HomeMy WebLinkAbout2026-10 - Investment PolicyRESOLUTION N0. 2026-10
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF COSTA MESA,
CALIFORNIA, ADOPTING THE 2025-2026 STATEMENT OF INVESTMENT POLICY
FOR THE CITY, AND DESIGNATING THE CITY TREASURER, TO INVEST AND
REINVEST IDLE MONIES OF THE CITY OF COSTA MESA IN ACCORDANCE WITH
THE 2025-2026 STATEMENT OF INVESTMENT POLICY
THE CITY COUNCIL OF THE CITY OF COSTA MESA DOES HEREBY
RESOLVE AS FOLLOWS:
WHEREAS, the City Council has established and each year approves a
Statement of Investment Policy ("Policy") pertaining to idle funds under the control of the
City Treasurer; and
WHEREAS, the Policy specifies the City's investment objectives in accordance
with California law and provides a framework for managing and investing the City's
funds in accordance with these objectives; and
WHEREAS, the Policy provides that it must be reviewed on an annual basis by
the Finance and Pension Advisory Committee and approved by the City Council in an
open public meeting; and
WHEREAS, on March 1 'I, 2026, the Finance and Pension Advisory Committee reviewed
the Policy; and
WHEREAS, the City Council desires to approve the 2025-2026 Policy and
delegate authority to the City Treasurer to invest idle funds.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Costa
Mesa as follows:
1. In accordance with section 53607 of the California Government Code, the City
Council hereby authorizes the City Treasurer, (a) to invest such portion of 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 City Council is
authorized to invest such sums by the provisions of Government Code section
53601 and section 53635, in accordance with the provisions of the City's
Statement of 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 the City Council.
This delegation shall be valid for one (1 ) year pursuant to Government Code
section 53607.
2. The City Council hereby adopts the 2025-2026 Statement of Investment Policy
as set forth in the attached document.
3. The City Clerk shall certify to the passage and adoption of this resolution, and it
shall be thereupon in full force and effect.
Resolution No. 2026-10 Page I of 2
PASSED AND ADOPTED this I7'h day of March, 2026.
JohdStephens, Mayor
ATTEST:APPROVED AS TO FORM:
'"e&"'itycierx Klmbe%rlyHallBaowmiCity A5ff0rney
STATE OF CALIFORNIA )
COUNTY OF ORANGE )
CITY OF COSTA MESA )
SS
1, BRENDA GREEN, City Clerk of the City of Costa Mesa, DO HEREBY CERTIFY that
the above and foregoing is the original of Resolution No. 2026-10 and was duly passed
and adopted by the City Council of the City of Costa Mesa at a regular meeting held on
the I 7'h day of March, 2026, by the following roll call vote, to wit:
AYES: COUNCIL MEMBERS: BULEY, GAMEROS, MARR, PETTIS, REYNOLDS,
CHAVEZ, AND STEPHENS.
NOES. COUNCIL MEMBERS: NONE.
ABSENT: COUNCIL MEMBERS: NONE.
IN WITNESS WHEREOF, I have hereby set my hand and affixed the seal of the
City of Costa Mesa this 1 8'h day of March, 2026.
f":'G! , ("'Clerk
Resolution No. 2026-10 Page 2 of 2
CITY OF COST A MESA
ST ATEMENT OF INVESTMENT POLICY
2025-2026
I. GENERAL INTRODUCTION
Under the laws of the State of California, it is the responsibility of the City Treasurer, at the direction of the
City Council, to secure and protect the public funds of the City, and to establish proper safeguards, controls, and
procedures to maintain these funds in a lawful, rational and auspicious manner. Said maintenance shall include
the prudent and secure investment of idle funds, in a manner anticipated to provide additional benefit to the
people of the City of Costa Mesa. The City's Finance Director serves as the City Treasurer. If the position of
Finance Director is vacant, the City Manager shall serve as City Treasurer cmtil such time as the Finance
Director position is filled.
On an annual basis, this Statement of Ii'ivesti'nent Policy will be reviewed by the Finance and Pension Advisory
Coi'nmittee and approved by the City Council in an open public meeting. It will be provided to securities dealers,
banks, and brokers currently approved for conducting investment transactions with the City Treasurer's office in
the ongoing effoit to i'nanage tlie investment portfolio; to other affected persons or entities; and to any members
of the public wishing to review this document upon request. The Treasurer reserves the right to provide these
documents on a cost basis.
II. SCOPE
This Statement of Investment Policy pertains to those idle funds under the control of tl'ie Treasurer, designated
for the daily ongoing operations of the City; and concerns the deposit, maintenance, safekeeping, and
preservation of all such funds, and the investments made with these funds. This Policy does not apply to pension
trust funds, deferred compensation funds, and certain other trust or non-operating funds.
Ill. PURPOSE
The purpose of this Statement of Investment Policy is to provide tlie City Council, the Finance and Pension
Advisory Comi'nittee, those involved in servicing the investment requirements of the City, and any other
interested party, a clear understanding of the regulations and internal guidelines that will be observed in
maintaining and investing City funds. This stateinei'it is intended to provide guidelines for the prudent
investment of the City's temporary idle cash, and outline the procedures for maximizing tlie efficiency of the
City's cash management systei'n. The ultimate goal of the Investi'nent Policy is to enhance the economic status
of the City while safeguarding its assets.
IV. OBJECTIVE
Tlie City's cash management system is designed to accurately monitor and forecast revenues and expenditures,
thus enabling the City to invest funds to tl'ie fullest extent possible only after the criteria established for safety
and liquidity have been met.
The basic preinise underlying the City's investment philosophy is and continues to be, to ensure that surplus
funds are always safe and available when needed. The City strives to invest all idle funds as near 100 percent
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 investinents and the order of priority are:
1.
2.ffi This refers to the ability to "cash in" at any inoment in time with a minimal cliance of losing
soine portion of principal or interest.
