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HomeMy WebLinkAboutR-2011-05 amending the City of La Porte Investment Policy D REQUEST FOR CITY COUNCIL AGENDA ITEM Agenda Date Requested: May 23, 2011 Appropriation Requested By: Michael G. Dolby, CPA Source of Funds: N/A Department: Finance Account Number: N/A Report: Resolution: X Ordinance: Amount Budgeted: N/A Exhibits Resolution Amount Requested: NSA Exhibits: Investment Policy- Clean & Edited Version Budgeted Item: YES NO Exhibits SUMMARY & RECOMMENDATION The City Council of the City of La Porte originally adopted an Investment Policy on January 13, 1992, by Ordinance No. 1802. The Investment Policy governs how the City will invest the City's funds and outlines administrative and legal guidelines for the Investment Officers to follow for the preservation of capital. The Public Funds Investment Act requires that a City must present the Investment Policy to Council annually for review or amendment. On May 9, 2011, the Finance Department presented the Investment Policy to the Fiscal Affairs Committee. A few changes have been made to the Investment Policy based on recommendations from the Government Treasurers Organization. Staff recommends that the Investment Policy be amended to include the following: • Address requirements for acceptance, substitution and release of collateral — Collateralization is the pledging of appropriate securities or other instruments (i.e. Federal agency securities or letters of credit) by depositories to protect public deposits. The investment officer should approve the acceptance, substitution and release of all collateral pledged in order to maintain control and reduce the risk to the City's deposits and investments. • Reference of independent third -party safekeeping for investment securities - Public deposits are best protected by collateral that is held in safekeeping by an independent third party, so the section on safekeeping has been added to the policy to better protect the City's investments. The City currently has third party agreements in place for safekeeping; however, that language is not in the current investment policy. • Outline reporting requirements for the quarterly investment reports — The reporting requirements include the investment details, market values and interest earnings. Additionally, verbiage has been added to reference the Public Funds Investment Act. The reference to annual reports has been removed, since more frequent reports are submitted. • Guaranteed Investment Contracts (GIC's) as an authorized investment - A guaranteed investment contract (GIC) is a contract that guarantees repayment of principal and a fixed or floating interest rate for a predetermined period of time. A GIC is used primarily as a vehicle that yields a higher return than a savings account or United States Treasury securities. Staff is proposing the addition of GICs as an authorized investment since a few of the pools include them in their investment portfolio. In addition to the above mentioned changes, the policy has been reformatted and the order of the wording moved around to improve the flow of the document. The authorized investment wording has been condensed and references to the Act added. The changes proposed are not making the policy less stringent. Additions have been made to better protect the City's investments. Action Required by Council: aff reco i nds that the Council receive and approve the amended Investment Policy by resolution. AI iru /freflatiit cilA.enda (fib f »! Ron Bottoms, T ty anager Date RESOLUTION NO. IX NS A RESOLUTION OF THE CITY OF LA PORTE, TEXAS, AMENDING AN INVESTMENT POLICY CONFORMING TO ALL STATUTES GOVERNING INVESTMENT OF THE CITY OF LA PORTE'S FUNDS, INCLUDING, BUT NOT BY WAY OF LIMITATION, THE PUBLIC FUNDS INVESTMENT ACT, CHAPTER 2256, TEXAS GOVERNMENT CODE; FINDING COMPLIANCE WITH THE OPEN MEETINGS LAW; AND SETTING AN EFFECTIVE DATE THEREOF. WHEREAS, the City of La Porte requires that funds be invested in a manner which will preserve the principal of funds invested while meeting daily cash flow demands of the City; and WHEREAS, the Public Funds Investment Act requires the adoption of certain investment policies and controls regarding the investment of its funds; and WHEREAS, the Public Funds Investment Act further requires that the governing body of an investing entity shall adopt a written investment policy by resolution, and shall further state that it has reviewed the investment policy and investment strategies adopted, and that the written policy adopted shall record any changes made to either the investment policy or investment strategies previously adopted; and WHEREAS, the City will endeavor to earn a return on funds invested at the highest return possible after taking into account the primary goals of preservation of liquidity of funds invested, consistent with the City's Investment Policy; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF LA PORTE, THAT: SECTION 1. The findings and recitations set out in the preamble to this Resolution are found to be true and correct and that they are hereby adopted by the City Council of the City of La Porte and made a part hereof for all purposes. SECTION 2. The City of La Porte hereby designates the attached policy titles, City of La Porte, Texas Investment Policy, as an official policy of the City of La Porte and that it is hereby adopted by the City of La Porte and made a part hereof for all purposes. SECTION 3. The City Council officially finds, determines, recites, and declares that a sufficient written notice of the date, hour place and subject of this meeting of the City Council was posted at a place convenient to the public at City Hall of the City for the time required by law preceding this meeting, as required by the Open Meetings Law, Chapter 551, Texas Government Code; and that this meeting has been open to the public as required by law at all times during which this Resolution and the subject matter thereof has been discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. SECTION 4. This resolution shall be effective upon its passage and approval. Passed by the City Council this 23rd day of May, 2011. CITY OF LA PORTE Al, • Lo 14 Rigby I Ma ATTEST: P te( CQ, Patrice Fogarty (1 `� City Secretary APPROVED: / 1.