3. Financial Policy
CITY OF
CHANHASSEN
690 City Cewr Drive, PO Box 147
ChanhaEm, Minnesotll55317
Phone 612.937.1900
Gmtrlll Fax 612.937.5739
Engineering Fax 612.937.9152
Public Safety Fax 612.934.2524
Web www.ci.chanhassfn.mn.ns
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MEMORANDUM
TO:
Mayor
City Council
Scott A. Botcher, City Manager ~
January 27, 2000
FROM:
DATE:
SUBJ:
Financial Management Policy Discussion
Please find attached a couple items; first, a copy of our current Financial
Management Policies dated December 1994; secondly, a copy of a sample
investment policy from GFOA; and thirdly, a copy of a Closed Debt Service
Capital Project Fund Policy from the City of Woodbury. Bruce and I thought
that the procedure we would employ this evening would be as follows: first, as
we are not sure how familiar you are with the current Financial Policies from
1994, we felt that you should have the opportunity to review the current policies
so that you can understand our starting point. Our plan is to not read through
them line for line, but to initially walk through them and answer any questions
you may have on specific items. Then, Bruce and I will deliver verbally some
of OUI' thoughts regarding specitic items included therein.
Secondly, I believe that the sample Investment Policy from GFOA and the
Closed Debt Service Capita] Project Fund Policy from the City of Woodbury
should be modified to reflect City of Chanhassen and adopted (when we get that
far). These are both well-v.TItlen documents and there is no reason for us to re-
invent the wheel in either ofthese two areas.
Again, it is our expectation tltat this process will take at a minimum two work
sessions and one council meeting, so please do not feel rushed to any extent.
We want to make sure that we take appropriate time to go through this policy
and answer any questions that people may have. However, again, we feel that
starting at ground zero may be in our best interests. As always, please call with
any questions.
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The City ofChauhassm. A f./'0winK community with clean wkes, quality schooIi, a charminr downtown, thriviu~ buJinesscs, and beauti/ù! parks. A ~eat øwce to live. work. and øw,
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CITY OF
CBANBASSEN,MINNESOTA
FINANCIAL MANAGEMENT POLICIES
December 1994
1. PURPOSE
The City of Cban1u.....n is aecountable to its citizens to carefully account for public funds, to
manage municipal fmances wisely, and to plan the adequate funding of services desired by
the public, including the provision and maintenance of public facilities. The city is also. ._
accountable for providing both short-term and long-term financial stability. The city must
ensure that it is capable of adequately funding and providing local government services
needed by the community.
Further, these financial policies provide the framework for the overall fiscal management of
the city. Operating independently of changing circumstances and conditions, these policies
assist the decision making processes of the City Council and Administration.
Most of the policies represent long standing principles, traditions and practices for city
governments. These financial policies will be reviewed periodically to determine if changes
are necessmy.
IL OBJECTIVES
In order to achieve this.1JDfPOse, this plan has the following objectives for the city's fiscal
performance:
L Provide sufficient fmancial stability to prevent financial difficulties which m~y
encumber the city council's ability to make important decisions.
2. Provide sound principles to guide the important decisions, which have significant fiscal
effects, of the city council and management.
3_ Provide adequatcand accurate information to facilitate the council's decision making.
4. Establish pñnciples which will ensure that the city operates efficiently and effectively.
5. Minimize investment and fmancial ñsk.
6. Promote sound managcinent of the city's government by providing accurate and timely
information.
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7. Employ policies which promote sustainable revenue sources.
8. Employ fair user charges where the direct benefit is identifiable and the cost is
measurable.
9. Provide and maintain public facilities and infrastructure.
10. Protect and enhance the city's credit rating.
1 L Ensure the legal use and protection of aU city funds through a sound system of
financial and internal controls.
12. Maintain a risk management program that will minimize the impact of legal liabilities,
natural disasters or other emergencies.
IlL FINANCIAL MANAGEMENT POLICIES
Capital Improvemellt Budget Policies
L The city has adopted five year capital budgets associated with most capital and
operating funds included in the annual budget, i.e. vehicle and equipment replacement,
municipal facilities, streets/sewer/water, etc. During 1995, and continuing thereafter,
these budgets will be assimilated into one separate five year capital improvement and
expenditure plan.
2. The city will coordinate development of the capital improvement budget with the
development of the operating budget. Future operating costs associated with new
capital improvements will be projected and included in operating budget forecasts.
3. The city will project its equipment replacement and maintenance needs for the next
five years and will update this projection each year. From this projection, a
maintenance and replacement schedule will be developed and included in the operating
budget. In addition, the city will maintain aU its assets at a level adequate to protect
the city's capital investment and to minimize future maintenance and replacement
costs.
4. The city staff will identify through a Capital Funding Plan the estimated costs and
potential funding sources, including the consideration of joint ventures with other
cities, for each capital project proposal before it is submitted to the city council for
approval.
5. The city will determine the least costly financing method considering the life of the
asset.
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Revenue Polids
1. The citywiD;t;Stimate its annual revenue by a conservative and analytical process.
2. The city will JII'Oject revenues for the next five years and will update this projection
annually. Eadi existing revenue source will be reexamined annually.
3. The city wiD maintain sound property appraisal procedures. Property value will be
reassessed at Jcast evexy four years at the legally mandated market value for each class
of property.
4. Whenever user charges and fees are determined to be appropriate and the direct
benefits are identifiable, the city will establish and revise annually, all user charges
and fees at a level related to the cost of providing the service (operating, direct,
indirect and capital).
5. The city will set fees and user charges for each Enterprise Fund, such as Water and
Sewer, and recreational funds in total, at a level which fully supports the total direct
and indirect costs and capital costs of the activity. Indirect costs include the cost of
annual depreciation of capital assets.
6. The city will recover the prior year's net property tax delinquencies and abatements in
setting the annual property tax levy.
