ITEM 3.9 Investment PolicyP
Otkzo
MINNESOTA
DEPARTMENT INFORMATION
Request for
City Council Action
ORIGINATING DEPARTMENT:
REQUESTOR:
MEETING DATE:
Administration
Adam Flaherty, Finance Director
December 14, 2015
PRESENTER(s):
REVIEWED BY:
ITEM #:
Consent Agenda
City Administrator Johnson
3.9 Investment Policy
AGENDA ITEM DETAILS
RECOMMENDATION:
It is recommended by staff that the City Council approve the revisions to the City's investment policy.
ARE YOU SEEKING APPROVAL OF A CONTRACT? IS A PUBLIC HEARING REQUIRED?
No I No
BACKGROUND/JUSTIFICATION:
The Finance Director is recommending the following changes to the City's Investment Policy.
1) Position Notation — The current version of the investment policy references the Administrative
Services Director, which was the person responsible for the City's investment portfolio when the
policy was adopted. The proposed revisions include changing any references to that position to
now instead reference the Finance Director. This change is to better reflect the City's current
organizational structure.
2) Processing & Custody — The current version of the investment policy references that all of the
City's investment security transactions and subsequent custody of investment securities will be
conducted by a trustee. Quotes for trustee custodial arrangements from both US Bank and
Wells Fargo Bank were received at a nearly equal cost, of which the minimum would have been
$10,000 annually. Given that this is a significant cost, the Finance Director sought other options.
The most desirable option was that of Bank Safekeeping with Wells Fargo Bank, which is of no
cost to the City. This option still provides for centralized safekeeping, security transaction
processing and streamlined reporting. All of the City's securities will be held by Wells Fargo Bank
in an account under the City's name. The revisions of the policy removes wording referencing a
trustee, and replace with wording referencing a safekeeping agent (Wells Fargo Bank).
3) Reporting — The revisions to the current policy remove reference of monthly transaction
reporting to the Administrator and City Council. Instead, the Finance Director will provide a
quarterly investment report to the Administrator and City Council, which will provide more
useful data and analysis in comparison to a list of monthly transactions.
SUPPORTING DOCUMENTS: ATTACHED NONE
• Current Investment Policy with highlighted revisions.
• Quarterly Investment Report (as of November 30, 2015)
POSSIBLE MOTION
Please word motion as you would like it to appear in the minutes.
-Motion to approve the revisions to the City's Investment Policy dated December 14, 2015.
BUDGET INFORMATION
FUNDING:
N/A
ACTION TAKEN
BUDGETED:
N/A
❑ APPROVED AS REQUESTED ❑ DENIED ❑ TABLED ❑ OTHER (List changes)
Comm
ADOPTED: 1 172,1,1201,1l2/14/2015
CITY OF OTSEGO
INVESTMENT POLICY
It is the policy of the City of Otsego to invest public monies which may become available for a
period of time before such monies are required to be expended. It is prudent that such monies
are invested to maximize the resources available for the City. It is the intent of the City to:
1. Invest these public monies in a responsible and secure manner in conformance with
Minnesota Statute 118A to provide protection of investment principal.
2. Acquire a reasonable rate of return given market conditions and alternate uses of funds.
3. Provide sufficient liquidity to meet daily cash flow requirements, and
4. Conform vAthto all state statutes and city policies or directives.
This investment policy applies to all assets of the City that are accounted for in the City's
Comprehensive Annual Financial Report. The City will work with the depository banks and
brokers approved annually by the City Council.
Investments shall be made with judgment and care under circumstances, then prevailing, that
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 income to be generated from the investment. The standard of prudence to be used by the
designated investment officer shall be the prudent person standard as defined in Minnesota
Statutes 356A.04 Subdivision 2, and shall be in the context of managing an overall investment
portfolio. The designated investment officer acting in accordance with written procedures and
policies and exercising due diligence shall be relieved of personal responsibility for an individual
security's credit risk or market prices changes provided deviations from expectations are
reported in a timely fashion and appropriate action is taken to control adverse developments.
