directed to the 49–60-month segment to take advantage
of typically higher rates further out on the yield curve. This has been challenging in the current
investment environment which has experienced an inverted yield curve. The Treasury Indexes
began to slowly accelerate at the beginning of Fiscal Year 2022-23, then slightly declined followed
by a continued steady increase again at the end of the FY 2022-23. One of the primary ways for
the Federal Reserve to adjust monetary policy is through changes to the federal funds rate. With
many variables in play that affect interest rates, the City remains consistent with its use of this
laddered maturities investment strategy while also considering the City’s investment objectives.
In the chart above the performance of the portfolio is compared to the six-month, one-year and
two-year treasury constant maturity rate as of the end of each quarter. The stated performance
benchmark for the portfolio is the one-year treasury which averaged a 4.63 percent yield over the
twelve months ended June 30, 2023, as compared to the City’s average yield of 1.63 percent over
the same twelve-month period. The City’s average yield is lower than the benchmark due to the
rapid rise in shorter term interest rates over a brief period of time combined with the City adhering
to its conservative laddered investment strategy and investments being directed to the 49–60-
month segment.
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Investment of Bond Proceeds and Cash Held with Fiscal Agent
The Annual Investment Report for the Investment of Bond Proceeds and Cash Held with Fiscal
Agent (Attachment 3) shows funds held with fiscal agents related to bond proceeds and loan
fundings on June 30, 2023, were $21,251,135. Earnings on the bond trust accounts, loan
proceeds and cash held with fiscal agent were $593,503 for the year. Amounts held by trustee
banks and investments are based upon the bond indenture agreement for each bond issue and
the Investment Policy of California Infrastructure and Development Bank (IBank) for the IBank
loan proceeds. Rates on available investment vehicles are yielding an effective rate of return
ranging from 4.55 percent to 5.01 percent. As the City has paid off bond issues or refunded bonds
in the past few years, the requirement for bond reserves for these bond issues has been
eliminated, reducing the amount of bond proceeds held in trust. The majority of funds held on
June 30, 2023, were for the 2022 IBank loan proceeds and related interest income, ($20,583,900)
originated during Fiscal Year 2022-23. Interest on the IBank loan proceeds not yet disbursed is
payable to the City annually. As of June 30, 2023 funds have not yet been distributed from the
IBank loan proceeds.
Investment Policy Update
Section XVII of the investment policy requires at least an annual review of the investment policy
regardless of whether there are any proposed changes to the policy. The last revisions to the
investment policy were made in 2022.
There were several California statutory changes related to laws pertaining to the investment of
public funds reflected in the California Local Agency Investment Guidelines; however, there were
no changes that directly affected the City. The Local Agency Investment Guidelines provided by
the California Debt and Advisory Commission reflect the most current investment statutes as of
January 1, 2023. Staff performed a review of the City’s current investment policy, which follows
these investment guidelines, and is recommending adoption of the City’s investment policy for
Fiscal Year 2023-24 with minor formatting and administrative changes. See Summary of Changes
below.
In Fiscal Year 2020-21, the City adopted Resolution 2021-67, whereby the City Council has
directed the City Treasurer not to invest in certain companies as well as to petition the managers
of the pooled funds the City is invested in to divest from fossil fuel companies. The City Treasurer
has complied with this direction from the City Council.
Summary of Changes to Investment Policy
Investment Policy Section
Section II. Scope
Description of Change
Added language that the City
manages funds for one Community
Facilities District (Mello-Roos) in a
Custodial Fund.
Comments
To add clarity and information
for the reader.
Section II. Scope Added language due to the addition
of bank loan proceeds from IBank.
To add clarity and information
for the reader.
2023-10-18 Item #08F Page 6 of 97
ATTACHMENT(S):
1. Resolution No. 2023-114 titled “A Resolution of the City Council of the City of Encinitas,
California, Approving the Statement of Investment Policy for the Fiscal Year 2023-24, and
Delegating the Authority to Invest City Funds to the Treasurer”
2. Annual Investment Report for the Pooled Investment Fund, June 30, 2023
3. Annual Investment Report for the Investment of Bond Proceeds, June 30, 2023
4. City of Encinitas Investment Policy (F019), amended October 18, 2023, Redlined
2023-10-18 Item #08F Page 7 of 97
Attachment 1
RESOLUTION 2023-114
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF ENCINITAS, CALIFORNIA,
APPROVING THE STATEMENT OF INVESTMENT POLICY FOR THE FISCAL YEAR 2023-
2024, AND DELEGATING THE AUTHORITY TO INVEST CITY FUNDS TO THE TREASURER
WHEREAS, Section 53646 of the Government Code provides for the Treasurer of a local
agency to present to the legislative body a statement of the agency’s investment policy and any
changes to the policy for consideration at a public meeting; and
WHEREAS, the City Council of the City of Encinitas (“City”) last considered and approved
the City’s Investment Policy (“Policy”) on October 19, 2022; and
WHEREAS, the City follows the California Local Agency Investment Guidelines which
incorporate the most current investment statutes as of January 1, 2023. There were no new
California statutory changes reflected in the guidelines that apply to the City of Encinitas as of
January 1, 2023.
WHEREAS, it is good practice for the City Council to review the Statement of Investment
Policy to ensure its consistency with the overall objectives of preservation of principal, liquidity
and return, and its relevance to current laws and financial and economic trends; and
WHEREAS, Section 53601 of the Government Code authorizes the City Council to invest
City funds, and Section 53607 of the Government Code further authorizes the City Council to
delegate said authority to the City Treasurer, and Encinitas Municipal Code Chapter 2.28
designates that the Director of Finance shall serve as the City Treasurer; and
WHEREAS, the City Council desires to delegate its authority to invest City funds to the
City Treasurer.
NOW, THEREFORE, BE IT RESOLVED, by the City Council of the City of Encinitas that:
1. That the above recitals are true and correct.
2. That the Investment Policy for Fiscal Year 2023-2024, as contained in Exhibit A to this
resolution is hereby approved.
3. That the City Council of the City of Encinitas does hereby authorize the Treasurer to
invest City funds.
NOW, THEREFORE, BE IT FURTHER RESOLVED that this action is exempt from the
provisions of the California Environmental Quality Act (CEQA) pursuant to Section 15378(b)(5) of
the CEQA Guidelines, as an organizational or administrative activity of government that will not
result in a direct or indirect physical change in the environment.
PASSED, APPROVED AND ADOPTED this 18th day of October 2023 by the City Council
of the City of Encinitas, State of California.
2023-10-18 Item #08F Page 8 of 97
______________________________
Tony Kranz, Mayor
ATTEST:
______________________________
Kathy Hollywood, City Clerk
APPROVED AS TO FORM:
_____________________________
Tarquin Preziosi, City Attorney
CERTIFICATION: I, Kathy Hollywood, City Clerk of the City of Encinitas, California, do hereby
certify under penalty of perjury that the foregoing Resolution was duly adopted at a regular
meeting of the City Council on the 18th day of October 2023 by the following vote:
AYES:
NOES:
ABSENT:
ABSTAIN:
______________________________
Kathy Hollywood, City Clerk
2023-10-18 Item #08F Page 9 of 97
Exhibit A
CITY OF ENCINITAS
ADMINISTRATIVE MANUAL
Policy Title: Investment Policy Section: Finance
Responsible Department: Finance Number: Admin Policy F019
Approved By: City Council Date Approved: 1994
Last Amended: October 18, 2023
I. Philosophy
The Investment Policy of the Encinitas City Council for the City of Encinitas represents the financial
guidelines for the City’s Investment Program. It is the policy of the City of Encinitas to invest excess
public funds in a prudent manner that safeguards the public trust, minimizes the risk of loss of capital,
and provides assurance that all financial obligations will be met in the regular course of business. The
City Council shall provide direction to the City Treasurer as to the goals and specific objectives of the
Investment Program.
II. Scope
This Investment Policy applies to all financial assets under the oversight of the City of Encinitas, except
bond proceeds held by outside trustees and funds held by other governmental agencies. The City of
Encinitas includes the City and all component units: the Encinitas Housing Authority (EHA), the
Encinitas Public Financing Authority (EPFA), and the San Dieguito Water District (SDWD). These
funds are accounted for in the City of Encinitas’ Annual Comprehensive Financial Report and include:
GENERAL FUND
SPECIAL REVENUE FUNDS
CAPITAL PROJECT FUNDS
ENTERPRISE FUNDS
INTERNAL SERVICE FUNDS
This policy also applies to funds that the City manages for other governmental agencies. Currently,
the City manages funds for the Encinitas Ranch Golf Authority (ERGA), a legally separate joint powers
authority which is not a component unit of the City. The City also manages funds for one Community
Facilities District (Mello-Roos) for which the City acts as an agent for debt service activities which are
accounted for in a Custodial Fund.
The investment of Bond Proceeds and loan proceeds held with trustees is directed by the City, but is
governed by the restrictions on Permitted Investments in the applicable Bond Indenture agreements
and the Investment Policy of the California Infrastructure and Economic Development Bank.
A portion of City funds is held by other governmental agencies. These funds are invested under the
guidelines of the investment policies of those agencies.
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The City retirement plan is with CALPERS, and the City has no authority or oversight over the
investments in any of those plans. Further, the City administers several deferred compensation plans.
Assets held in those plans are held in trust for the participants, and are not assets of the City. The
City does not have any authority over the investments held in these trusts.
III. Prudence
Investments shall be made with reasonable financial 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 standard of prudence to be used by investment officials shall be the “prudent investor” standard.
California Gov’t Code 53600.3 states that, “When investing, reinvesting, purchasing, acquiring,
exchanging, selling or managing public funds, a trustee shall act with care, skill, prudence, and
diligence under the circumstances then prevailing, including, but not limited to, the general economic
conditions and the anticipated needs of the Agency, that a prudent person acting in a like capacity and
familiarity with those matters would use in the conduct of funds of a like character and with like aims,
to safeguard the principal and maintain the liquidity needs of the Agency. The standard shall be
applied in the context of managing an overall portfolio. Investment officials acting in accordance with
established procedures and exercising due prudence shall be relieved of personal responsibility for an
individual security's credit risk or market price changes.