Debt Policies
1. The city wi11 confine long-term borrowing to capital improvements or projects which
cannot be financed from current revenues. In addition, the city will not incur debt to
support current operations.
2. When the city imances capital projects by issuing bonds, it will pay back the bonds
within a period not to exceed the expected useful life of the project.
3. In all bond issues, the city will attempt to retire 50% of the principal amount issued
within ten years.
4. The city will lItempt to keep the maturity of General Obligation Bonds and General
Obligation Guamnteed Bonds at or below 15 years.
3.. Total debt service for General Obligation Ad Valorem debt should not exceed ten
percent (10"10) Ðf total annual locally generated operating revenue in the General Fund
and Special Revenue Fund.
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6. Total General Obligation debt subject to statutory debt limits will not exceed two
percent (2%) of the estimated t,narket valuation of taxable property in the city.
7. Where possible, the city will use special assessment, revenue or other self·supporting
bonds instead of General Obligation Ad Valorem Bonds.
8. The city will maintain open communications with bond rating agencies regarding its
financial condition. The city will follow a policy of full disclosure in every financial
report and bond prospectus.
9. The Housing & Redevelopment Authority (HRA) and Economic Development Agency
will develop a set of written policies concerning the use of Tax Increment Financing
(TIF) as a development incentive.
Reset'l'e Policies
Enlelp/'ise Fund Reserve Policy
L Over a three year period, each enterprise fund shall set rates and charges/user fees
such that there is no cumulative reduction in net fund equity, including depreciation
and transfer of funds. Recreation type funds shall be considered on a combined basis
for compliance with this policy.
2. Equity transfer of funds from an enterprise fund to the General Fund should only be
done on a one-time exception basis, to fund any unusual, unanticipated expenses. In
no event shall equity transfers be made in consecutive years.
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General Fund Reserve Policy-
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The city shall not use tax anticipation borrowings to cover operating expenses.
2.
The year end fund balance shall be adequate to cover 50% of the percentage of which
property taxes and HACA comprise total General Fund revenue sources for the
following year.
The city will continue to reduce fund balances for the portion above the formula ~
amount for capital improvement projects such as building expansion/refurbishing. f
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Investment Policies
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1. The city will make cash flow analyses of all funds on a regular basis. Disbursement,
collection and deposit of all funds will be scheduled to ensure maximum cash
availability for investment
2. When permitted by law, the city will pool cash from all funds for investment
pwposes.
3. The city will have at least 97% of its cash funds earning interest.
4. Investment maturities should be matched to operating cash needs and debt service
requirements. No more than 50% of cash and investments shall have average
maturities exceeding 5 years.
5. The preservation of principal shall be the paramount objective of the investment
program. Management of the portfolio will consider safety, liquidity and yield, in that
order, to ensure the preservation of principal. _
6. It is the intent of this policy to substantially reduce the interest rate risk and duration
of the current investment portfolio. As current investments mature or are liquidated,
reinvestment of these funds will only be in accordance with these adopted financial
management policies.
7. Compliance with these policies shall be through the finance director. The finance
director shall report to the city council at least quarterly the condition of the city's
investment portfolio, including stated value, current market value, current yield and
conformance to city policies. In addition, city administration shall establish a check
and balance system with each broker handling city investments whereby a control
number must be received and confirmed by them before any investment is purchased,
. sold, or traded per an ordered issue by the finance director.
Each broker shall sign an affidavit stating that they have read the city's financial
policies and that the investment being requested to be made by the finance director
and their firm conforms to the adopted financial policies.
8. The city shall have no investments in Risk Category Three as defined by
Governmental Standard Board Station No.3.
Accowuing, Auditing mId Fillallcial Reporûng Policies
1. The city will maintain the GFOA Certificate of Excellence in Financial Reporting.
2. Accounting policies will reflect the principle of charging current taxpayers and/or
users for the full cost of providing current services.
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3. Regular monthly reports will present a summary of financial activity by major types of
funds as compared to budget.
4. An independent public accounting firm will peñorm an annual audit and will publicly
issue an opinion concerning the city's finances.
5. The Finance Director will prepare an action plall for submission to the city council on
issues raised in the annual audit wiÏ1Ûii:s'ixtýdãys' from submission to the State of
Minnesota AúdítOf'S' Office.
6. Develop a calendar of financial activities to be used as a guideline for planning
purposes on a yearly basis.
Risk Mallagement Policies
1. The city will maintain a Risk Management Program that will minimize the impact of
legal liabilities, natural disasters or other emergencies through the following activities:
a. Loss Prevention. Prevent negative occurrences.
b. Loss Control. Reduce or mitigate expenses of a negative occurrence.
c. Loss Financing. Provide a means to finance losses. _
d. Loss Information Management. Collect and analyze relevant data to make
prudent loss prevention, loss control and loss financing decisions.
2. The city's Risk Management Program will:
a. Analyze all of the city's risks.
b. Avoid risks whenever cost effective.
c. Reduce risks whenever cost effective.
3. The city will maintain an active Safety Program.
4. The city will periodically conduct educational safety and risk avoidance programs,
through our various departments and with the participation of Berkley Administrator
(city insurer).
5. The city will maintain the highest deductible amount, considering the relationship
between cost and the city's ability to sustain the loss.
Operatillg Budget Policies
L The city will adopt a balanced budget in accordance with state statute.
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2. The city will match 2Il cum:nt expenditures with current revenues. The city will avoid
budgetaIy procedures that balance current expenditures at the expense of meeting
future ye81S' JIe\4CIIIICL
3. The cq shall ~ that the Capital Projects Administration Fund has a balance, at
year enè1, of at least S% of the total operating budget, including General, Special
Revenue Mid Capital..Fnnñ- such to act as a contingency fund to provide a resource
for U/I...,;,,;pated exPenditures Øf a non·recurring nature.
4. The city manager, wbensubmitting the proposed budget to the city council, will
submit a balanced budget in which appropriations will not exceed the total of the
estimated General Fund Revenue and the fund balance available after applying the
General Fund Reserve Policy.
