Financial Management PoliciesCITY OF
CHANHASSEN, MINNESOTA
FINANCIAL MANAGEMENT POLICIES
Adopted May 8, 2000
Amended October 12, 2009
Amended June 27, 2011
Amended 2012
PURPOSE
The City of Chanhassen is responsible to its citizens to manage municipal finances wisely and properly
account for public funds. The City must ensure that it is capable of adequately funding and providing
local government services needed by the community. The City is also accountable for providing both
short-term and long-term financial stability for the community.
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. These policies represent long standing principles,
traditions and practices for City governments. These financial policies will be reviewed periodically to
determine if changes are necessary.
II. OBJECTIVES
In order to achieve this purpose, this plan has the following objectives for the City's fiscal performance:
1. Promote sound financial management of the City by providing accurate, complete, and timely
information to facilitate the City Council's decision making process.
2. Use conservative financial principles when estimating revenues, expenditures and tax revenues.
3. Minimize investment and financial risk by emphasizing principal preservation and liquidity over
investment yield.
4. Use benchmarks and best practices to ensure that the City operate-& efficiently and effectively.
5. Employ policies which promote sustainable revenue sources.
6. Employ fair user charges where the direct benefit is identifiable and the cost is measurable.
7. Provide public facilities, infrastructure, buildings, and equipment through use of a five-year capital
improvement program which identifies sources and uses of funds.
8. Establish and maintain open communication with credit rating agencies to protect and enhance
the City's credit rating.
9. Provide sufficient maintenance to ensure that capital assets operate effectively to their full useful
life expectancy.
10. Protect City assets through a sound system of financial and internal controls.
11: Maintain a risk management program that will minimise the impact of legal liahilitiPc nati,ral
disasters or other emergencies.
III. FINANCIAL MANAGEMENT POLICIES
Capital Improvement Budget Policies
1. The City shall adopt a five year capital budget associated with all capital and operating funds.
The City will project its capital needs for the next five years and will update this projection each
year. In addition, the City will maintain its capital assets to minimize future maintenance and
replacement costs.
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. City staff will identify the estimated costs and potential funding sources, including possible joint
ventures with other governmental jurisdictions, for each capital project proposal before the capital
budget is submitted to the City Council for approval.
4. The City will utilize the most advantageous financing method for the acquisition of capital goods.
Revenue Policies
1. The City will estimate its annual revenue by a conservative analytical process taking into account
economic conditions, historical trends, and management estimates.
2. 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).
3. The City will set fees and user charges for each enterprise fund at a level which fully supports the
total direct costs and capital costs of the activity.
4. The City will consider the prior year's net property tax delinquencies and abatements in setting
the annual property tax levy.
General Fund Reserve Policies & Fund Balance Spend -Down Policies
1. The City shall not use tax anticipation borrowings to cover operating expenses.
2. The year end general fund balance shall maintain a minimum unassigned fund balance for
working capital in an amount adequate to cover 50% of the property taxes and related State Aids
(If Any) for the following year.
3. The City will utilize fund balances in the best long term financial interests of the City.
4. The City Council authorizes the City Manager or Finance Director to assign fund balances that
reflect the City's intended use of those funds. When both restricted and unrestricted resources
are available for use, it is the City's policy to use restricted resources, then unrestricted resources
in the following order; 1) committed 2) assigned 3) unassigned. The exception to this is the Park
Dedication Fund (410), where it is the City's policy to use resources in the following order; 1)
assigned 2) committed 3) restricted. These fund balance classifications apply only to
governmental funds, not proprietary funds.
Fixed Asset Policies
1. The City will record and track the purchase, transfer and disposition of all assets with an expected
life at least two years and an initial cost basis of at least $5,000.
2. Other assets of less than $5,000 but with significant personal value, such as computers, will be
tracked for insurance purposes. These items will not be reported on the financial statements.
The purpose of this investment policy is to aid the City of Chanhassen in the appropriate management of
its investments. The City of Chanhassen should use this policy as a guide to fit its needs and to comply
with state and local laws, regulations, and other policies concerning the investment of public funds.
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This policy applies to the investment of all funds, except for cash in certain restricted funds. The City 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.
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
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.
The City 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 City will do business
Diversifying the investment portfolio so that potential losses on individual securities will be
minimized.
The City 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.
