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HomeMy WebLinkAbout96-59 - Adopting the 1996-97 Statement of Investment Policy, Authorizing City Treasurer to Invest & Reinvest Idle MoniesRESOLUTION NO. ?6 _ 5F A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF COSTA MESA, CALIFORNIA, ADOPTING THE 1996-97 STATEMENT OF INVESTMENT POLICY, AND AUTHORIZING THE CITY TREASURER TO INVEST AND REINVEST IDLE MONIES OF THE CITY OF COSTA MESA IN ACCORDANCE WITH THE 1996-97 STATEMENT OF INVESTMENT POLICY, AND AUTHORIZING SAID TREASURER TO DELEGATE TO THE ASSISTANT DIRECTOR OF FINANCE THE CARRYING OUT OF ANY SUCH TASKS. THE CITY COUNCIL OF THE CITY OF COSTA MESA DOES HEREBY RESOLVE AS FOLLOWS: WHEREAS, in accordance with Section 53607 of the Government Code of the State of California, the City Treasurer is hereby authorized (a) to invest such portion of any sinking fund of, or idle money in, the City Treasury, not required for the immediate necessities of the City as is deemed wise or expedient, in securities in which this Council is authorized to invest such sums by the provisions of State Government Code Section 53601 and Section 53635, limited by the City's Investment Policy; and (b) to sell, or exchange for other eligible securities, and reinvest the proceeds of the securities purchased. The City Treasurer shall make a monthly report of such transactions to this Council. NOW, THEREFORE BE IT RESOLVED that the City Council of the City of Costa Mesa has adopted the 1996-97 Statement of Investment Policy as set forth in the attached document. The City Clerk shall certify to the passage and adoption of this resolution, and it shall thereupon be in full force and effect. PASSED AND ADOPTED this 17th day of June, 1996. ATTEST: Deputy Ci t Clerk of the City of Costa Mesa STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss CITY OF COSTA MESA ) C� Mayq of the City of Costa Mesa A ROVED AS TO FORM CITY ATTORNEY I, MARY T. ELLIOTT, Deputy City Clerk and ex -officio Clerk of the City Council of the City of Costa Mesa, hereby certify that the above and foregoing Resolution No. 96 -J79 was duly and regularly passed and adopted by the said City Council at a regular meeting thereof held on the 17th day of June, 1996, by the following roll call vote: AYES: LRicKSeAl� I�UFFA f-�oRn13u���t, �E,11;5 �A✓Ff IfA�/ NOES: (Jo nJ-i:- ABSENT: t3on1E IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Costa Mesa this 18th day of June, 1996. Deputy City (Aerk and ex -officio Clerk of the City CourUil of the City of Costa Mesa CITY OF COSTA MESA STATEMENT OF INVESTMENT POLICY 1996-97 I. PURPOSE This statement is intended to provide guidelines for the prudent investment of the City's temporary idle cash, and outline the procedures for maxinuzing the efficiency of the City's cash management system. The ultimate goal is to enhance the economic status of the City while safeguarding its assets. H. OBJECTIVE The City's cash management system is designed to accurately monitor and forecast revenues and expenditures, thus enabling the City to "invest funds to the fullest extent possible. The City attempts to obtain the highest yield possible only after the criteria established for safety and liquidity have been met. The City of Costa Mesa operates its pooled idle cash investments 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. This affords the City a broad spectrum of investment opportunities as long as the investment is deemed prudent and is allowable under current legislation of the State of California Government Code Section 53600 et seq. and the general laws of the City of Costa Mesa. The City of Costa Mesa strives to maintain the level of investment of all idle funds as near 100% as possible, through daily and projected cash flow determinations. Idle cash management and investment transactions are the responsibility of the City Treasurer or his/her designee. Criteria for selecting investments and the order of priority are: 1. Safety: The safety and risk associated with an investment refers to the potential loss of principal, interest, or a combination of these amounts. The City only operates in those investments that are considered very safe. 2. Liquidity: This refers to the ability to "cash in" at any moment in time with a minimal chance of losing some portion of principal or interest. 3. Yield: Yield is the potential dollar earnings an investment can provide, and sometimes is referred to as the rate of return. 4. Safekeeping: Securities purchased shall be held in third party safekeeping in the Trust Department of a financial institution, in the City's name and control. The account established shall be protected from seizure by creditors should the financial institution holding the City's securities file for bankruptcy protection. The basic premise underlying the City's investment philosophy is and continues to be, to insure that surplus funds are always safe and available when needed. III. DELEGATION OF INVESTMENT AUTHORITY Authority to manage the City of Costa Mesa's investment program is derived from City of Costa Mesa Council Resolution No. 96-59. Management responsibility for the investment program is hereby delegated to the City Treasurer or his/her designee, who shall establish written procedures for the operation of the investment program consistent with this Investment Policy. Procedures should include references to: safekeeping, repurchase agreements, wire transfer agreements, banking service contracts, and collateral/ depository agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City Treasurer or his/her designee. The City Treasurer or his/her designee shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. IV. AUTHORIZED HWESTMENTS The California Government Code allows the City to invest in the following media: • Securities of the U.S. Government, or its agencies • Small Business Administration loans • Certificates of deposit, placed with commercial banks and savings and loan companies • Negotiable certificates of deposit • Bankers acceptances • Commercial paper • Corporate notes and bonds, including medium term notes • Local Agency Investment Fund • Repurchase agreements • Reverse repurchase agreements • Passbook savings account demand deposits • County Treasurer demand deposits • Asset-backed and mortgage-backed securities • Money market mutual funds As a matter of practice, however, the City of Costa Mesa generally limits its investments to the following vehicles: 2 U.S. Treasury Bills - Issued weekly with maturity dates up to one year. They are issued and traded on a discount basis with interest figured on a 360 -day basis, actual number of days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. U.S. Treasury Notes - Initially issued with two- to ten-year maturities. They are actively traded in a large secondary market and are very liquid. The Treasury may issue Note issues with a minimum of $1,000, however, the average minimum is $5,000. Federal Agency Issues - Guaranteed directly or indirectly by the United States Government. All agency obligations qualify as legal investments and are acceptable as security for public deposits. They usually provide higher yields than regular Treasury issues with all of the same advantages. Examples include: FICBs (Federal Intermediate Credit Bank Debentures) - Loans to lending institutions used to finance the short-term and intermediate needs of farmers, such as seasonal production. They are usually issued monthly in minimum denominations of $3,000 with a nine-month maturity. Interest is payable at maturity and is calculated on a 360 -day, 30 -day month basis. FFCBs (Federal Farm Credit Bank) - Debt instruments used to finance the short and intermediate term needs of farmers and the national agricultural industry. They are issued monthly with three- and six-month maturities. The FFCB issues larger issues (one to ten year) on a periodic basis. These issues are highly liquid. FLBs (Federal Land Bank Bonds) - Long-term mortgage credit provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. The minimum denomination is $1,000. They carry semi-annual coupons. Interest is calculated on a 360 -day, 30 -day month basis. FHLBs (Federal Home Loan Bank Notes and Bonds) - Issued by the Federal Home Loan Bank System to help finance the housing industry. The notes and bonds provide liquidity and home mortgage credit to savings and loan associations, mutual savings banks, cooperative banks, insurance companies, and mortgage -lending institutions. They are issued irregularly for various maturities. The minimum denomination is $5,000. The notes are issued with maturities of less than one year and interest is paid at maturity. The bonds are issued with various maturities and carry semi-annual coupons. Interest is calculated on a 360 -day, 30 -day month basis. FNMAs (Federal National Mortgage Association) - Used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those 91 guaranteed by the Veterans Administration. They are issued about four times a year for maturities ranging from a few months to eight years. They are issued inminimum denominations of $10,000. They carry semi-annual coupons. Interest is computed on a 360 -day, 30 -day month basis. FHLMCs (Federal Home Loan Mortgage Corporation) - A government- sponsored corporation established to develop the secondary market for conventional home mortgages. Mortgages are purchased solely from the Federal Home Loan Bank System member lending institutions whose deposits are insured by agencies of the United States Government. They are issued for various maturities and in minimum denominations of $10,000. Interest is paid semi-annually and is calculated on a 360 -day, 30 -day month basis. Other federal agency issues are Small Business Administration notes (SBAs), Government National Mortgage Association notes (GNMAs), Tennessee Valley Authority notes (TVAs), and Student Loan Marketing Association notes (SALLIE-MAEs). As a matter of practice, the City does not invest in these issues as they do not suit our purposes as well as other investment opportunities available. The City limits its investments to no more than 20% of its surplus funds in any one Federal Agency. Bankers Acceptances - Short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at its maturity. An acceptance is a high-grade negotiable instrument. Acceptances are purchased in various denominations for 30, 60, or 90 days, but no longer than 270 days. The interest is calculated on a 360 -day discount basis similar to Treasury Bills. Local agencies may not invest more than 40% of their surplus money in bankers acceptances. Certificates of Deposit - Time deposits of a bank or savings and loan. They are purchased in various denominations with maturities ranging from 30 to 360 days. The interest is calculated on a 360 -day, actual -day month basis and is payable monthly. Negotiable Certificates of Deposit - Unsecured obligations of the financial institution, bank or savings and loan, bought at par value with the promise to pay face value plus accrued interest at maturity. They are high-grade negotiable instruments, paying a higher interest rate than regular certificates of deposit. The primary market issuance is in multiples of $1,000,000, the secondary market usually trades in denominations of $500,000, although smaller lots are occasionally available. As a matter of practice, only the ten largest U.S. banks where there is a secondary market established for continued liquidity are considered for investment. 