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HomeMy WebLinkAboutItem 4.2 Invest Policy ReviewSTAFF REPORT CITY COUNCIL CITY CLERK File #320-30 DATE: September 20, 2011 TO: Honorable Mayor and City Councilmembers FROM: Joni Pattillo, City Manager SUBJECT: Annual Review of City Investment Policy and Delegation of Authority To Complete Investment Transactions Prepared by Paul S. Rankin, Administrative Services Director EXECUTIVE SUMMARY: The adopted Investment Policy for the City of Dublin includes a provision for an annual review of the policy to be presented at a public meeting. The City Council is also required to annually designate positions authorized to complete investment transactions. No changes are recommended. In accordance with State Law the City Council can only delegate for a one year period the responsibility to complete investment transactions. The City Council has authorized in the past the City Treasurer (Administrative Services Director) and Deputy City Treasurers (City Manager and / or Finance Manager). FINANCIAL IMPACT: Adoption of policy does not have a financial impact. RECOMMENDATION: Staff recommends that the City Council adopt the resolution adopting the 2011 Annual Review of Investment Policy and Delegation of Authority to Complete Investment Transactions. Submitted By Reviewed By Administrative Services Director Assistant to the City Manager Page 1 of 2 ITEM NO. 4.2 DESCRIPTION: The current Investment Policy was adopted in August of 2007 and reviewed annually by the City Council. In 2010 language reporting was clarified, however no substantive changes have occurred with the policy. Section XVI of the policy provides that it is subject to annual review by the City Council and that the review shall be conducted by the second meeting in September. Staff reviewed the current policy to determine whether any legislative or other changes would dictate the need to modify the policy. Staff has determined that no legislative changes occurred in the past year which would necessitate a change in the policy. The policy was originally developed in consultation with PFM Asset Management LLC, an investment advisor which provides services to public agencies. Delegation of Authorization To Complete Investment Transactions Section IV of the Investment Policy specifically delegates authorization to City Staff (Treasurer and Deputy Treasurer) to complete investment transactions. The policy provides that the Administrative Services Director shall be designated as the City Treasurer and the City Manager and/or Finance Manager shall be designated as the Deputy City Treasurer. State law has a specific provision for this authorization to be valid for a one year period. The following provision in the California Government Code reads: 53607. The authority of the legislative body to invest or to reinvest funds of a local agency, or to sell or exchange securities so purchased, may be delegated for aone- year period by the legislative body to the treasurer of the local agency, who shall thereafter assume full responsibility for those transactions until the delegation of authority is revoked or expires, and shall make a monthly report of those transactions to the legislative body. Subject to review, the legislative body may renew the delegation of authority pursuant to this section each year. Staff has prepared a Resolution (Attachment 1) which documents the annual review and confirms the delegation of authority to Staff to complete investment transactions. It is recommended that the City Council adopt the resolution approving the 2010 Annual Review of Investment Policy and Delegation of Authority to Complete Investment Transactions. NOTICING REQUIREMENTS/PUBLIC OUTREACH: None. ATTACHMENTS: 1. Resolution Adopting the 2011 Annual Review of Investment Policy and Delegation of Authority to Complete Investment Transactions Page 2 of 2 RESOLUTION NO. xx - 11 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN ADOPTING THE 2011 ANNUAL REVIEW OF INVESTMENT POLICY AND DELEGATION OF AUTHORITY TO COMPLETE INVESTMENT TRANSACTIONS WHEREAS, on August 21, 2007 the City Council adopted Resolution 152-07 containing a policy for City Investments; and WHEREAS, Section XVI of the Investment Policy provides that the policy shall be reviewed annually by the second meeting in September; and WHEREAS, annually since 2007 the City Council conducted annual reviews and confirmed the existing policy without modification; and WHEREAS, the focus of the annual review is to allow for any adjustments as a result in State laws or other recommended modifications; and WHEREAS, the investment policy consistent with the provisions of Government Code Section 53607 allows in Section IV for the City Council to delegate for a one year period the authority to invest City funds to the City Treasurer and any duly appointed Deputy City Treasurer; and WHEREAS, Staff provided recommended clarifying language which was added to section XV Report Information, and discussed as part of the Staff Report presented September 20, 2011; and WHEREAS, the City Council has reviewed the revised Investment Policy at a public meeting on September 20, 2011; and WHEREAS, the City of Dublin Investment Policy is attached to~this resolution as Exhibit A. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Dublin does hereby in accordance with California Government Code 53646(a)(2) conclude the 2011 Annual Review of the Investment Policy with a minor revision to Section XV as attached hereto as Exhibit A. BE IT FURTHER RESOLVED that the City Council action explicitly renews the delegation of authority to complete investment transactions by City Staff (Administrative Services Director designated as the City Treasurer and the City Manager and/or Finance Manager shall be designated as the Deputy City Treasurer), as described in Section IV of the policy. PASSED, APPROVED AND ADOPTED this 20th day of September, 2011, by the following vote: AYES: NOES: ABSENT: ABSTAIN: ATTEST: City Clerk Mayor ATTACHMENT 1 STATEMENT OF INVESTMENT POLICY FOR THE CITY OF DUBLIN I. INTRODUCTION The purpose of this document is to identify various policies and procedures that enhance opportunities for a prudent and systematic investment policy. This document also serves to organize and formalize investment related activities. II. SCOPE It is intended that this policy cover all funds and investment activities under the direct authority of the City of Dublin, as set forth in the State Government Code, sections 53600 et seq.. Cash held by the City shall be pooled in order to more effectively manage City cash resources. All pooled funds are accounted for in the City's Comprehensive Annual Financial Report and include: Funci~ General Fund Special Revenue Funds Capital Project Funds Internal Service Funds Enterprise Funds Agency Funds III. OBJECTIVES The overall program shall be designed and managed with a degree of professionalism worthy of the public trust. The primary objectives, in order of priority, of the City's investment activities shall be: (1) Safety: Safety of principal is the foremost objective of the investment program. The City's investments shall be undertaken in a manner that seeks to safeguard the principal of the funds under its control by maintaining an appropriate risk level. (2) Liquidity: The City's investment portfolio will remain sufficiently liquid to enable the City to meet its reasonably anticipated cash flow requirements. (3) Yield: Yield should become a consideration only after the basic requirements of safety and liquidity have been met. The City seeks to attain market average rate of return on its investments throughout economic cycles, consistent with constraints imposed by its safety objectives and cash flow considerations. (4) Diversification: The investment portfolio will be diversified to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. This shall also conform with applicable sections of the Government Code. EXHIBIT A (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) IV. DELEGATION OF AUTHORITY As authorized in Government Code Section 53607, the City Council delegates the authority to invest funds of the City to the City Treasurer and/or any duly appointed Deputy City Treasurer. The Treasurer and any duly appointed Deputy City Treasurer shall make all investment decisions and transactions in strict accordance with State law and this investment policy. The Administrative Services Director shall be designated as the City Treasurer and the City Manager and/or Finance Manager shall be designated as the Deputy City Treasurer. This delegation shall be for aone-year period until the delegation of authority is revoked or expires. The City Council may renew the authority each year as part of an annual review of this policy. The City recognizes that in a diversified portfolio, occasional measured losses may be inevitable and must be considered within the context of the overall portfolio's return and the cash flow requirements of the City. Authorized individuals acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. V. PRUDENCE Pursuant to California Government Code Section 53600.3, all persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard: "When investing, reinvesting, purchasing, acquiring; exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, 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 agency." VI. ETHICS AND CONFLICTS OF INTEREST All participants in the investment process shall acts as custodians of the public trust. Investment officials shall recognize that the investment portfolio is subject to public review and evaluation. The overall program shall be designed and managed with a degree of professionalism that is worthy of the public trust. Thus employees and officials involved in the investment process shall refrain from personal business activity that conflicts with proper execution of the investment program, or impairs their ability to make impartial investment decisions. Additionally, the City Treasurer and the Deputy Treasurer shall file applicable financial disclosures as required by the Fair Political Practices Commission (FPPC). VII. INTERNAL CONTROLS The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not 2 (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. Periodically as deemed appropriate by City Management and/or the City Council an independent analysis by an external auditor shall be conducted to review internal controls, account activity and compliance with policies and procedures. VIII. AUTHORIZED FINANCIAL DEALERS AND INSTITUTIONS To the extent practical the Treasurer shall endeavor to complete investment transactions using a competitive bid process whenever possible. It shall be the City's policy to purchase securities only from authorized institutions and firms. No deposit of public funds shall be made except in a qualified public depository as established by state laws. The Treasurer shall maintain procedures for the establishing a list of authorized broker/dealers and financial institutions which are approved for investment