3.
V. DELEGATION OF INVESTMENT AUTHORITY
Authority to manage the City of Costa Mesa's investment program is derived froin City of Costa Mesa Council
Resolution No. 2026-xx. Managei'nent responsibility for the investinent prograi'n is hereby delegated for Fiscal
Year 2025-2026 to the City Treasurer or his/her designee, who shall establish written procedures for the
operation of the iiwestment program consistent with this Investment Policy. Procedures should include
references to: safekeeping, repurchase agreei'nents, wire transfer agreements, banking service contracts, and
collateral/ depository agreei'nents. Such procedures shall include explicit delegation of authority to persons
responsible for investment transactions. No person may engage in ai'i 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 undeitaken and shall establish a system of
controls to regulate the activities of subordinate officials.
The City i'nay engage the services of an external investment inanager to assist in the inanagement of the
City's investment poitfolio in a manner consistent with the City's objectives. Such an external manager may
be granted discretion to purchase and sell investment securities in accordance with this Investi'nent Policy.
Such a manager must be registered under the Investment Advisers Act of 1940.
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VI. ST ANDARD OF PRUDENCE
The Treasurer shall perform the investment function in conjunction with the Prudent Investor Standard as set
forth in the California Government Code Section 53600.3: "... all governing bodies of local agencies or persons
authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to this
chapter are trustees and therefore fiduciaries subject to the prudent investor standard. When investing,
reinvesting, purchasing, acquiring, exclianging, selling, or managing public funds, a trustee shall act with care,
skill, prudence, and diligence under the circui'nstances then prevailing, including, but not limited to, the general
economic conditions and the anticipated needs of the City, that a prudent person acting in a like capacity and
familiarity with those matters would use in the conduct of funds of a like character and with like aims, to
safeguard the principal and maintain the liquidity needs of the City. Within the limitations of this section and
considering individual investments as part of an overall strategy, investments may be acquired as authorized
by law."
VII. AUTHORIZED AND SUIT ABLE INVESTMENTS
All investments will be i'nade in accordance with Sections 53600 et seq. of the Government Code of California
and as described within this Investment Policy. Peri'nitted investments under this policy include:
1.Municipal Securities. These include obligations of the City, tl'ie State of California, any other states,
and any local agency within the State of California, provided that:
a. Long-term obligations are rated "A" or higher, or the equivalent by at least one nationally
recognized statistical rating organization (NRSRO);
b. The maximui'n maturity is five years; and
c. No i'nore than 5 percent per issuer.
2.U.S. Treasui7 and other government obligations for whicli the full faith and credit of the United States
are pledged for the payment of principal and interest. There are no lii'nits on the dollar amount or
percentage that the City may invest in U.S. Treasuries.
3.Federal Agency or United States government-sponsored enterprise obligations, participations, or other
instruments, including those issued by or fully guaranteed as to principal and interest by federal
agencies or United States governinent-sponsored enterprises. There are no lii'nits on the dollar amount
or percentage tliat the City may invest ii'i government-sponsored enterprises. No more than 35
percent of the portfolio may be invested in any one issuer.
4.Banker's acceptances provided that:
a. They are issued by institutions with short term debt obligations rated "A-1" or higher, or the
equivalent, by at least one NRSRO; and have long-term debt obligations which are rated "A"
or higher, or the equivalent by at least one NRSRO;
b. The maturity does not exceed 180 days; and
c. No more than 40 percent of the total portfolio may be invested in banker's acceptances and
no more than 5 percent per issuer.
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Federally insured time deposits (Non-negotiable certificates of deposit) in state or federally
chartered banks, savings and loans, or credit unions, provided that:
a. The amount per institution is limited to the maximum covered under FDIC; and,
b. The maturity of such deposits does not exceed five years.
Time deposits (Non-negotiable certificates of deposit) in state or federally chartered banks,
savings and loans, or credit unions in excess of FDIC insured amounts which shall be fully secured
in accordance with California Government Code Section 53652, provided that:
a. No i'nore than 20 percent of the portfolio will be invested in a combination of federally
insured and collateralized time deposits;
b. No more than 5 percent per issuer;
c. Tliey are issued by institutions which have long-term debt obligations which are rated "A"
or liigher, or the equivalent by at least one NRSRO; and/or have short teri'n obligations rated "A-
l" or higher, or the equivalent, by at least one NRSRO; and
d. The maturity of such deposits does not exceed five years.
Certificate of Deposit Placement Service (CDARS)
a. No i'nore than 30 percent of the total portfolio i'nay be invested in a combination of
certificates of deposit including CDARS; and
b. The maturity of CDARS deposits does not exceed five years.
Negotiable certificates of deposit (NCDs) provided that:
a. They are issued by institutions which have long-teri'n obligations which are rated "A" or higher,
or the equivalent by at least one NRSRO; and/or have shoit term debt obligations rated
"A-1" or higher, or t)ie equivalent, by at least one NRSRO;
b. The maturity does not exceed five years; and
c. No inore than 30 percent of the total poitfolio may be invested in NCDs and no more than 5
percent per issuer.
Repurchase agreements collateralized with securities authorized under tlie City's Authorized and
Suitable Investments (Section VII) of this policy maintained at a level of at least 102 percent of
the market value of the repurchase agreements, provided that:
a. The inaximum maturity of repurchase agreements will be one year;
b. No more than 30 percent of the total poitfolio may be invested in repurchase agreements;
c. Securities used as collateral for repurchase agreements will be delivered to the City's
custodian bank (See Section X); and
d. The repurchase agreements are the subject of a master repurchase agreement between the
City and the provider of tlie repurchase agreement. The master repurchase agreement will
be substantially in the form developed by the Securities Industry and Financial Markets
Association (SIFMA).