Any investment of the City is limited to those that are permitted by Minnesota Statutes. The
objective of any City investment shall be prioritized as follows:
1. Safety
2. Liquidity
3. Maintaining the Public Trust
4. Investment Return
ADOPTED: 1 1/ 12/ 14/2015
City of Otsego
Appendix A - Investment Policy
Page Two
Safety is the first investment objective. Investment options shall be considered in a manner that
seeks to ensure the preservation of the principal amount in the overall investment portfolio. To
obtain this objective, diversification is to be considered in the type of investment, maturity and
the investment institution where the investment is located. For checking accounts and savings
accounts collateral may be required. Such collateral requirements will be monitored on a
monthly basis. Certificates of deposit will not be purchased beyond the FDIC limitations on
insurance of said Certificates.
Liquidity is the second investment objective to be considered. The investment portfolio must
remain sufficiently liquid to enable the City to meet its cash flow requirements as may be
reasonably anticipated. Liquidity in the face of changing market conditions will also be a
consideration in determining the term of any investment purchased. Criteria will be established
and periodically reviewed to determine the proportions of the portfolio invested at less than one
year, one to three years and three to five years. The maximum maturity authorized for
investment is five years from the date of purchase unless otherwise authorized by the City
Council. The City's liquidity will be reviewed on a monthly basis and may be considered part of
any interim reporting to Administration or the Council.
Maintaining the Public Trust is the third of the investment objectives. All employees that are
part of the investment process shall act responsibly as custodians of the public trust. Employees
of the City shall avoid transactions that may impair the public's confidence in the City's ability
to govern effectively.
The Return on Investment is the fourth investment objective. The investment portfolio should
be designed with the objective of attaining a market rate of return through the budgetary and
economic cycles taking into account the constraints of risk and cash flow characteristic on the
investment portfolio.
The City's investment policies and practices will conform to Minnesota Statutes 118A.
Management of the City's investment activity is delegated to the City's Finance ^ di:nifiist .,.t:.,o
SerN,ieesDirector. No person will engage in an investment transaction on behalf of the City
except as provided under the terms of this policy and the procedures established to maintain this
program.
Employees and any other city officials involved in the investment process shall refrain from
personal business activity that could conflict with the City's investment program or could
reasonably expect the public to question or doubt the ability to make impartial, objective
investment decisions. Any such conflict or potential conflicts must be declared to the City
Administrator as soon as such conflict or potential conflict is known. The City Council will
annually approve the financial institutions or broker/dealers authorized to provide investment
ADOPTED: 1 ;n io; 412/ 14/2015
City of Otsego
Appendix A - Investment Policy
Page Three
services. All broker/dealers providing investment services shall have a Broker Certification form
properly completed annually and on file with the City.
The Council will also adopt, on an annual basis, a Corporate Form of Resolution declaring that
the City Administrator and Finance Directoraireet of AdministFative Ser-vieesare authorized
to transact business on behalf of the City of Otsego.
Investments authorized and permitted by this policy are as follows:
• United States Securities including governmental bonds, notes, bills, mortgages and other
securities which are direct obligations or are guaranteed or insured issues of the United
States, its agencies, its instrumentalities, or organizations created by an act of Congress
( e.g. U.S. Treasury bills, Federal Home Loan Bank Notes, other government backed
securities, etc.).
Minnesota Joint Powers Investment Trust agreements or contracts for shares of a
Minnesota joint powers investment trust whose investments are restricted to securities
authorized for investment by the City and shares of an investment company registered
under the Federal Securities Act of 1940, whose shares are registered under the Federal
Securities Act of 1933, as long as the investment company receives the highest credit
rating and is rated in one of the two highest risk categories by at least one nationally
recognized statistical rating organization and is invested in financial instruments with a
final maturity of no longer than 13 months (e.g. the Minnesota Municipal Money Market
(4M) Fund).
• State and local government obligations including any security that is a general obligation
of any state or local government with taxing powers rated "A" or is a revenue obligation
of any state or local government which is rated "AA" or better by a national bond rating
service.
Commercial paper issued by a United States Corporation or their Canadian subsidiary
that are rated in the highest quality category by at least two nationally recognized rating
agencies. The rating of such commercial paper is referred to as "A1P1".