purposes. These may include primary or regional dealers that qualify under Securities & Exchange Commission Rule 15C3-1 (uniform net capital rule). The City requires each firm that will be used for the purchase or sale of securities to be evaluated by the Treasurer prior to any investments. The firms shall submit current financial statements, and annual audited financial statements each year thereafter, which are to be evaluated by the Treasurer. At a minimum, the firm must be financially sound and have been in business a minimum of three years. In addition, the firms must. provide: proof of National Association of Security Dealers membership, proof of state registration or exemption, and certificate of having read the City's investment policy. IX. AUTHORIZED AND SUITABLE INVESTMENTS The City's investments are governed by Government Code, Sections 53600 et seq. Within the investments permitted by the Government Code, the City seeks to further restrict eligible investment to the investments listed below. In the event an apparent discrepancy is found between this Policy and the Government Code, the more restrictive parameters will take precedence. Percentage holding limits listed in this section apply at the time the security is purchased. Any investment currently held at the time the Policy is adopted which does not meet the new Policy guidelines can be held until maturity, and shall be exempt from the current Policy. At the time of the investment's maturity or liquidation such funds shall be reinvested only as provided in the most current Policy. An appropriate risk level shall be maintained by primarily purchasing securities that are of high quality, liquid, and marketable. The portfolio shall be diversified by security type and institution to avoid incurring unreasonable and avoidable risks regarding specific security types or individual financial institutions. 1. United States Treasury Issues. United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. There is no limitation as to the percentage of the portfolio that maybe invested in this category. 3 (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) 2. Federal Agency Obligations. 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 government- sponsored enterprises. There is no limitation as to the percentage of the portfolio that may be invested in this category. However, the Treasurer should strive to limit the portfolio's exposure to any one federal agency issuer to 40 percent of the overall portfolio and limit the portfolio's exposure to callable federal agency securities to 25 percent of the overall portfolio. 3. Bankers Acceptances. Bankers' acceptances, otherwise known as bills of exchange or time drafts, that are drawn on and accepted by a commercial bank. Bankers' acceptances must be secured by the irrevocable primary obligation of the accepting domestic bank. Purchasers are limited to issuers whose short-term debt is rated "A-1" or higher, or the equivalent, by a Nationally Recognized Statistical-Rating Organization (NRSRO). Bankers' acceptances cannot exceed a maturity of 180 days. A maximum of 40 percent of the portfolio may be invested in this category. The amount invested in bankers' acceptances with any one financial institution in combination with any other debt from that financial institution shall not exceed 20 percent of the portfolio. 4. Commercial Paper. Commercial paper of "prime" quality of the highest ranking or of 'the highest letter and number rating as provided for by a NRSRO. The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (A) or paragraph (B): (A) The entity meets the following criteria: (i) Is organized and operating in the United States as a general corporation. (ii) Has total assets in excess of five hundred million dollars ($500,000,000). (iii) Has debt other than commercial paper, if any, that is rated "A" or higher by a nationally recognized statistical-rating organization. (B) The entity meets the following criteria: (i) Is organized within the United States as a special purpose corporation, trust, or limited liability company. (ii) Has program wide credit enhancements including, but not limited to, over collateralization, letters of credit, or surety bond. (iii) Has commercial paper that is rated "A-1" or higher, or the equivalent, by a nationally recognized statistical-rating organization. Eligible commercial paper shall have a maximum maturity of 270 days or less and not represent more than 10 percent of the outstanding paper of an issuing corporation. A maximum of 25 percent of the portfolio may be invested in this category. The amount invested in commercial paper of any one issuer in combination with any other debt from that issuer shall not exceed 20 percent of the portfolio. 5. Negotiable Certificates of Deposit. Negotiable certificates of deposit (NCDs) issued by a nationally or state-chartered bank, a savings association or a federal association, a state or federal credit union, or by astate-licensed branch of a foreign bank. Purchases are limited to institutions which have long-term debt rated "AA" or better and/or have short-term debt rated at least "A-1" or higher, or the equivalent by a NRSRO. A maximum of 30 percent of the 4 (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) portfolio may be invested in this category. The amount invested in NCDs with any one financial institution in combination with any other debt from that financial institution shall not exceed 20 percent of the portfolio. 