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10. Commercial paper provided that:
a. The inaturity does not exceed 270 days from the date of purchase;
b. The issuer is a corporation organized and operating in the United States with assets in excess of
$500 million;
c. They are issued by institutions whose short term obligations are rated "A-l" or higher, or
tlie equivalent, by at least one NRSRO; and whose long-term obligations are rated "A" or
higher, or the equivalent by at least one NRSRO; and
d. No more than 25 percent of the portfolio is invested in commercial paper and no more than
5 percent per issuer.
11.State of California Local Agency Investment Fund (LAIF), provided that:
a. The City i'nay invest up to tlie maximum peri'nitted ainount in LAIF; and,
b. LAIF's iiwestments in instruinents prohibited by or not specified in the City's policy do not
exclude it from the City's list of allowable investinents, provided that the fund's reports allow the
Finance Director/Treasurer to adequately judge the risk inherent in LAIF's portfolio.
12.Orange County Treasurer's Pool is 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 percent of its surplus
money with tlie Orange County Treasurer's Pool. The County Treasurer charges investment
administration fee to all pool participants. Investment earnings are distributed to the pool
participants on a i'nonthly basis, net of the administration fee. The earnings are credited to the
participant's accounts on either the last day of tlie month or the first day of the subsequent month.
13.Shares in a California coi'nmon law trust established pursuant to Title 1, Division 7, Chapter 5 of the
Governinent Code of the State of California which invests exclusively in investments permitted by
Section 53601 of Title 5, Division 2, Chapter 4 of the Government Code of California, as it may be
amended.
14.All Local Government Investment Pools (LGIPs), provided that:
a. The City i'nay invest up to the maximum peri'nitted amount in any LGIP; and,
b. Tlie LGIPs investments in instruinents prohibited by or not specified in the City's policy do not
exclude it from the City's list of allowable investments, provided that tlie fund's repoits allow the
Finance Director/Treasurer to adequately judge tlie risk inherent in the LGIP's portfolio; and,
c. The City only operates in those LGIPs that are considered prudent and allowable under current
legislation ofthe State of California Government Code Section 53600 et seq. and tlie general laws
of the City of Costa Mesa.
15.Corporate medium term notes (MTNs), provided that:
a. Such notes have a maximum maturity of five years;
b. Are issued by corporations organized and operating within the United States or by depository
institutions licensed by the United States or any state and operating within the United States;
c. Are rated "A" category or better, or the equivalent by at least one NRSRO; and
d. Holdings of medium-teri'n notes may not exceed 30 percent of the portfolio and no more
than 5 percei'it per issuer.
Mortgage pass-through securities, collateralized mortgage obligations, and asset-backed
securities, provided that such securities:
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17.
a. Have a maximui'n stated final maturity of five years;
b. Be issued by an issuer having an "A" or higlier rating, or the equivalent for the issuer's debt
as provided by an NRSRO;
c. Be rated in a rating category of "AA" or better, or its equivalent by an NRSRO; and
d. Purchase of securities authorized by this subdivision may not exceed 20% of the portfolio
and no i'nore than 5 percent per issuer.
Money market mutual funds that are registered witli tlie Securities and Exchange Commission
under tlie Investment Company Act of 1940:
a. Provided tliat such funds meet either of tlie following criteria:
1. Attained tlie higliest ranking or tlie liighest lettei- and numerical rating provided by not
less than two NRSRO; or
2. Have retained an investment adviser registered Or exempt from registration with the
Securities and Excliange Commission with not less than five years' experience iiwesting
in the securities and obligations authorized by California Governinent Code Section 53601
(a through j) and with assets under management in excess of $500 million.
b. Purchase of securities authorized by this subdivision may not exceed 20 percent of the
poitfolio.
Supranational securities of United States dollar denoininated sei'iior unsecured unsubordinated
obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and
Developinent, International Finance Corporation, or Inter-American Development Bank, with
remaining maturity up to five years, and eligible for purchase and sale within the United States.
Investment under this sectioxi shall be rated "AA" or higher, or the equivalent by an NRSRO and
shall not exceed 15 percent of the poitfolio. No more than 5 percent of the portfolio shall be
invested in one issuer.
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19.
VIII. INVESTMENT OF BOND PROCEEDS
Wlien investing proceeds from the issuance of bonds, the City of Costa Mesa will follow tliis Investment Policy
when determining allowable investments. Sliould the trust agreen'ient of a particular bond issue be inore
restrictive t)ian tlie City's policy on permitted investinents, then tlie tnist agreen'ient will take precedence.
IX. CITY CONSTRAINTS
Tlie City Treasurer or Iiis/lier designee will evaluate local banks and savings institutions and may invest idle
cash funds with sucli institutions wliei'i the criteria for prudent investment previously stated are met. The City
operates its investi'nent pool according to State and self-iinposed constraints. Any investment extending beyond
a five-year period requires prior City Council approval. Additionally, a minimum of 20 percent of tlie
outstanding iiwestinents i'nust inature wit)iin a one-year time period.
X. SAFEKEEPING AND COLLATERALIZATION
All security transactions, including collateral for repurcliase agreements, entered into by tlie City shall be
conducted on a delivery-versus-payi'nent (DVP) basis. Secui-ities purchased shall be held in third party
safekeeping in tlie Trust Department of a financial institution, in tlie City's name and control. The account
established sliall be protected from seizure by creditors sliould tlie financial institution liolding tlie City's
securities file for bankruptcy protection.
Collateralization will be required on two types of investinents: ceitificates of deposit and repurcliase
agreements. In order to anticipate i'narket clianges 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 tlie State of California. Tlie deposits cannot exceed tlie amount of tlie bank's
or savings and loan's paid-up capital and surplus.
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The bank or savings and loan must secure public funds deposits witli eligible securities having a market value
of 110 percent of the total amount of the deposits. State law also allows as an eligible security, first trust deeds
having a value of 150 percent of the total amount of the deposits. A third class of collateral is 105 percent in
tlie 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 $250,000 of a deposit is federally insured and deposits in excess of $250,000
are collateralized as previously indicated.