5. Prior to adopting the General Fund annual budget, the city council shall confirm that
the Capital Projects Fund has a sufficient projected balance to meet the City's Reserve
Policy.
6. In the event there is.an unanticipated shortfall of revenues in a current year budget,
the city manager may recommend the use of a portion of the General Fund balance,
not to exceed the amount available after deducting amounts reserved for item~ not
readily convertible to cash or-reserved for working capital or already appropriated to
the General Fund cum:nt budget, as shown on the most recent General Fund Reserve
Policy as established by the city council.
7. The budget will provide for adequate maintenance of the capital plant and equipment,
and for their orderly rep]aœment.
8. The budget will provide for adequate funding of all retirement systems.
9. The city administration will prepare regular monthly reports comparing actual revenues
and expenditures to the budgeted amount.
] O. The Operating Budget will describe the major goals to be achieved and the services
and programs to be delivered fqr the level of funding provided.
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Financial Calendar
Begin Capital Budget Planning
Audit field work begins
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Finalize Capital Budgel
Bonding- 1 st Series
Produce CAFR & apply for certificate
Finalize Budget CalendarlWork Session dates
Budget Work Sessions-Proposed Departmental Expenditures
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Auditor reviews CAFR with City Council
Bonding- 2nd Series
Budget Work Sessions-Proposed Departmental Expenditures
Department 01 Revenue notifies City 01 HACA
Certify to the County Auditor dates lor public hearing & maximum property tax levy
RFP lor official depository
Budget Work Sessions-Revenues Compared to Expenditures
Designate olliclal depository
Truth in taxation Notices mailed by the County Treasurer
Budget Work Sessions-Present Balanced Budget
Truth In Taxation Hearing
Continuation hearing, il necessary, 5-14 days 1011 owing
Formal Adoption 01 Budget & Tax Levy/Certilication
Sample Investment Policy
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Sample Investment Policy
The purpose of this investment policy is to aid the general membership of Government Finance Officers
Association (GFOA) in the preparation of an investment policy. This policy is not intended to supplant an
existing policy. Each entity should use this sample as a model to customize a policy to fit its needs and to
comply with state and local laws, regulations, and other policies concerning the investment of public funds.
J. Scope
This policy applies to the investment of short-term operating funds_ Longer-term funds, including investments
of employees' investment retirement funds and proceeds from certain bond issues, are covered by a separate
policy.
1. Pooling of Funds Except for cash in certain restricted and special funds, the [entity] will consolidate
cash balances from all funds to maximize investment earnings. Investment income will be allocated to
the various funds based on their respective participation and in accordance with generally accepted
accounting principles.
II. General Objectives
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
1. Safety Safety of principal is the foremost objective of the investment program. Investments shall be
undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The
objective will be to mitigate credit risk and interest rate risk.
a. Credit Risk The [entity] will minimize credit risk, the risk of loss due to the failure of the
security issuer or backer, by:
· Limiting investments to the safest types of securities
· Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with
which the [entity] will do business
· Diversifying the investment portfolio so that potential losses on individual securities will be
minimized.
b. Interest Rate Risk The [entity] will minimize the risk that the market value of securities in the
portfolio will fall due to changes in general interest rates, by:
· Structuring the investment portfolio so that securities mature to meet cash requirements
for ongoing operations, thereby avoiding the need to sell securities on the open market
prior to maturity
· Investing operating funds primarily in shorter-term securities, money market mutual funds,
or similar investment pools.
2. liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements
that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities
mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all
possible cash demands cannot be anticipated, the portfolio should consist largely of securities with
active secondary or resale markets (dynamic liquidity). A portion of the portfolio also may be placed in
money market mutual funds or local government investment pools which offer same-day liquidity for
short-term funds.
3. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return
throughout budgetary and economic cycles, taking into account the investment risk constraints and
liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity
objectives described above. The core of investments are limited to relatively low risk securities in
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anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior
to maturity with the following exceptions:
o A security with declining credit may be sold early to minimize loss of principal.
o A security swap would improve the quality, yield, or target duration in the portfolio.
o Liquidity needs of the portfolio require that the security be sold.
III. Standards of Care
1. Prudence The standard of prudence to be used by investment officials shall be the "prudent person"
standard and shall be applied in the context of managing an overall portfolio. Investment officers acting
in accordance with written procedures and this investment policy and exercising due diligence shall be
relieved of personal responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of
securities are carried out in accordance with the terms of this policy.
Investments shall be made with judgment and care, under circumstances then prevailing, which persons
of prudence, discretion and intelligence exercise in the management of their own affairs. not for
speculation, but for investment, considering the probable safety of their capital as well as the probable
income to be derived.
2. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall
refrain from personal business activity that could conflict with the proper execution and management of
the investment program, or that could impair their ability to make impartial decisions. Employees and
investment officials shall disclose any material interests in financial institutions with which they conduct
business. They shall further disclose any personal financial/investment positions that could be related to
the performance of the investment portfolio. Employees and officers shall refrain from undertaking
personal investment transactions with the same individual with whom business is conducted on behalf
of the [entity].
3. Delegation of Authority Authority to manage the investment program is granted to [designated
official, hereinafter referred to as investment officer] and derived from the following: (insert code citation,
ordinances, charters or statutes). Responsibility for the operation of the investment program is hereby
delegated to the investment officer, who shall act in accordance with established written procedures and
internal controls for the operation of the investment program consistent with this investment policy.
Procedures should include references to: safekeeping, delivery vs. payment. investment accounting,
repurchase agreements, wire transfer agreements, and collateral/depository agreements. No person
may engage in an investment transaction except as provided under the terms of this policy and the
procedures established by the investment officer. The investment officer shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the activities of subordinate
officials.