• Time deposits fully insured by the Federal Deposit Insurance Corporation.
Investment transactions are to be documented by the City's finance department. Investment
confirmations are received from banks and/or brokers for each transaction. The finance
department maintains all investment transactions on a monthly summary of cash and
investments. Quarterly reports on composition of the investment portfolio will be provided to
the Council by the second Friday of the month following the end of the quarter.
ADOPTED: 11,12 4/2014 12/ 14/2015
City of Otsego
Appendix A - Investment Policy
Page Four
INVESTMENT PROCEDURES
• City funds not required for cash flow purposes will be invested at the direction of the
Finance AdministFative Ser-vieeTDirector in instruments that meet the criteria set forth by
the City's investment policy, including the types of instruments, maturity dates, insurance
and collateral requirements of the portfolio.
• Investment securities may be purchased through the services of a bank, dealer or broker
who has a current Broker Certification Form on file with the City.
• b
r-eselatien. The T rtisteeThe safekeeping agent will provide monthly statements to the
City of those instruments held by the wee- safekeeping agent on behalf of the City,
their purchase and maturity dates, interest rate, face value, and fair market value as of the
end of the statement period.
• All investment securities owned by the City shall be held by a single safekeeping agent in
the name of the City. The qualified safekeeping agents for use by the City are outlined by
Minnesota Statute 1 18A.06.
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izn„-�a� b j., .,. ...-b ram:':.....
On a quarterly basis, the ^ d' i.~�-+~#ive SeFvie-sFi►iance Director will provide to the City
Administrator and the City Council an Investment Report including but not limited to a
detailed listing of all investment instruments and securities in the City's portfolio with
both book value and fair market value as of the end of the reporting period.
0
OtCITY OF
0
MINNESOTA
Investment Report I November 30, 2015
The Finance Director presents the following report summarizing the investment activity for the City
of Otsego as of November 30, 2015. The components of this report are organized in the priority
order of the objectives outlined in the City's investment policy.
Safe
Bank Deposits — FDIC & Collateral
Minnesota State Statutes and the City's investment policy require all deposits be protected by a
combination of Federal Deposit Insurance Corporation (FDIC) coverage and collateral. The market
value of the collateral provided by the respective institution must equal 110% of the deposits not
covered by FDIC. The chart below illustrates the coverage on the City's deposit accounts.
Description
Bank
Balance
Less:
FDIC
Net
Balance
110%
Coverage
Pledged
Collateral
The Bank of Elk River
Checking Account
$ 1,230,852
Money Market Account
450,206
Institution Total
1,681,058
250,000
1,431,058
1,574,164
2,135,956
Klein Bank
Money Market Account
3,420,185
250,000
3,170,185
3,487,204
13,878,566
Grand Total
$ 5,101,243 $
500,000
$ 4,601,243
$ 5,061,367
$ 16,014,522
As of November 30, 2015, the City's deposits have adequate collateral coverage.
City of Otsego 113400 90`I' Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
Investments
In the case of brokered certificates of deposit, the City manages the risk of each investment
primarily by only investing in each depository at an amount under the FDIC coverage limits.
Another safety measure regarding these certificates of deposit is that the investments are in the
City's name, and not the name of the safekeeping agent, although the physical security itself is kept
with the agent.
The safeties of the Cities other investments, which are securities of US Government Agencies or
State and Local Government Agencies, are primarily achieved by only purchasing securities of a
certain rating. The respective ratings are provided by either: Standard & Poors, Moody's; or Fitch,
which are independent firms. The following charts will outline authorized investment types and the
respective minimum ratings as described in the City's investment policy.
US Government Agency Securities (no minimum rating)
Book
Fair -Market
Description
Value
Value
Concentration
Ratings (')
Federal Farm Credit Banks (FFCB)
$ 2,174,854
$ 2,165,996
8.92%
Aaa IAA+
Federal Home Loan Banks (FHLB)
1,370,611
1,380,303
5.62%
Aaa /AA+
Federal Home Loan Mortgage Corporation (FHLMC)
1,375,646
1,370,136
5.64%
Aaa /AA+
Federal National Mortgage Association (FNMA)
289,188
293,936
1.19%
Aaa /AA+
Total US Government Agency Securities $ 5,210,299 $ 5,210,371
(*) - Respectively: Moody's; then Standard & Poor's.
