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HomeMy WebLinkAboutResolution 97-32RESOLUTION NO.97-32 AUTHORIZING THE DISTRICTS’TREASURER TO INVEST AND/OR REINVEST DISTRICTS’FUNDS,AND ADOPTING DISTRICTS’INVESTMENT POLICY STATEMENT AND PERFORMANCE BENCHMARKS A JOINT RESOLUTION OF THE BOARDS OF DIRECTORS OF COUNTY SANITATION DISTRICT NOS.1,2,3,5,6,7,II,13 AND 14 OF ORANGE COUNTY,CALIFORNIA,AUTHORIZING THE DISTRICTS’TREASURER TO INVEST AND/OR REINVEST DISTRICTS’FUNDS,AND ADOPTING DISTRICTS’INVESTMENT POLICY STATEMENT AND PERFORMANCE BENCHMARKS WHEREAS,on December 8,1994,the Boards of Directors adopted Resolution No.94-156,appointing the Director of Finance as Treasurer of County Sanitation District Nos.1, 2,3,5,6,7,11,13 and 14 of Orange County,California;and, WHEREAS,on September 25,1996,the Boards of Directors adopted Resolution No.96-79,readopting the Districts’Investment Policy Statement,and establishing specific performance benchmarks and objectives,together with a schedule of frequency of investment performance reports;and, WHEREAS,pursuant to California Government Code Section 53607,the Boards of Directors may delegate authority to invest and/or reinvest Districts’funds to the Treasurer for a one-year period;and, WHEREAS,pursuant to California Government Code Section 53646,the Districts are required to review their Investment Policy annually and readopt their Policy at a public meeting, which Policy will establish specific performance benchmarks and objectives,and specific monitoring and reports. NOW,THEREFORE,the Boards of Directors of County Sanitation District Nos.1,2,3, 5,6,7,11,13 and 14 of Orange County,California, DO HEREBY RESOLVE,DETERMINE AND ORDER: Section 1 That the authority of the Boards of Directors to invest or reinvest Districts’ surplus funds,or to sell or exchange securities so purchased,or to deposit for safekeeping the funds and investments of the Districts with depositories,as provided for in California Government Code Sections 53608 and 53630,is hereby delegated to the Districts’Treasurer for a one-year period commencing on the date this Resolution is adopted,as authorized by California Government Code Section 53607. Section 2 That the Boards of Directors hereby adopt the Investment Policy Statement of the County Sanitation Districts of Orange County,California,as set forth in Exhibit “A,”attached hereto and incorporated herein by reference. Section 3 That the Boards of Directors hereby adopt the following specific performance benchmarks for their two investment funds in accordance with Section 14.0 of the Districts’Investment Policy: LIQUID OPERATING MONIES The Short-Term Operating Fund will be compared to the three month T-Bill rate,and the Callan Active Cash Flow Income Style Group.The Callan Active Cash Flow Income Style Group represents a peer group of managers who operate with a maximum maturity of one year. LONG-TERM OPERATING MONIES The Long-Term Operating Fund will be compared to the Merrill Lynch Government and Corporate One-to-Five Year Maturity Index and to the Callan Defensive Fixed Income Style Group. Section 4 That the Boards of Directors hereby adopt a performance monitoring and reporting schedule,as required by Section 15.0 of the Districts’Investment Policy,which schedule is attached hereto as Exhibit “B,”and incorporated herein by reference. PASSED AND ADOPTED at a regular meeting held September 24,1997. \‘Jead\data2~wp.dta\admin\BS\RES\RES97\97-32.Investment Policy.doc STATE OF CALIFORNIA ) )SS. COUNTY OF ORANGE ) I,PENNY KYLE,Secretary of the Boards of Directors of County Sanitation Districts Nos.1,2,3,5,6,7,11,13 and 14 of Orange County,California,do hereby certify that the foregoing Resolution No.97-32 was passed and adopted at a regular meeting of said Boards on the 24th day of September,1997,by the following vote,to wit: AYES:George Brown;Tom Carroll;John Collins;Jan Debay;Barry Denes; Shirley Dettloff;Norman Z.Eckenrode;James M.Ferryman;Pat McGuigan;Margie Rice;Thomas R.Saltarelli;Peer A.Swan;Charles E. Sylvia; NOES:Steve Anderson;Mark Leyes;Patsy Marshall;Eva Minor-Bradford;Chris Norby;John Noyes;Mark Schwing;William G.Steiner;Dave Sullivan; Bob Zemel ABSENT:Brian Donahue;Burnie Dunlap;Mark A.Murphy;Christina Shea IN WITNESS WHEREOF,I have hereunto set my hand and affixed the official seal of County Sanitation District No.I on behalf of itself and Districts Nos.2,3,5,6,7, 11,13 and 14 of Orange County,California,this 24th day of September,1997. Penny Ky~jSeqt’~tary Boards of Directbts,County Sanitation Districts Nos.1,2,3,5,6,7,11,13 and 14 of Orange County,California H:~wp.dta’admin\BS\FORMS~97\F1 2.032.doc COUNTY SANITATION DISTRICTS OF ORANGE COUNTY INVESTMENT POLICY STATEMENT Reviewed and Approved by Finance,Administration and Human Committee on Resources September 10,1997 Adopted by Joint Boards of Directors on September 24,1997 (Resolution No.97-XX) S MUNICIPAL TREASURERS’AssociATIoN UNITED STATES &CANADA December 10,1996 Gary G.Streed Director of Finance/Treasurer County Sanitation Districts of Orange County,California P.O.Box 8127 Fountain Valley,CA 92728-8 127 Dear Mr.Streed: The Municipal Treasurers’Association is pleased to present the County Sanitation Districts of Orange County,California with the Association’s Investment Policy Certification. Members of the Association’s Investment Policy Certification Committee congratulate the•County Sanitation Districts of Orange County,California for its success in developing a comprehensive written investment policy which meets the criteria set forth by the Association’s Investment Policy Certification Program. Our review of your investment policy is limited to the doc~ir’~entaUon submitted. The Certification is not a guarantee against loss due tc~economic and market conditions or human behavior. The Association’s Investment Policy Certification Committee Chairman,Rod Rich, wifi be presenting the Investment Policy Certification plaque to all recipients at the Association’s 1997 Annual Conference in Sacramento,California.The County Sanitation Districts will be recognized during the Awards Luncheon on Wednesday,August 20.We hope that you will be able to attend this luncheon, however,ii your schedule does not permit you to attend,please call me at (202) 833-1017. The County Sanitation Districts of Orange County,California is to be commended for enhancing Its fiscal responsibility in the management of fiscal funds. Sincerely, Executive Irector 1229 Nineteenth Street,N.W~Washingion,DC 20036 PHONE 202-833-1017 FAX 202-833-0375 TABLE OF CONTENTS Section Topic Page 1.0 Policy 1 2.0 Scope I 3.0 Standard of Prudence 2 4.0 Investment Objectives 2 5.0 Delegation of Authority 3 6.0 Ethics and Conflicts of Interest 4 7.0 Authorized Financial Dealers and Institutions 4 8.0 Authorized and Suitable Investments 5 9.0 Collateralization 8 10.0 Safekeeping and Custody 9 11.0 Diversification 9 12.0 Maximum Maturities 10 13.0 Internal Controls 11 14.0 Performance Objectives and Benchmarks 11 15.0 Reporting 12 16.0 Investment Policy Adoption and Revision 13 Appendix A.Summary of Investment Authorization B.Board Resolution No.97-XX,Authorizing the Districts’Treasurer to Invest and/or Reinvest Districts’Funds,and Adopting Investment Policy and Performance Benchmarks C.Sections of the California Government Code Pertinent to Investing Public Funds D.Glossary of Investment Terms COUNTY SANITATION DISTRICTS OF ORANGE COUNTY,CA INVESTMENT POLICY STATEMENT 1.0 Policy It is the policy of the County Sanitation Districts of Orange County (CSDOC)to invest public funds in a manner which ensures the safety and preservation of capital while meeting reasonably anticipated operating expenditure needs,achieving a reasonable rate of return and conforming to all state and local statutes governing the investment of public funds. 