IV. Safekeeping and Custody
1. Authorized Financial Dealers and Institutions A list will be maintained of financial institutions
authorized to provide investment services. In addition, a list also will be maintained of approved security
broker/dealers selected by creditworthiness (e.g., a minimum capital requirement of $10,000,000 and at
least five years of operation). These may include "primary" dealers or regional dealers that qualify under
Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).
All financial institutions and broker/dealers who desire to become qualified for investment transactions
must supply the following as appropriate:
o Audited financial statements
o Proof of National Association of Securities Dealers (NASD) certification
o Proof of state registration
o Completed brokerldealer questionnaire
o Certification of having read and understood and agreeing to comply with the [entity's] investment
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policy.
An annual review of the financial condition and registration of qualified financial institutions and
broker/dealers will be conducted by the investment officer. (See the GFOA Recommended Practice on
"Governmental Relationships with Securities Dealers," in Appendix 3.)
From time to time, the investment officer may choose to invest in instruments offered by minor~y and
community financial institutions. In such situations, a waiver to the criteria under Paragraph 1 may be
granted. All terms and relationships will be fully disclosed prior to purchase and will be reported to the
appropriate entity on a consistent basis and should be consistent with state or local law. These types of
investment purchases should be approved by the appropriate legislative or governing body in advance.
2. Internal Controls The investment officer is responsible for establishing and maintaining an internal
control structure designed to ensure that the assets of the [entity] are protected from loss, theft or
misuse. The internal control structure shall be designed to provide reasonable assurance that these
objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control
should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires
estimates and judgments by management.
Accordingly, the investment officer shall establish a process for an annual independent review by an
external auditor to assure compliance with policies and procedures. The internal controls shall address
the following points:
o Control of collusion
o Separation of transaction authority from accounting and recordkeeping
o Custodial safekeeping
o Avoidance of physical delivery securities
o Clear delegation of authority to subordinate staff members
o Written confirmation of transactions for investments and wire transfers
o Development of a wire transfer agreement with the lead bank and third-party custodian
3. Delivery vs. Payment All trades where applicable will be executed by delivery vs. payment (DVP) to
ensure that securities are depos~ed in an eligible financial institution prior to the release of funds.
Securities will be held by a third-party custodian as evidenced by safekeeping receipts.
V. Suitable and Authorized Investments
1. Investment Types Consistent with the GFOA Policy Statement on State and Local Laws Concerning
Investment Practices, the following investments will be permitted by this policy and are those defined by
state and local law where applicable:
o U.S. government obligations, U.S. government agency obligations, and U.S. government
instrumentality obligations, which have a liquid market w~h a readily determinable market value;
o Canadian government obligations (payable in local currency);
o Certificates of deposit and other evidences of deposit at financial inslnutions, bankers'
acceptances, and commercial paper, rated in the highest tier (e.g., A-1, P-1, F-1, or D-1 or
higher) by a nationally recognized rating agency;
o Investment-grade obligations of state, provincial and local governments and public authorities;
o Repurchase agreements whose underlying purchased securities consist of the foregoing;
o Money market mutual funds regulated by the Securities and Exchange Commission and whose
portfolios consist only of dollar-denominated securities; and
o Local government investment pools, e~her state-administered or through joint powers statutes
and other intergovernmental agreement legislation.
Investment in derivatives of the above instruments shall require authorization by the appropriate
governing authority. (See the GFOA Recommended Practice on "Use of Derivatives by State and Local
Governments," 1994.)
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2. Collaterallzatlon Where allowed by state law and in accordance with the GFOA Recommended
Practices on the Collateralization of Public Deposits, full collateralization will be required on non-
negotiable certificates of deposit. (See GFOA Recommended Practices, Appendix 3.)
3. Repurchase Agreements Repurchase agreements shall be consistent with GFOA Recommended
Practices on Repurchase Agreements. (See GFOA Recommended Practices, Appendix 3.)
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VI. Investment Parameters
1. Diversification The investments shall be diversified by:
o limiting investments to avoid overconcentration in securities from a specific issuer or business
sector (excluding U.S. Treasury securities),
o limiting investment in securities that have higher credit risks,
o investing in securities with varying maturities, and
o continuously investing a portion of the portfolio in readily available funds such as local
government investment pools (LGIPs), money market funds or overnight repurchase agreements
to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. (See the
GFOA Recommended Practice on "Diversification of Investments in a Portfolio" in Appendix 3.)
2. Maximum Maturities To the extent possible, the [entity] shall attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the [entity] will not directly
invest in securities maturing more than five (5) years from the date of purchase or in accordance with
state and local statutes and ordinances. The [entity] shall adopt weighted average maturity limitations
(which often range from 90 days to 3 years), consistent with the investment objectives.
Reserve funds and other funds with longer-term investment horizons may be invested in securities
exceeding five (5) years if the maturity of such investments are made to coincide as nearly as
practicable with the expected use of funds. The intent to invest in securities with longer maturities shall
be disclosed in writing to the legislative body. (See the GFOA Recommended Practice on "Maturities of
Investments in a Portfolio" in Appendix 3.)
Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the
portfolio should be continuously invested in readily available funds such as LGIPs. money market funds,
or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing
obligations.
VII. Reporting
1. Methods The investment officer shall prepare an investment report at least quarterly, including a
management summary that provides an analysis of the status of the current investment portfolio and
transactions made over the last quarter. This management summary will be prepared in a manner which
will allow the [entity] to ascertain whether investment activities during the reporting period have
conformed to the investment policy. The report should be provided to the investment officer, the
legislative body, and any pool participants. The report will include the following:
o Listing of individual securities held at the end of the reporting period.
o Realized and unrealized gains or losses resulting from appreciation or depreciation by listing the
cost and market value of securities over one-year duration that are not intended to be held until
maturity (in accordance with Governmental Accounting Standards Board (GASB) requirements).
o Average weighted yield to maturity of portfolio on investments as compared to applicable
benchmarks.
o Listing of investment by maturity date.
o Percentage of the total portfolio which each type of investment represents.