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 that offer same-day liquidity for short-term
funds.
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
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liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity
objectives described above. The core of investments is limited to relatively low risk securities in
anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to
maturity with the following exceptions:
® A security with declining credit may be sold early to minimize loss of principal.
® A security swap would improve the quality, yield, or target duration in the portfolio.
® Liquidity needs of the portfolio require that the security be sold.
111. Standards of Care
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.
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 which business is conducted on behalf of the City.
Delegation of Authority
Authority to manage the investment program is granted to City Manager and derived from Minnesota
Statutes 412.141. Responsibility for the operation of the investment program is hereby delegated to the
Finance Director, 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
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A. Any Federal Reserve Bank,
B. Any bank authorized under the laws of the United States or any state to exercise corporate trust
powers, including but not limited to the bank from which the investment is purchased,
C. A primary reporting dealer in United States government securities to the Federal Reserve Bank of
New York, or
D. A securities broker-dealer having its principal executive office in Minnesota, licensed pursuant to
Chapter 80A, or an affiliate of it, regulated by the securities and exchange commission and
maintaining a combined capital and surplus of $40,000,000 or more, exclusive of subordinated
debt.
The City's ownership of all securities in which the fund is invested should be evidenced by written
acknowledgments identifying the securities by:
A. The Names of issuers,
B. The Maturity dates,
C. The Interest rates,
D. Any Serial Numbers or other distinguishing marks.
The City may not invest in securities that are both uninsured and not registered in the name of the city
and are held by either:
A. The counterparty or
B. The counterparty's trust department or agent, but not in the name of the City.
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:
Audited financial statements
® Proof of National Association of Securities Dealers (NASD) certification
® Proof of state registration
® Certification of having read and understood and agreeing to comply with the City's investment
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.)
The Finance Director is responsible for establishing and maintaining an internal control structure
designed to ensure that the assets of the City 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:
® Control of collusion
® Separation of transaction authority from accounting and record keeping
® Custodial safekeeping
® Avoidance of physical delivery securities
® Clear delegation of authority to subordinate staff members
® written confirmation of transactions for investments and wire transfers
® Development of a wire transfer agreement with the lead bank and third -party custodian
Delivery vs. Payfffn en t
All trades where applicable will be executed by delivery vs. payment (DVP) to ensure that securities are
deposited in an eligible financial institution prior to the release of funds. A third -party custodian as
evidenced by safekeeping receipts will hold securities.
Investment instruments authorized and permitted by this policy are as follows:
A. Obligations of the United States or its agencies under a repurchase agreement if the margin
agreement under the repurchase agreement is 101 percent and with any of the following institutions:
1) a bank qualified as depository of public funds,
2) any national or state bank in the United States which is a member of the Federal Reserve System
and whose combined capital and surplus equals or exceeds $101000,000,
3) a primary reporting dealer in the United States government securities to the Federal Reserve
Bank of New York,
4) a securities broker --dealer having its principal executive office in Minnesota, licensed pursuant to
Chapter 80A, or an affiliate of it, regulated by the Securities and Exchange commission and
maintaining a combined capital and surplus of $40,000,000 or more, exclusive of subordinated
debt.
B. 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, excluding mortgage-backed securities defined as "high risk" (as
defined below) or in certificates of deposit secured by letters of credit issued by federal Home Loan
Banks.
High risk mortgage-backed securities are as follows:
1) interest -only or principal -only mortgage-backed securities,
2) any mortgage derivative security that:
a) has an expected average life greater than ten years,
b) has an expected average life that:
i) will extend by more than four years as the result of an immediate and sustained parallel
shift in the yield curve of plus 300 basis points: or
ii) will shorten by more than six years as the result of an immediate and sustained parallel
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c) will have an estimated change in price of more than 17 percent as the result of an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis points.
C. Shares of an investment company registered under the Federal Investment company Act of 1940,
whose shares are registered under the Federal Securities Act of 1933, and whose only investments
are in:
1) securities described in "B" above, (with the exception that "high-risk" mortgage-backed securities
are permissible investments for an investment company),
2) general obligation tax-exempt securities rated A or better by a national bond rating service, and
3) repurchase or reverse repurchase agreements fully collateralized by securities described above if
the agreements are only entered into with an entity which is:
a) a primary reporting dealer to the Federal Reserve Bank of New York, or
b) one of the 100 largest U.S. commercial banks.