1.1.This Investment Policy is set forth by CSDOC for the following purposes: 1.1.1.To establish a clear understanding for the Boards of Directors, CSDOC management,responsible employees and third parties of the objectives,policies and guidelines for the investment of the CSDOC’s idle and surplus funds. 1.1.2.To offer guidance to investment staff and any external investment advisors on the investment of CSDOC funds (see Appendix “A”). 1.1.3.To establish a basis for evaluating investment results. 1.2.CSDOC establishes investment policies which meet its current investment goals.CSDOC shall review this policy annually,and may change its policies as its investment objectives change. 2.0 Scope This Investment Policy applies to all financial assets of CSDOC,except for the funds of the Deferred Compensation Plan,which are managed externally;proceeds of CSDOC’s capital projects financing program,which are invested in accordance with provisions of their specific bond indentures;and such funds excluded by law or other Board-approved covenant or agreement. These funds are accounted for by CSDOC as represented in CSDOC’s Comprehensive Annual Financial Report and include: General Fund Special Reserve Funds Debt Service Funds (unless prohibited by bond indentures) Capital Project Funds Enterprise Funds Internal Service Funds Trust and Agency Funds Any new Fund established by the Boards of Directors,unless exempted by the Board Page 1 of 13 3.0 Standard of Prudence 3.1 The standard of prudence to be used by CSDOC internal staff shall be the “prudent investor”standard defined below in Section 3.1.1,and shall be applied in the context of managing an overall portfolio.Investment staff 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. 3.1 .1 The Prudent Investor Standard:Investments shall be made with judgment and care—under circumstances then prevailing-- which persons of prudence,discretion and intelligence exercise in the management of their own affairs,not for speculation,but for investment,considering the probable safety of their capital as well as the probable income to be derived. 4.0 Investment Objectives The primary objectives,in priority order,of CSDOC’s investment activities shall be: 4.1 Safety:The safety and preservation of principal is the foremost objective of the investment program of CSDOC.Investments shall be selected in a manner that seeks to ensure the preservation of capital in CSDOC’s overall portfolio.This will be accomplished through a program of diversification, more fully described in Section 11.0,and maturity limitations,more fully described in Section 12.0,in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 4.2 Liquidity:The investment program will be administered in a manner that will ensure that sufficient funds are available for CSDOC to meet its reasonably anticipated operating expenditure needs. 4.3 Return on Investments:The CSDOC investment portfolio will be structured and managed with the objective of achieving a rate of return throughout budgetary and economic cycles,commensurate with legal,safety,and liquidity considerations. Page 2 of 13 5.0 Delegation of Authority 5.1 Authority to manage CSDOC’s investment program is derived from the California Government Code Sections 53600 et seq.and Sections 53635 et seq.The Boards of Directors hereby delegates management responsibility for the CSDOC investment program to it’s Director of Finance I Treasurer, who shall establish written procedures for the operation of the investment program,consistent with this Policy.The Financial Manager/Assistant Treasurer shall be responsible for day-to-day administration,monitoring,and the development of written administrative procedures for the operation of the investment program,consistent with this Policy.No person may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Treasurer.The Treasurer shall be responsible for all transactions undertaken by CSDOC internal staff,and shall establish a system of controls to regulate the activities of internal staff and external investment advisors engaged in accordance with Section 5.3. 5.2 The administrative procedures for the operation of CSDOC’s investment program will provide for,but not be limited to,the following: 5.2.1 Formats for monthly and quarterly reports to the Finance, Administration and Human Resources Committee,and the Boards of Directors. 5.2.2 Compliance with generally accepted accounting principles of the Government Accounting Standards Board. 5.2.3 Establishment of benchmarks for performance measurement. 5.2.4 Establishment of a system of written internal controls. 5.2.5 Establishment of written procedures for competitive bids and offerings of securities that may be purchased or sold by internal CSDOC staff. 5.2.6 Establishment of a Desk Procedures Manual for treasury operations and management. 5.3 The Boards of Directors of CSDOC may,in its discretion,engage the services of one or more registered investment advisors to assist in the management of CSDOC’s investment portfolio in a manner consistent with CSDOC’s objectives.Such external investment advisors,which shall be selected through a competitive process,shall be granted discretion to purchase and sell investment securities in accordance with this Investment Policy.Such advisors must be registered under the Investment Advisers Act of 1940,or be exempt from such registration. Page 3 of 13 6.0 Ethics and Conflicts of Interest 6.1 Officers and employees of CSDOC involved in the investment process shall refrain from personal business activities that could conflict with proper execution of CSDOC’s investment program,or which could impair their ability to make impartial investment decisions.Employees and investment officials shall disclose to the General Manager any material financial interests in financial institutions that conduct business within CSDOC’s boundaries,and they shall further disclose any large personal financial/investment positions,the performance of which could be related to the performance of positions in CSDOC’s portfolio. 