2. Performance Standards The investment portfolio will be managed in accordance with the
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parameters specified within this policy. The portfolio should obtain a market average rate of return
during a market/economic environment of stable interest rates. A series of appropriate benchmarks
shall be established against which portfolio peñormance shall be compared on a regular basis.
3. Marking to Market The market value of the portfolio shall be calculated at least quarterly and a
statement of the market value of the portfolio shall be issued at least quarterly. This will ensure that
review of the investment portfolio, in terms of value and price volatility, has been peñormed consistent
with the GFOA Recommended Practice on "Mark-to-Market Practices for State and Local Government
Investment Portfolios and Investment Pools." (See GFOA Recommended Practices, Appendix 3.) In
defining market value, considerations should be given to the GASB Statement 31 pronouncement.
VIII. Policy Considerations
1. Exemption Any investment currently held that does not meet the guidelines of this policy shall be
exempted from the requirements of this policy. At maturity or liquidation, such monies shall be
reinvested only as provided by this policy.
2. Amendments This policy shall be reviewed on an annual basis. Any changes must be approved by
the investment officer and any other appropriate authority, as well as the individual(s) charged with
maintaining internal controls.
IX. list of Attachments
The following documents, as applicable, are attached to this policy:
· Listing of authorized personnel,
· Relevent investment statutes and ordinances,
· Repurchase agreements and tri-party agreements,
· Listing of authorized broker/dealers and financial institutions,
· Credit studies for securities purchased and financial institutions used,
· Safekeeping agreements,
· Wire transfer agreements,
· Sample investment reports, and
· Methodology for calculating rate of return.
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Appendix 1: Glossary of Cash Management Terms
The following is a glossary of key investing terms, many of which appear in GFOA's Sample Investment Policy.
This glossary has been adapted from an article, entitled "Investment terms for everyday use," that appeared in
the April 5, 1996, issue of Public Investor, GFOA's subscription investment newsletter.
Accrued Interest - The accumulated interest due on a bond as of the last interest payment made by the
issuer.
Agency - A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by
the full faith and credit of the U.S. Government. Federally sponsored agencies (FSAs) are backed by each
particular agency with a market perception that there is an implicit government guarantee. An example of
federal agency is the Government National Mortgage Association (GNMA). An example of a FSA is the Federal
National Mortgage Association (FNMA).
Amortization - The systematic reduction of the amount owed on a debt issue through periodic payments of
principal.
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Average Life - The average length of time that an issue of serial bonds and/or term bonds with a mandatory
sinking fund feature is expected to be outstanding.
Basis Point - A unit of measurement used in the valuation of fixed-income securities equal to 1/100 of 1
percent of yield, e.g., "1/4" of 1 percent is equal to 25 basis points.
Bid - The indicated price at which a buyer is willing to purchase a security or commodity.
Book Value - The value at which a security is carried on the inventory lists or other financial records of an
investor. The book value may differ significantly from the security's current value in the market.
Callable Bond - A bond issue in which all or part of its outstanding principal amount may be redeemed before
maturity by the issuer under specified conditions.
Call Price - The price at which an issuer may redeem a bond prior to maturity. The price is usually at a slight
premium to the bond's original issue price to compensate the holder for loss of income and ownership.
Call Risk - The risk to a bondholder that a bond may be redeemed prior to maturity.
Cash SalelPurchase - A transaction which calls for delivery and payment of securities on the same day that
the transaction is initiated.
Collateralizatlon - Process by which a borrower pledges securities, property, or other deposits for the purpose
of securing the repayment of a loan and/or security.
Commercial Paper - An unsecured short-term promissory note issued by corporations, with maturities ranging
from 2 to 270 days.
Convexity - A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates
greater sensitivity of a bond's price to interest rate changes.
Coupon Rate - The annual rate of interest received by an investor from the issuer of certain types of fixed-
income securities. Also known as the "interest rate."
Credit Quality - The measurement of the financial strength of a bond issuer. This measurement helps an
investor to understand an issuer's ability to make timely interest payments and repay the loan principal upon
maturity. Generally, the higher the credit quality of a bond issuer, the lower the interest rate paid by the issuer
because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies.
Credit Risk - The risk to an investor that an issuer will default in the payment of interest and/or principal on a
security.
Current Yield (Current Return) - A yield calculation determined by dividing the annual interest received on a
security by the current market price of that security.
Delivery Versus Payment (DVP) - A type of securities transaction in which the purchaser pays for the
securities when they are delivered either to the purchaser or his/her custodian.
Derivative Security - Financial instrument created from, or whose value depends upon, one or more
underlying assets or indexes of asset values.
Discount - The amount by which the par value of a security exceeds the price paid for the security.
Diversification - A process of investing assets among a range of security types by sector, maturity, and quality
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rating.
Duration - A measure of the timing of the cash flows, such as the interest payments and the principal
repayment, to be received from a given fixed-income security. This calculation is based on three variables:
term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price
volatility for given changes in interest rates.
Fair Value - The amount at which an investment could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
Federal Funds (Fed Funds) - Funds placed in Federal Reserve banks by depository institutions in excess of
current reserve requirements. These depository institutions may lend fed funds to each other overnight or on a
longer basis. They may also transfer funds among each other on a same-day basis through the Federal
Reserve banking system. Fed funds are considered to be immediately available funds.
Federal Funds Rate - Interest rate charged by one institution lending federal funds to the other.
Government Securities - An obligation of the U.S. government, backed by the full faith and credit of the
government. These securities are regarded as the highest quality of investment securities available in the U.S.
securities market. See ''Treasury Bills, Notes, and Bonds."
Interest Rate - See ·Coupon Rate."
Interest Rate Risk - The risk associated with declines or rises in interest rates which cause an investment in a
fixed-income security to increase or decrease in value.