D. State and local government obligation as follows:
1) an obligation of the State of Minnesota or any of its municipalities,
2) obligation of other state and local governments:
a) that have taxing power, and
b) are rated "A" or better by a national bond rating service.
3) general obligations of the Minnesota Housing Finance Agency that are rated"A" or better by a
national agency.
4) General obligations of housing finance agencies of other states, provided:
a) they include a moral obligation of the state, and
b) they are rated "A" or better by a national bond rating service,
c) general of revenue obligation of any agency or authority of the State of Minnesota other than
those found in 3 or 4 above (Housing finance Agency) that are rated "AK or better by a
national bond rating service.
E. Bankers acceptances of United States Corporation or their Canadian subsidiaries that is rated "Al" by
Moody's Investors Service and/or P1 by Standard and Poor's Corporation and matures in 270 days or
less.
F. Commercial paper issued by United States corporations or their Canadian subsidiaries that is rated
"Al" by Moody's Investors Service and/or "P1" by Standard and Poor's Corporation and matures in
270 days or less
G. Certificates of deposit at state and federally chartered banks and savings and loan associations. All
investments made under this subsection shall be limited to the amount of Federal Deposit Insurance
Corporation or shall be secured in the manner set forth in Minnesota statute 118.005. The certificate
of deposit should be in the form of a discounted security maturing in the amount not to exceed the
insurance coverage or in the amount so that at any time the face amount together with any accrued
interest does not exceed the insurance coverage.
H. The Finance Director will not purchase securities that are considered highly sensitive. A highly
sensitive investment is a debt instrument with contract terms that make the investment's fair value
highly sensitive to interest rate changes. Examples include range notes and index amortizing notes,
step-up notes and bonds, variable-rate investments with coupon multipliers, and coupons that vary
inversely with a benchmark index.
I. The Finance Director will not purchase securities that could expose the City to foreign currency risk.
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The City will limit investments to avoid over concentration in securities from a specific issuer or business
sector. At the time of purchase, no more than 5% of the overall portfolio may be invested in the securities
of a single issuer, except for the securities of the U.S. Government, external investment pools, and U.S
Government Sponsored Enterprises (or "Agencies").
In accordance with state law and the GFOA Recommended Practices on the Collateralization of Public
Deposits, collateralization of 110% of the total value of deposits will be required of all banks listed as
authorized depositories. (See GFOA Recommended Practices, Appendix 3.)
V11. Investment Parameters
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The investments shall be diversified by:
o limiting investments to avoid over concentration 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.)
Maximum Maturities
To the extent possible, the City shall attempt to match its investments with anticipated cash flow
requirements. The City will not directly invest in securities maturing more than seven (7) years from the
date of purchase with the majority (90%) of the portfolio maturing within five (5) years, or in accordance
with state and local statutes and ordinances. No more than 10% of the portfolio can have maturity dates
between five (5) and seven (7) years of the date of purchase. The City 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 seven (7) years if the maturity of such investments is 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.
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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 City to
ascertain whether investment activities during the reporting period have conformed to the investment
policy. The report shall be provided to the City Manager, the City Council, 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 Listing of investment by maturity date.
o Percentage of the total portfolio that each type of investment represents.
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The investment portfolio will be managed in accordance with the 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
performance shall be compared on a regular basis.
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 performed 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.
vlll. PoNcy Cons n rato'ons
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.
Amendments
This policy shall be reviewed by the Finance Director on an annual basis. Any changes must be approved
by the City Manager and City Council.
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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.
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 Sale/Purchase - A transaction that calls for delivery and payment of securities on the same day
that the transaction is initiated.
collateralization - 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.
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Uonvexity - JA measure OT a Donds price sensitivity to changing interest rates. A high convexity indicates
greater sensitivity of a bond's price to interest rate changes.
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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 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
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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
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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:
• Control of collusion - Collusion is a situation where two or more employees are working in
conjunction to defraud their employer.
• 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.
• 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.
• 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.
• 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.
• 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.
• Development of a wire transfer agreement with the lead bank and third -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.
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 -to -market - The process whereby the book value or collateral value of a security is adjusted to
reflect its current market value.
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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 and - 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:
Report standardized performance calculations.