XL PORTFOLIO RISK MANAGEMENT
A. Prohibited investment veliicles andl2.ractices
]. State law notwithstanding, any investinents not specifically described lierein are prohibited,
including, but not limited to futures and options, or stocks.
2. In accordance witli Governinent Code Section 53601.6, investment in inverse floaters, range
notes, or moitgage derived interest-only strips is prohibited.
3. Investment in any security that could result in a zero interest accrual if lield to maturity is
prohibited.
4. Trading securities for the sole purpose of speculating on the future direction of ii'iterest rates is
prohibited.
5. Purchasing or selling securities on margin is prohibited.
6. The use of reverse repurchase agreei'nents, securities lending or any other fori'n of borrowing or
leverage is prohibited.
7. The purchase of foreign currency denominated securities is prohibited.
B. Mitigating credit risk in the poitfolio
Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or
perceived change in the ability of the issuer to repay its debt. The City will mitigate credit risk by
adopting tlie following strategies:
1. The diversification requirements included in Section VII are designed to mitigate credit risk in
tlie poitfolio;
2. No more than 5 percent of the total portfolio i'nay be invested in securities of any single issuer, other
than the U.S. Governi'nent, its agencies and enterprises;
3. The City may elect to sell a security prior to its maturity and record a capital gain or loss in order to
improve the quality, liquidity or yield of the portfolio in response to market conditions or
City's risk preferences; and
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4. If sectirities owned by the City are downgraded by an NRSRO to a level below the quality required
by this Investment Policy, it will be the City's policy to review the credit situation and make a
deteri'nination as to whether to sell or retain such securities in the portfolio.
a. If a security is downgraded, the Finance Director/Treasurer will use discretion in determining
whether to sell or hold the security based on its current maturity, the economic outlook for the
issuer, and other relevant factors.
b. If a decision is made to retain a downgraded security in the portfolio, its presence in tl'ie portfolio
will be monitored and repoited monthly to the City Council.
C. Mitigatim market risk in the poitfolio
Market risk is the risk that the poitfolio value will fluctuate due to changes in the general level of interest
rates. The City recognizes tliat, over tiine, longer-term portfolios have the potential to achieve
higher returns. On the other hand, longer-teri'n poitfolios have higher volatility of return. The City
will mitigate inarket risk by providing adequate liquidity for shoit-term cash needs, and by making
longer-terin investinents only with funds that are not needed for current cashflow purposes. Tlie
City fuither recognizes that certain types of securities, including variable rate securities, securities witli
principal paydowns prior to maturity, and securities with embedded options, will affect the market
risk profile of the portfolio differently in different interest rate environinents. The City, therefore,
adopts tlie following strategies to control and mitigate its exposure to market risk:
1. The City will maintain a minii'nui'n of three months of budgeted operating expenditures in short term
investments to provide sufficient liquidity for expected disburseinents;
2. The inaxii'num percent of callable securities (does not include "make whole call" securities as defined
in the Glossary) in the portfolio will be 20 percent;
3. The i'naximum stated final inaturity of individual securities in the poitfolio will be five years, except
as otherwise stated in this policy; and
4. The duration of tlie portfolio will at all times be approximately equal to the duration (typically
plus or minus 20 percent) of a Market Benchi'nark Index selected by the City based on tlie City's
investinent objectives, constraints and risk tolerances. The City's current Benchmark will be
documented in the investment guidelines.
XII. POLICY COMPLI ANCE REGULATIONS
Should the portfolio, for any reason, fall out of compliance with this Investment Policy, immediate liquidation
of securities in order to bring the portfolio back into compliance is not required. However, the Treasurer inust
take action to bring the portfolio into compliance within 12 inonths from the date the portfolio was determined
to be in non-compliance with the provisions of this Investment Policy so long as the action is deemed to be
prudent under then current market conditions. Additionally, adequate disclosure as to all instances of
noncompliance, and the effoits undeitaken to bring the poitfolio into compliance, must be made on the monthly
Treasurer's Report.
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XIII. REPORTING
Under provisions of Section 53646 of the California Government Code, the Treasurer or his/her designee shall
render a quarterly investinent report to the City Council, the City Manager, and the City Attorney within 30 days
following the end of the quaiter 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, par value, amount of deposit, rate of
interest, current market value for all securities, and such other data as i'nay be required by the City Council on a
monthly basis. Furthermore, a Finance and Pension Advisory Comi'nittee comprised of the following individuals
will meet quarterly to review the City's portfolio and investment strategy.
Mayor. or his/her designee
City Treasurer
Assistant Finance Director
Revenue Supervisor
Eleven Committee Members appointed by City Council who are either residents or conduct business
within the City and have experience in banking, securities trading, or financial planning.
Monthly reports
Monthly investment reports will be submitted by the City Treasurer or his/her designee to the City
Council members, the City Manager and the Finance and Pension Advisory Cominittee. These
reports will disclose, at a minimum, the following information about the risk characteristics of the City's
portfolio:
1. An asset listing showing par value, cost and accurate and complete market value of each security,
type of investment, issuer, and interest rate;
2. Monthly transactions for the period;
3. A one-page sui'nmary report that shows:
a. Average maturity of the portfolio and modified duration of the poitfolio;
b. Maturity distribution of the poitfolio;
c. Average poitfolio credit quality; and,
d. Time-weighted total rate of return for the portfolio for the prior one i'nonth, three months, twelve
inonths, year to date, and since inception compared to the Benchmark Index returns for the
same periods;
4. A statement of compliance with investi'nent policy, including a schedule of any transactions or
holdings which do not comply with this policy or witli the California Government Code Section
53600 et seq., including a justification for their presence in the portfolio and a timetable for
resolution; and,
5. A statement tliat the City has adequate funds to meet its cash flow requirements for the next six
months.