Internal Controls - An internal control structure designed to ensure that the assets of the entity are protected
from loss, theft, or misuse. The internal control structure is designed to provide reasonable assurance that
these objectives are met. The concept of reasonable assurance recognizes that 1) the cost of a control should
not exceed the benefits likely to be derived and 2) the valuation of costs and benefits requires estimates and
judgments by management. Internal controls should address the following points:
1. Control of collusion - Collusion is a situation where two or more employees are working in conjunction
to defraud their employer.
2 Separation of transaction authority from accounting and record keeping - By separating the
person who authorizes or performs the transaction from the people who record or otherwise account for
the transaction, a separation of duties is achieved.
3. Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral
(as defined by state law) shall be placed with an independent third party for custodial safekeeping.
4. Avoidance of physical delivery securities - Book-entry securities are much easier to transfer and
account for since actual delivery of a document never takes place. Delivered securities must be properly
safeguarded against loss or destruction. The potential for fraud and loss increases with physically
delivered securities.
5. Clear delegation of authority to subordinate staff members - Subordinate staff members must have
a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation
of authority also preserves the internal control structure that is contingent on the various staff positions
and their respective responsibilities.
6. Written confirmation of transactions for Investments and wire transfers - Due to the potential for
error and improprieties arising from telephone and electronic transactions, all transactions should be
supported by written communications and approved by the appropriate person. Written communications
may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures.
7. Development of a wire transfer agreement with the lead bank and thlrd·party custodian - The
designated official should ensure that an agreement will be entered into and will address the following
points: controls. security provisions, and responsibilities of each party making and receiving wire
transfers.
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Inverted Yield Curve - A chart formation that illustrates long-term securities having lower yields than short-
term securities. This configuration usually occurs during periods of high inflation coupled with low levels of
confidence in the economy and a restrictive monetary policy.
Investment Company Act of 1940- Federal legislation which sets the standards by which investment
companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance reporting
requirements, and securities valuations.
Investment Policy - A concise and clear statement of the objectives and parameters formulated by an
investor or investment manager for a portfolio of investment securities.
Investment.grade Obligations - An investment instrument suitable for purchase by institutional investors
under the prudent person rule. Investment-grade is restricted to those obligations rated BBB or higher by a
rating agency.
Liquidity - An asset that can be converted easily and quickly into cash.
Local Government Investment Pool (LGIP) - An investment by local governments in which their money is
pooled as a method for managing local funds.
Mark-ta-market _ The process whereby the book value or collateral value of a security is adjusted to reflect its
current market value.
Market Risk - The risk that the value of a security will rise or decline as a result of changes in market
conditions.
Market Value - Current market price of a security.
Maturity - The date on which payment of a financial obligation is due. The final stated maturity is the date on
which the issuer must retire a bond and pay the face value to the bondholder. See "Weighted Average
Maturity."
Money Market Mutual Fund - Mutual funds that invest solely in money market instruments (short-term debt
instruments, such as Treasury bills, commercial paper, bankers' acceptances, repos and federal funds).
Mutual Fund - An investment company that pools money and can invest in a variety of securities, including
fixed-income securities and money market instruments. Mutual funds are regulated by the Investment
Company Act of 1940 and must abide by the following Securities and Exchange Commission (SEC) disclosure
guidelines:
1. Report standardized performance calculations.
2. Disseminate timely and accurate information regarding the fund's holdings, performance, management
and general investment policy.
3. Have the fund's investment policies and activities supervised by a board of trustees, which are
independent of the adviser, administrator or other vendor of the fund.
4. Maintain the daily liquidity of the fund's shares.
5. Value their portfolios on a daily basis.
6. Have all individuals who sells SEC-registered products licensed with a self-regulating organization
(SRO) such as the National Association of Securities Dealers (NASD).
7. Have an investment policy governed by a prospectus which is updated and filed by the SEC annually.
Mutual Fund Statistical Services - Companies that track and rate mutual funds, e.g., IBC/Donoghue, Lipper
Analytical Services, and Morningstar.
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National Association of Securhles Dealers (NASD) - A self-regulatory organization (SRO) of brokers and
dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that
distribute mutual fund shares as well as other securities.
Net Asset Value - The market value of one share of an investment company, such as a mutual fund. This
figure is calculated by totaling a fund's assets which includes securities, cash, and any accrued earnings,
subtracting this from the fund's liabilities and dividing this total by the number of shares outstanding. This is
calculated once a day based on the closing price for each security in the fund's portfolio. (See below.) [(Total
assets) - (Liabilities)Y(Number of shares outstanding)
No Load Fund - A mutual fund which does not levy a sales charge on the purchase of its shares.
Nominal Yield - The stated rate of interest that a bond pays its current owner, based on par value of the
security. It is also known as the "coupon," "coupon rate," or "interest rate."
Offer - An indicated price at which market participants are willing to sell a security or commodity. Also referred
to as the "Ask price."
Par - Face value or principal value of a bond, typically $1,000 per bond.
PosltJve Yield Curve - A chart formation that illustrates short-term securities having lower yields than long-
term securities.
Premium - The amount by which the price paid for a security exceeds the security's par value.
Prime Rate - A preferred interest rate charged by commercial banks to their most creditworthy customers.
Many interest rates are keyed to this rate.
Principal - The face value or par value of a debt instrument. Also may refer to the amount of capital invested in
a given security.
Prospectus - A legal document that must be provided to any prospective purchaser of a new securities
offering registered with the SEC. This can include information on the issuer, the issuer's business, the
proposed use of proceeds, the experience of the issuer's management, and certain certified financial
statements.
Prudent Person Rule - An investment standard outlining the fiduciary responsibilities of public funds investors
relating to investment practices.
Regular Way Delivery - Securities settlement that calls for delivery and payment on the third business day
following the trade date (T +3); payment on a T +1 basis is currently under consideration. Mutual funds are
settled on a same day basis; government securities are settled on the next business day.