4 Commercial Paper - Short-term unsecured promissory notes issued by a corporation to raise working capital. These negotiable instruments are purchased at a discount to par value or at par value with interest bearing. Commercial paper is issued by corporations such as General Motors Acceptance Corporation, IBM, BankAmerica, etc. Local agencies are permitted by State law to invest in commercial paper of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc., and/or Standard and Poor's Corporation. Purchases of eligible commercial paper may not exceed 180 days maturity nor exceed 30% of the local agency's surplus funds. Medium Term Corporate Notes - Unsecured promissory notes issued by a corporation organized and operating in the United States. These are negotiable instruments and are traded in the secondary market. Medium term corporate notes can be defined as extended maturity commercial paper. Local agencies are restricted by the Government Code to investments in corporations rated in the top three note categories by Moody's Investors Service, Inc., and/or Standard and Poor's Corporation. For medium-term notes, eligible purchases consist of instruments that have a rating of "A" or better by both Moody's Investors Service, Inc., and Standard and Poor's Corporation. If the security's credit rating falls below "A" by one of these agencies, then awareness is heightened and the security monitored closely to determine if credit risk has been significantly increased. If a security falls below "A" by both rating agencies, then the City Treasurer or his/her designee will evaluate the need to sell the security prior to maturity. Further restrictions are a maximum term of five years to maturity and total investments in medium term corporate notes may not exceed 30% of the local agency's surplus funds. Repurchase Agreements - A repurchase agreement is a short-term investment transaction. Banks buy temporarily idle funds from a customer by selling U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date. Repurchase agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal funds and the maturity of the repurchase agreement. Some banks will execute repurchase agreements for a minimum of $100,000 to $500,000, but most banks have a minimum of $1,000,000. The term of a repurchase agreement may not exceed one year. The market value of securities that underlay a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Repurchase Agreements can only be executed with financial institutions or broker/dealers that have signed a Master Repurchase Agreement with the City. Reverse Repurchase Agreements - A reverse repurchase agreement is the opposite of a repurchase agreement. The City loans a security to a bank in exchange for cash. The City agrees to pay off the loan with interest on a future date. As this type of investment actually involves a loan arrangement, the City may not invest more than 10% of its surplus funds in reverse repurchase agreements, and must always match 5 its maturities to the reinvestment. Reverse repurchase agreements may be utilized only when either of the following conditions are met: 1. The security was owned or specifically committed to purchase, by the local agency, prior to December 31, 1994, and was sold using a reverse repurchase agreement on December 31, 1994. 2. The security: a) to be sold has been owned and fully paid for for a minimum of 30 days prior to sale; and b) the total of all reverse repurchase agreements owned does not exceed 10 percent of the base value of the portfolio; and c) the agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement and the final maturity date of the same security. LAW (Local Agency Investment Fund) - A special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum balance of $20,000,000 for any agency. However, any investment with LAIF must comply with other self-imposed restrictions as specified in this Investment Policy. The City is restricted to a maximum of ten transactions per month. It offers high liquidity because deposits can be converted to cash in 24 hours and no interest is lost. All interest is distributed to those agencies participating on a proportionate share basis determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly. The State retains an amount for reasonable costs of making the investments, not to exceed one- quarter of one percent of the earnings. California Government Code §16429.3 states, in part: "money placed with the State Treasurer for deposit in the Local Agency Investment Fund by cities, counties, or special districts shall not be subject to impoundment or seizure by any state official or state agency." Orange County Treasurer's Pool - A special fund in the County Treasury which local agencies may use to deposit funds for investment. The City may not invest more than 35% of its surplus money with the Orange County Treasurer's Pool. However, any investment with the Orange County Treasurer's Pool must comply with other self-imposed restrictions as specified in this Investment Policy. The County Treasurer charges 12.5 basis points (.125%) to all pool participants for its direct costs. Direct Costs include proper staffing, bank and custodial fees, software maintenance fees, and other indirect costs relating to the investment. Investment earnings are distributed to the pool participants on a monthly basis, net of the above charges. The earnings are credited to the participants accounts on either the last day of each month or the first day of the subsequent month. 