IV. Investment Objectives
A. Safety of Principal - the first objective of this policy is to ensure the safety of principal. The
portfolio shall be planned and managed to minimize the risk of actual loss of principal. Principal is
defined as the original purchase price of the security, excluding any purchase of accrued interest, up
to the par (face) value of the security. Any purchase amount above par value (premium) is considered
to be a purchase of accrued interest, and is excluded from the calculation of principal amount. The
City Treasurer shall consider both credit risk and concentration risk (the concept of diversification)
when assessing safety, and shall follow the guidelines outlined later in this policy to achieve that
objective.
B. Liquidity - The second objective is the maintenance of sufficient liquidity to meet all operating
and capital spending requirements that can be reasonably anticipated.
C. Return on investments - The third objective is yield, specifically, attaining a market rate of
return over time, consistent with Council direction as to acceptable levels of risk. Refer to Section XV
below for further discussion of performance measurement.
V. Delegation of Authority
In accordance with the California Government Code, Section 53607, the City Council hereby
delegates the authority to invest or reinvest the City’s funds, to sell or exchange securities purchased,
and to deposit securities for safekeeping to the City Treasurer. Encinitas Municipal Code Chapter
2.28 designates that the Director of Finance shall serve as City Treasurer. The City Treasurer has
the option to delegate some, or all, of the duties described in this Policy to other qualified individuals
within the organization.
Investment Procedures
The City Treasurer is responsible for establishing written investment procedures for the management
and operation of the Investment Program, consistent with this Policy. Those procedures shall include
reference to such items as: custody/safekeeping, repurchase agreements (if applicable), wire transfer
agreements, banking service agreements, and explicit delegation of authority to personnel involved
2023-10-18 Item #08F Page 11 of 97
in the processing of banking or investment transactions. No person may engage in any investment
transaction except as provided under the terms of this Policy and the established procedures.
VI. Ethics, & Conflict of Interest
The investment responsibility carries with it the responsibility of ensuring that investments placed are
done so without improper influence or the appearance of improper influence. All officers and
employees (officials) involved in the investment function shall adhere to the State's Code of Economic
Interest and to the following:
Officials shall refrain from personal business activity that could conflict with proper and impartial
execution of the Investment Program, or that could impair their ability to make impartial investment
decisions. Further, officials shall not personally or through a close relative maintain any accounts,
interest, or private dealings with any firm with which the City places investments, with the exception
of regular savings, checking and money market accounts, or other similar transactions that are offered
on a non-negotiable basis to the general public. Any such relationships shall be disclosed annually
to the City Clerk in conjunction with annual disclosure statements of economic interest.
VII. Authorized Financial Dealers and Institutions
The City Treasurer shall maintain a list of qualified financial institutions authorized to provide financial
or investment services to the City.
The City shall contract with one institution to provide general banking services, which shall be
reviewed at least every five years. City Council shall approve the selected institution and the
contract for banking services.
The City shall contract with one institution to provide investment custody services, which shall be
reviewed at least every five (5) years. City Council shall approve the selected institution and the
contract for custody services.
The City Treasurer shall maintain a list of qualified security broker-dealers authorized to provide
financial or investment services to the City. To be eligible for consideration to become an authorized
provider, each Broker/Firm shall meet the following MINIMUM requirements:
(1) have a net capital position in excess of $10 million,
(2) have been in business for at least five years,
(3) are currently licensed as a broker-dealer or investment adviser in California, and
(4) Must carry adequate insurance coverage including liability, errors and omissions, and
workers compensation (if applicable.)
Firms providing only representation of money market funds are exempt for requirement #1, but must
still comply with all other requirements, including those listed below.
The City Council shall approve the initial authorization of any broker-dealer. Authorized firms shall
be notified by the City Treasurer via an engagement letter, which outlines each parties’ responsibilities
(primarily the continuing compliance requirements discussed directly below). There is no contract for
professional services or term to the engagement. The City Treasurer shall periodically evaluate the
performance of all qualified broker-dealers, and determine if any changes need to be made.
All broker-dealers authorized to do business with the City of Encinitas must also comply with the
following requirements.
(1) Firms must submit audited financial statements annually, within six months of their fiscal
year-end,
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(2) Firms must provide proof of their Financial Industry Regulatory Authority (FINRA)
certification, and must disclose to the City immediately any regulatory actions or complaints
against the broker assigned to the City account,
(3) Firms must provide proof of their registration/license to do business in the State of California,
and shall immediately disclose to the City any change in that status.
(4) Firms must certify in writing that they have received, read, and agree to comply with the City
of Encinitas’ most recently adopted Investment Policy.
VIII. Authorized & Suitable Investment Instruments
As a unit of local government in the State of California, the City of Encinitas is restricting itself to
the investments authorized by Government Code, Sections 16429.1, 27133 and Sections 53600
through 53635 (the Gov’t “Code”) except as otherwise provided herein by specific additional
Council actions.
SPECIFIC INVESTMENT TYPES AND AMOUNTS - The City Treasurer is authorized to invest in
only the following types of investments listed below in Section VIII.
INVESTMENT ALLOCATIONS - The State Law Maximum allocations listed below refer to the
percentage of the total portfolio or dollar amount that may be invested in each instrument under the
provisions of the Gov’t Code. The Investment Policy Maximum allocations refer to maximum
allocations the City Treasurer follows, in order to effect proper diversification of the portfolio and
limit concentration risk. The City Treasurer is permitted to exceed these maximum allocations for
temporary periods. Any asset allocation that exceeds the Investment Policy Maximum allocation
for a period of more than three months shall be reported to the City Manager.
For purposes of calculating the percentage allocations, the assumption will be applied that the size
of the portfolio for any fiscal year shall be determined by the total par value of the portfolio at the
beginning of the first day of the fiscal year. Any investment types that exceed the maximum
allowable under the Gov’t Code shall be reported to the City Council in the quarterly investment
report.
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
(1) Repurchase agreements NO LIMIT 20%
This type of investment is only authorized in relation to the City’s general banking
arrangements, in which excess cash balances are “swept” into an interest earning
account overnight. Maximum maturity is one year. All balances are required to be
properly collateralized at 102% of par value in accordance with State requirements.
(2) CA Local Agency Inv Fund (LAIF) STATE LAW MAXIMUM 30%
The “STATE LAW MAXIMUM” refers to the LAIF limit on maximum deposits per local
agency, not to the CA gov’t code restrictions. The City of Encinitas maintains two
accounts with the LAIF, one in the name of the City and the other in the name of the
San Dieguito Water District. Each account has a deposit limit of the maximum
2023-10-18 Item #08F Page 13 of 97
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
amount allowed by CA state law. Since San Dieguito Water District is a component
unit of the City, the City may legally utilize the SDWD account in the operation of the
City Pool. Thus, SDWD owns its ratable share of all City Pooled investments, but
does not have a direct ownership interest in the LAIF account in its name.
(3) Other Gov’t Managed Pools NO LIMIT 30%
Per Issuer 10% per Pool
Investments in individual pools shall be limited to 10% of the total portfolio. Currently
approved pools are the San Diego County Investment Pool and the California Asset
Management Program (CAMP). The City Council must approve the addition of any
other governmental pools.
(4) Mutual Funds and Money Market Mutual Funds (Total)
20% 20%
Per Issuer 10% 10%
(A) Money Market Mutual Funds N/A 20%
Per Issuer N/A 10%
Qualifying funds must meet one of the following criteria: (1) Attained the highest
ranking or the highest letter and numerical rating provided by not less than two
nationally recognized statistical rating organizations, OR (2) Retained an Investment
Advisor registered or exempt from registration with the SEC with not less than five
years’ experience managing money market mutual funds with assets under
management in excess of $500 million.
(B) Mutual Funds N/A 10%
Per Issuer N/A 5%
A mutual fund must receive the highest ranking by not less than two nationally
recognized rating agencies or the fund must retain an investment advisor who is
registered with the SEC (or exempt from registration), has assets under
management in excess of $500 million, and has at least five years experience
investing in instruments authorized by California Government Code sections 53601
and 53635.
(5) Certificates of Deposit (CD’s) NO LIMIT 30%
Per Issuer NO LIMIT 5%
All CD’s must be either insured by the FDIC or properly collateralized, pursuant to
Section X below. Maturity shall not exceed five years. No more than 5% of the total
account value per issuer. To be eligible to receive deposits from the City of
Encinitas, each qualified financial institution must have received an overall rating of
not less than “satisfactory” in its most recent evaluation by regulators of its record of
meeting the credit needs of its community.
2023-10-18 Item #08F Page 14 of 97
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
(6) Negotiable Certificates of Deposit 30% 30%
Per Issuer 5%
All Negotiable CD’s must be issued by a provider rated either: (1) Aaa by Moody’s,
(2) AAA by Standard & Poors, or (3) Aa1 by Moody’s and AA+ by Standard & Poor’s.
Investments of $250,000 or less that are fully insured by the FDIC are exempt from
the above credit rating requirements. Maturity shall not exceed five years. No more
than 5% of the total account value per issuer.
(7) Bankers Acceptances 40% 10%
Per Issuer 30% 5%
Bankers Acceptances (BA’s) represent a time draft drawn on and accepted by a
Bank for payment of the shipment or storage of merchandise. They are generally
considered a very safe investment since both the credit of the issuer and the Bank
is pledged for repayment. They must not exceed 180 days maturity. BA’s must have
an underlying credit rating of A1/P1, and are limited to 5% of the total account value
per issuer.
(8) U.S. Treasury Bills, Notes and Bonds NO LIMIT 50%
(9) U.S. Government-Sponsored Agencies NO LIMIT 60%
Per Issuer 25%
City shall invest primarily in securities issued by Federal Home Loan Bank (FHLB),
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), and Federal Farm Credit Bureau (FFCB). City may invest in
Private Equity Funding Corporation (PEFCO) and Tennessee Valley Authority
(TVA); however, the overall limit of 60% still applies. City may also invest in the
Government National Mortgage Association, but only via authorized Mutual Funds
cited in Category 5 above, and subject to those limitations.