Disseminate timely and accurate information regarding the fund's holdings, performance,
management and general investment policy.
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.
® Maintain the daily liquidity of the fund's shares.
® Value their portfolios on a daily basis.
0 Have all individuals who sell SEC -registered products licensed with a self-regulating organization
(SRO) such as the National Association of Securities Dealers (NASD).
® Have an investment policy governed by a prospectus that is updated and filed by the SEC
annually.
MutuaQ Fund Statistical Services - Companies that track and rate mutual funds, e.g., IBC/Donoghue,
Lipper Analytical Services, and Morningstar.
National Association of Securities 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)]/(Number of shares outstanding)
No Load Fund - A mutual fund that 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.
Positive Yield Curve - A chart formation that illustrates short-term securities having lower yields than
long-term securities.
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rremwm'The amount by which the price paid for osecurity exceeds the security's par value.
Pn'me Rate-Aprefemedinterest rate charged by commercial banks to their most creditworthy
customers. Many interest rates are keyed tothis rete.
Principal - The face value or par value of a debt instrument. Also may refer to the amount ofcapital
invested inagiven 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 PersonRu|e-Aninvestment standard outlines the fiduciary responsibilities of public funds
investors relating toinvestment practices.
Regular Way Delivery - Securities settlement that calls for delivery and payment onthe third business
day following the trade date (T+3);payment onaT+1 basis iacurrently 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 nate of return currently generated by that holding.
Repurchase Agreement (repo or RP) '/\nagreement ofone party tosell securities ataspecified price
to a second party and a simultaneous agreement of the first party to repurchase the securities ata
specified price orataspecified 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 ataspecified price tothe second party ondemand orata specified date.
Rule 2e+7 of the Investment Company Act - Applies toall money market mutual funds and mandates
such funds to maintain certain standards, including a 13- month maturity limit and a 90 -day average
maturity on inveatmonts, to help maintain a constant net asset value of one dollar ($1.00).
Smfekeeping- Holding ofassets (e.g.. securities) by financial institution.
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-Moneyeccumulatedona regular basis ineseparate custodial account that is used to
redeem debt securities or preferred stock issues.
Svvap-Tredingoneoasetfor 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 ofterm 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
dividonda or oapita| Ydins. This ib oa|ou|ateU bytaKing thefo||oWing L;ompunenta during e uenLain iime
period. (Price Appreciation) + (Dividends paid) + (Capital gains) = Total Return
Treasury EU8|s-Short-term U.8.government non-interest bearing debt securities with maturities ofno
longer than one year and issued in minimum denominations of $10,000. Auctions of three- and six-month
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bills are weekly, while auctions of one-year bills are monthly. The yields on these bills are monitored
closely inthe money markets for signs of interest rate trends.
Treasury Notes - Intermediate U.8.government debt securities with maturities of one to1Oyears and
issued indenominations ranging from $1.00to$1 million ormore.
Treasury Bonds - Long-term U.8.government debt securities with maturities of ten years orlonger and
issued in minimum denominations of $1,000. Currently, the longest outstanding maturity for such
securities is3Oyears.
Uniform Net Capital Rule -8EC Rule 16C8-1 outlining capital requirements for broker/dealers.
Volatility - A degree of fluctuation in the price and valuation of securities.
"Volatility Rimk" Rating - A rating system to o|eedy 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
(^aae^ by S&P; Wc1^ by Fitch)to those that are highly sensitive with currently identifiable market volatility
risk ("coo-^by8&P.Wc1D"byFitch).
Weighted Average Maturity (WAM) - The average maturity of all the securities that comprise a portfolio.
According to SEC rule 2a'7, the VVAyWfor SEC registered money market mutual funds may not exceed 90
days and noone security may have amaturity that exceeds 3Q7days.
When Issued (WU� - A conditional transaction in which an authorized new security has not been issued.
All "when issued" transactions are settled when the actual security ioissued.
Yield - The current rate of return on an investment security generally expressed as a percentage of the
security's current price.
Yield -to -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 -Agnaphio representation that depicts the
relationship at a given point in time between yields and maturity for bonds that are identical in every way
except maturity. A normal yield curve may bealternatively referred to as o positive yield curve.
Yield -to -maturity ' The rate of return yielded by a debt security held to maturity when both interest
payments and the investor's potential capital gain or |ooa are included in the calculation of return.