---4/4-4 Clark T. Askins Assistant City Attorney City of La Port Texas In vestmt Poli dopted by th en City Council A Of the City o f L Porte On January 13, 992 by Ordinance No. 1802 L 7 o e i I ' v. , ,- � r.a Nor fl II tea f k 'I/ ''''''1, , ili Am ended: City of La Port e, Texas Novem 1995 Michael G. Dolby, CPA August 1997 Director of Finance November 2000 February 2003 Shelley Wolny February 2005 Treasurer October 2005 July 2009 POLICY It is the policy of the City of La Porte, Texas (the "City ") to administer and invest its funds in a manner which will preserve the principal and maintain the liquidity through limitations and diversification while meeting the daily cash flow requirements of the City. The City will invest all available funds in conformance with legal and administrative guidelines, seeking to optimize interest earnings to the maximum extent possible. The purpose of this investment policy is to comply with all statutes governing the investment of the City's funds, including the Public Funds Investment Act, Chapter 2256 of the Texas Government Code (the " Act "), which requires the City to adopt a written investment policy regarding the investment of its funds and funds under its control. The Investment Policy addresses the methods, procedures and practices that must be exercised to ensure effective and judicious fiscal management of the City's funds. II. SCOPE The City will strive to earn a return on funds invested at the highest investment return possible after taking in consideration the primary goals of preservation of principal and liquidity of funds invested, consistent with the policy objectives described below. This investment policy applies to the investment activities of the government of the City of La Porte, Texas. FUNDS INCLUDED The City's funds, which are pooled together and constitute the investment portfolio, include all financial assets of all funds managed by the City, including but not limited to receipts of tax revenues, charges for services, bond proceeds, interest incomes, loans and funds received by the City where the City performs a custodial function. These funds are accounted for in the City's Comprehensive Annual Financial Report (CAFR) and include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Funds Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. 111. OBJECTIVES SAFETY The primary objective of the City's investment activity is the preservation of capital and the protection of investment principal in the overall portfolio. Each investment transaction shall seek first to ensure that capital losses are avoided, whether they are from securities defaults or erosion of market value. The City will strive to minimize credit risk by limiting investments to the safest types of investments, prequalifying the financial institutions and broker /dealers with which the City conducts business, and diversify the investment portfolio so that potential losses on individual issuers will be minimized. To minimize interest rate risk, the City will ladder the portfolio and match investments with future cash requirements and invest operating funds in shorter, more liquid securities and investments. 1 LIQUIDITY The City's investment portfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. Because all possible cash demands cannot be anticipated, a portion of the portfolio will be invested in shares of money market mutual funds or local government investment pools that offer same day liquidity. PUBLIC TRUST All participants in the investment process shall seek to act responsibly as custodians of the public trust. Investment Officials shall avoid any transaction that might impair public confidence in the City's ability to govern effectively. The governing body recognizes that in a diversified portfolio, occasional measured losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. YIELD (Optimization of Interest Earnings) The City's cash management portfolio shall be designed with the objective of regularly meeting or exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the City's weighted average maturity in days. The investment program shall seek to augment returns above this threshold consistent with risk limitations identified herein and prudent investment principles. IV. RESPONSIBILITY AND CONTROL Oversight Responsibility for the investment activity of the City of La Porte shall rest with the Fiscal Affairs Committee and the City Manager. DELEGATION Management responsibility for the investment program is hereby delegated to the Director of Finance, who shall establish written procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. SUBORDINATES All persons involved in investment activities will be referred to as "Investment Officers." No person shall engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Director of Finance. The Director of Finance shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of Subordinate Investment Officers. All investment officers, including the Director of Finance, will demonstrate competence in the execution of the city's investments. All Investment Officers will insure compliance with the investment program with ongoing training and evaluation by management. PRUDENCE Investments shall be made with the exercise of due care, 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 own capital as well as the probable income to be derived. Investment Officers acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this policy. IMDEMNIFICATION The Director of Finance and the Investment Officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for 2 a specific investment's credit risk or market price changes, provided that these deviations are reported immediately and the appropriate action is taken to control adverse developments. ETHICS DISCLOSURE AND CONFLICTS OF INTEREST Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program, or which could impair their ability to make impartial