(10) Commercial Paper 40% 25%
Per Issuer 10% 5%
Commercial Paper (CP) is a short-term I.O.U. issued by large corporations of high
credit standing which is unsecured. Investments are limited to only “prime quality”
CP issued with the highest letter and number rating provided by one of the two
nationally recognized rating agencies. City limits itself only to CP rated A-1 or better
by Standard & Poors and P-1 by Moodys. Issuing corporations must be organized
and operating within the United States, have assets in excess of $500 million, and
debt other than commercial paper must be in a rating category of “A” or its equivalent
or higher by a nationally recognized statistical rating organization or the issuing
corporation must be organized within the U.S. as a special purpose corporation,
trust, or LLC, have program wide credit enhancements, and have commercial paper
that is rated “A-1” or higher or the equivalent, by a nationally recognized statistical
rating agency. City may not purchase more than 5% of outstanding commercial
paper of any single corporate issuer. The maximum allowable maturity is 270 days
or less.
2023-10-18 Item #08F Page 15 of 97
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
Per California Code Section 53601(h) beginning January 1, 2021, until January 1,
2026, portfolio limitation maximums are 40% and revert back to 25% after January
1, 2026. The 10% single issue limitation for commercial paper and medium-term
notes will remain in effect.
(11) Commercial Medium-Term Notes 30% 15%
Per Issuer 10% 5%
Medium-Term Notes are defined as all corporate and depository institution debt
securities with a maximum remaining maturity of five years or less, issued by
corporations organized and operating in the United States or by depository
institutions licensed by the United States. State Code requires a credit rating of “A”
or better by one nationally recognized rating agency. The City is further limiting itself
to notes that are rated Aa3 or better (Moody’s) and AA- or better (S & P).
(12) Guaranteed Investment Contracts None 10%
Per Issuer 5%
Guaranteed Investment Contracts (GIC’s) are corporate obligations similar to
medium-term notes, but are issued directly to the Agency by the issuer in the form
of an investment contract. They are generally longer term in nature. They are
generally utilized for the investment of bond proceeds, but may be utilized for the
investment of Pooled funds. Uncollateralized GIC’s are permitted only with issuers
rated Aaa (Moody’s) and/or AAA (Standard & Poors) Collateralized GIC’s are
permitted with issuers rated Aa2 or better (Moody’s) and AA or better (Standard &
Poors). No more than $5 million per issuer.
(13) Demand Deposits (non-interest bearing) None 0-2%
Per Issuer 0-2%
Non-interest bearing demand deposits with a financial institution approved to do
business with the City shall be an allowable investment for the City Pool. These
types of accounts are necessary to carry on the regular day-to-day financial
operations of the City, must be collateralized, and are reported as “cash” on the
monthly investment reports. When available, the City Treasurer shall execute a
“sweep arrangement” with the designated financial institution, to provide for excess
overnight balances to earn interest.
(14) Demand Deposits (interest bearing) None 20%
Per Issuer 10%
Interest-bearing demand deposits with a financial institution approved to do business
with the City shall be an allowable investment for the City Pool. These types of
accounts generally serve as an alternative to bank certificates of deposit, and have
a stated minimum balance requirement. These types of accounts require a separate
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INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
agreement with the financial institution and must be fully collateralized as Public
Deposits under California law. In addition, some part of the deposit (currently
$250,000) may be insured by the Federal Deposit Insurance Corporation (FDIC) in
lieu of collateralization.
(15) Asset-Backed Securities 20% 10%
Per Issuer 5%
These securities consist of Traditional Asset-Backed, Mortgage-Backed, Mortgage
Pass-Through Securities, and Collateralized Mortgage Obligations. They are
permitted given that the securities are rated in a rating category of “AA” or its
equivalent or better by a NRSRO and have a maximum remaining maturity of five
years or less. No more than 10% of the total portfolio may be invested in these
securities. No more than 5% of the portfolio may be invested in any single Asset-
Backed or Commercial Mortgage security issuer. There is no issuer limitation on
any mortgage security where the issuer is the U.S. Treasury or a Federal
Agency/GSE.
(16) Supranationals 30% 20%
Per Issuer 15%
Supranational issues are U.S. 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. They are permitted if rated in a rating category of
“AA” or its equivalent or better by a NRSRO. No more than 20% of the total portfolio
may be invested in these securities. No more than 15% of the portfolio may be
invested in any single issuer. The maximum maturity does not exceed five years.
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SUMMARY TABLE of INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
(1) REPURCHASE AGREEMENTS NO LIMIT 20%
(2) CALIFORNIA LAIF NO LIMIT 30%
(3) OTHER GOV’T POOLS NO LIMIT 30%
Per Issuer 10%
(4) MUTUAL FUNDS TOTAL 20% 20%
Per Issuer 10% 10%
(4-A) Money Market Mutual Funds N/A 20%
Per Issuer N/A 10%
(4-B) Mutual Funds N/A 10%
Per Issuer N/A 5%
(5) CD’s NO LIMIT 30%
Per Issuer 5%
(6) NEGOTIABLE CD’s 30% 30%
Per Issuer 5%
(7) BANKERS ACCEPTANCES 40% 10%
Per Issuer 30% 5%
(8) U.S. TREASURYS NO LIMIT 50%
(9) U.S. FEDERAL AGENCIES NO LIMIT 60%
Per Issuer 25%
(10) COMMERCIAL PAPER 40% 25%
Per Issuer 10% 5%
(11) COMMERCIAL MTN NOTES 30% 15%
Per Issuer 10% 5%
(12) GIC’s NO LIMIT 10%
Per Issuer 5%
(13) Demand Deposits (non-interest bearing) NO LIMIT 0-2%
Per Issuer 0-2%
(14) Demand Deposits (interest bearing) NO LIMIT 20%
Per Issuer 10%
(15) Asset-Backed Securities 20% 10%
Per Issuer 5%
(16) Supranationals 30% 20%
Per Issuer 15%
The State of California Government Code restricts local agencies from investing in securities with
final maturity dates greater than five (5) years, except as specifically authorized by the City Council.
This Policy authorizes two specific exceptions to the above restriction.
(1) The City may invest in up to $5 million (par value) of securities (at date of purchase)
rated AAA or equivalent by either S&P or Moody’s with maturities of greater than five
(5) years, but not exceeding seven (7) years.
(2) The City’s General Contingency Reserve is not a part of normal operating reserves,
and the related funds are not expected to be utilized in the foreseeable future, thus,
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the likelihood of liquidation is very small. The objective(s) of investment in this area
are to maximize earnings with safety, while recognizing that liquidity is less of an
issue than with operating or capital funds. Consistent with these objectives, the City
Treasurer is authorized to invest contingency funds in securities rated AAA or
equivalent with maturities greater than seven (7) years that have a ready market
should the need arise to liquidate the investment.
The City Council has directed the City Treasurer not to invest in securities of companies involved in
the production of tobacco, alcohol related products, or fossil fuel companies. Furthermore, Encinitas’
City Council directs the City Treasurer to annually, if not more often, petition the managers of the
pooled funds the City is invested in to divest from fossil fuel companies. The City recognizes that, due
to the extreme complexity of today’s corporate structures, it is possible that investments may be
placed in good faith in corporations that have an interest in tobacco, alcohol related products or fossil
fuel companies that is not widely known or properly disclosed by those corporations. The City
Treasurer shall make his/her best efforts, including notice to broker/dealers, to assure that any
corporate investments are placed with companies who are not in the tobacco, alcohol, or fossil fuel
business. This policy applies at the time of purchase only.
Certain investments are specifically prohibited by the State Code. Local Agencies may not invest in
the following: Inverse floating-rate notes, range notes, or mortgage-derived interest-only strips. The
Code also states that “A local Agency shall not invest in any security that could result in zero interest
accrual if held to maturity.” The City’s interpretation of this Code section is that it does not prohibit
investment in U.S. Treasury or Federal Agency securities which carry a variable rate of interest;
because the chance that such notes could result in zero interest accrual to maturity is remote.
California SB 998 added Government Code Section 53601.6(b)2), which allows a local agency to
invest in securities issued by, or backed by, the United States government that could result in zero-
or negative-interest accrual if held to maturity, in the event of, and for the duration of a period of
negative market interest rates. This is applicable from January 1, 2021 until January 1, 2026.
IX. Due Diligence Requirements for Investment Pools, Mutual Funds, and CD’s
Investments of these types are authorized in Section VIII. above. Before investing any funds in pools
or mutual funds, the City Treasurer shall perform a thorough investigation of the fund(s) to determine
the suitability of the investment for the City of Encinitas Pooled Investment Fund. This investigation
shall include, at a minimum: review of the Funds investment policy and/or prospectus, a review of the
performance history of the Fund, review of ratings (where applicable), review of the latest published
portfolio composition, review of fees and charges, and references from other agencies who invest in
the Fund.
The City Treasurer shall monitor placement of Certificates of Deposit with financial institutions on a
regular basis. Compliance with collateral requirements shall be monitored (if applicable).
X. Collateralization of Public Deposits
Collateralization will be required on two types of investments: demand and timed deposits (which are
not fully insured by FDIC) and repurchase agreements. The City Treasurer has agreed to waive
collateral requirements on the first $250,000 of CD’s from each institution, which are insured by FDIC.
In order to anticipate market changes and provide a level of security for all invested funds, the required
collateralization levels will be:
(1) Overnight repurchases 102% of market value
(2) Timed Deposits in accordance with CA law regarding Public Deposits
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(3) Demand Deposits in accordance with CA law regarding Public Deposits
Collateral must be held by an independent third party with whom the entity has a current custodial
agreement. Collateral for overnight repurchases (sweep agreements) may be held by the Trust
Department of the institution providing such sweep services. Sweep contracts shall provide for a
perfected security interest for the City in collateralized securities.
Collateral shall be provided by the issuing institution in accordance and compliance with the California
Gov’t Code Sections 53630 et al. Issuing institution is responsible for compliance with all collateral
requirements, and must provide the City periodic evidence of that compliance, in a form acceptable
to the City.