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x AUTHORIZED FINANCIAL INSTITUTIONS. DEPOSITORIES. AND BROKER/DEALERS
A list will be maintained of financial institutions and depositories authorized to provide investment services.
In addition, a list will be maintained of approved security broker/dealers selected by conducting a
process of due diligence described in the investment procedures i'nanual. These may include "pritnary"
dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule l 5C3- l
(biniform net capital rule).
A. The City Finance Director/Treasurer will deterinine which financial institutions are authorized
to provide investment services to the City. Institutions eligible to transact investment business
with the City include:
1. Primary government dealers as designated by the Federal Reserve Bank and non-
primary governi'nent dealers;
2. Nationally or state-chartered banks;
3. The Federal Reserve Bank; and,
4. Direct issuers of securities eligible for purchase.
B. Selection of financial institutions and broker/dealers authorized to engage in transactions
with tlie City will be at the sole discretion of the City.
C. All financial institutions which desire to become qualified bidders for investmenttransactions
(and which are not dealing only with the investment adviser) i'nust supply tlie Finance
Director/Treasurer with a statement certifying that the institution has reviewed the California
Government Code Section 53600 et seq. and tlie City's Investment Policy.
D. Selection of broker/dealers used by an external investi'nent adviser retaii'ied by the City will
be at the sole discretion of the investment adviser.
E. Public deposits will be made only in qualified public depositories as established by State
law. Deposits will be insured by the Federal Deposit Insurance Corporation, or, to the extent the
amount exceeds the insured maximum, will be collateralized in accordance with State law.
XV. POLICY REVIEW
Tliis 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
econoi'nic trends.
Should conditions change or legislation become effective that behooves subsequent changes or a liberalization
of terms within the policy during tlie next fiscal year, the revised policy will be subi'nitted to both the Finance
and Pension Advisory Committee and Council for adoption of the recommended action.
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XVL INVESTMENT OBJECTIVES (PERFORMANCE ST ANDARDS AND EV ALUATION)
A. Overall objective: The investment portfolio will be designed with the overall objective of obtaining a total
rate of return throughout econoi'nic cycles, cominensurate with investment risk constraints and cash
flow needs.
B. Specific objective: The investi'nent perfori'nance objective for the portfolio will be to earn a total rate
of return over a i'narket cycle which is approximately equal to the return on the Market Benchmark
Index as described in the City's investment guidelines.
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CITY OF COSTA MESA
INVESTMENT GUIDELINES AND STRATEGY
GUIDELINES - Guidelines are established to direct and control activities in such a manner that
previously established goals are achieved.
Investment Transactions. Investi'nent transactions will be periodically reviewed by the Treasurer
or his/her designee.
Pooled Cash. Whenever practical, City cash is consolidated into one bank account and invested
on a pooled concept basis. Interest earnings are allocated montlily according to month-end cash
and investment balances for each fund.
Coinpetitive Bids. Purcliase and sales of securities are made on tlie basis of competitive offers
and bids wlien practical.
Cash Forecast. The casli flow for the City is analyzed with the receipt of revenues and maturity
of investments scheduled so tliat adequate cash will be available to ineet disbursement
requirei'nents.
Investinent Limitations. Security pcirchases and holdings are maii'itained within statutory limits
imposed by the California Government Code. Current limits are:
Bankers' Acceptances
Coini'nercial Paper
Negotiable Certificates of Deposit
Medium Terin Notes
Money Market Mutual Funds
Asset-Backed/Mortgage-Backed Securities
Federal Agency restriction
Local Agency Ii'ivesti'nent Fund
Orange Cocinty Treasurer's Pool
Supranational Securities
Portfolio Maturing witliin one year
40% Section 53601(g)
25% Section 53601(h)
30% Section 53601(i)
30% Section 53601(10
20% Section 53601(1)
20% Section 53601(0)
35% per Agency Section VII of Policy
$65,000,000 inaximui'n allowed per Section
VII of Policy
35% per Section VII of Policy
15% per Section VII of Policy
20% per Section IX of Policy
4 The i'narketability of a security is considered at the time of purchase, as the security
may liave to be sold at a later date to i'neet unanticipated cash demands.
Diversification. The portfolio should consist of a i'nix of various types of securities, issuers,
and i'naturities.
12
CITY OF COSTA MESA
INVESTMENT GUIDELINES AND STRATEGY
(Continued)
Evaluate Ceitificates of Deposit
(a) Certificates of Deposit sliall be evalciated in teri'ns of FDIC coverage. For deposits in
excess of the FDIC insured maximum, approved collateral at full market value shall be
required. (California Government Code Section 53652)
(b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of
the issuer, as these deposits are hminsured and uncollateralized proinissory notes.
Benchmark Index. The portfolio has a performance index of ICE BofAML 1-5 Year US Treasury
& Agency Index. This index includes all securities with a remaining term to final
maturity less than five years.
STRATEGY - Strategy refers to the ability to i'nanage financial resources in the most advantageous
manner.
Econoinic Forecasts. Ecoiioinic Forecasts are obtained periodically from econoi'nists and
financial expeits through bankers and brokers to assist the Treasurer or liis/her designee with the
formulation of an investi'nent strategy for the local agency.
Implementing Investment Strategy. Investment transactions are executed wliich conforin with
anticipated interest rate trends and the current investi'nent strategy plan.
Preserve Portfolio Value. Field standards are developed ii'i order to maintain earnings near the
market and to preserve the value of the poitfolio.
13
CITY OF COSTA MESA
INVESTMENT PROCEDURES
INTERNAL CONTROL - GUIDELINES
OBJECTIVES OF INTERNAL CONTROL
Internal control is tlie plan of organization and all tlie related systems establislied by tlie inanagement's objective
of ensuring, as far as practicable:
Tlie orderly and efficient conduct of its business, including adherence to i'nanagement policies.