Zero-coupon Securities - Security that is issued at a discount and makes no periodic interest payments.
The nate of return consists of gradual accretion of the principal of the security and is payable at per
upon maturity.
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Appendix 2: Investment Pools
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.
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:
o Does the pool provide a written statement of investment policy and objectives?
o 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?
o Are changes in the policies communicated to the pool participants?
o 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
o 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 gains/losses reported? factored monthly or only when realized?
o Is the yield reported to participants of the pool monthly? (If not, how often?)
o Are expenses of the pool deducted before quoting the yield?
o Is the yield generally in line with the market yields for other investment alternatives?
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o 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.
o Does the pool disclose safekeeping practices?
0 Is the pool subject to audit by an independent auditor at least annually?
0 Is a copy of the audit report available to participants?
o Who makes the portfolio decisions?
o How does the manager monitor the credit risk of the securities in the pool?
0 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?
o Does the pool have specific policies with regard to the various investment vehicles?
a. What are the different investment alternatives?
b. What are the policies for each type of investment?
o Does the pool mark the portfolio to its market value?
o 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 portfolio (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:
o Does the pool limit eligible participants?
o What entities are permitted to invest in the pool?
o Does the pool allow multiple accounts and sub -accounts?
0 Is there a minimum or maximum account size?
o Does the pool limit the number of transactions each month? What is the number of
transactions permitted each month?
0 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?
o How much notice is required for withdrawals/deposits?
o What is the cutoff time for deposits and withdrawals?
o Can withdrawals be denied?
o Are the funds 100 percent withdrawable at anytime?
o What are the procedures for making deposits and withdrawals?
a. What is the paperwork required, if any?
b. What is the wiring process?
o Can an account remain open with a zero balance?
o 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.
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o 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?)
o 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 commingled fund for arbitrage purposes.
o Does the pool accept bond proceeds subject to arbitrage rebate?
o Does the pool provide accounting and investment records suitable for proceeds of bond
issuance subject to arbitrage rebate?
o Will the yield calculation reported by the pool be acceptable to the IRS or will it have to be
recalculated?
o Will the pool accept transaction instructions from a trustee?
o 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?
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 listed and should be followed whenever
possible:
Procurement of Banking Services (1997, 2005)
Frequency of Purchased Securities Valuation in Repurchase Agreements (1999, 2003, updated
2006)
Electronic Signatures (2006)
• Governmental Relationships with Securities Dealers (1986, 1988, 2003, 2006)
• Use of Various Types of Mutual Funds by Public Cash Managers (1987, 20031 2006)
Debt Service Payment Settlement Procedures (2007) (previously titled Same -Day Funds
Settlement Procedures -19941 2003)
• Diversification of Investments in a Portfolio (1997, 20023 2007)
Investment of Bond Proceeds (1996, 2007)
Managing Market Risk in a Portfolio (2007) (previously titled Maturities of Investments in a
Portfolio - 1997, 2002)
• Selection of Investment Advisers for Non -Pension Fund Assets (1999, 2003, 2007)
• Use of Commercial Paper (2001, 2007)
• Revenue Control and Management Policy (2007)
• Revenue Control and Management Policy: Accounts Receivable Controls (2003 and 2007)
Revenue Control and Management Policy: Cash Receipts Controls (2003 and 2007)
• Payment Consolidation Services (2007)
• Collateralization of Public Deposits (1984, 1987, 1993, 2000, and 2007)
Acceptance of Credit and Debit Cards (1999, 2002 and 2008)
• Use of Cash Flow Forecasts in Operations (2005 and 2008)
• Electronic Commerce (1997, 2001, 2002, 2005, 2008)
Mark -to -Market Reporting Practices for State and Local Government Investment Portfolios (1995,
2000, 2003, 2005, and 2008)
Purchasing Card Programs (1998, 2003, and 2008)
Repurchase Agreements and Reverse Repurchase Agreements (1986, 1995, and 1998, 2000,
2003, 2006, 2008) new
• Security Lending Programs for Non -Pension Fund Portfolios (1995, 2002, 2008)
• Use of Local Government Investment Pools (2007, 2008)
• Bank Account Fraud Prevention (2007, 2009) revised
• Use of Lockbox Services (2000, 2003) 20071 2009) revised
fAgregs\investments\financial policy 2009.docx
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