XI. Safekeeping and Custody
All security transactions entered into by the City shall be conducted on a delivery-versus-payment
(DVP) basis. Securities shall be held by an independent third-party custodian approved by the City
Council. All broker-dealers shall send a transaction confirmation to the City Treasurer, and all security
transactions confirmations shall be treated as a “Vital Record” by City personnel and kept safe per
the requirements of City policy on Vital Records. Broker-dealers shall also send a monthly activity
statement to the City showing all transactions entered into in the period. No City securities or cash
will be held by any broker-dealer. The custodian sends a monthly statement to the City Treasurer
covering all investment activity handled by that institution.
XII. Diversification
The City will diversify its investments by security type and institution, to avoid incurring unreasonable
risks inherent in over-investing in specific instruments or individual financial institutions. This Policy
sets limits on maximum allocations by investment type and by issuer. Refer to Section VIII. above
for a listing of authorized investments and the maximum allocation by type of investment. Section
VIII. also details specific limitations per issuer. For purposes of this Policy, those limits each apply to
the overall portfolio.
XIII. Maximum Maturities
To the extent possible, the City of Encinitas will attempt to match its investments with anticipated cash
flow requirements, after taking into consideration interest rate (market) risk and the potential benefits
of extending investment maturities. The City conforms to the California Gov’t Code requirements
limiting investments in notes to five (5) years, subject to the exceptions cited in Section VIII. This
relates principally to funds classified as reserves, which may be invested in specified instruments with
maturities greater than five (5) years.
XIV. Internal Control
The City Treasurer shall establish a system of internal controls over all cash management and
investment transactions, designed to provide reasonable assurance that assets are safeguarded and
that all transactions are properly and timely recorded.
The City’s independent auditor shall annually review the system of internal controls and report any
deficiencies and/or suggestions for improvements to the Director of Finance/City Treasurer. Any
confirmed significant deficiencies shall be reported to the City Manager and City Council in writing,
along with the City’s response to the audit findings.
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XV. Performance Standards:
The City has determined that periodic quantitative measurement of investment portfolio performance
is an important component of the overall monitoring of the investment program. As stated in Section
IV(C) above, the performance objective of the Program is attaining a market rate of return over time
consistent with the overall risk tolerance of the organization.
The City Treasurer is charged with determining an appropriate benchmark by which to measure
periodic performance. The chosen benchmark shall be designed to match as closely as practicable
the City’s tolerance for investment risk. Utilization of the benchmark and analysis of actual
performance vs. the benchmark represent an important risk management tool, and analysis of
significant variations shall be reported to the City Council in a timely manner. At the same time, it is
recognized that the benchmark represents a guideline only, and that performance may vary,
especially over relatively short time periods. A timeframe of 2-3 years is considered to be the
minimum time period necessary for judging overall performance, due to changing market conditions,
cash flow requirements and the fact that no chosen performance benchmark will exactly mirror the
City’s portfolio.
Attaining a market rate of return over time shall be measured and reported to the City Council, at least
quarterly, via the utilization of the following benchmark to measure performance.
The one (1) year constant maturity Treasury index
Any change to the above performance benchmark shall be reported to the City Council during the
City Treasurer’s quarterly investment report.
The City Treasurer shall report performance on a quarterly basis based on the book yield (standard
income) approach. Book yield calculates the earnings on an investment based on actual interest
earned during any reporting period, including the accretion of purchase discounts and/or the
amortization of purchase premiums. The City Treasurer shall also report the estimated market value
of investments held (as provided by a third-party data provider) with each periodic report. The City no
longer reports investment income on a total return basis each fiscal year (the alternative method
presented in Gov’t Actg. Standards Board (GASB) Statement No. 31) as the results over time are
roughly comparable.
XVI. Investment Accounting and Reporting
The City Treasurer shall prepare (or have prepared) monthly investment reports sufficient to properly
track and record all investment transactions and activity. The City Treasurer shall report investment
positions and results of the Pooled Investment Fund to the City Council at least quarterly, in a form
acceptable to the City Council. These reports shall either be presented as an Agenda Report or as a
memo report to the City Council members, at the discretion of the City Manager. The City Treasurer
shall report positions and results of the Pooled Investment Fund and the Investment of Bond
Proceeds annually to the City Council at a Public Meeting. Detailed annual reports of the Pooled
Investment Fund shall be made available on the City’s website for public review. The City shall
publicly report on the results of the annual petitions to the managers of the pooled funds the City is
invested in to define and divest from fossil fuel companies.
XVII. Investment Policy Adoption:
The Investment Policy shall be reviewed and adopted by the City Council at a Public Meeting at least
annually, regardless of whether there are any proposed changes to the Policy. The Policy shall be
posted for public review on the City’s website (www.encinitasca.gov) under Departments/Finance.
2023-10-18 Item #08F Page 21 of 97
Any typographical errors of other minor errors or inconsistencies shall be investigated and interpreted by the
City Treasurer, who shall then seek the concurrence of the City Manager before making any changes to
policies or procedures.
XVIII. Glossary of Investment Terms
AGENCIES. Shorthand market terminology for any obligation issued by a government-sponsored entity
(GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full
faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural
industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB
issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in
the housing market. FHLMC, also called “FreddieMac” issues discount notes, bonds and
mortgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to
provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues
discount notes, bonds and mortgage pass-through securities.
GNMA. The Government National Mortgage Association, known as “GinnieMae,” issues mortgage
pass-through securities, which are guaranteed by the full faith and credit of the US
Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not
guaranteed by the full faith and credit of the US government.
TVA. The Tennessee Valley Authority provides flood control and power and promotes development
in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount
notes and bonds.
ASKED. The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of
revolving lines of credit.
AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of
principal payments, weighted by the amount of principal expected.
BANKER’S ACCEPTANCE. A money market instrument created to facilitate international trade transactions. It
is highly liquid and safe because the risk of the trade transaction is transferred to the bank which
“accepts” the obligation to pay the investor.
BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial market index, which
reflects the mix of securities allowed under a specific investment policy.
BID. The price at which a buyer offers to buy a security.
BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a
commission. A broker does not sell securities from his own position.
CALLABLE. A callable security gives the issuer the option to call it from the investor prior to its maturity. The
main cause of a call is a decline in interest rates. If interest rates decline since an issuer issues
securities, it will likely call its current securities and reissue them at a lower rate of interest. Callable
securities have reinvestment risk as the investor may receive its principal back when interest rates
are lower than when the investment was initially made.
CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate. Large
denomination CDs may be marketable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows
local agencies to purchase more than $250,000 in CDs from a single financial institution (must be
a participating institution of CDARS) while still maintaining FDIC insurance coverage. CDARS is
currently the only entity providing this service. CDARS facilitates the trading of deposits between
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the California institution and other participating institutions in amounts that are less than $250,000
each, so that FDIC coverage is maintained.
COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase
agreement. Also, securities pledged by a financial institution to secure deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the cash flows of
mortgage securities (and whole loans) to create securities that have different levels of prepayment
risk, as compared to the underlying mortgage securities.
COMMERCIAL PAPER. The short-term unsecured debt of corporations.
COST YIELD. The annual income from an investment divided by the purchase cost. Because it does not give
effect to premiums and discounts which may have been included in the purchase cost, it is an
incomplete measure of return.
COUPON. The rate of return at which interest is paid on a bond.
CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely manner due
to changes in the condition of the issuer.
CURRENT YIELD. The annual income from an investment divided by the current market value. Since the
mathematical calculation relies on the current market value rather than the investor’s cost, current
yield is unrelated to the actual return the investor will earn if the security is held to maturity.
DEALER. A dealer acts as a principal in security transactions, selling securities from and buying securities
for his own position.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby payment for a security must be
made at the time the security is delivered to the purchaser’s agent.
DERIVATIVE. Any security that has principal and/or interest payments which are subject to uncertainty (but
not for reasons of default or credit risk) as to timing and/or amount, or any security which represents
a component of another security which has been separated from other components (“Stripped”
coupons and principal). A derivative is also defined as a financial instrument the value of which is
totally or partially derived from the value of another instrument, interest rate, or index.
DISCOUNT. The difference between the par value of a bond and the cost of the bond, when the cost is below
par. Some short-term securities, such as T-bills and banker’s acceptances, are known as discount
securities. They sell at a discount from par, and return the par value to the investor at maturity
without additional interest. Other securities, which have fixed coupons, trade at a discount when
the coupon rate is lower than the current market rate for securities of that maturity and/or quality.
DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive exposure to
any one source of risk.
DURATION. The weighted average time to maturity of a bond where the weights are the present values of
the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates.
(See modified duration).
FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks. The
Federal Reserve Bank through open-market operations establishes it.
FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes monetary
policy and executes it through temporary and permanent changes to the supply of bank reserves.
LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate
higher than the cost of borrowing.
LIQUIDITY. The speed and ease with which an asset can be converted to cash.
LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government entities and
certain non-profit organizations in California that is managed by the State Treasurer’s Office.
LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer’s Office Local
Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities (JPAs). These funds
are not subject to the same SEC rules applicable to money market mutual funds.
MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining debt
early. Unlike a call option, with a make whole call provision, the issuer makes a lump sum payment
that equals the net present value (NPV) of future coupon payments that will not be paid because
of the call. With this type of call, an investor is compensated, or "made whole."
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MARGIN. The difference between the market value of a security and the loan a broker makes using that
security as collateral.
MARKET RISK. The risk that the value of securities will fluctuate with changes in overall market conditions
or interest rates.
MARKET VALUE. The price at which a security can be traded.
MARKING TO MARKET. The process of posting current market values for securities in a portfolio.
MATURITY. The final date upon which the principal of a security becomes due and payable.
MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major corporations which are
sold in relatively small amounts on either a continuous or an intermittent basis. MTNs are highly
flexible debt instruments that can be structured to respond to market opportunities or to investor
preferences.
MODIFIED DURATION. The percent change in price for a 100 basis point change in yields. Modified duration
is the best single measure of a portfolio’s or security’s exposure to market risk.
MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, commercial
paper, and banker’s acceptances) are issued and traded.
MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in the interest and principal cash flows
from a specified pool of mortgages. Principal and interest payments made on the mortgages are
passed through to the holder of the security.
MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and operating
expenses.
MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a set of securities
which is specifically defined in the fund’s prospectus. Mutual funds can be invested in various types
of domestic and/or international stocks, bonds, and money market instruments, as set forth in the
individual fund’s prospectus. For most large, institutional investors, the costs associated with
investing in mutual funds are higher than the investor can obtain through an individually managed
portfolio.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).