investment decisions. Employees and Investment Officers shall disclose to the City Manager any material interests in financial institutions that conduct business with the City of La Porte, and shall further disclose any personal financial or investment positions that could be related to the performance of the City's investment portfolio. Employees and Investment Officers shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the City of La Porte. An Investment Officer of the City of La Porte who has a personal business relationship with an organization seeking to sell an investment to the City of La Porte shall file a statement disclosing that personal business interest. An Investment Officer who is related within the second degree by affinity or consanguinity to an individual seeking to sell an investment to the City of La Porte shall file a statement disclosing that relationship. A statement required under subsection 2256.005(i) of the Act must be filed with the Texas Ethics Commission and the governing body of the City of La Porte. TRAINING Investment Officers shall attend 10 hours of investment training within 12 months after taking office or assuming duties, and 10 hours every succeeding two years. The investments training shall be provided from an independent source approved by the Fiscal Affairs Committee to insure the quality and capability of investment management in compliance with the Act. For the purposes of this policy, an "independent source" is defined as a professional organization, an institute of higher learning or any other sponsor other than a Business Organization with whom the City may engage in investment transactions. Training shall be in accordance with the Act and shall include education in investment controls, security risks, strategy risks, market risks, diversification of investment portfolio, and compliance with statutes governing the investment of public funds. V. REPORTING Investment reports shall be prepared quarterly and be signed and submitted by the Investment Officers, in a timely manner. These reports will be submitted to the City Manager and City Council. This report shall describe in detail the investment position of the City, disclose the market value and book value of each fund group as well as each separate investment, and state the maturity date of each security and accrued interest for the reporting period. The report shall include all information as required by Section 2256.023 of the Act. It must also express compliance of the portfolio to the investment strategy contained in the City's Investment Policy, the Act, and Generally Accepted Accounting Principles (GAAP). MONITORING The market price of each investment shall be obtained monthly from a source such as the Wall Street Journal newspaper, a reputable brokerage firm or security pricing service and reported on the investment reports. 3 VI. INVESTMENTS ACTIVE PORTFOLIO MANAGEMENT The City intends to pursue active versus passive portfolio management philosophy. That is, securities may be sold before they mature if market conditions present an opportunity for the City to benefit from the trade. AUTHORIZED INVESTMENTS The following are authorized investments for the City and all are authorized and further defined by the Act: A. Obligations, including letters of credit, of the United States or its agencies and instrumentalities; direct obligations of this state or its agencies and instrumentalities; other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities; and obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent. (Section 2256.009 (a) of the Act) The following are not authorized investments under Section 2256.009 (b) of the Act: • obligations whose payment represents the coupon payment on the outstanding principal balance of the underlying mortgage- backed security collateral and pays not principal (Interest only bonded); • obligations whose payment represents the principal stream of cash from the underlying mortgage- backed security collateral and pays no interest (Principal only bonds); • collateralized mortgage obligations that have a final stated maturity date of greater than 10 years; and • collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. B. Fully collateralized certificates of deposit issued by a depository institution that has its main office or branch office in Texas and, guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor; secured by obligations authorized by this subchapter, or secured in any other manner and amount provided by law for deposits of the City. (Section 2256.010 of the Act) C. Fully collateralized repurchase agreements with a defined termination date; and secured by obligations described by the Act (Section 2256.009 (a)(1)); such collateral, held in the City's name, and deposited at the time the investment is made with the City or an independent third party selected and approved by the City. Repurchase agreements must be purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this Texas. Repurchase agreements and reverse repurchase agreements shall be entered into only with dealers who have executed a Master Repurchase Agreement with the City. The term of any reverse security repurchase agreement may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by the City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the term of the authorized — investments acquired must mature no later than the expiration date stated in the reverse security repurchase agreement. (Section 2256.011 of the Act) 4 D. Bankers' acceptances with a stated maturity of 270 days or fewer from the date of its issuance; liquidated in full at maturity; eligible for collateral for borrowing from a Federal Reserve Bank; and accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less that A -1 or P -1 or an equivalent rating by at least one nationally recognized credit rating agency. (Section 2256.012 of the Act) E. Commercial Paper with a stated maturity of 270 days or fewer from the date of its issuance; and is rated not less than A -1 or P -1 or an equivalent rating by at least two nationally recognized credit rating