6. Time Certificates of Deposit. Time Certificates of Deposit (TCDs) placed with commercial banks and savings and loans. The purchase of TCDs from out-of--state banks or savings and loans is prohibited. The amount on deposit shall not exceed the shareholder's equity in the financial institution. To be eligible for purchase, the financial institution must have received a minimum overall satisfactory rating for meeting the credit needs of California Communities in its most recent evaluation, as provided Government Code Section 53635.2. TCDs are required to be collateralized as specified under Government Code Section 53630 et. seq. The Treasurer, at his discretion, may waive the collateralization requirements for any portion that is covered by federal insurance. The City shall have a signed agreement with the depository per Government Code Section 53649. TCDs may not exceed one (1) year in maturity. A maximum of 10 percent of the portfolio may be invested in this category. 7. Money Market Funds. Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 and following). The company shall have met either of the following criteria: (A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs. (B) Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years' experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). A maximum of 20 percent of the portfolio may be invested in this category. For due diligence, the Treasurer shall maintain on file a copy of the current Prospectus for any mutual fund in which the City has funds invested. 8. State of California Local Agency Investment Fund (LAIF). A maximum of 75 percent of the portfolio may be invested in this category. For due diligence, the Treasurer shall maintain on file a copy of LAIF's current Answer Book. 9. California Asset Management Program (CAMP). Shares of beneficial interest issued by a joint powers authority organized pursuant to Government Code Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (n), inclusive of to Government Code Section 53601. For due diligence, the Treasurer shall maintain on file a copy of CAMP's current Information Statement. X. AUTHORIZED INVESTMENTS FOR BOND PROCEEDS Bond proceeds shall be invested in securities permitted by the applicable bond documents. If the bond documents are silent as to the permitted investments, bond proceeds will be invested in securities permitted by this Policy. Notwithstanding the provisions of Policy, the percentage or dollar portfolio limitations listed in elsewhere in this Policy do not apply to bond proceeds. In addition to the securities listed in Section IX above, bond proceeds may be invested in structured investment products if approved by the Treasurer. 5 (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) XI. PROHIBITED INVESTMENT PRACTICES AND INSTRUMENTS The City shall not make investments for the purpose of trading or speculation as the dominate criterion such as anticipation of appreciation of capital value through changes in market rates. Securities are purchased with the intent to hold to maturity. Any investment in a security not specifically listed as an Authorized and Suitable Investment above, but otherwise permitted by the Government Code, is prohibited without the prior approval of the City Council. Section 53601.6 of the Government Code specifically disallows investments in invoice floaters, range notes, or interest-only strips that are derived from a pool of mortgages. XII. TERM OF INVESTMENTS Funds of the City will be invested in accordance with sound treasury management principles. It is the objective of this Policy to provide a system which will accurately monitor and forecast revenues and expenditures so that the City can invest funds to the fullest extent possible. The maximum maturity of individual investments shall not exceed the limits set forth in under Authorized and Suitable Investments. No investment shall exceed a maturity of five years from the date of purchase unless the City Council has granted express authority to make that investment either specifically or as a part of an investment program approved by the City Council no less than three months prior to the investment. XIII. SAFEKEEPING AND CUSTODY Investment securities are to be purchased when possible in book-entry form in the City's name. All security transactions entered into by the City shall be conducted on a delivery-versus- payment (DVP) basis. All cash and securities in the City's portfolio shall be held in safekeeping in the City's name by a third party bank trust department, acting as agent for the City under the terms of a custody agreement executed by the bank and the City. All investment transactions will require a safekeeping receipt or acknowledgment generated from the trade. A monthly report will be received by the City from the safekeeping institution listing all securities held in safekeeping with current market data and other information. The only exception to the foregoing shall be depository accounts and securities purchases made with: (i) local government investment pools; (ii) time certificates of deposit, and, (iii) money mutual funds, since the purchased securities are not deliverable. Term and non-negotiable instruments, such as certificates of deposit, can be held by the Treasurer, or in safekeeping as the Treasurer deems appropriate. XIV. PERFORMANCE BENCHMARK The Treasurer shall monitor and evaluate the portfolio's performance. A comparison of the portfolio's performance against a performance benchmark may be included in the Treasurer's quarterly report.. The Treasurer shall select an appropriate, readily available index to use as a performance benchmark. 