7.0 Authorized Financial Dealers and Institutions 7.1 For investment transactions conducted by CSDOC internal staff,the Treasurer will maintain a list of financial institutions authorized to provide investment services to CSDOC,including “primary”or regional dealers that qualify under Securities and Exchange Commission Rule I 5C3-1 (uniform net capital rule),and Federal or State of California chartered banks.No public deposit shall be made except in a qualified public depository as established by State law. All financial institutions which desire to become qualified bidders for investment transactions with CSDOC must supply the following for evaluation by the Treasurer: 7.1.1.Audited financial statements for the institution’s three (3)most recent fiscal years. 7.1.2.A statement,in the format prescribed by the Government Finance Officers Association (GFOA),certifying that the institution has reviewed CSDOC’s Investment Policy and that all securities offered to the Districts shall comply fully and in every instance with all provisions of the California Government Code and with this Investment Policy. 7.1.3.A statement describing the regulatory status of the dealer,and the background and expertise of the dealer’s representatives. Selection of financial institutions,broker/dealers,and banks authorized to engage in transactions with CSDOC shall be made through a competitive process.An annual review of the financial condition of qualified institutions will be conducted by the Treasurer. Page 4 of 13 7.2 Selection of broker/dealers used by external investment advisors retained by CSDOC,shall be in compliance with contract provisions between CSDOC and any external investment advisors,and shall be in substantially the following form: Use of Securities Brokers Neither the Investment Advisor nor any parent, subsidiary or related firm shall act as a securities broker with respect to any purchases or sales of securities which may be made on behalf of CSDOC, provided that this limitation shall not prevent the Investment Advisor from utilizing the services of a securities broker which is a parent,subsidiary or related firm,provided such broker effects transactions on a “cost only”or “nonprofit”basis to itself and provides competitive execution.The Investment Advisor shall provide the Districts with a list of suitable independent brokerage firms (including names and addresses)meeting the requirements of Government Code Section 53601.5,and,unless otherwise directed by CSDOC,the Investment Advisor may utilize the service of any of such independent securities brokerage firms it deems appropriate to the extent that such firms are competitive with respect to price of services and execution. 8.0 Authorized and Suitable Investments All investments shall be made in accordance with the California Government Code including Sections 16429.1 etseq.,53600 et seq.,and 53684,and as described within this Investment Policy.Permitted investments under this Policy shall include: 8.1 Securities issued by the US Government or an agency of the US Government and fully guaranteed as to payment by the US Government or agency of the US Government.Investment in mortgage-backed bonds and CMOs is not governed by this Section 8.1,even if such bonds are issued by agencies of the US Government.See Section 8.2 for conditions of purchase of mortgage-backed securities.See Section 8.11 for conditions of purchase of CMOs. 8.2 Mortgage-backed securities issued by an agency of the US Government, which are backed by pools of mortgages guaranteed by the full faith and ci~edit of the U.S.Government,or an agency thereof.Selection of mortgage derivatives,which include interest-only payments (lOs)and principal-only payments (P05);inverse floaters,and RE-REMICs (Real Estate Mortgage Investment Conduits),is hereby prohibited. 8.3 Commercial paper of “prime”quality and rated “P1”by Moody’s Investor Services (Moody’s),and rated “Al”by Standard &Poor’s Corporation (S&P),and issued by a domestic corporation organized and operating in the United States with assets in excess of $500 million and having a rating of “A” or better on its long-term debt as provided by Moody’s or S&P.Purchases of eligible commercial paper may not exceed 180 days to maturity from the Page 5 of 13 date of purchase.Purchases of commercial paper shall not exceed 15%of the market value of the portfolio,except that a maximum of 30%of the market value of the portfolio may be invested in commercial paper,so long as the average maturity of all commercial paper in the portfolio does not exceed 31 days.No more than 5%of the market value of the portfolio,or 10%of the issuer’s outstanding paper,may be invested in commercial paper issued by any one (1)eligible corporation. 8.4 Banker’s acceptances issued by institutions,the short-term obligations of which are rated a minimum of “P1”by Moody’s,or “Al”by S&P provided that:(a)the acceptance is eligible for purchase by the Federal Reserve System;(b)the maturity does not exceed 270 days;(c)no more than 40% of the total portfolio may be invested in banker’s acceptances;and (d)no more than 30%of the total portfolio may be invested in the banker’s acceptances of any one (1)commercial bank. 8.5 Medium term (or corporate)notes 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,the long-term obligations of which are rated at least “A3”by Moody’s,or “A-”by S&P.No more than 30%of the portfolio may be invested in eligible medium term or corporate notes. 8.6 Shares of mutual funds investing in securities permitted under this policy and under California Government Code Section 53601.Such funds must either:(1)attain the highest ranking,or the highest letter and numerical rating,provided by not less than two of the three largest nationally recognized rating services;or (2)have an investment Advisor registered with the Securities and Exchange Commission with not less than five (5)years of experience investing in the securities and obligations authorized under this Policy and under California Government Code Section 53601,and with assets under management in excess of $500 million.The purchase price of such shares may not include any commissions.Investment in mutual funds may not exceed 15%of the total portfolio. 