agencies. (Section 2256.013 of the Act) F. AAA - rated, no -load money market mutual funds registered with and regulated by the Securities and Exchange Commission; having a dollar - weighted average stated maturity of 90 days or fewer; and includes in its investment objectives the maintenance of a stable net asset value of $1 for each share. (Section 2256.014 of the Act) The Fund must provide the City with a prospectus and other information required by the Securities and Exchange Act of 1934 (15 U.S.C. Section 80a -1 et seq.); The City is not authorized by Section 2256.014 (c) of the Act to: • invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves in other funds held for debt service, in mutual funds described in the Act (Section 2256.014); • invest any portion of bond proceeds, reserves and funds held for debt service, in mutual funds described in the Act (Section 2256.014); or • invest its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund described in the Act (Section 2256.014) in an amount that exceeds 10 percent of the total assets of the mutual fund. G. Guaranteed Investment Contracts (GICS) with a defined termination date; secured by obligations described in the Act (Section 2256.009) in an amount at least equal to the amount of bond proceeds invested under the contract; and pledged to the City and deposited with the City or with a third party selected and approved by the City. GICS are further subject to the limitations contained in Section 2256.015 of the Act. H. AAA - rated, constant dollar, investment pools with a weighted average maturity of no greater than 90 days as authorized by the City Council and as further defined by the Act, which invests in eligible securities as authorized by Section 2256.016 of the Act. EXISTING INVESTMENTS The Investment Officer is not required to liquidate investments that were authorized investments at the time of purchase. Any investments currently held that do not meet the guidelines of this policy shall be reviewed to determine the ability to liquidate. If the investment cannot be liquidated because of material adverse change in the value since the time of purchase, and holding the investment to maturity does not negatively affect disbursements or cash flow, a recommendation of holding said investment to maturity is acceptable. MAXIMUM MATURITIES The maximum stated maturity, from the date of purchase, for any individual investment may not exceed 5 years and the maximum dollar- weighted average maturity for the pooled fund group (investment portfolio) may not exceed 2 years. 5 DIVERSIFICATION It is the policy of the City to diversify its investment portfolios. Assets held in the pooled investment portfolio shall be diversified to eliminate the risk of loss resulting from over - concentration of assets in a specific maturity, specific issuer or specific class of securities. Diversification strategies shall be determined and revised periodically by the Fiscal Affairs Committee. FINANCIAL INSTRUMENTS Maximum allowable percentages of the total portfolio for investments are stated as follows: Investment Type Maximum Limit 1. Investment Pools 100% 2. Money Market Accounts 10% 3. Certificates of Deposit 60% 4. U.S. Government Securities 80% 5. U.S. Agency Securities 80% 6. Repurchase Agreements 50% 7. Bankers' Acceptances 20% 8. Commercial Paper 25% VII. SELECTION OF FINANCIAL INSTITUTIONS AND BROKER DEALERS SELECTION OF FINANCIAL INSTITUTIONS Depositories shall be selected through the City's banking services procurement process, which shall include a formal request for proposal (RFP) issued every five (5) years. In selecting depositories, the services available, service costs, and credit worthiness of institutions shall be considered, and the Director of Finance shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. The City shall select financial institutions from which the City may purchase certificates of deposit in accordance with the Act and this policy and will have a written depository agreement with the selected institution. The Investment Officer shall monitor the fiscal condition of financial institutions where certificates of deposit are held. AUTHORIZED FINANCIAL BROKER/DEALERS AND INSTITUTIONS The Investment Officer shall maintain a list of broker /dealers and financial institutions authorized to provide investment services. These may include primary dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3 -1 (uniform net capital rule). All financial institutions and broker /dealers who desire to become qualified bidders for investment transactions must submit: audited financial statements, proof of National Association of Security Dealers certification, and proof of state registration. Before engaging in investment transactions with a financial institutions or broker /dealers, the Investment Officer shall have received, from a Qualified Representative of said firm, a signed Certification Form. (Exhibit B) This form shall attest that the individual responsible for the City's account with that firm has (1) received and reviewed the investment policy of the City; and (2) acknowledged that the business organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the City and the organization that are not authorized by the City's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the City's entire portfolio or requires an interpretation of subjective investment standards. Investment Officers of the City may not acquire or otherwise obtain any authorized investment described in the investment policy from a 6 person who has not delivered a signed Certification Form. The Fiscal Affairs Committee shall at least annually review, revise, and adopt a list of qualified broker /dealers and other financial institutions that are authorized to engage in investment transactions with the City. (Exhibit A) COMPETITIVE BIDDING All investment transactions must be competitively transacted and executed with broker /dealers or financial institutions that have been authorized by the City. The City will obtain at least three competitive offers. Exception: New issues will not be required to