6 (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-OS 2009 Review: Reso 122-09 2010 Review Reso. 135-10) XV. REPORT INFORMATION The Treasurer shall prepare a report to the City Council on a quarterly basis which is available within 30 days following the end of the quarter covered by the report. The report shall be presented at a subsequent regularly scheduled City Council Meeting. (Revised 9/7/2010) The report shall be inclusive of a monthly listing of investment transactions At a minimum the quarterly report shall include the following: a) Type of Investment b) Issuer c) Date of Maturity d) Par and dollar amount invested e) Current Market Value as of the date of the report f) Source of the market value information g) A list of investment transactions. h) A statement of compliance with the investment policy i) A statement as to the ability of the City to meet its expenditure requirements for the next six months XVI. REVIEW OF INVESTMENT POLICY This policy shall be subject to review by the City Council on an annual basis, by the seco~ld Council meeting in September. Any recommended modifications or amendments shall be presented by Staff to the City Council for their consideration and adoption. (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 2010 Review Reso. 135-10) CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and btformational Purposes Only) ACCRUED INTEREST: Interest earned but not yet received. AGENCIES: Federal agency securities and/or Government-sponsored enterprises. Examples of well known agencies that issue bonds are Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), Federal National Mortgage Association (FNMA or "Fannie Mae"), and the Federal Home Loan Bank. AMORTIZATION: An accounting practice of gradually decreasing (increasing) an asset's book value by spreading its depreciation (accretion) over a period of time. ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BASIS POINT: One basis point is one hundredth of one percent (.O1). BENCHMARK: A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio's investments. BID PRICE: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. BOND: A financial obligation for which the issuer promises to pay the bondholder a specified stream of future cash flows, including periodic interest payments and a principal repayment. BOOK ENTRY: The system maintained by the Federal Reserve, by which most money market securities are delivered to an investor's custodial bank. The Federal Reserve maintains a computerized record of the ownership of these securities and records any changes in ownership corresponding to payments made over the Federal Reserve wire (delivery versus payment.) BOOK VALUE: The value at which a debt security is shown on the holder's balance sheet. Book value is acquisition cost less amortization of premium or accretion of discount. BROKER: A broker brings buyers and sellers together for a commission. CALLABLE BOND: A bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer under specified conditions. CALL PRICE: The price at which an issuer may redeem a bond. prior to maturity. The price is usually at a slight premium to the bond's original issue price to compensate the holder for loss of income and ownership. (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review:. Reso 174-08 2009 Review: Reso 122-09 ) Page 8 of 13 CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and Informational Purposes Only) CALL RISK: The risk to a bondholder that a bond maybe redeemed prior to maturity. CERTIFICATE OF DEPOSIT (CD): A deposit insured up to $100,000 by the FDIC at a set rate for a specified period of time. COLLATERAL: Securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. COMMERCIAL PAPER: An unsecured promissory note of industrial corporations, utilities and bank holding companies having assets in excess of $500 million and an "A" or higher rating for the issuer's debentures. Interest is discounted from par and calculated using the actual number of days on a 360- day year. The notes are in bearer form, mature from one to 270 days and generally start at $100,000. There is a secondary market for commercial paper and an investor may sell them prior to maturity. Unused lines of credit back commercial paper from major banks. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual financial report for the City. It includes combined statements and basic financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles (GAAP). Supplemental information is also included including a detailed multi year comparative statistics. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. CURRENT YIELD: The interest paid on an investment expressed as a percentage of the current price of the security. CUSTODY: A banking service that provides safekeeping for the individual securities in a customer's investment portfolio under a written agreement which also calls for the bank to collect and pay out income, and to buy, sell, receive and deliver securities when ordered to do so by the account holder. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT (DVP): Delivery versus payment is delivery of securities with an exchange of money for the securities. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 ) Page 9 of 13 CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and Informational Purposes Only) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security and its value at maturity when quoted at lower than face value. DISCOUNT SECURITIES: Non-interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. DURATION: A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed-income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA or Fannie Mae): FNMA, like GNMA was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). The corporation is called, is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FEDERAL OPEN MARKET COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 ) Page 10 of 13 CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and Informational Purposes Only) Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. FED WIRE: A wire transmission service established by the Federal Reserve Bank to facilitate the transfer of funds through debits and credits of funds between participants within the Fed system. FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC or Freddie Mac): A United States government sponsored corporation. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term "pass-throughs" is often used to describe Ginnie Maes. INTEREST RATE: The annual yield earned on an investment, expressed as a percentage. LIQUIDITY: Refers to the ability to easily and rapidly convert a security into cash. LOCAL AGENCY INVESTMENT FUND (LAIF): The local Agency Investment Fund (LAIF) is a special fund in the California State Treasury created and governed pursuant to Government Code Sections 16429.1 et seq. There are limits on the maximum dollars deposited by a city as well as the number of transactions allowed each month. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold on a specific date. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET MUTUAL FUND:Mutual funds that invest solely in money market instruments (short-term debt instruments, such as Treasury bills, commercial paper, bankers' acceptances, and federal funds). NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD): A self-regulatory organization (SRO) of brokers and dealers in the over-the-counter securities business. Its regulatory mandate includes authority over firms that distribute mutual fund shares as well as other securities. (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 ) Page 11 of 13 CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and Informational Purposes Only) NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NSROs); Credit rating agencies whose ratings are permitted to be used for regulatory purposes such as those imposed by the Securities and Exchange Commission. NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate of deposit which can be sold in the open market prior to maturity. NEW ISSUE: Term used when a security is originally "brought" to market. OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOIVIC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of securities held by an investor. PREMIUM: The amount by which the price paid for a security exceeds the security's par value. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms. PRINCIPAL: The face value or par value of a debt instrument, or the amount of capital invested in a given security. PURCHASE DATE: The date in which a security is purchased for settlement on that or a later date. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This maybe the amortized yield to maturity on a bond or the current income return. REPURCHASE AGREEMENT (RP OR REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "buyer" in effect lends the "seller" money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. RULE 2a-7 OF THE INVESTMENT COMPANY ACT: Applies to all money market mutual funds and mandates such funds to maintain certain standards, including a 13-month maturity limit and a 90- day average maturity on investments, to help maintain a constant net asset value of one dollar ($1.00). (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 ) Page 12 of 13 CITY OF DUBLIN INVESTMENT POLICY -APPENDIX GLOSSARY OF CASH MANAGEMENT TERMS (For Background and Informational Purposes Only) SAFEKEEPING: See CUSTODY. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the .initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SETTLEMENT DATE: The date on which a trade is cleared by delivery of securities against funds. TIME CERTIFICATE OF DEPOSIT: Anon-negotiable certificate of deposit which cannot be sold prior to maturity. TREASURY BILLS: Anon-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year and are sold on a discount basis. TREASURY BONDS: Long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of 1 to 10 years. U.S. GOVERNMENT AGENCIES: Instruments issued by various US Government Agencies most of which are secured only by the credit worthiness of the particular agency. WEIGHTED AVERAGE MATURITY (WAM): The average maturity of all the securities that comprise a portfolio that is typically expressed in days or years. YIELD: The rate of annual income return on an investment, expressed as a percentage. It is obtained by dividing the current dollar income by the current market price of the security. YIELD TO MATURITY: The rate of income return on an investment, minus any premium or plus any discount, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond, expressed as a percentage. YIELD CURVE: The yield on bonds, notes or bills of the same type and credit risk at a specific date for maturities up to thirty years. ZERO-COUPON SECURITY: Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity. (Orig. Adoption Reso.152-07 Subject to annual review. 2008 Review: Reso 174-08 2009 Review: Reso 122-09 ) Page 13 of 13