8.7 Certificates of deposit: 8.7.1 Secured (collateralized)time deposits issued by a nationally or state-chartered bank or state or federal savings and loan association,as defined by Section 5102 of the California Financial Code,and having a net operating profit in the two (2)most recently completed fiscal years. Collateral must comply with Chapter 4,Bank Deposit Law,Section 16500 et seq.,and Chapter 4.5,Savings and Loan Association and Credit Union Deposit Law,Section 16600 et seq.,of the California Government Code. 8.7.2 Negotiable certificates of deposit (NCDs)issued by a nationally or state-chartered bank or state of federal savings and loan Page 6 of 13 association,as defined by Section 5102 of the California Financial Code; ~Li~which shall have a rating of “A”or better on its long-term debt as provided by Moody’s or S&P;or which shall have the following minimum short-term ratings by at least two (2)rating services:“P1”for deposits by Moody’s,“Al”for deposits by S&P,or comparably rated by a nationally recognized rating agency which rates such securities;or as otherwise approved by the districts’Boards of Directors. 8.8 Taxable or tax-exempt municipal bonds issued by the State of California or its subdivisions.Such securities must be rated “A3”or higher by Moody’s, or “A-”or higher by S&P;or as otherwise approved by the Districts’Boards of Directors. 8.9 The State of California Local Agency Investment Fund (LAIF). 8.10 The Orange County Investment Pool. 8.11 Collateralized mortgage obligations (CMOs)issued by agencies of the US Government which are backed by pools of mortgages guaranteed by the full faith and credit of the U.S.Government,or an agency thereof,and asset- backed securities rated “Aaa”by Moody’s and “AAA”by S&P.Selection of mortgage derivatives,which include interest-only payments (lOs)and principal-only payments (POs);inverse floaters,and RE-REMICS (Real Estate Mortgage Investment Conduits),is hereby prohibited.Securities eligible for purchase under this Section 8.11 shall be issued by an issuer having a rating on its unsecured long-term debt of “A”or higher.Combined purchases of mortgage-backed securities,CMOs and asset-backed securities as authorized under this Section 8.11,may not exceed 20%of the total Long-Term Operating Monies portfolio. 8.12 Repurchase agreements provided that: 8.12.1 All repurchase agreements shall be collateralized with securities eligible for purchase under this Policy,and are maintained at a level of at least 102%of the market value of the repurchase agreements.Collateral securities shall be delivered to a third-party safekeeping agent or to CSDOC’s custodian bank. 8.12.2 All repurchase agreements shall be collateralized with securities eligible for purchase under this Policy.In order to anticipate market changes and to provide a level of security for all repurchase agreement transactions, collateralization shall be maintained at a level of at least 102%of market value of the principal and accrued interest,and shall be adjusted no less than weekly. 8.13 Reverse repurchase agreements provided that: Page 7 of 13 8.13.1 Generally,no more than 20%of CSDOC’s portfolio shall be invested in reverse repurchase agreements,and there shall be no long-term reverse repurchase agreements unless otherwise authorized by the Districts’ Boards of Directors. 8.13.2 The maximum maturity of reverse repurchase agreements shall be ninety (90)days. 8.13.3 Reverse repurchase agreements shall mature on the exact date of a known cash flow which will be unconditionally available to repay the maturing reverse repurchase. 8.13.4 Proceeds of reverse repurchase agreements shall be used solely to supplement portfolio income or to provide portfolio liquidity,and shall not be used to speculate on market movements. 8.13.5 All reverse repurchase agreements must be the subject of a Master Repurchase Agreement between CSDOC and the provider of the reverse repurchase agreement.The Master Repurchase Agreement shall be substantially in the form developed by the Public Securities Association. 8.14 Sales of CSDOC-owned securities in the secondary market may incur losses in order to improve the risk or return characteristics of the portfolio,to prevent anticipated further erosion of principal,or when trading for securities that result in an expected net economic gain to CSDOC. 8.15 If securities owned by the CSDOC are downgraded by either Moody’s or S&P to a level below the quality required by this Investment Policy,it shall be CSDOC’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.If a decision is made to retain the downgraded securities in the portfolio,their presence in the portfolio will be monitored and reported monthly to the CSDOC General Manager,the Finance,Administration and Human Resources Committee and Boards of Directors. 9.0 Collateralization Generally,the value to secure deposits under this Policy shall comply with Section 53652 of the California Government Code.Collateralization will be required for secured time deposits,as more fully described in Section 8.7.1;and repurchase agreements,as more fully described in Section 8.12.1.Collateral will always be held by an independent third party,as more fully described in Section 10.1.The right of collateral substitution is granted. Page 8 of 13 10.0 Safekeeping and Custody 10.1 All securities transactions,including collateral for repurchase agreements, entered into by,or on behalf of CSDOC,shall be conducted on a delivery-versus-payment (DVP)basis.Securities will be held by CSDOC’s third-party custodian bank,which shall be selected through a competitive process,or that agent’s representative,or in the agent’s account at the Federal Reserve Bank,and evidenced by safekeeping receipts. 11.0 Diversification CSDOC will diversify its investments by security type,issuer,and financial institution in accordance with the following: 11.1 There is no limit on investment in securities issued by or guaranteed by the full faith and credit of the U.S.government. 11.2 No more than 20%of the portfolio may be invested in securities of a single agency of the U.S.government,which does not provide the full faith and credit of the U.S.government. 11.3 No more than 5%of the portfolio may be invested in securities of any one issuer,other than the U.S.government or its agencies. 11.4 No individual holding shall constitute more than 5%of the total debt outstanding of any issuer. 11.5 No more than 40%of the portfolio may be invested in banker’s acceptances. 11.6 No more than 15%of the portfolio may be invested in commercial paper, except that 30%of the portfolio may be so invested so long as the average maturity of all commercial paper in the portfolio does not exceed 31 days. 11.7 No more than 30%of the portfolio may be invested in medium-term (corporate)notes. 11.8 No more than 15%of the portfolio may be invested in mutual funds. 11.9 No more than 30%of the portfolio may be invested in negotiable certificates of deposit. 