be competitively transacted as all broker /dealers would show the same price and yield. VIII. COLLATERAL COLLATERALIZATION OF PUBLIC DEPOSITS Collateralization requirements are governed by the Texas Government Code Chapter 2257 (Public Funds Collateral Act). All bank deposits, certificates of deposit, and repurchase agreements shall be secured by pledged collateral. In order to anticipate market changes and provide a level of security for all funds, the required minimum collateral level will be a market value equal to no less than 102% of the deposits. Collateral levels should be monitored and maintained by the financial institution. Repurchase agreements shall be documented by specific agreement noting the collateral pledged in each agreement and should be monitored daily. Collateral shall be reviewed monthly to assure the market value of the securities pledged equals or exceeds the related bank balances. Collateral shall always be held in the City's name by an independent third party with whom the City of La Porte has a current custodial agreement. Evidence of the pledged collateral shall be maintained by a written agreement. A safekeeping receipt must be supplied to the City of La Porte for any transaction involving sales /purchases /maturities of securities and /or underlying collateral, which the City of La Porte will retain. The right of collateral substitution is granted provided the substitution has prior approval of the City and is followed by the delivery of an original safekeeping receipt to the City, and replacement collateral is received prior to the release of original collateral. COLLATERAL DEFINED The City shall accept only the following securities as collateral: A. FDIC insurance coverage; B. United States Treasuries and Agencies; C. Obligations, including letters of credit, of the United States or its agencies and instrumentalities. D. Other securities as approved by the Fiscal Affairs Committee. SUBJECT TO AUDIT All collateral shall be subject to inspection and audit by the Director of Finance or the City's independent auditors. IX. SAFEKEEPING AND CUSTODY SAFEKEEPING AGREEMENT All securities owned by the City shall be held in the City's designated third party safekeeping. The third party custodian shall be required to issue safekeeping receipts to the City listing each specific security, description, maturity, cusip number yield and/or coupon and other pertinent information. Each safekeeping receipt shall clearly indicate that the instrument is held for the City of La Porte. All safekeeping arrangements shall be documented by the Investment Officer. 7 DELIVERY VERSUS PAYMENT All investment transactions shall be executed on a delivery versus payment basis. That is, funds shall not be wired or paid until verification has been made that the collateral was received by the Trustee. The collateral shall be held in the name of the City. The Trustee's records shall assure the notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. X. MANAGEMENT AND INTERNAL CONTROLS The Director of Finance shall establish a system of internal controls, which shall be reviewed by an independent auditor. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees or Investment Officers of the City. Controls and managerial emphasis deemed most important that shall be employed where practical are: A. Control of collusion B. Separation of duties C. Separation of transaction authority from accounting and record keeping D. Custodian safekeeping receipts records management E. Avoidance of physical delivery securities F. Clear delegation of authority to subordinate staff members G. Documentation on investment bidding events H. Written confirmation of transactions for investments and wire transfers I. Reconcilement and comparisons of security receipts with the investment subsidiary records J. Compliance with investment policies K. Accurate and timely reports L. Validation of investment maturity decisions with supporting cash flow data M. Adequate training and development of Investment Officers O. Review of financial condition of all brokers, dealers and financial institutions P. Staying informed about market conditions, changes, and trends that require adjustments in investment strategies COMPLIANCE AUDIT The City shall perform, in conjunction with its annual financial audit, a compliance audit of management controls on investments and adherence to the entity's established investment policies. The audit shall include a formal review of the quarterly investment reports by an independent auditor and the results reported to the governing body by the independent auditor. Also, the governing body shall review its investment policy and investment strategy not less than annually and adopt a written instrument by rule, order, ordinance, or resolution stating that it has reviewed the investment policy and strategy, and recorded any changes made to them. 8 Exhibit A City of La Porte Approved List of Brokers/Dealers and Investment Pools Brokers/Dealers Coastal Securities Wells Fargo Morgan Stanley, Inc. Investment Pools TexPool LOGIC Investment Pool TexSTAR Exhibit B BROKER/DEALER CERTIFICATION FORM As required by Texas Government Code 2256.005 (k -1) CITY OF LA PORTE, TEXAS This certification is executed on behalf of (the Investor) and (the Dealer) pursuant to the Public Funds Investment Act, Chapter 2256, Government Code, Texas Codes Annotated (the Act) in connection with investment transactions conducted between the Investor and Dealer. The Undersigned Qualified Representative of the Dealer hereby certifies on behalf of the Dealer that: 1. The Dealer Qualified Representative is duly authorized to execute this Certification on behalf of the Dealer, and 2. The Dealer Qualified Representative has received and reviewed the Investment Policy furnished by the Investor, and 3. The Dealer has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the Dealer and the Investor that are not authorized by the entity's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the entity's entire portfolio or requires an interpretation of subjective investment standards. Dealer