Reinvestment Risk - The risk that a fixed-income investor will be unable to reinvest income proceeds from a
security holding at the same rate of return currently generated by that holding.
Repurchase Agreement (repe or RP) - An agreement of one party to sell securities at a specified price to a
second party and a simultaneous agreement of the first party to repurchase the securities at a specified price
or at a specified later date.
Reverse Repurchase Agreement (Reverse Repo) - An agreement of one party to purchase securities at a
specified price from a second party and a simultaneous agreement by the first party to resell the securities at a
specified price to the second party on demand or at a specified date.
Rule 2a-7 of the Investment Company Act - Applies to all money market mutual funds and mandates such
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funds to maintain certain standards, including a 13- month maturity limit and a 90-day average maturity on
investments, to help maintain a constant net asset value of one dollar ($1.00).
"
Safekeeping - Holding of assets (e.g., securities) by a financial institution.
g
Serial Bond - A bond issue, usually of a municipality, with various maturity dates scheduled at regular intervals
until the entire issue is retired.
Sinking Fund - Money accumulated on a regular basis in a separate custodial account that is used to redeem
debt securities or preferred stock issues.
Swap - Trading one asset for another.
Term Bond - Bonds comprising a large part or all of a particular issue which come due in a single maturity.
The issuer usually agrees to make periodic payments into a sinking fund for mandatory redemption of term
bonds before maturity.
Total Return - The sum of all investment income plus changes in the capital value of the portfolio. For mutual
funds, return on an investment is composed of share price appreciation plus any realized dividends or capital
gains. This is calculated by taking the following components during a certain time period. (Price Appreciation) +
(Dividends paid) + (Capital gains) = Total Return
Treasury Bills - Short-term U.S. government non-interest bearing debt securities with maturities of no longer
than one year and issued in minimum denominations of $10,000. Auctions of three- and six-month bills are
weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored closely in the
money markets for signs of interest rate trends.
Treasury Notes - Intermediate U.S. government debt securities with maturities of one to 10 years and issued
in denominations ranging from $.1,000 to $1 million or more.
Treasury Bonds - Long-term U.S. government debt securities with maturities of ten years or longer and issued
in minimum denominations of $1,000. Currently, the longest outstanding maturity for such securities is 30
years.
Uniform Net Capital Rule - SEC Rule 15C3-1 outlining capital requirements for broker/dealers.
Volatility - A degree of fluctuation in the price and valuation of securities.
"Volatility Risk" Rating - A rating system to clearly indicate the level of volatility and other non-credit risks
associated with securities and certain bond funds. The ratings for bond funds range from those that have
extremely low sensitivity to changing market conditions and offer the greatest stability of the returns ("aaa" by
S&P; "V-1" by Fitch) to those that are highly sensitive with currently identifiable market volatility risk ("ccc-" by
S&P, "V-10" by Fitch).
Weighted Average Maturity (WAM) - The average maturity of all the securities that comprise a portfolio.
According to SEC rule 2a-7, the WAM for SEC registered money market mutual funds may not exceed 90 days
and no one security may have a maturity that exceeds 397 days.
When Issued (WI) - A conditional transaction in which an authorized new security has not been issued. All
"when issued" transactions are settled when the actual security is issued.
Yield - The current rate of return on an investment security generally expressed as a percentage of the
security's current price.
Yleld.ta-call (YTC) - The rate of return an investor earns from a bond assuming the bond is redeemed (called)
prior to its nominal maturity date. Yield Curve - A graphic representation that depicts the relationship at a given
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point in time between yields and maturity for bonds that are identical in every way except maturity. A normal
yield curve may be alternatively referred to as a positive yield curve.
Yield·to-maturlty - The rate of return yielded by a debt security held to maturity when both interest payments
and the investor's potential capital gain or loss are included in the calculation of return.
Zero-coupon Securities - Security that is issued at a discount and makes no periodic interest payments. The
rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity.
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Appendix 2: Investment Pools
1. Definition
In most states, there are provisions for the creation and operation of a government investment pool. The
purpose of a pool is to allow political subdivisions to pool investable funds in order to achieve a potentially
higher yield.
There are basically three (3) types of pools: 1) state-run pools; 2) pools that are operated by a political
subdivision where allowed by law and the political subdivision is the trustee; and 3) pools that are operated for
profit by third parties. Prior to any political subdivision being involved with any type of pool, a thorough
investigation of the pool and its policies and procedures must be reviewed.
2. Pool Questionnaire
Prior to entering a pool, the following questions and issues should be considered:
Securities: Government pools may invest in a broader range of securities than an entity may invest in.
It is important to be aware of, and comfortable with, the securities a pool buys. The following is a list of
questions an investment officer may wish to ask a prospective pool:
I. Does the pool provide a written statement of investment policy and objectives?
2. Does the statement contain:
a. a description of eligible investment instruments?
b. the credit standards for investments?
c. the allowable maturity range of investments?
d. the maximum allowable dollar weighted average portfolio maturity?
e. the limits of portfolio concentration permitted for each type of security?
f. the policy on reverse repurchase agreements, options, short sales and futures?
3. Are changes in the policies communicated to the pool participants?
4. Does the pool contain only the types of securities that are permitted by your investment policy?
Interest: Interest is not reported in a standard format, so it is important to know how interest is quoted,
calculated, and distributed in order to make comparisons with other investment alternatives.
Interest Calculations
1. Does the pool disclose the following about yield calculations:
a. the methodology used to calculate interest? (simple maturity, yield to maturity, etc.)
b. the frequency of interest payments?
c. how interest is paid? (credIted to principal at the end of the month, each quarter;
mailed?)
d. how are gainsliosses reported? factored monthly or only when realized?
Reporting
I. Is the yield reported to participants of the pool monthly? (If not, how often?)
2. Are expenses of the pool deducted before quoting the yield?
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3. Is the yield generally in line with the market yields for other investment alternatives?