11.10 No more than 10%of the portfolio may be invested in eligible municipal bonds. Page 9 of 13 11.11 No more than 20%of the Long Term Operating Monies portfolio may be invested in a combination of mortgage-backed securities,CMOs and asset- backed securities.Mortgage-backed securities,CMOs and asset-backed securities may only be purchased by the Districts’external money managers with prior Board approval,and may not be purchased by the Districts’staff. 11.12 No more than the lesser of 15%of the portfolio or the statutory maximum may be invested in LAIF. 11.13 No more than 15%of the portfolio may be invested in the Orange County Investment Pool. 11.14 No more than 20%of the portfolio may be invested in repurchase agreements. 12.0 Maximum Maturities To the extent possible,CSDOC will attempt to match its investments with reasonably anticipated cash flow requirements.The Treasurer shall develop a five-year cash flow forecast,which shall be updated quarterly.Based on this forecast,the Treasurer shall designate,from time-to-time,the amounts to be allocated to the investment portfolio. CSDOC monies invested in accordance with this Policy are divided into two (2)categories: 12.1 Liquid Operating Monies.Funds needed for current operating and capital expenditures are known as Liquid Operating Monies. 12.1.1 The maximum final stated maturity of individual securities in the Liquid Operating Monies account portfolio shall be one (1)year from the date of purchase. 12.1.2 The average duration of the Liquid Operating Monies account portfolio shall be recommended by the Treasurer based on the Districts’ cash flow requirements,but may never exceed 180 days,and shall be reviewed and approved by the Finance,Administration and Human Resources Committee,and shall be updated as needed. 12.2 Long Term Operating Monies.Funds needed for longer term purposes are known as the Long Term Operating Monies. 12.2.1 The maximum final stated maturity of individual securities in the Long Term Operating Monies account portfolio shall be five (5)years from the date of purchase,unless otherwise authorized by the Districts’Boards of Directors. Page 10 of 12 12.2.2 The duration of the Long Term Operating Monies account portfolio shall be recommended by the Treasurer based on the Districts’five- year cash flow forecast,shall be reviewed and approved by the Finance, Administration and Human Services Committee,and shall be updated as needed. 12.2.3 The duration of the Long Term Operating Monies account portfolio shall never exceed 120%of the duration as established in accordance with Section 12.2.2. 12.2.4 The duration of the Long Term Operating Monies account portfolio shall never be less than 80%of the duration as established in accordance with Section 12.2.2 13.0 Internal Controls 13.1 The Treasurer shall establish an annual process of independent review by an external auditor.This review will provide internal control by assuring compliance with policies and procedures. 14.0 Performance Objectives and Benchmarks 14.1 Overall objective.The investment portfolio of CSDOC shall be designed with the overall objective of obtaining a rate of return throughout budgetary and economic cycles,commensurate with investment risk constraints and reasonably anticipated cash flow needs. 14.2 The Liquid Operating Monies.The investment performance objective for the Liquid Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index approved by the Finance,Administration and Human Resources Committee,and by the Districts’Boards of Directors,when the duration of the portfolio is established.This market index is more fully described in Board Resolution No.97-)(X (see Appendix “B”). 14.3 The Long Term Operating Monies.The investment performance objective for the Long Term Operating Monies shall be to earn a total rate of return over a market cycle which exceeds the return on a market index selected by the Finance,Administration and Human Resources Committee and approved by the Districts’Boards of Directors,when the duration of the portfolio is established.This market index is more fully described in Board Resolution No.96-XX (See Appendix “B”). Page 11 ofl2 15.0 Reporting 15.1 Monthly and quarterly investment reports shall be submitted by the Treasurer to the Finance,Administration and Human Resources Committee which shall forward the reports to the Districts’Boards of Directors.The monthly reports shall be submitted to the Finance,Administration and Human Resources Committee within 30 days of the end of the month.These reports shall disclose,at a minimum,the following information about the risk characteristics of CSDOC’s portfolio: 15.1.1 Cost and accurate and complete market value of the portfolio. 15.1.2 Modified duration of the portfolio compared to Benchmark. 15.1.3 Dollar change in value of the portfolio for a one-percent (1%) change in interest rates. 15.1.4 Percent of portfolio invested in reverse repurchase agreements, and a schedule which matches the maturity of such reverse repurchase agreements with the cash flows which are available to repay them at maturity. 15.1.5 For the Liquid Operating Monies account only,the percent of portfolio maturing within 90 days. 15.1.6 Average portfolio credit quality. 15.1.7 Percent of portfolio with credit ratings below “A”by any rating agency,and a description of such securities. 15.1.8 State that all investments are in compliance with this policy and the California Government Code,or provide a listing of any transactions or holdings which do not comply with this policy or with the California Government Code. 15.1.9 Time-weighted total rate of return for the portfolio for the prior three months,twelve months,year to date,and since inception compared to the Benchmark returns for the same periods. 15.1.10 State that sufficient funds are available for CSDOC to meet its operating expenditure requirements for the next six months,or if not,state the reasons for the shortfall. Page 12 of 13 15.2 CSDOC’s Treasurer shall meet quarterly with the Finance,Administration and Human Resources Committee to review investment performance,proposed strategies and compliance with this investment policy.External investment advisors may be required to attend said meetings at the discretion of the Chairman of the Finance,Administration and Human Resources Committee. 16.0 Investment Policy Adoption and Revision 16.1 The Investment Policy of CSDOC shall be reviewed by the Finance, Administration and Human Resources Committee and shall be adopted by resolution of the Boards of Directors of CSDOC.The Policy shall be reviewed on an annual basis by the Finance,Administration and Human Resources Committee,which shall recommend revisions,as appropriate,to the Boards of Directors.Any modifications made thereto shall be approved by the Boards of Directors. 