Tlie safeguarding of assets.
Tlie prevention or detection of errors and fraud.
Tlie accuracy and completeness of the accounting records.
Tlie timely preparation of reliable financial information.
LIMIT ATIONS OF INTERNAL CONTROL
No internal control systein, liowever elaborate, can by itself guarantee tlie achievement of management's
objectives. Internal control can provide only reasonable assurance tliat tlie objectives are met, because of its
inlierent limitations, ii'icluding:
Manageinent's usual requirement tliat a control be cost-effective.
Tlie direction of inost controls at recurring, i-atlier tlian unusual, types of transactions.
Human error due to misunderstanding, carelessness, fatigue, or distraction.
Potential for collusion tliat circumvents controls dependent on tlie segregation of functions.
Potential for a person responsible for exei-cising control abusing tliat responsibility; a responsible staff
inember could be in a position to override controls wliicli inanagement lias set LIP.
14
CITY OF COSTA MESA
INVESTMENT PROCEDURES
INTERNAL CONTROL - GUIDELINES
(Continued)
ELEMENTS OF INTERNAL CONTROL
Elements of a system of internal control are tl'ie means by wliicli an organization can satisfy the objectives of
internal control. Tl'iese eleinents are:
ORGANIZATION
Specific responsibility for tlie perforinance of duties should be assigned and lines of autliority and
reporting clearly identified and understood.
PERSONNEL
Personnel sliould liave capabilities coinmensurate wit)i t)ieir responsibilities. Personnel selection and
training policies togetlier with tlie quality and quantity of supervision are thus important.
SEGREGATION OF FUNCTIONS
Segregation of ii'icompatible functions reduces the risk tliat a person is in a position both to perpetrate
and conceal erpors or fraud in the normal course of duty. If two paits of a transaction are liandled by
different people, collusion is necessary to conceal errors or fraud. In particular, t)ie functions tliat should
be considered wlien evaluating segregation of functions are autliorization, execution, recording, custody
of assets, and performing reconciliations.
AUTHORIZATION
All transactions should be autliorized by an appropriate responsible individual. The responsibilities and
limits of autliorization slioild be clearly delineated. Tlie individual or group autliorizing a specific
transaction or granting general autliority for transactions s)iould be in a position commensurate witli tlie
nature and significance of tlie transactions. Delegation of autliority to autliorize transactions should be
liandled very carefully.
CONTROLS OVER AN ACCOUNTING SYSTEM
Controls over an accounting system include tlie procedures, botli inanual and computerized, carried out
independently to ascertain tliat transactions are coinplete, valid, autliorized, and properly recoi-ded.
15
PROCEDURES PERFORMED BY EXTERNAL AUDITORS WITH RESPECT TO CASH RECEIPTS
CITYOFCOST AMESA
CASH CONTROLS
A. City procedures and controls are reviewed. Soi'ne 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 Manager.
5.Cash counts are done by two or inore 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. Cliecks are restrictively endorsed upon receipt or when niii through casli register.
11. Adequate physical security over cash.
12.Individuals that liandle casli do not post to customer account records or process billing
statements.
13. Adequate supervision of Finance Departinent operations.
B. Significant revenues are confirmed directly with payor and coi'npared with City books to make sure
amounts are recorded properly.
Cash balances are substantiated by confiri'ning 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 iteins by proving to subsequent bank
statements.
16
CITY OF COSTA MESA
SEGREGATION OFRESPONSIBILITIESOF
THE TREASURY FUNCTIONS
Function
Autliorization of investi'nent
transacttons:
Forinal investment policy should be:
'* Prepared by:
" Submitted to:
Investinent transactions
sliould be approved by
Execution of iiwestinent
transactions
Investinent transactions approved
for coinpliance with iiwestment
policy and/or State law
Tii'nely recording of investinent
transactions:
Recording of iiwestinent
transactions in the
Treasurer's records
Recording of investment
transactions in tlie
accounting records
Verification of investinent,
i.e., i'natcli broker confirina-
tion to Treasurer's records
Responsibility
City Treasurer
City Council
City Treasurer and/or Exteriial Investment
Manager
Assistant Finance Director and/or
Finance Officer - Revenue and/or External
Investinent Manager
Assistant Finance Director and/or External
Iiwesti'nent Manager
Finance Officer - Revenue
Accounting Supervisor and/or
Accountant
Assistant Finance Director and/or
Finance Officer - Revenue and/or External
Investinent Manager
6.Safeguarding of assets and records:
Reconciliation of Treasurer's
records to tlie accounting records
18
Reconciliation of Treasurer's records to bank statements and safekeeping records
Accounting Supervisor
and/or Accountant
19
CITY OF COSTA MESA
SEGRF,GATION OF RESPONSIBILITIES OF
THE TREASURY FUNCTIONS
(Continued)
Function
Safeguarding of Assets and Records
(continued):
Annual review of (a) financial
institution's financial condition,
(b) safety, liquidity, and potential
yields of investinent instruments.
Resnonsihilitv
Assistant Finance Director witl'i
Treasurer's approval
No less tlian an annual
review ofiiwestinent
poitfolio as prepared by
Treasurer including:
Investment types
Purcliase Price
Par values
Market values
Maturity dates
Investinent yields
Conformance to stated investinent policy
Safekeeping reports
Periodic review of investment
External Independent Auditors
Finance and Pension Advisory Cominittee
portfolio and strategies.
20
Glossary of Investment Terms
AGENCIES. Shoithand market terminology for any obligation issued by a government-sponsored entity (GSE),
or a federcdly related institution. Most obligations of GSEs are not guaranteed by the full faith and
credit of tlie US government. Examples are:
FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industiy.
FFCB issues discount notes and bonds.
FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB issues
discount notes and bonds.