A credit rating agency that the Securities and Exchange Commission in the United States uses
for regulatory purposes. Credit rating agencies provide assessments of an investment's risk. The
issuers of investments, especially debt securities, pay credit rating agencies to provide them with
ratings. The three most prominent NRSROs are Fitch, S&P, and Moody's.
NEGOTIABLE CD. A short-term debt instrument that pays interest and is issued by a bank, savings or federal
association, state or federal credit union, or state-licensed branch of a foreign bank. Negotiable
CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor
(investor).
PREMIUM. The difference between the par value of a bond and the cost of the bond, when the cost is above
par.
PREPAYMENT SPEED. A measure of how quickly principal is repaid to investors in mortgage securities.
PREPAYMENT WINDOW. The time period over which principal repayments will be received on mortgage
securities at a specified prepayment speed.
PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal Reserve in its
execution of market operations to carry out U.S. monetary policy, and (2) that participates for
statistical reporting purposes in compiling data on activity in the U.S. Government securities market.
PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries. In
California, the rule is stated as “Investments shall be managed with the care, skill, prudence and
diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity
and familiar with such matters, would use in the conduct of an enterprise of like character and with
like aims to accomplish similar purposes.”
REALIZED YIELD. The change in value of the portfolio due to interest received and interest earned and
realized gains and losses. It does not give effect to changes in market value on securities, which
have not been sold from the portfolio.
REGIONAL DEALER. A financial intermediary that buys and sells securities for the benefit of its customers
without maintaining substantial inventories of securities and that is not a primary dealer.
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REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the
securities back at a higher price. From the seller’s point of view, the same transaction is a reverse
repurchase agreement.
SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the customer’s name.
STRUCTURED NOTE. A complex, fixed income instrument, which pays interest, based on a formula tied to
other interest rates, commodities or indices. Examples include inverse floating rate notes which
have coupons that increase when other interest rates are falling, and which fall when other interest
rates are rising, and "dual index floaters," which pay interest based on the relationship between
two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate.
Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap
agreements.
SUPRANATIONAL. A Supranational is a multi-national organization whereby member states transcend
national boundaries or interests to share in the decision making to promote economic development
in the member countries.
TOTAL RATE OF RETURN. A measure of a portfolio’s performance over time. It is the internal rate of
return, which equates the beginning value of the portfolio with the ending value; it includes interest
earnings, realized and unrealized gains, and losses in the portfolio.
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and credit
of the United States. Treasuries are considered to have no credit risk, and are the benchmark for
interest rates on all other securities in the US and overseas. The Treasury issues both discounted
securities and fixed coupon notes and bonds.
TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted
instruments, and are called Treasury bills. The Treasury currently issues three- and six-month T-
bills at regular weekly auctions. It also issues “cash management” bills as needed to smooth out
cash flows.
TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes,
and pay interest semi-annually.
TREASURY BONDS. All securities issued with initial maturities greater than ten years are called Treasury
bonds. Like Treasury notes, they pay interest semi-annually.
VOLATILITY. The rate at which security prices change with changes in general economic conditions or the
general level of interest rates.
YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected
cash flows from the investment to its cost.
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Attachment 4
CITY OF ENCINITAS
ADMINISTRATIVE MANUAL
Policy Title: Investment Policy Section: Finance
Responsible Department: Finance Number: Admin Policy F019
Approved By: City Council Date Approved: 1994
Last Amended: October 198, 20232
I. Philosophy
The Investment Policy of the Encinitas City Council for the City of Encinitas represents the financial
guidelines for the City’s Investment Program. It is the policy of the City of Encinitas to invest excess
public funds in a prudent manner that safeguards the public trust, minimizes the risk of loss of capital,
and provides assurance that all financial obligations will be met in the regular course of business. The
City Council shall provide direction to the City Treasurer as to the goals and specific objectives of the
Investment Program.
II. Scope
This Investment Policy applies to all financial assets under the oversight of the City of Encinitas, except
bond proceeds held by outside trustees and funds held by other governmental agencies. The City of
Encinitas includes the City and all component units: the Encinitas Housing Authority (EHA), the
Encinitas Public Financing Authority (EPFA), and the San Dieguito Water District (SDWD). These
funds are accounted for in the City of Encinitas’ Annual Comprehensive Financial Report and include:
GENERAL FUND
SPECIAL REVENUE FUNDS
CAPITAL PROJECT FUNDS
ENTERPRISE FUNDS
INTERNAL SERVICE FUNDS
This policy also applies to funds that the City manages for other governmental agencies. Currently,
the City manages funds for the Encinitas Ranch Golf Authority (ERGA), a legally separate joint powers
authority which is not a component unit of the City. The City also manages funds for one Community
Facilities District (Mello-Roos) for which the City acts as an agent for debt service activities which are
accounted for in a Custodial Fund.
The investment of Bond Proceeds and loan proceeds held with trustees is directed by the City, but is
governed by the restrictions on Permitted Investments in the applicable Bond Indenture agreements
and the Investment Policy of the California Infrastructure and Economic Development Bank .Bank..
A portion of City funds is held by other governmental agencies. These funds are invested under the
guidelines of the investment policies of those agencies.
2023-10-18 Item #08F Page 82 of 97
The City retirement plan is with CALPERS, and the City has no authority or oversight over the
investments in any of those plans. Further, the City administers several deferred compensation plans.
Assets held in those plans are held in trust for the participants, and are not assets of the City. The
City does not have any authority over the investments held in these trusts.
III. Prudence
Investments shall be made with reasonable financial 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 standard of prudence to be used by investment officials shall be the “prudent investor” standard.
California Gov’t Code 53600.3 states that, “When investing, reinvesting, purchasing, acquiring,
exchanging, selling or managing public funds, a trustee shall act with care, skill, prudence, and
diligence under the circumstances then prevailing, including, but not limited to, the general economic
conditions and the anticipated needs of the Agency, that a prudent person acting in a like capacity and
familiarity with those matters would use in the conduct of funds of a like character and with like aims,
to safeguard the principal and maintain the liquidity needs of the Agency. The standard shall be
applied in the context of managing an overall portfolio. Investment officials acting in accordance with
established procedures and exercising due prudence shall be relieved of personal responsibility for an
individual security's credit risk or market price changes.
IV. Investment Objectives
A. Safety of Principal - the first objective of this policy is to ensure the safety of principal. The
portfolio shall be planned and managed to minimize the risk of actual loss of principal. Principal is
defined as the original purchase price of the security, excluding any purchase of accrued interest, up
to the par (face) value of the security. Any purchase amount above par value (premium) is considered
to be a purchase of accrued interest, and is excluded from the calculation of principal amount. The
City Treasurer shall consider both credit risk and concentration risk (the concept of diversification)
when assessing safety, and shall follow the guidelines outlined later in this policy to achieve that
objective.
B. Liquidity - The second objective is the maintenance of sufficient liquidity to meet all operating
and capital spending requirements that can be reasonably anticipated.
C. Return on investments - The third objective is yield, specifically, attaining a market rate of
return over time, consistent with Council direction as to acceptable levels of risk. Refer to Section XV
below for further discussion of performance measurement.
V. Delegation of Authority
In accordance with the California Government Code, Section 53607, the City Council hereby
delegates the authority to invest or reinvest the City’s funds, to sell or exchange securities purchased,
and to deposit securities for safekeeping to the City Treasurer. Encinitas Municipal Code Chapter
2.28 designates that the Director of Finance shall serve as City Treasurer. The City Treasurer has
the option to delegate some, or all, of the duties described in this Policy to other qualified individuals
within the organization.
Investment Procedures
The City Treasurer is responsible for establishing written investment procedures for the management
and operation of the Investment Program, consistent with this Policy. Those procedures shall include
reference to such items as: custody/safekeeping, repurchase agreements (if applicable), wire transfer
agreements, banking service agreements, and explicit delegation of authority to personnel involved
2023-10-18 Item #08F Page 83 of 97
in the processing of banking or investment transactions. No person may engage in any investment
transaction except as provided under the terms of this Policy and the established procedures.
VI. Ethics, & Conflict of Interest
The investment responsibility carries with it the responsibility of ensuring that investments placed are
done so without improper influence or the appearance of improper influence. All officers and
employees (officials) involved in the investment function shall adhere to the State's Code of Economic
Interest and to the following:
Officials shall refrain from personal business activity that could conflict with proper and impartial
execution of the Investment Program, or that could impair their ability to make impartial investment
decisions. Further, officials shall not personally or through a close relative maintain any accounts,
interest, or private dealings with any firm with which the City places investments, with the exception
of regular savings, checking and money market accounts, or other similar transactions that are offered
on a non-negotiable basis to the general public. Any such relationships shall be disclosed annually
to the City Clerk in conjunction with annual disclosure statements of economic interest.
VII. Authorized Financial Dealers and Institutions
The City Treasurer shall maintain a list of qualified financial institutions authorized to provide financial
or investment services to the City.
The City shall contract with one institution to provide general banking services, which shall be
reviewed at least every five years. City Council shall approve the selected institution and the
contract for banking services.
The City shall contract with one institution to provide investment custody services, which shall be
reviewed at least every five (5) years. City Council shall approve the selected institution and the
contract for custody services.
The City Treasurer shall maintain a list of qualified security broker-dealers authorized to provide
financial or investment services to the City. To be eligible for consideration to become an authorized
provider, each Broker/Firm shall meet the following MINIMUM requirements:
(1) have a net capital position in excess of $10 million,
(2) have been in business for at least five years,
(3) are currently licensed as a broker-dealer or investment adviser in California, and
(4) Must carry adequate insurance coverage including liability, errors and omissions, and
workers compensation (if applicable.)
Firms providing only representation of money market funds are exempt for requirement #1, but must
still comply with all other requirements, including those listed below.
The City Council shall approve the initial authorization of any broker-dealer. Authorized firms shall
be notified by the City Treasurer via an engagement letter, which outlines each parties’ responsibilities
(primarily the continuing compliance requirements discussed directly below). There is no contract for
professional services or term to the engagement. The City Treasurer shall periodically evaluate the
performance of all qualified broker-dealers, and determine if any changes need to be made.