16.2 The Finance,Administration and Human Resources Committee shall serve as the oversight committee for the Districts’Investment program and shall adopt guidelines for the ongoing review of duration,quality and liquidity of the Districts’portfolio. Page 13 of 13 _ __ U APPENDIX “A” U U -ii Ii- APPENDIX “A” SUMMARY OF INVESTMENT AUTHORIZATION INTERNAL AND EXTERNAL MANAGERS SHORT TERM OPERATING FUND INVESTMENT INTERNAL EXTERNAL U.S.Treasuries OK OK Federal Agencies Fixed coupon,fixed mat.OK Mortgage-backed NO NO Commercial paper OK OK Banker’s Accept.OK OK Medium Term Notes Fixed coupon,fixed mat.*OK Mutual Funds Money Market OnIy~Money Market Only Negotiable CDs Fixed coupon,fixed mat.*OK Municipal Bonds OK*NO LAIF OK NO OCIP OK NO CMOs NO NO Asset-backed NO NO Repurchase Agree.OK OK Reverse Repos OK*OK LONG TERM OPERATING PORTFOLIO INVESTMENT INTERNAL EXTERNAL U.S.Treasuries OK OK Federal Agencies Fixed coupon,fixed mat.OK Mortgage-backed NO OK Mutual Funds Money Market Only~OK Negotiable CDs Fixed coupon,fixed mat.*OK Municipal Bonds OK*OK LAIF OK NO OCIP OK NO CMOs NO With Board Approval Asset-backed NO With Board Approval Repurchase Agree.OK OK Reverse Repos OK*OK *With prior approval of the Finance,Administration and Human Resources Committee. ~Using financial institutions approved by the Finance,Administration and Human Resources Committee. H:\WP.DTA~FIN~221O~CRANE’dNVEST.PLY~97INVE$T.PLY - __ . APPENDIx “B” _ U -r RESOLUTION NO.97- AUTHORIZING THE DISTRICTS’TREASURER TO INVEST AND/OR REINVEST DISTRICTS’FUNDS,AND ADOPTING DISTRICTS’INVESTMENT POLICY STATEMENT AND PERFORMANCE BENCHMARKS A JOINT RESOLUTION OF THE BOARDS OF DIRECTORS OF COUNTY SANITATION DISTRICT NOS.1,2,3,5,6,7,11,13 AND 14 OF ORANGE COUNTY,CALIFORNIA,AUTHORIZING THE DISTRICTS’TREASURER TO INVEST AND/OR REINVEST DISTRICTS’FUNDS,AND ADOPTING DISTRICTS’ INVESTMENT POLICY STATEMENT AND PERFORMANCE BENCHMARKS WHEREAS,on December 8,1994,the Boards of Directors adopted Resolution No.94-156,appointing the Director of Finance as Treasurer of County Sanitation District Nos.1, 2,3,5,6,7,11,13 and 14 of Orange County,California;and, WHEREAS,on September 25,1996,the Boards of Directors adopted Resolution No.96-79,readopting the Districts’Investment Policy Statement,and establishing specific performance benchmarks and objectives,together with a schedule of frequency of investment performance reports;and, WHEREAS,pursuant to California Government Code Section 53607,the Boards of Directors may delegate authority to invest and/or reinvest Districts’funds to the Treasurer for a one-year period;and, WHEREAS,pursuant to California Government Code Section 53646,the Districts are required to review their Investment Policy annually and readopt their Policy at a public meeting, which Policy will establish specific performance benchmarks and objectives,and specific monitoring and reports. NOW,THEREFORE,the Boards of Directors of County Sanitation District Nos.1,2,3,5, 6,7,11,13 and 14 of Orange County,California, DO HEREBY RESOLVE,DETERMINE AND ORDER:• Section 1 That the authority of the Boards of Directors to invest or reinvest Districts’ surplus funds,or to sell or exchange securities so purchased,or to deposit for safekeeping the funds and investments of the Districts with depositories,as provided for in California Government Code Sections 53608 and 53630,is hereby delegated to the Districts’Treasurer for a one-year period commencing on the date this Resolution is adopted,as authorized by California Government Code Section 53607. Section 2 That the Boards of Directors hereby adopt the Investment Policy Statement of the County Sanitation Districts of Orange County,California,as set forth in Exhibit “A,”attached hereto and incorporated herein by reference. Section 3 That the Boards of Directors hereby adopt the following specific performance benchmarks for their two investment funds in accordance with Section 14.0 of the Districts’Investment Policy: LIQUID OPERATING MONIES The Short-Term Operating Fund will be compared to the three month T-BiIl rate,and the Callan Active Cash Flow Income Style Group.The Callan Active Cash Flow Income Style Group represents a peer group of managers who operate with a maximum maturity of one year. LONG-TERM OPERATING MONIES The Long-Term Operating Fund will be compared to the Merrill Lynch Government and Corporate One-to-Five Year Maturity Index and to the Callan Defensive Fixed Income Style Group. Section 4 That the Boards of Directors hereby adopt a performance monitoring and reporting schedule,as required by Section 15.0 of the Districts’Investment Policy,which schedule is attached hereto as Exhibit “B”and incorporated herein by reference. PASSED AND ADOPTED at regular meeting held , 1997. H :\wp.dta\admin\BS\RES\97-27 .DOC EXHI “B” COUNTY SANITATION DISTRICTS OF ORANGE COUNTY PERFORMANCE MONITORING &REPORTING FOR THE DISTRICTS’INVESTMENT PROGRAM POLICY REFERENCE PERFORMANCE CHARACTERISTIC REPORTING PARTY* 15.1.1 15.1.2 15.1.3 15.1.4 15.1.5 15.1.6 15.1.7 15.1.8 15.1.9 ADDL** ADDL** ADDL** ADDL** Cost and market value of the portfolio (monthly mark-to-market). Modified duration of the portfolio compared to benchmark. Dollar change in value of the portfolio for a 1%change in interest rate. Percent of portfolio invested in reverse repurchase agreements,and a schedule which matches the maturity of such reverse repurchase agreements with the cash flows which are available to repay them at maturity. For the Liquid Operating Monies account only,the percent of portfolio maturing within 90 days. Average portfolio credit quality. Percent of portfolio with credit ratings below “A”by any rating agency,and a description of such securities. Listing of any transactions or holdings which do not comply with this policy or with the California Government Code. Time-weighted total rate of return for the portfolio for the prior three months,twelve months,year-to- date,and since inception compared to the benchmark returns for the same periods. Comparison of portfolio performance to market index benchmark. Comparison of Manager’s performance to peer group benchmark. Monitoring of organizational and structural changes of investment management firm. Audit portfolios for compliance with investment policy guidelines. PIMCO MELLON CALLAN M,Q M,Q Q M,Q Q M,Q Q M,Q M,Q Q M,Q Q M,Q Q M,Q M,Q Q M,Q Q 0 0 0 15.1.10 CSDOC will report if sufficient funds are available for it to meet operating expenditure requirements for the next six months,or if not,state the reasons for the shortfall. Notes *M =Monthly Q =Quarterly ADDL =Monitoring of Additional Performance Characteristics K:~WP.DTA’FIN\221O~CRANE~JNVESTPLY\M0Nff0RCHT 4 . APPENDIx “C” . _ -IE Sections of the California Government Code Pertinent to Investing Public Funds Introduction A requirement of Section 8,Authorized and Suitable Investments,of the Districts’Investment Policy Statement,is that all investments shall be made in accordance with the California Government Code,including Sections 16429.1 et seq.,53600 et seq.,and 53684.This appendix presents a copy of these sections for the reader’s reference. (Please Note:Copies of the latest Government Code sections referenced above are being obtained and will be included in a spiral bound version of the Districts’Investment Policy which will be published following final Board action on this item.) II L U APPENDIX “D” .U - APPENDIX “D” GLOSSARY OF INVESTMENT TERMS Agencies.Shorthand market terminology for any obligation issued by a government- sponsored entity (GSE),or a federally related institution.Obligations of GSEs are not guaranteed by the full faith and credit of the US government.There are eight GSEs,five of which are currently active in the new issue market.The five include: FFCB.The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry.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 Home Loan Mortgage Corporation provides credit and liquidity in the housing market.FHLMC,also called “FreddieMac” issues discount notes,bonds and mortgage 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. SLMA.The student loan marketing association,also known as “SallieMae,” provides liquidity to private lenders who make various types of loans for education.SLMA currently issues floating rate notes. Federally related institutions are arms of the federal government.Most do not issue securities directly into the market.Those which do issue directly include the following: GNMA.The Government National Mortgage Association,known as “GinnieMae,”issues mortgage pass-through securities which are guaranteed by the full faith and credit of the US Government. PEFCO.The Private Export Funding corporation assists exporters.Obligations of PEFCO are not guaranteed by the full faith and credit of the US government. WA.The Tennessee Valley Authority provides flood control and power and promotes development in portions of the Tennessee,Ohio and Mississippi River valleys.WA currently issues discount notes and bonds. Page 1 of 7 Amortized Cost.Measure of the cost of a security whereby the cost value will change over time as the discount or premium paid for the security is gradually incorporated into the principal value as interest payments are received. Asked.The price at which a seller offers to sell a security. Asset-backed securities.Securities collateralized with consumer receivables,such as automobile loans,credit card receivables,or home equity loans,which are owned by the issuer,but placed with a trustee for the benefit of the investor. Average life.In mortgage-related investments,including CMOs,the average time to expected receipt of principal payments,weighted by the amount of principal expected. Banker’s acceptance.A money market instrument created to facilitate international trade transactions.It is highly liquid and safe because the risk of the trade transaction is transferred to the bank which “accepts”the obligation to pay the investor. Benchmark.A comparison security or portfolio.A performance benchmark is a partial market index which reflects the mix 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. Bullet structure.A portfolio strategy in which a manager overweights both the short and long end of the yield curve,and underweights the middle part of the curve. Certificate of Deposit (CD).A time deposit with a specific maturity evidenced by a certificate.Large denomination CDs may be marketable. Collateral.Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement.Also,securities pledged by a financial institution to secure deposits of public moneys. Collateralized Mortgage Obligations (CMO).Classes of bonds which redistribute the cash flows of mortgage securities (and whole loans)to create securities which have different levels of prepayment risk,as compared to the underlying mortgage securities. Commercial paper.The short-term unsecured debt of corporations. Page 2 of 7 Conditional prepayment rate (CPR).A measure of mortgage prepayment activity.It assumes that a constant fraction of the principal prepays each month and is based on the previous month’s remaining balance.The rate is expressed as an annualized percentage.For instance,a CPR of 6%indicates that each month 6%of the remaining principal balance prepays on an annualized basis. Convexity.The rate of change in a bond’s price as duration changes.It is a particularly important component of price change for longer term bonds,or for large changes in interest rates. Cost Yield.The annual income from an investment divided by the purchase cost. Because it does not give effect to premiums and discounts which may have been included in the purchase cost,it is an incomplete measure of return. Coupon.The rate at which a bond pays interest. Credit risk.The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer. Current yield.The annual income from an investment divided by the current market value.Since the mathematical calculation relies on the current market value rather than the investor’s cost,current yield is unrelated to the 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 from and buying securities for his own position. Debenture.A bond secured only by the general credit of the issuer. Derivative.Any security that has principal and/or interest payments which are subject to uncertainty (but not for reasons of default or credit risk)as to timing and/or amount,or any security which represents a component of another security which has been separated from other components (“Stripped”coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument,interest rate or index. Discount.The difference between the par value of a bond and the cost of the bond, when the cost is below par.Some short-term securities,such as Tbills and banker’s acceptances,are known as discount securities.They sell at a discount from par,and return the par value to the investor at maturity without additional interest.Other securities,which have fixed coupons trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality. Page 3 of 7 Diversification.Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk. Duration.The weighted average time to maturity of a bond where the weights are the present values of the future cash flows.Duration measures the price sensitivity of a bond to changes in interest rates.(See modified duration and effective duration). Effective duration.Measures the price volatility of a fixed income security that contains embedded options.A more accurate measure of price volatility when the cash flow characteristics of the bond change when interest rates shift. Federal funds rate.The rate of interest charged by banks for short term loans to other banks.It is established by the Federal Reserve Bank through open-market operations. Federal Open Market Committee.A committee of the Federal Reserve Board which establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves. Ladder structure.A portfolio strategy in which a manager attempts to weight securities equally across the yield curve. Leverage.Borrowing funds in order to invest in securities which have the potential to pay earnings at a rate higher than the cost of borrowing. Liquidity.The speed and ease with which an asset can be converted to cash. 