4. How often does the pool report? What information does that report include? Does it include the
market value of securities?
Security: The following questions are designed to help safeguard funds from loss of principal and loss
of market value.
I. Does the pool disclose safekeeping practices?
2. Is the pool subject to audit by an independent auditor at least annually?
3. Is a copy of the audit report available to participants?
4. Who makes the portfolio decisions?
5. How does the manager monitor the credit risk of the securities in the pool?
6. Is the pool monitored by someone on the board of a separate neutral party external to the
investment function to ensure compliance with written policies?
7. Does the pool have specific policies with regard to the various investment vehicles?
a. Whaf are the different investment alternatives?
b. What are the pollcies for each type of investment?
8. Does the pool mark the portfolio to its market value?
9. Does the pool disclose the following about how portfolio securities are valued:
a. the frequency with which the portfolio securities are valued?
b. the method used to value the portfollo (cost, current value, or some other method)?
Operations: The answers to these questions will help determine whether this pool meets the entity's
operational requirements:
I. Does the pool limit eligible participants?
2. What entities are permitted to invest in the pool?
3. Does the pool allow multiple accounts and sub-accounts?
4. Is there a minimum or maximum account size?
5. Does the pool limit the number of transactions each month? What is the number of transactions
permitted each month?
6. Is there a limit on transaction amounts for withdrawals and deposits?
a. What is the minimum and maximum withdrawal amount permitted?
b. What Is the minimum and maximum deposit amount permitted?
7. How much notice is required for withdrawals/deposits?
8. What is the cutoff time for deposits and withdrawals?
9. Can withdrawals be denied?
10. Are the funds 100 percent withdrawable at anytime?
11. What are the procedures for making deposits and withdrawals?
a. What is the paperwork required, if any?
b. What is the wiring process?
12. Can an account remain open with a zero balance?
13. Are confirmations sent following each transaction?
Statements: It is important for (the designated official) and the agency's trustee (when applicable), to
receive statements monthly so the pool's records of activity and holdings are reconciled by (the
designated official) and its trustee.
1. Are statements for each account sent to participants?
a. What are the fees?
b. How often are they passed?
c. How are they paid?
d. Are there additional fees for wiring funds? (What is the fee?)
2. Are expenses deducted before quoting the yield?
Questions to Consider for Bond Proceeds: It is important to know (1) whether the pool accepts bond
proceeds and (2) whether the pool qualifies with the U.S. Department of the Treasury as an acceptable
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commingled fund for arbitrage purposes.
1. Does the pool accept bond proceeds subject to arbitrage rebate?
2. Does the pool provide accounting and investment records suitable for proceeds of bond issuance
subject to arbitrage rebate?
3. Will the yield calculation reported by the pool be acceptable to the IRS or will it have to be
recalculated?
4. Will the pool accept transaction instructions from a trustee?
5. Are separate accounts allowed for each bond issue so that the interest earnings of funds subject
to rebate are not commingled with funds not subject to regulations?
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Appendix 3: GFOA Recommended Practices and Policy Statements Related to Cash
Management
GFOA's Standing Committee on Cash Management has developed recommended practices and policy
statements pertaining to the prudent investment of public funds. State and local governments should carefully
consider the factors outlined in the GFOA recommended practices and policy statements when making
investment decisions and entering into investment transactions. (A complete set of recommended practices
and policy statements can be obtained from GFOA's Chicago office by calling 312/977-9700.)
The following recommended practices and policy statements are attached:
· Collateralization of Public Deposits (1984, 1987 and 1993)
· Diversification of Investments in a Portfolio (1997)
· Governmental Relationships with Securities Dealers (1986 and 1988)
· Market Risk (Volatility) Ratings (1995)
· Mark-to-Market Practices for State and Local Government Investment Portfolios and Investment Pools
(1995)
· Master Trust and Custodial Bank Security Lending Programs (1995)
· Maturities of Investments in a Portfolio (1997)
· Repurchase Agreements, Reverse Repurchase Agreements, Leveraging, and Prudent Investment
Practices for Cash Management (1986 and 1995)
· Selection of Investment Advisers (1992)
· State and Local Laws Concerning Investment Practices (1997)
· Use and Application of Voluntary Agreements and Guidelines and Support for Written Investment
Policies for State and Local Governments (1995)
· Use of Derivatives by State and Local Governments (1994)
· Use of Various Types of Mutual Funds by Public Cash Managers (1987)
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REVISED
CJ:TJC OF WOODBURY, MINNESOTA
CLOSED DEBT SERVICE CAPITAL PROJECT FUND
STATEMENT
The City CI:nmcl.l in December 1987 created the Closed Debt Service Capital Project
Fund. :rJ>a~:r COWlCU ..f the city of woodbury desires to amend the policy for
the Closed Debt service capital Project Fund and the use of those funds.
POLICY
The following apply to use of funds from the Closed Debt Service Fund:
1. All projects must receive prior approval of the City Council.
2. Expenditures are to be for capital projects having an expected useful life
of twenty (20) years or more and a cost of $250,000 or more.
3. Projects are to be of community-wide benefit, or benefit the majority of
the community.
4.
Projects to be funded should not have other available City funding sources,
and it should be determined by the City COUncil that bonding is not
available or is deemed undesirable.
5. The c1t7 Council may use this fund as a.funding source for projects not
meet:ing the above criteri.a provided funds must be repaid to the Closed Debt
service Fund and in1:erest charged on the funds borrowed. The following
shoÓl~ be taken into account before a loan is approved:
A.
Loans
1.
could be made for -
Interi.m financing for projects until final financing is
available, i.e., for construction projects waiting for bonds
to be issued.
Projects that would
small size makes it
2.
otherwise qualify for
impractical to bond.
bonding, but whose
B. Amount of the loan and the impact it would have on other Closed Debt
Service projects.
C. Xbere should be reasonable certainty the loan will be repaid.
D. Feasibility of the project without the loan.