State & Local Government Agency Securities (minimum rating of "A")
Book
Fair -Market
Description
Value
Value
Concentration
Ratings (')
Independent School District 813; Lake City, MN
$ 102,341
$ 100,385
0.42%
AA+
County of LaCrosse, WI
81,386
78,243
0.33%
Aal
County of Scott, MN
92,144
91,416
0.38%
Aal
City of Glencoe, MN
100,487
100,195
0.41%
Al
City of North Mankato, MN
56,562
56,213
0.23%
AA
County of Linn, IA
205,698
202,618
0.84%
Aaa
City of Elbow Lake, MN
101,992
101,372
0.42%
A
City of Kaukauna, WI
215,206
213,788
0.88%
AA -
City of Ennis, TX
437,385
430,852
1.79%
AA -
State of California
1,000,740
1,000,210
4.10%
Aa3
Total US Government Agency Securities $ 2,393,941 $ 2,375,292
Concentration of Credit Risk — Both of the tables above include a column that calculates the
concentration of investments in any one issuer in terms of the City's total deposit and investment
portfolio. The Governmental Accounting Standards Board (GASB) requires a footnote disclosure in
the annual financial statements if there is concentration in excess of 5% in any one issuer.
City of Otsego 113400 901h Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
Liquidity
Duration Distribution
The City's deposit and investment accounts are not all readily available to meet the liquidity needs
of the City. The Finance Director continually monitors the liquidity needs of the City by tracking
current cash flows as well as projecting the next five years of cash flows. Once it is determined that
sufficient funds are available to meet operating cash flow needs, the Finance Director then turns the
objective to gaining a return on investment, as typically the longer you are able to invest, the higher
the return. This is done by structuring investment maturities to meet significant future cash flow
needs such as debt service and capital improvement projects.
The City's investment policy currently sets a maximum maturity for an investment at 5 years from
the date of purchase. It should be noted that those investments beyond that maturity were made by
previous Finance Directors, and were also in place before the current version of the investment
policy was adopted by the City Council.
The chart below illustrates the distribution of the City's total deposit and investment accounts by
duration.
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000 -
-
d ic
Immediate
Availability
90 Days
1 Year
Ito 3 Years
3 to 5 Years
5 Years +
November
5,371,305
352,561
6,196,369
9,567,606
1,448,269
1,458,649
October
11,085,793
747,430
3,958,441
6,962,951
1,946,314
1,936,580
■ November ® October
City of Otsego 113400 90`h Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
Sector Distribution
Currently, $5,101,243 (210/6), of the City's available funds is being held in Bank Deposit accounts.
The remaining $19,293,516 (79%) is considered investments. The primary factors for this
distribution between Bank & Investments are the liquidity needs of the City, which is the second
objective outlined in the City's Investment Policy. Once it is determined that sufficient funds are
available to meet operating cash flow needs, the Finance Director then turn the objective to gaining
a return on investment. Part of accomplishing that task requires the City to diversify its investments
within different sectors.
The chart below illustrates the distribution of the City's total deposit and investment accounts by
sector.
,870,391, 16%
A,230,852 , 5%
2,393,941, 10%
11,419,213, 47%
■ CD's ■ Agency Securities Municipal Securities
■ Bank - Checking ■ Bank - Money Market Brokered Money Market
Maintaining Public Trust
The Finance Director is responsible for maintenance of the City's investment portfolio. This
requires the employee to act responsibly, with judgement, and with prudent person standards as
defined by Minnesota Statute.
The Finance Director currently deals with only two brokers, which are representatives of Wells
Fargo Securities and Northland Securities. Each of the brokers is based out of offices located in the
Twin Cities metro area. Each of the brokers are very involved in the Minnesota Government
Finance Officers Association, and also come highly recommended by my peers.