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 which a security can be traded. Marking to market.The process of posting current market values for securities in a portfolio. Maturity.The final date upon which the principal of a security becomes due and payable. Medium term note.A corporate bond which is brought to market over a period of time rather than at a single offering.Generally issued as senior unsecured obligations of the borrower. Page 4 of 7 Modified duration.Measures the percentage price volatility of a fixed income security or portfolio.Modified duration approximates the change in price for small changes in interest rates,assuming that the cash flow characteristics do not change when the yield curve shifts. Money market.The market in which short term debt instruments (Tbills,discount notes,commercial paper and banker’s acceptances)are issued and traded. Mortgage Pass Through Securities.Securities collateralized with residential mortgage loans,the principal and interest payments of which are distributed,or “passed-through”to the investor.Many of these securities are issued by agencies of the federal government,including GNMA and FHLMC. Mutual fund.An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund’s prospectus.Mutual funds can be invested in various types of domestic and/or international stocks, bonds and money market instruments,as set forth in the individual fund’s prospectus.For most large,institutional investors,the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio. Negative convexity.A phenomenon associated with bonds which have embedded call options,it measures the rate at which duration of a callable bond gets smaller as interest rates fall.Negative convexity is an undesirable characteristics in bonds. PSA Standard Prepayment Model (PSA).A measure of mortgage prepayment activity.The model is expressed as a monthly series of annual prepayment rates.The series begins at .2%per year in the first month,and increases by .2%per year in each successive month until month 30,where it levels out at 6% per year until maturity.This series is labeled 100 PSA.200 PSA doubles this series,and 50 PSA would cut the series in half. Option adjusted spread.A measure of the value of a bond relative to a benchmark security,which takes into account the value of the embedded option inherent in any bond that has uncertain cash flows (i.e.,callable bonds). Premium.The difference between the par value of a bond and the market value of the bond,when the market value is above par. Prepayment speed.A measure of how quickly principal is repaid to investors in mortgage securities. Prepayment window.The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed. Page 5of7 Prudent investor rule.A standard of responsibility which applies to fiduciaries. In California,the rule is stated as “Investments shall be managed with the care, skill,prudence and diligence,under the circumstances then 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.” Realized return.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. Repurchase agreement (Repo).A short-term transaction in which a bank or dealer (seller)sells a government security to an investor (buyer),with the simultaneous agreement to repurchase the security from the buyer for an agreed-upon fixed price,on a specified date. Revere repurchase agreement (Reverse Repo).A short-term transaction in which an investor (seller)sells a government security it owns to a bank or dealer (buyer)under an agreement in which the buyer agrees to sell the security back to the investor on a specified date,at an agreed-upon interest rate. Safekeeping.A service to bank customers whereby securities are held by the bank In the customer’s name. Scenario analysis.A portfolio management technique that measures the performance of the portfolio under varying scenarios including,but not limited to,interest rate movements,spread changes and nonparallel yield curve shifts. Structured note.A complex,fixed income instrument which pays interest based on a formula tied to other interest rates,commodities or indices.Examples include inverse floating rate notes which have coupons that increase when other interest rates are falling,and which fall when other interest rates are rising,and “dual index floaters,”which pay interest based on the relationship between two other interest rates -for example,the yield on the ten-year Treasury note minus the Libor rate.Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements. Total rate of return.A measure of a portfolio’performance over time.It is the internal rate of return which equates the beginning value of the portfolio with the ending value,and includes interest earnings and realized and unrealized gains and losses on 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 benchmark for interest rates on all other securities in the US and overseas.The Treasury issues both discounted securities and fixed coupon notes and bonds. Page 6 of 7 Treasury bills.All securities issued with initial maturities of one year or less are issued as discounted instruments,and are called Treasury bills.The Treasury currently issues three-and six-month TbiIIs at regular weekly auctions.It also issues “cash management”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 semi-annually. Treasury bonds.All securities issued with 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 (YTM).The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost. Yield to maturity (at market).The discount rate that equates the present value of the promised cash flow (interest payments and redemption value)to the market price,assuming that all cash flows are invested at the YTM rate. Yield to maturity (at purchase cost).The YTM that equates to the purchase price of the security. Page 7 of 7 Exhibit “B” FY 1997-98 Performance Monitoring &Reporting Schedule For the FAHR Committee and Board of Directors meetings of: The Monthly Treasurer’s Report to be presented for the month of: The Quarterly Investment Management Program Report to be presented for the period of: July 1997 June 1997 August July April—June 1997 September August October September November October July —Sept 1997 December November January 1998 December 1997 February January1998 Oct—Dec 1997 March February April March May April Jan —March 1998 June May H:\.\FINANCE\21 O\KOZAK\EXHIBITB