FHLMC. Like FHLB, the Federal Hoine Loan Mortgage Corporation provides credit and liquidity
in the housing market. FHLMC, also called "FreddieMac" ISSUES discount notes, bonds and
moitgage pass-through securities.
FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established
to provide credit and liquidity in the housing market. FNMA, also known as "FannieMae," issues
discount notes, bonds and mortgage pass-through securities.
GNMA. The Governmei'it National Mortgage Associatioi'i, ki'iown as "GinnieMae," issues i'noitgage
pass-through securities, which are guaranteed by the full faith and credit of the US Government.
PEFCO. Tlie Private Expoit Funding Corporation assists expoiters. Obligations of PEFCO are not
guaranteed by the full faith and credit of the US governinent.
TVA. The Tennessee Valley Authority provides flood control and power and promotes development in
poitions of the Tennessee, Ohio, and MiSSiSSippi River valleys. TVA currently issues discount notes
and bonds.
ASKED. Tlie price at which a seller offers to sell a security.
ASSET BACKED SECURITIES. Securities suppoited by pools of installment loans or leases or by pools of
revolving lines of credit.
AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of
principal payments, weighted by the ainount of principal expected.
BANKER'S ACCEPTANCE. A money inarket instruinent created to facilitate international trade transactions.
It is liighly liquid and safe because the risk of the trade transaction is transferred to tlie bank wliich
"accepts" tlie obligation to pay the investor.
BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial i'narket index, wliicli
reflects the inix of securities allowed under a specific investment policy.
BID. The price at which a buyer offers to buy a security.
BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a
commission. A broker does not sell securities from his own position.
CALLABLE. A callable security gives the issuer the option to call it froin the investor prior to its maturity.
The inain cause of a call is a decline in interest rates. If interest rates decline since an issuer issues
securities, it will likely call its current securities and reissue tliem at a lower rate of interest. Callable
securities have reinvestment risk as the investor i'nay receive its principal back when interest rates
are lower than when the investment was initially made.
CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate. Large
denoi'nination CDs i'nay be marketable.
CERTIFICATE OF DEPOSIT ACCOUNT RE(JSTRY SYSTEM (CDARS). A private placement service tliat allows
local agencies to purchase i'nore tlian $250,000 in CDs froin a single financial institution (must be
a participating institution of CDARS) wliile still maintaining FDIC insurance coverage. CDARS is
currently tlie only entity providing this service. CDARS facilitates the trading of deposits between the
California institution and otlier participating institutions in amounts that are less than
$250,000 each, so that FDIC coverage is maintained.
21
COLLATERAL. Securities or cash pledged by a borrower to secure repayi'nent of a loan or repurchase agreei'nent.
Also, securities pledged by a financial institution to secure deposits of public i'nonies.
COLLATERALIZED MORTGAGE onticarioxs (CMO). Classes of bonds that redistribute the casli flows of
i'nortgage securities (and whole loans) to create securities that have different levels of prepayment
risk, as compared to the underlying moitgage securities.
COMMERCIAL PAPER. The short-tenn unsecured debt of corporations.
COST YIELD. The annual income froin an investinent divided by the purchase cost. Because it does not give
effect to premiums and discounts which may liave been included in the purchase cost, it is an incomplete
measure of return.
COUPON. The rate of return at which interest is paid on a bond.
CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely i'nanner
due to changes in the condition of the issuer.
CURRENT YIELD. The annual income from an investment divided by the current inarket value. Since the
inathematical calculation relies on the current market value rather than the investor's cost, current yield
is unrelated to tl'ie actual return the investor will earn if the security is held to maturity.
DEALER. A dealer acts as a principal in security transactions, selling securities froi'n and buying securities
for his own position.
DEBENTURE. A bond secured only by the general credit of the issuer.
DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby paymei'it for a security must be
made at tlie time tlie security is delivered to the purchaser's agent.
DERIVATIVE. Any security that has principal and/or interest payinents wliich are subject to uncertainty (but
not for reasons of default or credit risk) as to tiining and/or amount, or any security which represents
a component of another security which has been separated from other coinponents ("Stripped" coupons
and principal). A derivative is also defined as a financial instrui'nent tlie value of whicli is totally or
partially derived from the value of another instrument, interest rate, or index.
DISCOUNT. The difference between tlie par value of a bond and the cost of the bond, wlien tlie cost is below
par. Some shoit-term securities, SLICII as T-bills and banker's acceptances, are known as discount
securities. They sell at a discount froi'n par, and return the par value to the investor at maturity
without additional interest. Otlier securities, whicli have fixed coupons, trade at a discount when the
coupon rate is lower than the current i'narket rate for securities of that maturity and/or quality.
DIVERSIFICATION. Dividing investment funds among a variety of investi'nents to avoid excessive exposure
to any one source of risk.
DURATION. The weiglited average time to i'naturity of a bond where the weights are the present values of
the future casli flows. Duration measures the price sensitivity of a bond to c)'ianges in interest rates. (See
modified duration).
FEDERAL FUNDS RATE. The rate of interest cliarged by banks for short-term loans to other banks. The
Federal Reserve Bank through open-i'narket operations establishes it.
FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes
monetary policy and executes it through temporary and permanent changes to the supply of bank
reserves.
LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate
higher than the cost of borrowing.
LIQUIDITY. Tlie speed and ease with whicli an asset can be converted to cash.
LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntaiy investment fund open to government entities and
certain i'ion-profit organizations in California t)iat is inanaged by the State Treasurer's Office.
LOCAL GOVERNMENT INVESTMENT POOL. Investi'nent pools tliat range from the State Treasurer's Office Local
Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities (JPAs). These funds are
not subject to the same SEC rules applicable to money market mutual funds.
MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining
debt early. Unlike a call option, with a make whole call provisioi'i, the issuer i'nakes a lui'np suin
22
payment tliat equals tlie net present value (NPV) of future coupon payments tliat will not be paid
because of tlie call. Witli tliis type of call, an investor is compensated, or "made wliole."