2 Money Market Mutual Funds - Shares of beneficial interest issued by diversified management companies. To be eligible for investment, shares must: 1. attain the highest rating provided by Moody's Investors Service, Inc., which is currently "Aaa," and/or Standard and Poor's Corporation, which is currently "AAA;" and 2. the investment adviser managing the shares must be registered with the Securities and Exchange Commission with not less than five year's experience investing in instruments authorized under California Government Code §53601 subdivisions (a) to (m) inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000); and 3. the purchase price of shares shall not include any commission that these companies may charge; and 4. investment in shares shall not exceed 15 percent of surplus funds. However, any investment in a money market mutual fund must comply with other self-imposed restrictions as specified in this Investment Policy. Asset -Backed and Mortgage -Backed Security - Bonds backed by payments from receivables/mortgages having a maximum of five years maturity. These securities must have an "AA" or better rating by Moody's Investors Services, Inc., and/or Standard and Poor's Corporation. No more than 20% of the City's surplus money may be invested in these securities. V. INVESTMENT OF BOND PROCEEDS When investing proceeds from the issuance of bonds, the City of Costa Mesa will follow this Investment Policy when determining allowable investments. Should the trust agreement of a particular bond issue be more restrictive than the City's policy on permitted investments, then the trust agreement will take precedence. VI. CITY CONSTRAINTS The City of Costa Mesa operates its pooled idle cash investments under the Prudent Man rule. This provides a broad spectrum of prudent investment opportunities consistent with current State of California legislation and other imposed legal restrictions. The City Treasurer or his/her designee will evaluate local banks and savings institutions and may invest idle cash funds with such institutions when the criteria for prudent investment previously stated are met. The City operates its investment pool according to State and self-imposed constraints. It does not buy stocks; it does not speculate; it does not deal in futures or options. Any investment extending beyond a five-year period requires prior City Council approval. Additionally, a minimum of 40% of the outstanding investments must mature within a one-year time period. 6 VII. SAFEKEEPING AND COLLATERALIZATION All security transactions, including collateral for repurchase agreements, entered into by the City shall be conducted on a delivery -versus -payment (DVP) basis. Securities will be held by a third party custodian designated by the City Treasurer or his/her designee. Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse repurchase) agreements. In order to anticipate market changes and provide a level of security for all funds, a minimum collateralization level is required. Surplus funds must be deposited in State or national banks, State or Federal savings and loan associations, or State or Federal credit unions within the State of California. The deposits cannot exceed the amount of the bank's or savings and loan's paid-up capital and surplus. The bank or savings and loan must secure public funds deposits with eligible securities having a market value of 110% of the total amount of the deposits. State law also allows as an eligible security, first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is 105% in the form of a letter of credit drawn on the Federal Home Loan Bank. The City Treasurer or his/her designee may waive security for that portion of a deposit which is insured pursuant to Federal law. Currently, the first $100,000 of a deposit is federally insured. Deposits in excess of $100,000 are collateralized as previously indicated. VIII. DERIVATIVE INVESTMENTS A derivative is a generic term often used to categorize a wide variety of financial instruments whose value "depends on" or is "derived from" the value of an underlying asset, reference rate, or index. Investments in derivative instruments are limited to debt securities that have periodic increases, or step-up interest rate adjustments that provide upward mobility in yield return. Investments in debt securities which contain a callable feature are also allowable, but must comply with other restrictions as specified in this Investment Policy. Investments purchased after June 19, 1995, in derivative instruments known as "inverse floaters," "dual index," or "stepped inverse" securities that produce higher than market yields at purchase date (when interest rates are low), but have the possibility of producing low or no coupon rates as market interest rates rise through the life of the instrument are not allowable. Furthermore, investments in range notes or interest -only strips that are derived from a pool of mortgages are not allowable. However, debt securities that have a floor or a built-in feature that prevents the instrument from potentially returning no yield are allowable. 