All broker-dealers authorized to do business with the City of Encinitas must also comply with the
following requirements.
(1) Firms must submit audited financial statements annually, within six months of their fiscal
year-end,
2023-10-18 Item #08F Page 84 of 97
(2) Firms must provide proof of their Financial Industry Regulatory Authority (FINRA)
certification, and must disclose to the City immediately any regulatory actions or complaints
against the broker assigned to the City account,
(3) Firms must provide proof of their registration/license to do business in the State of California,
and shall immediately disclose to the City any change in that status.
(4) Firms must certify in writing that they have received, read, and agree to comply with the City
of Encinitas’ most recently adopted Investment Policy.
VIII. Authorized & Suitable Investment Instruments
As a unit of local government in the State of California, the City of Encinitas is restricting itself to
the investments authorized by Government Code, Sections 16429.1, 27133 and Sections 53600
through 53635 (the Gov’t “Code”) except as otherwise provided herein by specific additional
Council actions.
SPECIFIC INVESTMENT TYPES AND AMOUNTS - The City Treasurer is authorized to invest in
only the following types of investments listed below in Section VIII.
INVESTMENT ALLOCATIONS - The State Law Maximum allocations listed below refer to the
percentage of the total portfolio or dollar amount that may be invested in each instrument under the
provisions of the Gov’t Code. The Investment Policy Maximum allocations refer to maximum
allocations the City Treasurer follows, in order to effect proper diversification of the portfolio and
limit concentration risk. The City Treasurer is permitted to exceed these maximum allocations for
temporary periods. Any asset allocation that exceeds the Investment Policy Maximum allocation
for a period of more than three months shall be reported to the City Manager.
For purposes of calculating the percentage allocations, the assumption will be applied that the size
of the portfolio for any fiscal year shall be determined by the total par value of the portfolio at the
beginning of the first day of the fiscal year. Any investment types that exceed the maximum
allowable under the Gov’t Code shall be reported to the City Council in the quarterly investment
report.
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
(1) Repurchase agreements NO LIMIT 20%
This type of investment is only authorized in relation to the City’s general banking
arrangements, in which excess cash balances are “swept” into an interest earning
account overnight. Maximum maturity is one year. All balances are required to be
properly collateralized at 102% of par value in accordance with State requirements.
(2) CA Local Agency Inv Fund (LAIF) STATE LAW MAXIMUM 30%
The “STATE LAW MAXIMUM” refers to the LAIF limit on maximum deposits per local
agency, not to the CA gov’t code restrictions. The City of Encinitas maintains two
accounts with the LAIF, one in the name of the City and the other in the name of the
San Dieguito Water District. Each account has a deposit limit of the maximum
2023-10-18 Item #08F Page 85 of 97
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
amount allowed by CA state law. Since San Dieguito Water District is a component
unit of the City, the City may legally utilize the SDWD account in the operation of the
City Pool. Thus, SDWD owns its ratable share of all City Pooled investments, but
does not have a direct ownership interest in the LAIF account in its name.
(3) Other Gov’t Managed Pools NO LIMIT 30%
Per Issuer 10% per Pool
Investments in individual pools shall be limited to 10% of the total portfolio. Currently
approved pools are the San Diego County Investment Pool and the California Asset
Management Program (CAMP). The City Council must approve the addition of any
other governmental pools.
(4) Mutual Funds and Money Market Mutual Funds (Total)
20% 20%
Per Issuer 10% 10%
(A) Money Market Mutual Funds N/A 20%
Per Issuer N/A 10%
Qualifying funds must meet one of the following criteria: (1) Attained the highest
ranking or the highest letter and numerical rating provided by not less than two
nationally recognized statistical rating organizations, OR (2) Retained an Investment
Advisor registered or exempt from registration with the SEC with not less than five
years’ experience managing money market mutual funds with assets under
management in excess of $500 million.
(B) Mutual Funds N/A 10%
Per Issuer N/A 5%
A mutual fund must receive the highest ranking by not less than two nationally
recognized rating agencies or the fund must retain an investment advisor who is
registered with the SEC (or exempt from registration), has assets under
management in excess of $500 million, and has at least five years experience
investing in instruments authorized by California Government Code sections 53601
and 53635.
(5) Certificates of Deposit (CD’s) NO LIMIT 30%
Per Issuer NO LIMIT 5%
All CD’s must be either insured by the FDIC or properly collateralized, pursuant to
Section X below. Maturity shall not exceed five years. No more than 5% of the total
account value per issuer. To be eligible to receive deposits from the City of
Encinitas, each qualified financial institution must have received an overall rating of
not less than “satisfactory” in its most recent evaluation by regulators of its record of
meeting the credit needs of its community.
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INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
(6) Negotiable Certificates of Deposit 30% 30%
Per Issuer 5%
All Negotiable CD’s must be issued by a provider rated either: (1) Aaa by Moody’s,
(2) AAA by Standard & Poors, or (3) Aa1 by Moody’s and AA+ by Standard & Poor’s.
Investments of $250,000 or less that are fully insured by the FDIC are exempt from
the above credit rating requirements. Maturity shall not exceed five years. No more
than 5% of the total account value per issuer.
(7) Bankers Acceptances 40% 10%
Per Issuer 30% 5%
Bankers Acceptances (BA’s) represent a time draft drawn on and accepted by a
Bank for payment of the shipment or storage of merchandise. They are generally
considered a very safe investment since both the credit of the issuer and the Bank
is pledged for repayment. They must not exceed 180 days maturity. BA’s must have
an underlying credit rating of A1/P1, and are limited to 5% of the total account value
per issuer.
(8) U.S. Treasury Bills, Notes and Bonds NO LIMIT 50%
(9) U.S. Government-Sponsored Agencies NO LIMIT 60%
Per Issuer 25%
City shall invest primarily in securities issued by Federal Home Loan Bank (FHLB),
Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage
Corporation (FHLMC), and Federal Farm Credit Bureau (FFCB). City may invest in
Private Equity Funding Corporation (PEFCO) and Tennessee Valley Authority
(TVA); however, the overall limit of 60% still applies. City may also invest in the
Government National Mortgage Association, but only via authorized Mutual Funds
cited in Category 5 above, and subject to those limitations.
(10) Commercial Paper 40% 25%
Per Issuer 10% 5%
Commercial Paper (CP) is a short-term I.O.U. issued by large corporations of high
credit standing which is unsecured. Investments are limited to only “prime quality”
CP issued with the highest letter and number rating provided by one of the two
nationally recognized rating agencies. City limits itself only to CP rated A-1 or better
by Standard & Poors and P-1 by Moodys. Issuing corporations must be organized
and operating within the United States, have assets in excess of $500 million, and
debt other than commercial paper must be in a rating category of “A” or its equivalent
or higher by a nationally recognized statistical rating organization or the issuing
corporation must be organized within the U.S. as a special purpose corporation,
trust, or LLC, have program wide credit enhancements, and have commercial paper
that is rated “A-1” or higher or the equivalent, by a nationally recognized statistical
rating agency. City may not purchase more than 5% of outstanding commercial
paper of any single corporate issuer. The maximum allowable maturity is 270 days
or less.
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INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
Per California Code Section 53601(h) beginning January 1, 2021, until January 1,
2026, portfolio limitation maximums are 40% and revert back to 25% after January
1, 2026. The 10% single issue limitation for commercial paper and medium-term
notes will remain in effect.
(11) Commercial Medium-Term Notes 30% 15%
Per Issuer 10% 5%
Medium-Term Notes are defined as all corporate and depository institution debt
securities with a maximum remaining maturity of five years or less, issued by
corporations organized and operating in the United States or by depository
institutions licensed by the United States. State Code requires a credit rating of “A”
or better by one nationally recognized rating agency. The City is further limiting itself
to notes that are rated Aa3 or better (Moody’s) and AA- or better (S & P).
(12) Guaranteed Investment Contracts None 10%
Per Issuer 5%
Guaranteed Investment Contracts (GIC’s) are corporate obligations similar to
medium-term notes, but are issued directly to the Agency by the issuer in the form
of an investment contract. They are generally longer term in nature. They are
generally utilized for the investment of bond proceeds, but may be utilized for the
investment of Pooled funds. Uncollateralized GIC’s are permitted only with issuers
rated Aaa (Moody’s) and/or AAA (Standard & Poors) Collateralized GIC’s are
permitted with issuers rated Aa2 or better (Moody’s) and AA or better (Standard &
Poors). No more than $5 million per issuer.
(13) Demand Deposits (non-interest bearing) None 0-2%
Per Issuer 0-2%
Non-interest bearing demand deposits with a financial institution approved to do
business with the City shall be an allowable investment for the City Pool. These
types of accounts are necessary to carry on the regular day-to-day financial
operations of the City, must be collateralized, and are reported as “cash” on the
monthly investment reports. When available, the City Treasurer shall execute a
“sweep arrangement” with the designated financial institution, to provide for excess
overnight balances to earn interest.
(14) Demand Deposits (interest bearing) None 20%
Per Issuer 10%
Interest-bearing demand deposits with a financial institution approved to do business
with the City shall be an allowable investment for the City Pool. These types of
accounts generally serve as an alternative to bank certificates of deposit, and have
a stated minimum balance requirement. These types of accounts require a separate
2023-10-18 Item #08F Page 88 of 97
INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
MAXIMUM MAXIMUM
agreement with the financial institution and must be fully collateralized as Public
Deposits under California law. In addition, some part of the deposit (currently
$250,000) may be insured by the Federal Deposit Insurance Corporation (FDIC) in
lieu of collateralization.
(15) Asset-Backed Securities 20% 10%
Per Issuer 5%
These securities consist of Traditional Asset-Backed, Mortgage-Backed, Mortgage
Pass-Through Securities, and Collateralized Mortgage Obligations. They are
permitted given that the securities are rated in a rating category of “AA” or its
equivalent or better by a NRSRO and have a maximum remaining maturity of five
years or less. No more than 10% of the total portfolio may be invested in these
securities. No more than 5% of the portfolio may be invested in any single Asset-
Backed or Commercial Mortgage security issuer. There is no issuer limitation on
any mortgage security where the issuer is the U.S. Treasury or a Federal
Agency/GSE.