Qualified Representative Signature Name (Printed): Title: Date: Exhibit C City of La Porte, Texas Investment Strategy Statement The City of La Porte, Texas (the "City ") will strive to administer and invest its pooled funds at the highest investment return possible while always taking into account the primary goals of preservation of principal and liquidity of funds invested consistent with the City's investment policy. The City's funds, which are pooled together and constitute the investment portfolio, include all financial assets of all funds managed by the City, including but not limited to receipts of tax revenues, charges for services, bond proceeds, interest incomes, loans and funds received by the City where the City performs a custodial function. The City will never invest its funds in a security that is deemed unsuitable to the financial requirements of the City. Maturities will be staggered in a manner that meets the cash flow needs of the City. The primary investment objective is the preservation and safety of principal. Each investment transaction shall seek first to ensure that principal losses are avoided, whether they are from security defaults or erosion of market value. The City's investment portfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. The City shall always maintain a highly diversified investment portfolio in order to reduce the amount of credit and market risk exposed to the City's portfolio. After first considering safety and liquidity, the City's investment portfolio shall be designed with the objective of regularly exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the City's weighted average maturity in days. The City shall seek to augment returns above this threshold consistent with risk limitations identified in the City's investment policy and prudent investment principles. City o La Porte, Texas Investment Policy Adopted by the City Council Of the City of La Porte On January 1 3,1992, by Ordinance N o. 1802 L Male 0 Ca tr je,...., -fi . ;I: ,_".,„,„ i ..v.„,,,,- 1, ,,,,,,-- , .....„,.....,_ Amen City o La Porte, Texas November 199 u Michael G. Dolby, CPA August 1997 Director °f- inance November 2000 February 2003 Shelley Wolny February 2005 Treasurer October 2005 July 2009 POLICY It is the policy of the City of La Porte, Texas (the "City ") to administer and invest its funds in a manner which will preserve the principal and maintain the liquidity through limitations and diversification while meeting the daily cash flow requirements of the City. The City will invest all available funds in conformance with legal and administrative guidelines, seeking to optimize interest earnings to the maximum extent possible. II. PURPOSE The purpose of this investment policy is to comply with all statutes governing the investment of the City's funds, and in including the Public Funds Investment Act, Chapter 2256 of the Texas Government Code (the "Public Funds Investmcnt Act "), which requires the City to adopt a written investment policy regarding the investment of its funds and funds under its control. The Investment Policy addresses the methods, procedures and practices that must be exercised to ensure effective and judicious fiscal management of the City's funds. III. SCOPE The City will strive to earn a return on funds invested at the highest investment return possible after taking in consideration the primary goals of preservation of principal and liquidity of funds invested, consistent with the policy objectives described below. This investment policy applies to the investment activities of the government of the City of La Porte, Texas. FUNDS INCLUDED The City's funds, which are pooled together and constitute the investment portfolio, include all financial assets of all funds managed by the City, including but not limited to receipts of tax revenues, charges for services, bond proceeds, interest incomes, loans and funds received by the City where the City performs a custodial function. These funds are accounted for in the City's Comprehensive Annual Financial Report (CAFR) and include: General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Enterprise Funds Internal Service Funds Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. VIII. OBJECTIVES SAFETY The primary objective of the City's investment activity is the preservation of capital and the protection of investment principal in the overall portfolio. Each investment transaction shall seek first to ensure that capital losses are avoided, whether they are from securities defaults or erosion of market value. The City will strive to minimize credit risk by limiting investments to the safest types of investments, prequalifying the financial institutions and broker /dealers with which the City conducts business, and diversify the investment portfolio so that potential losses on individual issuers will be minimized. To minimize interest rate risk, the City will ladder the portfolio and match investments with future cash requirements and invest operating funds in shorter, more liquid securities and investments. 1 LIQUIDITY The City's investment portfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. Because all possible cash demands cannot be anticipated, a portion of the portfolio will be invested in shares of money market mutual funds or local government investment pools that offer same day liquidity. PUBLIC TRUST All participants in the investment process shall seek to act responsibly as custodians of the public trust. Investment Officials shall avoid any transaction that might impair public confidence in the City's ability to govern effectively. The governing body recognizes that in a diversified portfolio, occasional measured losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. YIELD (Optimization of Interest Earnings) The City's cash management portfolio shall be designed with the objective of regularly meeting or exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the City's weighted average maturity in days. The investment program shall seek to augment returns above this threshold consistent with risk limitations identified herein and prudent investment principles. IV. RESPONSIBILITY AND CONTROL OVERSIGHT RESPONB_f_LITY •v r isht Res on '.' 