0 DC REPORTING Under provisions of Section 53646 of the California Government Code, the Treasurer or his/her designee shall render a quarterly investment report to the City Council, the City Manager, and the City Attorney within 30 days following the end of the quarter covered by the report. However, as a matter of practice, a monthly report shall be submitted listing the type of investments, institution, date of maturity, amount of deposit, rate of interest, current market value for all securities, and such other data as may be required by the City Council on a monthly basis. Furthermore, an Investment Oversight Committee comprised of the following individuals will meet quarterly to review the City's portfolio and investment strategy. Mayor, or his/her designee City Manager Three Members who are either residents or conduct business within the City and have experience in banking, securities trading, or financial planning. Additionally, an annual audit of the City's investment portfolio will be conducted by an independent Certified Public Accounting firm and a report of results will be made available. X. QUALIFIED DEALERS The City of Costa Mesa shall transact business only with banks, savings and loans, and registered investment securities dealers. The City will limit the number of broker/dealers authorized to do business with the City to one (1) broker/dealer for every $15,000,000 of portfolio size. The City Treasurer or his/her designee will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved broker/dealers who are authorized to provide investment services in the State of California. These may include "primary" and "regional" broker/dealers with offices located in the State of California. All financial institutions and broker/dealers who desire to become, qualified bidders for investment transactions must be approved by and supply the City Treasurer or his/her designee with a completed broker/dealer questionnaire. XI. POLICY REVIEW This Statement of Investment Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law, financial and economic trends. 7 I. CITY OF COSTA MESA IIWESTMENT GUIDELINES AND STRATEGY GUIDELINES - Guidelines are established to direct and control activities in such a manner that previously established goals are achieved. 1. Investment Transaction. Every investment transaction must be authorized and reviewed by the Treasurer or his/her designee. 2. Pooled Cash. Whenever practical, local agency cash is consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated quarterly according to month-end cash and investment balances for each fund. 3. Competitive Bids. Purchase and sales of securities are made on the basis of competitive offers and bids when practical. 4. Cash Forecast. The cash flow for the City is analyzed with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet disbursement requirements. 5. Investment Limitations. Security purchases and holdings are main- tained within statutory limits imposed by the California Government Code. Current limits are: Bankers Acceptances Commercial Paper Negotiable Certificates of Deposit Reverse Repurchase Agreements Medium Term Notes Money Market Mutual Funds Asset-Backed/Mortgage-Backed Securities 40% Section 53601(f) 30% Section 53601(g) 30% Section 53601(h) 20% Section 53601(i) 30% Section 53601Q) 15% Section 53601(k) 20% Section 53601(n) 6. Liquidity. The marketability of a security is considered at the time of purchase, as the security may have to be sold at a later date to meet unanticipated cash demands. 7. Diversification. The portfolio should consist of a mix of various types of securities, issuers, and maturities. 8. Evaluate Certificates of Deposit (a) Certificates of Deposit shall be evaluated in terms of FDIC coverage. For deposits in excess of the insured maximum of $100,000, approved collateral at full market value shall be required. (California Government Code Section 53652 and/or 53651(m) and 53651.2(a)(1). 10 II. (b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of the issuer, as these deposits are uninsured and uncollateralized promissory notes, STRATEGY - Strategy refers to the ability to manage financial resources in the most advantageous manner. 1. Economic Forecasts. Economic Forecasts are obtained periodically from economists and financial experts through bankers and brokers to assist the Treasurer or his/her designee with the formulation of an investment strategy for the local agency. 2. Implementing Investment Strategy. Investment transactions are executed which conform with anticipated interest rate trends and the current investment strategy plan. 3. Rapport. A close working relationship is maintained with large vendors of the city. The objective is to pinpoint when large disbursements will clear the city's bank account. It is essential for good cash control that such large expenditures be anticipated, estimated as to dollar amount, and communicated to the Treasurer or his/her designee for liquidity planning purposes. 4. Preserve Portfolio Value. Field standards are developed in order to maintain earnings near the market and to preserve the value of the portfolio. 