(16) Supranationals 30% 20%
Per Issuer 15%
Supranational issues are U.S. 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. They are permitted if rated in a rating category of
“AA” or its equivalent or better by a NRSRO. No more than 20% of the total portfolio
may be invested in these securities. No more than 15% of the portfolio may be
invested in any single issuer. The maximum maturity does not exceed five years.
2023-10-18 Item #08F Page 89 of 97
SUMMARY TABLE of INVESTMENT ALLOCATIONS
STATE LAW INV POLICY
(1) REPURCHASE AGREEMENTS NO LIMIT 20%
(2) CALIFORNIA LAIF NO LIMIT 30%
(3) OTHER GOV’T POOLS NO LIMIT 30%
Per Issuer 10%
(4) MUTUAL FUNDS TOTAL 20% 20%
Per Issuer 10% 10%
(4-A) Money Market Mutual Funds N/A 20%
Per Issuer N/A 10%
(4-B) Mutual Funds N/A 10%
Per Issuer N/A 5%
(5) CD’s NO LIMIT 30%
Per Issuer 5%
(6) NEGOTIABLE CD’s 30% 30%
Per Issuer 5%
(7) BANKERS ACCEPTANCES 40% 10%
Per Issuer 30% 5%
(8) U.S. TREASURYS NO LIMIT 50%
(9) U.S. FEDERAL AGENCIES NO LIMIT 60%
Per Issuer 25%
(10) COMMERCIAL PAPER 40% 25%
Per Issuer 10% 5%
(11) COMMERCIAL MTN NOTES 30% 15%
Per Issuer 10% 5%
(12) GIC’s NO LIMIT 10%
Per Issuer 5%
(13) Demand Deposits (non-interest bearing) NO LIMIT 0-2%
Per Issuer 0-2%
(14) Demand Deposits (interest bearing) NO LIMIT 20%
Per Issuer 10%
(15) Asset-Backed Securities 20% 10%
Per Issuer 5%
(16) Supranationals 30% 20%
Per Issuer 15%
The State of California Government Code restricts local agencies from investing in securities with
final maturity dates greater than five (5) years, except as specifically authorized by the City Council.
This Policy authorizes two specific exceptions to the above restriction.
(1) The City may invest in up to $5 million (par value) of securities (at date of purchase)
rated AAA or equivalent by either S&P or Moody’s with maturities of greater than five
(5) years, but not exceeding seven (7) years.
(2) The City’s General Contingency Reserve is not a part of normal operating reserves,
and the related funds are not expected to be utilized in the foreseeable future, thus,
2023-10-18 Item #08F Page 90 of 97
the likelihood of liquidation is very small. The objective(s) of investment in this area
are to maximize earnings with safety, while recognizing that liquidity is less of an
issue than with operating or capital funds. Consistent with these objectives, the City
Treasurer is authorized to invest contingency funds in securities rated AAA or
equivalent with maturities greater than seven (7) years that have a ready market
should the need arise to liquidate the investment.
The City Council has directed the City Treasurer not to invest in securities of companies involved in
the production of tobacco, alcohol related products, or fossil fuel companies. Furthermore, Encinitas’
City Council directs the City Treasurer to annually, if not more often, petition the managers of the
pooled funds the City is invested in to divest from fossil fuel companies. The City recognizes that, due
to the extreme complexity of today’s corporate structures, it is possible that investments may be
placed in good faith in corporations that have an interest in tobacco, alcohol related products or fossil
fuel companies that is not widely known or properly disclosed by those corporations. The City
Treasurer shall make his/her best efforts, including notice to broker/dealers, to assure that any
corporate investments are placed with companies who are not in the tobacco, alcohol, or fossil fuel
business. This policy applies at the time of purchase only.
Certain investments are specifically prohibited by the State Code. Local Agencies may not invest in
the following: Inverse floating-rate notes, range notes, or mortgage-derived interest-only strips. The
Code also states that “A local Agency shall not invest in any security that could result in zero interest
accrual if held to maturity.” The City’s interpretation of this Code section is that it does not prohibit
investment in U.S. Treasury or Federal Agency securities which carry a variable rate of interest;
because the chance that such notes could result in zero interest accrual to maturity is remote.
California SB 998 added Government Code Section 53601.6(b)2), which allows a local agency to
invest in securities issued by, or backed by, the United States government that could result in zero-
or negative-interest accrual if held to maturity, in the event of, and for the duration of a period of
negative market interest rates. This is applicable from January 1, 2021 until January 1, 2026.
IX. Due Diligence Requirements for Investment Pools, Mutual Funds, and CD’s
Investments of these types are authorized in Section VIII. above. Before investing any funds in pools
or mutual funds, the City Treasurer shall perform a thorough investigation of the fund(s) to determine
the suitability of the investment for the City of Encinitas Pooled Investment Fund. This investigation
shall include, at a minimum: review of the Funds investment policy and/or prospectus, a review of the
performance history of the Fund, review of ratings (where applicable), review of the latest published
portfolio composition, review of fees and charges, and references from other agencies who invest in
the Fund.
The City Treasurer shall monitor placement of Certificates of Deposit with financial institutions on a
regular basis. Compliance with collateral requirements shall be monitored (if applicable).
X. Collateralization of Public Deposits
Collateralization will be required on two types of investments: demand and timed deposits (which are
not fully insured by FDIC) and repurchase agreements. The City Treasurer has agreed to waive
collateral requirements on the first $250,000 of CD’s from each institution, which are insured by FDIC.
In order to anticipate market changes and provide a level of security for all invested funds, the required
collateralization levels will be:
(1) Overnight repurchases 102% of market value
(2) Timed Deposits in accordance with CA law regarding Public Deposits
2023-10-18 Item #08F Page 91 of 97
(3) Demand Deposits in accordance with CA law regarding Public Deposits
Collateral must be held by an independent third party with whom the entity has a current custodial
agreement. Collateral for overnight repurchases (sweep agreements) may be held by the Trust
Department of the institution providing such sweep services. Sweep contracts shall provide for a
perfected security interest for the City in collateralized securities.
Collateral shall be provided by the issuing institution in accordance and compliance with the California
Gov’t Code Sections 53630 et al. Issuing institution is responsible for compliance with all collateral
requirements, and must provide the City periodic evidence of that compliance, in a form acceptable
to the City.
XI. Safekeeping and Custody
All security transactions entered into by the City shall be conducted on a delivery-versus-payment
(DVP) basis. Securities shall be held by an independent third-party custodian approved by the City
Council. All broker-dealers shall send a transaction confirmation to the City Treasurer, and all security
transactions confirmations shall be treated as a “Vital Record” by City personnel and kept safe per
the requirements of City policy on Vital Records. Broker-dealers shall also send a monthly activity
statement to the City showing all transactions entered into in the period. No City securities or cash
will be held by any broker-dealer. The custodian sends a monthly statement to the City Treasurer
covering all investment activity handled by that institution.
XII. Diversification
The City will diversify its investments by security type and institution, to avoid incurring unreasonable
risks inherent in over-investing in specific instruments or individual financial institutions. This Policy
sets limits on maximum allocations by investment type and by issuer. Refer to Section VIII. above
for a listing of authorized investments and the maximum allocation by type of investment. Section
VIII. also details specific limitations per issuer. For purposes of this Policy, those limits each apply to
the overall portfolio.
XIII. Maximum Maturities
To the extent possible, the City of Encinitas will attempt to match its investments with anticipated cash
flow requirements, after taking into consideration interest rate (market) risk and the potential benefits
of extending investment maturities. The City conforms to the California Gov’t Code requirements
limiting investments in notes to five (5) years, subject to the exceptions cited in Section VIII. This
relates principally to funds classified as reserves, which may be invested in specified instruments with
maturities greater than five (5) years.
XIV. Internal Control
The City Treasurer shall establish a system of internal controls over all cash management and
investment transactions, designed to provide reasonable assurance that assets are safeguarded and
that all transactions are properly and timely recorded.
The City’s independent auditor shall annually review the system of internal controls and report any
deficiencies and/or suggestions for improvements to the Director of Finance/City Treasurer. Any
confirmed significant deficiencies shall be reported to the City Manager and City Council in writing,
along with the City’s response to the audit findings.
2023-10-18 Item #08F Page 92 of 97
XV. Performance Standards:
The City has determined that periodic quantitative measurement of investment portfolio performance
is an important component of the overall monitoring of the investment program. As stated in Section
IV(C) above, the performance objective of the Program is attaining a market rate of return over time
consistent with the overall risk tolerance of the organization.
The City Treasurer is charged with determining an appropriate benchmark by which to measure
periodic performance. The chosen benchmark shall be designed to match as closely as practicable
the City’s tolerance for investment risk. Utilization of the benchmark and analysis of actual
performance vs. the benchmark represent an important risk management tool, and analysis of
significant variations shall be reported to the City Council in a timely manner. At the same time, it is
recognized that the benchmark represents a guideline only, and that performance may vary,
especially over relatively short time periods. A timeframe of 2-3 years is considered to be the
minimum time period necessary for judging overall performance, due to changing market conditions,
cash flow requirements and the fact that no chosen performance benchmark will exactly mirror the
City’s portfolio.
Attaining a market rate of return over time shall be measured and reported to the City Council, at least
quarterly, via the utilization of the following benchmark to measure performance.
The one (1) year constant maturity Treasury index
Any change to the above performance benchmark shall be reported to the City Council during the
City Treasurer’s quarterly investment report.
The City Treasurer shall report performance on a quarterly basis based on the book yield (standard
income) approach. Book yield calculates the earnings on an investment based on actual interest
earned during any reporting period, including the accretion of purchase discounts and/or the
amortization of purchase premiums. The City Treasurer shall also report the estimated market value
of investments held (as provided by a third-party data provider) with each periodic report. The City no
longer reports investment income on a total return basis each fiscal year (the alternative method
presented in Gov’t Actg. Standards Board (GASB) Statement No. 31) as the results over time are
roughly comparable.