't for the inv•stm- of the Ci of L. P. - h.1 -- ith th- Fiscal Affairs Committee and the City Manager. DELEGATION Management responsibility for the investment program is hereby delegated to the Director of Finance, who shall establish written procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. SUBORDINATES All persons involved in investment activities will be referred to as "Investment Officers." No person shall engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Director of Finance. The Director of Finance shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of Subordinate Investment Officers. All investment officers, including the Director of Finance, will demonstrate competence in the execution of the city's investments. All Investment Officers will insure compliance with the investment program with ongoing training and evaluation by management. PRUDENCE Investments shall be made with the exercise of due care, 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 own capital as well as the probable income to be derived. Investment Officers acting in accordance with written procedures 2 and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidity and the sale of securities are carried out in accordance with the terms of this policy. IMDEMNIFICATION The Investment Officer, acting in accordance with written procedures and exercising due diligence, shall not be held personally responsible for a specific investment's credit risk or market price changes, provided that these deviations are reported immediately and the appropriate action is taken to control adverse developments. ETHICS DISCLOSURE AND CONFLICTS OF INTEREST Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution and management of the investment program, or which could impair their ability to make impartial investment decisions. Employees and Investment Officers shall disclose to the City Manager any material interests in financial institutions that conduct business with the City of La Porte, and shall further disclose any personal financial or investment positions that could be related to the performance of the City's investment portfolio. Employees and Investment Officers shall refrain from undertaking personal investment transactions with the same individual with which business is conducted on behalf of the City of La Porte. An Investment Officer of the City of La Porte who has a personal business relationship with an organization seeking to sell an investment to the City of La Porte shall file a statement disclosing that personal business interest. An Investment Officer who is related within the second degree by affinity or consanguinity to an individual seeking to sell an investment to the City of La Porte shall file a statement disclosing that relationship. A statement required under subsection 2256.005(i) of the Act must be filed with the Texas Ethics Commission and the governing body of the City of La Porte. TRAINING Investment Officers shall attend 10 hours of investment training within 12 months after taking office or assuming duties, and 10 hours within every succeeding two years. The investments training shall be provided from an independent source approved by the Fiscal Affairs Committee to insure the quality and capability of investment management in compliance with the Act. For the purposes of this policy, an "independent source" is defined as a professional organization, an institute of higher learning or any other sponsor other than a Business Organization with whom the City may engage in investment transactions. Training shall be in accordance with the Act and shall include education in investment controls, security risks, strategy risks, market risks, diversification of investment portfolio, and compliance with statutes governing the investment of public funds. V. REPORTING QUARTERLY REPORTS The Director of Finance shall submit quarterly an investment report characteristics, book values, market values and other features. The report shall explain the quarter's total investment return and compare the return to budgetary expectations. The report • - • - • • • • . • - - • • •. • - .. •. • .Investment reports shall be prepared quarterly and be signed and submitted by the Investment Officers, in a timely manner. These reports will be submitted to the City Manager and City Council. This report shall 3 describe in detail the investment position of the City, disclose the market value and book value of each fund group as well as each separate investment, and state the maturity date of each security and accrued interest for the reporting period. The report shall include all information as required by Section 2256.023 of the Act. It must also express compliance of the portfolio to the investment strategy contained in the City's Investment Policy, the Act, and Generally Accepted Accounting Principles (GAAP). MONITORING The market price of each investment shall be obtained monthly from a source such as the Wall Street Journal newspaper, a reputable brokerage firm or security pricing service and reported on the investment reports. ANNUAL REPORTS Within 90 days of the end of the fiscal year, the Dircctor of Finance shall .. .. - .. - ., . ..., . .. - - . , . . . I4VI. INVESTMENTS ACTIVE PORTFOLIO MANAGEMENT The City intends to pursue active versus passive portfolio management philosophy. That is, securities may be sold before they mature if market conditions present an opportunity for the City to benefit from the trade. AUTHORIZED INVESTMENTS • • . . . . - • : rnment of the City of La Porte may • - : •- • • - ' - ' • • • • - • The following are authorized investments for the City and all are authorized and further defined by the Act: .. _ - - 1. Exccpt as provided by Subsection (b), thc following arc authorized investments under this section: A. obligations Obligations, including letters of credit, of the United States or its agencies and instrumentalities; direct obligations of this state or its agencies and instrumentalities; of