11 CITY OF COSTA MESA INVESTMENT PROCEDURES INTERNAL CONTROL - GUIDELINES OBJECTIVES OF INTERNAL CONTROL Internal control is the plan of organization and all the related systems established by the management's objective of ensuring, as far as practicable: • The orderly and efficient conduct of its business, including adherence to management policies. • The safeguarding of assets. • The prevention or detection of errors and fraud. • The accuracy and completeness of the accounting records. • The timely preparation of reliable financial information. LIMITATIONS OF INTERNAL CONTROL No internal control system, however elaborate, can by itself guarantee the achievement of management's objectives. Internal control can provide only reasonable assurance that the objectives are met, because of its inherent limitations, including: • Management's usual requirement that a control be cost-effective. • The direction of most controls at recurring, rather than unusual, types of transactions. • Human error due to misunderstanding, carelessness, fatigue, or distraction. • Potential for collusion that circumvents controls dependent on the segregation of functions. • Potential for a person responsible for exercising control abusing that responsibility; a responsible staff member could be in a position to override controls which management has set up. 12 CITY OF COSTA MESA INTERNAL CONTROL - GUIDELINES ELEMENTS OF INTERNAL CONTROL Elements of a system of internal control are the means by which an organization can satisfy the objectives of internal control. These elements are: 1. ORGANIZATION Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and understood. 2. PERSONNEL Personnel should have capabilities commensurate with their responsibilities. Personnel selection and training policies together with the quality and quantity of supervision are thus important. 3. SEGREGATION OF FUNCTIONS Segregation of incompatible functions reduces the risk that a person is in a position both to perpetrate and conceal errors or fraud in the normal course of duty. If two parts of a transaction are handled by different people, collusion is necessary to conceal errors or fraud. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, custody of assets, and performing reconciliations. 4. AUTHORIZATION All transactions should be authorized by an appropriate responsible individual. The responsibilities and limits of authorization should be clearly delineated. The individual or group authorizing a specific transaction or granting general authority for transactions should be in a position commensurate with the nature and significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully. 5. CONTROLS OVER AN ACCOUNTING SYSTEM Controls over an accounting system include the procedures, both manual and computerized, carried out independently to ascertain that transactions are complete, valid, authorized, and properly recorded. 13 CITY OF COSTA MESA CASH CONTROLS PROCEDURES PERFORMED BY AUDITORS WITH RESPECT TO CASH RECEIPTS A. City procedures and controls are reviewed. Some of the system strengths are: 1. Receipts are controlled upon receipt by proper registration devices. 2. Receipts are reconciled on a daily basis. 3. Amounts are deposited intact. 4. All bank accounts are authorized by City Council. 5. Cash counts are done by two or more individuals. 6. Bank reconciliations are reviewed. 7. Prompt posting of cash receipt entries in books. 8. Receipt forms are prenumbered, accounted for, and physically secured. 9. Proper approval required for write-offs of customer accounts. 10. Checks are restrictively endorsed upon receipt or when run through cash register. 11. Adequate physical security over cash. 12. Individuals that handle cash do not post to customer account records or process billing statements. 13. Adequate supervision of Finance Department operations. B. Significant revenues are confirmed directly with payor and compared with City books to make sure amounts are recorded properly. C. Cash balances are substantiated by confirming all account balances recorded in books. Bank reconciliations are reviewed for propriety and recalculated by the auditor. All significant reconciling items on bank reconciliations are verified as valid reconciling items by proving to subsequent bank statements. 14 r CITY OF COSTA MESA SEGREGATION OF RESPONSIBILITIES OF THE TREASURY FUNCTIONS Function 1. Authorization of Investment Transactions: Formal Investment Policy should be: • Prepared By: • Submitted To: Investment Transactions should be approved by 2. Execution of investment transactions 3. Timely recording of investment transactions: Recording of investment transactions in the Treasurer's records Recording of investment transactions in the accounting records 4. Verification of investment, i.e., match broker confirma- tion to Treasurer's records 5. Safeguarding of Assets and Records: Reconciliation of Treasurer's records to the accounting records Reconciliation of Treasurer's records to bank statements and safekeeping records 15 Responsibility Treasurer City Council Treasurer Assistant Director of Finance Revenue Supervisor Accountant Assistant Director of Finance Revenue Supervisor Accountant CITY OF COSTA MESA SEGREGATION OF RESPONSIBILITIES OF THE TREASURY FUNCTIONS (Continued) Function 5. Safeguarding of Assets and Records (continued): Annual review of (a) financial institution's financial condition, (b) safety, liquidity, and potential yields of investment instruments. 6. Periodic review of investment portfolio as prepared by Treasurer including: Responsibility Assistant Director of Finance with Treasurer's approval Independent Auditors • Investment types • Purchase Price • Market values • Maturity dates • Investment yields • Conformance to stated investment policy • Safekeeping reports 16