XVI. Investment Accounting and Reporting
The City Treasurer shall prepare (or have prepared) monthly investment reports sufficient to properly
track and record all investment transactions and activity. The City Treasurer shall report investment
positions and results of the Pooled Investment Fund to the City Council at least quarterly, in a form
acceptable to the City Council. These reports shall either be presented as an Agenda Report or as a
memo report to the City Council members, at the discretion of the City Manager. The City Treasurer
shall report positions and results of the Pooled Investment Fund and the Investment of Bond
Proceeds annually to the City Council at a Public Meeting. Detailed annual reports of the Pooled
Investment Fund shall be made available on the City’s website for public review. The City shall
publicly report on the results of the annual petitions to the managers of the pooled funds the City is
invested in to define and divest from fossil fuel companies.
XVII. Investment Policy Adoption:
The Investment Policy shall be reviewed and adopted by the City Council at a Public Meeting at least
annually, regardless of whether there are any proposed changes to the Policy. The Policy shall be
posted for public review on the City’s website (www.encinitasca.gov) under Departments/Finance.
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Any typographical errors of other minor errors or inconsistencies shall be investigated and interpreted by the
City Treasurer, who shall then seek the concurrence of the City Manager before making any changes to
policies or procedures.
XVIII. Glossary of Investment Terms
AGENCIES. Shorthand market terminology for any obligation issued by a government-sponsored entity
(GSE), or a federally related institution. Most obligations of GSEs are not guaranteed by the full
faith and credit of the US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural
industry. FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB
issues discount notes and bonds.
FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in
the housing market. FHLMC, also called “FreddieMac” issues discount notes, bonds and
mortgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to
provide credit and liquidity in the housing market. FNMA, also known as “FannieMae,” issues
discount notes, bonds and mortgage pass-through securities.
GNMA. The Government National Mortgage Association, known as “GinnieMae,” issues mortgage
pass-through securities, which are guaranteed by the full faith and credit of the US
Government.
PEFCO. The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not
guaranteed by the full faith and credit of the US government.
TVA. The Tennessee Valley Authority provides flood control and power and promotes development
in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount
notes and bonds.
ASKED. The price at which a seller offers to sell a security.
ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of
revolving lines of credit.
AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of
principal payments, weighted by the amount of principal expected.
BANKER’S ACCEPTANCE. A money market instrument created to facilitate international trade transactions. It
is highly liquid and safe because the risk of the trade transaction is transferred to the bank which
“accepts” the obligation to pay the investor.
BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial market index, which
reflects the mix of securities allowed under a specific investment policy.
BID. The price at which a buyer offers to buy a security.
BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a
commission. A broker does not sell securities from his own position.
CALLABLE. A callable security gives the issuer the option to call it from the investor prior to its maturity. The
main cause of a call is a decline in interest rates. If interest rates decline since an issuer issues
securities, it will likely call its current securities and reissue them at a lower rate of interest. Callable
securities have reinvestment risk as the investor may receive its principal back when interest rates
are lower than when the investment was initially made.
CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate. Large
denomination CDs may be marketable.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows
local agencies to purchase more than $250,000 in CDs from a single financial institution (must be
a participating institution of CDARS) while still maintaining FDIC insurance coverage. CDARS is
currently the only entity providing this service. CDARS facilitates the trading of deposits between
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the California institution and other participating institutions in amounts that are less than $250,000
each, so that FDIC coverage is maintained.
COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase
agreement. Also, securities pledged by a financial institution to secure deposits of public monies.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the cash flows of
mortgage securities (and whole loans) to create securities that have different levels of prepayment
risk, as compared to the underlying mortgage securities.
COMMERCIAL PAPER. The short-term unsecured debt of corporations.
COST YIELD. The annual income from an investment divided by the purchase cost. Because it does not give
effect to premiums and discounts which may have been included in the purchase cost, it is an
incomplete measure of return.
COUPON. The rate of return at which interest is paid on a bond.
CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely manner due
to changes in the condition of the issuer.
CURRENT YIELD. The annual income from an investment divided by the current market value. Since the
mathematical calculation relies on the current market value rather than the investor’s cost, current
yield is unrelated to the actual return the investor will earn if the security is held to maturity.
DEALER. A dealer acts as a principal in security transactions, selling securities from and buying securities
for his own position.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby payment for a security must be
made at the time the security is delivered to the purchaser’s agent.
DERIVATIVE. Any security that has principal and/or interest payments which are subject to uncertainty (but
not for reasons of default or credit risk) as to timing and/or amount, or any security which represents
a component of another security which has been separated from other components (“Stripped”
coupons and principal). A derivative is also defined as a financial instrument the value of which is
totally or partially derived from the value of another instrument, interest rate, or index.
DISCOUNT. The difference between the par value of a bond and the cost of the bond, when the cost is below
par. Some short-term securities, such as T-bills and banker’s acceptances, are known as discount
securities. They sell at a discount from par, and return the par value to the investor at maturity
without additional interest. Other securities, which have fixed coupons, trade at a discount when
the coupon rate is lower than the current market rate for securities of that maturity and/or quality.
DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive exposure to
any one source of risk.
DURATION. The weighted average time to maturity of a bond where the weights are the present values of
the future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates.
(See modified duration).
FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks. The
Federal Reserve Bank through open-market operations establishes it.
FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes monetary
policy and executes it through temporary and permanent changes to the supply of bank reserves.
LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate
higher than the cost of borrowing.
LIQUIDITY. The speed and ease with which an asset can be converted to cash.
LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government entities and
certain non-profit organizations in California that is managed by the State Treasurer’s Office.
LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer’s Office Local
Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities (JPAs). These funds
are not subject to the same SEC rules applicable to money market mutual funds.
MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining debt
early. Unlike a call option, with a make whole call provision, the issuer makes a lump sum payment
that equals the net present value (NPV) of future coupon payments that will not be paid because
of the call. With this type of call, an investor is compensated, or "made whole."
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MARGIN. The difference between the market value of a security and the loan a broker makes using that
security as collateral.
MARKET RISK. The risk that the value of securities will fluctuate with changes in overall market conditions
or interest rates.
MARKET VALUE. The price at which a security can be traded.
MARKING TO MARKET. The process of posting current market values for securities in a portfolio.
MATURITY. The final date upon which the principal of a security becomes due and payable.
MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major corporations which are
sold in relatively small amounts on either a continuous or an intermittent basis. MTNs are highly
flexible debt instruments that can be structured to respond to market opportunities or to investor
preferences.
MODIFIED DURATION. The percent change in price for a 100 basis point change in yields. Modified duration
is the best single measure of a portfolio’s or security’s exposure to market risk.
MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, commercial
paper, and banker’s acceptances) are issued and traded.
MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in the interest and principal cash flows
from a specified pool of mortgages. Principal and interest payments made on the mortgages are
passed through to the holder of the security.
MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and operating
expenses.
MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a set of securities
which is specifically defined in the fund’s prospectus. Mutual funds can be invested in various types
of domestic and/or international stocks, bonds, and money market instruments, as set forth in the
individual fund’s prospectus. For most large, institutional investors, the costs associated with
investing in mutual funds are higher than the investor can obtain through an individually managed
portfolio.
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO).
A credit rating agency that the Securities and Exchange Commission in the United States uses
for regulatory purposes. Credit rating agencies provide assessments of an investment's risk. The
issuers of investments, especially debt securities, pay credit rating agencies to provide them with
ratings. The three most prominent NRSROs are Fitch, S&P, and Moody's.
NEGOTIABLE CD. A short-term debt instrument that pays interest and is issued by a bank, savings or federal
association, state or federal credit union, or state-licensed branch of a foreign bank. Negotiable
CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor
(investor).
PREMIUM. The difference between the par value of a bond and the cost of the bond, when the cost is above
par.
PREPAYMENT SPEED. A measure of how quickly principal is repaid to investors in mortgage securities.
PREPAYMENT WINDOW. The time period over which principal repayments will be received on mortgage
securities at a specified prepayment speed.
PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal Reserve in its
execution of market operations to carry out U.S. monetary policy, and (2) that participates for
statistical reporting purposes in compiling data on activity in the U.S. Government securities market.
PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries. In
California, the rule is stated as “Investments shall be managed with the care, skill, prudence and
diligence, under the circumstances then prevailing, that a prudent person, acting in a like capacity
and familiar with such matters, would use in the conduct of an enterprise of like character and with
like aims to accomplish similar purposes.”
REALIZED YIELD. The change in value of the portfolio due to interest received and interest earned and
realized gains and losses. It does not give effect to changes in market value on securities, which
have not been sold from the portfolio.
REGIONAL DEALER. A financial intermediary that buys and sells securities for the benefit of its customers
without maintaining substantial inventories of securities and that is not a primary dealer.
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REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the
securities back at a higher price. From the seller’s point of view, the same transaction is a reverse
repurchase agreement.
SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the customer’s name.
STRUCTURED NOTE. A complex, fixed income instrument, which pays interest, based on a formula tied to
other interest rates, commodities or indices. Examples include inverse floating rate notes which
have coupons that increase when other interest rates are falling, and which fall when other interest
rates are rising, and "dual index floaters," which pay interest based on the relationship between
two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate.
Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap
agreements.
SUPRANATIONAL. A Supranational is a multi-national organization whereby member states transcend
national boundaries or interests to share in the decision making to promote economic development
in the member countries.
TOTAL RATE OF RETURN. A measure of a portfolio’s performance over time. It is the internal rate of
return, which equates the beginning value of the portfolio with the ending value; it includes interest
earnings, realized and unrealized gains, and losses in the portfolio.
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and credit
of the United States. Treasuries are considered to have no credit risk, and are the benchmark for
interest rates on all other securities in the US and overseas. The Treasury issues both discounted
securities and fixed coupon notes and bonds.
TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted
instruments, and are called Treasury bills. The Treasury currently issues three- and six-month T-
bills at regular weekly auctions. It also issues “cash management” bills as needed to smooth out
cash flows.
TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes,
and pay interest semi-annually.
TREASURY BONDS. All securities issued with initial maturities greater than ten years are called Treasury
bonds. Like Treasury notes, they pay interest semi-annually.
VOLATILITY. The rate at which security prices change with changes in general economic conditions or the
general level of interest rates.
YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected
cash flows from the investment to its cost.
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