MARGIN. The difference between the market value of a security and tlie loan a broker makes using that
security as collateral.
MARKET RISK The risk that the value of securities will fluctuate with changes in overall market conditions
or interest rates.
MARKET VALUE. The price at wliicli a security can be traded.
MARKING TO MARKET. Tlie process of posting current market values for securities in a portfolio.
MATURITY. The final date upon wliidi the principal of a security becomes due and payable.
MEDIUM TERM NOTES. Unsecured, investmei'it-grade senior debt securities of i'najor corporations wliich
are sold in relatively small amounts on either a continuous or an interinittent basis. MTNs are liighly
flexible debt instruments that can be structured to respond to market oppoitunities or to iiwestor
preferences.
MODIFIED DURATION. Tlie percent cliange in price for a 100 basis point cliange in yields. Modified duration
is tlie best single ineasure of a poitfolio's or security's exposure to market risk.
MONEY MARKET. Tlie inarket in wliicli sliort-terin debt instruinents (T-bills, discount notes, coi'ni'iiercial paper, and
banker's acceptances) are issued and traded.
MORTGAGE PASS-THROUGH SECURITIES. A securitized participation in tlie interest and principal casli flows froin
a specified pool of mortgages. Principal ai'id interest payinents inade on tlie moitgages are passed
tlirougli to the holder of the security.
MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and operating
expenses.
MUTUAL FUND. An entity wliicli pools tlie funds of investors and invests those funds in a set of securities which
is specifically defined in tlie fund's prospectus. Mutual funds can be invested in various types of doi'nestic
and/or international stocks, bonds, and i'noney market instruinents, as set fortli in tlie individual fund's
prospectus. For most large, institutional investors, the costs associated witli investing in inutual funds
are liiglier tlian tlie investor can obtain througli an individually managed poitfolio.
NATIONALLY RECOGNIZED STATISTICAL RATINGS ORGANIZATION (NRSRO).
A credit rating agency tliat tlie Securities and Excliange Coininission in the United States uses for
regulatory purposes. Credit rating agencies provide assessments of an iiwestment's risk. Tlie
issuers of investments, especially debt securities, pay credit rating agencies to provide thein wit)i
ratings. Tlie tliree most proininent NRSROs are Fitc)i, S&P, and Moody's.
NEGOTIABLE CD. A slioit-terin debt instrument tliat pays interest and is issued by a bank, savings or federal
association, state or federal credit union, or state-licensed branch of a foreign bank. Negotiable CDs are
traded in a secondary inarket and are payable LlPOn order to the bearer or initial depositor (investor).
PREMIUM. The difference between the par value of a bond and tlie cost of tlie bond, wlien the cost is above
par.
PREPAYMENT SPEED. A ineasure of how quickly principal is repaid to investors in mortgage securities.
PREPAYMENT WINDOW. Tlie time period over which principal repayi'nents will be received on mortgage
securities at a specified prepayment speed.
PRIMARY DEALER. A financial institution (1) tliat is a trading counterpaity with tlie Federal Reserve in its
execution of market operations to carry out U.S. i'nonetary policy, and (2) tliat participates for
statistical reporting purposes in compiling data on activity in tlie U.S. Governinent securities market.
PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries.
In California, tlie rule is stated as "Investments shall be managed with the care, skill, prudence and
diligence, under tlie circumstances tlien prevailing, that a prudent person, acting in a like capacity
and familiar with such matters, would use in the conduct of an enterprise of like character and with
like aims to accomplish similar purposes."
23
REALIZED YIELD. The change in value of the portfolio due to interest received and interest earned and realized
gains and losses. It does not give effect to changes in market value on securities, which have not
been sold from the portfolio.
REGIONAL DEALER. A financial intermediary tliat buys and sells securities for the benefit of its customers
without maintaining substantial inventories of securities and that is not a primary dealer.
REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreei'nent to sell the
securities back at a higher price. From the seller's point of view, the same transaction is a reverse
repurchase agreeinent.
SAFEKEEPING. A service to bank customers whereby securities are lield by the bank in tlie customer's name.
STRUCTURED NOTE. A complex, fixed incoi'ne instrument, which pays interest, based 011 a formula tied to
otlier interest rates, commodities or indices. Examples include inverse floating rate notes which have
coupons that increase wlien other interest rates are falling, and which fall wlien other interest rates
are rising, and "dual index floaters," which pay interest based on the relationship between two other
interest rates - for exai'nple, the yield on the ten-year Treasury note minus the Libor rate. Issuers of SLICII
notes lock in a reduced cost of borrowing by purcliasing interest rate swap agreements.
SUPRANATIONAL. A Supranational is a inulti-national organization whereby member states transcend national
boundaries or interests to share in tlie decision making to proinote econoi'nic development in tlie member
countries.
TOTAL RATE OF RETURN. A measure of a portfolio's performance over time. It is the internal rate of return,
which equates the beginning value of tlie portfolio with the ending value; it includes interest
earnings, realized and unrealized gains, and losses in the portfolio.
U.S. TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and
credit of the United States. Treasuries are considered to have no credit risk, and are the benchinark
for interest rates on all other securities in the US and overseas. The Treasuiy issues botli discounted
securities and fixed coupon notes and bonds.
TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted
instruinents, and are called Treasury bills. Tlie Treasury currently issues three- and six-i'nonth T-
bills at regular weekly auctions. It also issues "casli manageinent" bills as needed to smooth out cash
flows.
TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes,
and pay interest seini-annually.
TREASURY BONDS. All securities issued witli initial maturities greater than ten years are called Treasury bonds.
Like Treasury notes, they pay interest semi-annually.
VOLATILITY. The rate at which security prices change with changes in general economic conditions or the
general level of interest rates.
YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected
cash flows from the investment to its cost.
24