City of Otsego 113400 go" Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414Fax (763) 441-9163
Return on Investment
Coupon Distribution
The interest rates the City is able to earn upon its investments are entirely dependent upon the open
market. The current interest rate environment is not favorable to investors, as the Federal Funds
rate, which is a driving factor for investment rates has been at 0.25% since 2008. Current rumblings
are pointing to a possible rate hike to 0.50% in December of 2015.
The chart below illustrates the distribution of the City's total deposit and investment values by the
coupon interest rate they are earning:
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000, 000
2,000, 000
0-1%
1-2%
2-3%
3-4%
4% +
November
13,788,095
8,158,588
2,114,482
252,208
81,386
October
18,023,133
6,166,300
2,114,482
252,208
81,386
■ November
■ October
City of Otsego 113400 9001 Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
Cash Flows
The return on investment that the City is able to earn can provide significant cash flows. The chart
below illustrates the amount of cash flow provided by interest revenue by month.
50,000.(
45,000.(
40,000.
35,000.(
30,000.(
25,000.(
20,000.(
15,000.(
10,000.(
5,000.0
°
Monthly
o-
_AL
0
0
0 -
0 -
0
0
0
0
-
o&
5 �
--0--2014 -41--2015
The chart below illustrates the amount of year-to-date interest revenue and the cumulative effect
that it can provide to the City.
250, 000.00
200,000.00
150, 000.00
100, 000.00
50,000.00
OID
0
L 2014 ■ 2015
It is important to note that the charts above show actual interest amounts received, and do not
include such accounting adjustments or accruals such as fair -market value and interest receivables.
City of Otsego 113400 90'h Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
Benchmarking
A benchmark is a standard or point of reference against which things may be compared or assessed.
It is important for the City to continually be monitoring the performance of our own investment
portfolio to that of an industry benchmark. The chart below illustrates the comparison of the City's
average book yield interest rate against the US Treasury with the same or similar maturity date.
0.80%
0.70%
0.60%
0.50%
0.40% ----
0.30% -
—
0.20%
0.10% - -
0.00% -
August September
■ City ® Benchmark
Book Value and Fair -Market Value
The overwhelming majority of the time, when the City makes an investment purchase, it is made at
"par", which is the same value the City will receive upon maturity. However, there are other
instances where an investment purchase is made at "premium", where the cost of the investment is
more than the par value that the City will receive at maturity. This is done as those investments are
locked in at coupon rates higher than current market interest rates, and will provide a greater return
than if you purchased an investment at par value. Investments can also be purchased at "discount",
where the cost of the investment is less than the par value that the City will receive at maturity,
although this is not done very often.
When the City purchases an investment, the cost of the investment is recorded within the City's
financial system and referred to as "book value". The Governmental Accounting Standards Board
(GASB) however requires that the City's investments are presented for financial statement
presentation at fair -market value.
City of Otsego 113400 90' Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163
The chart below illustrates the book value of the City's investments in comparison to the current
fair -market value of the City's investments. The City's deposit accounts are not subject to this
reporting standard, and therefore there are no differences for those sectors.
Investment Sector
Book Fair -Market
Value Value Gain / (Loss
CD's
$ 11,419,213
$ 11,451,277
Agency Securities
5,210,299
5,210,371
Municipal Securities
2,393,941
2,375,292
Bank - Checking
1,230,852
1,230,852
Bank - Money Market
3,870,391
3,870,391
Brokered Money Market
270,062
270,062
$ 32,065
72
(18,650)
Total Cash & Investments $ 24,394,759 $ 24,408,246 $ 13,487
The City has historically only adjusted the investment balance to fair -market value once per year, in
December, for the preparation of the annual financial statements. The chart below illustrates the
fluctuation in the fair -market value adjustment amount for the City's investment portfolio.
50,000.00
Q4 2014 Q1 2015 Q2 2015 Q3 2015 October 2015 November 2015
(50,000.00) - --- -
(100,000.00) — - -
(150,000.00) - -
(200,000.00)
It is important to note that the City purchases all of its investments with the intentions of holding
them until maturity. With this investment philosophy, these fair -market value adjustments are really
a moot point, and are only adjustments "on paper" to comply with accounting standards.
City of Otsego 113400 90`h Street NE, Otsego, MN 55330 1 Tel. (763) 441-4414 Fax (763) 441-9163