thc United States, thc underlying security for which is guaranteed by an agency or other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities; and obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent. (Section 2256.009 (a) of the Act) The following are not authorized investments under this- sSection 2256.009 (b) of the Act: • obligations whose payment represents the coupon payment on the outstanding principal balance of the underlying mortgage- backed security collateral and pays not principal (Interest only bonded); 4 • obligations whose payment represents the principal stream of cash from the underlying mortgage- backed security collateral and pays no interest (Principal only bonds); • collateralized mortgage obligations that have a final stated maturity date of greater thatthan 10 years; and • collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the changes in a market 137—fully collateralized C-certificates of Ddeposit and Share Certificates issued by a depository institution that has its main office or branch office in this state Texas ands guaranteed or insured by the Federal Deposit Insurance Corporation or its successor or the National Credit Union Share Insurance Fund or its successor; secured by obligations authorized by this subchapter, - . . .. • _ : :. cribcd by Section 2256.009 (a), including mortgage • . • • - • .. amount of the certificates, but excluding those mortgage backed securities of the nature described by Scction 2256.009 (b); or or secured in any other manner and amount provided by law for deposits of the investing entityCity. (Section 2256.010 of the Act) .C—Fully collateralized Repurchase Agreements with if the repurchase agreement: ... . has a defined termination date; and is-secured by obligations described by the Act (Section 2256.009 (a)(1) »; such collateral, and ..• - -- - . ' - .. ... : -- -- • _ . -- -- , held in the entity's City's name, and deposited at the time the investment is made with the entity -City or with -aan independent third party selected and approved by the entityCity--and, Repurchase agreements must be ii -plied purchased through a primary government securities dealer, as defined by the Federal Reserve, or a financial institution doing business in this statoTexas. repurchase Repurchase agreements and reverse repurchase agreements shall be entered into only with dealers who have executed a Master Repurchase Agreement with the City. In this section, "repurchase agfcement" means a simultaneous agreement to buy, hold for a .. - .. . . .. - .. - .. •_ . . •. . ... - •- , • funds disbursed. The tcrm includes a direct security repurchase agreement and a reverse security repurchase agreement. • • • - _ - - : , The term of any reverse security repurchase agreement may not exceed 90 days after the date the reverse security repurchase agreement is delivered. Money received by an-- entitythe City under the terms of a reverse security repurchase agreement shall be used to acquire additional authorized investments, but the term of the authorized - investments acquired must mature no later than the expiration date stated in the reverse security repurchase agreement. (Section 2256.011 of the Act) D: Banker's Aacceptances acceptance: has-with a stated maturity of 270 days or fewer from the date of its issuance; 5 will bc, in accordancc with its tcrms, liquidated in full at maturity; is-eligible for collateral for borrowing from a Federal Reserve Bank; and is-accepted by a bank organized and existing under the laws of the United States or any state, if the short-term obligations of the bank, or of a bank holding company of which the bank is the largest subsidiary, are rated not less that A -1 or P -1 or an equivalent rating by at least one nationally recognized credit rating agency. (Section 2256.012 of the Act) E - Commercial Paper has with a stated maturity of 270 days or fewer from the date of its issuance; and is rated not less than A -1 or P -1 or an equivalent rating by at least; two nationally recognized credit rating agencies,; -er . - - . _ = ncy and is fully secured by an irrevocable letter of credit issued by a bank or ndcr the laws of thc United States or any state. (Section 2256.013 of the Act) AAA- rated, no -load money market Mmutual 1funds fnutual-fund: .. is with and regulated by the Securities and Exchange Commission; - '' hasving a dollar- weighted average stated maturity of 90 days or fewer; and includes in its investment objectives the maintenance of a stable net asset value of $1 for each share. (Section 2256.014 of the Act) The Fund must proyides the t -en* City with. a prospectus and other information required by the Securities and Excha_n_ge_Act of 1934_(15 U.S.C. Section 80a -1 et seal: mutual d -with thc Securities and Exchange Commission; rating-firm of not less than AAA or it equivalent; and An entity is not authorized by this Ssection 2256.014 (c) of the Act to: • invest in the aggregate more than 15 percent of its monthly average fund balance, excluding bond proceeds and reserves in other funds held for debt service, in mutual funds described in the Act (Section 2256.014); • invest any portion of bond proceeds, reserves and funds held for debt service, in mutual funds described in Subso�eefien- the Act (Section 2256.014); or • invest its funds or funds under its control, including bond proceeds and reserves and other funds held for debt service, in any one mutual fund described in Sub3uo�ection or (b)the Act (Section 2256.014) in an amount that exceeds 10 percent of the total assets of the mutual fund. 6 G. Guaranteed Investment Contracts (GICS) with a defined termination date; secured by obligations described in the Act (Section 2256.009) in an amount at least equal to the amount of bond proceeds invested under the contract; and pledged to the City and deposited with the City or with a third party selected and approved by the City. GICS are further subject to the limitations contained in Section 2256.015 of the Act. A— AAA- rated, constant dollar, i`investment Pools with a weighted average maturity of no greater than 90 days as authorized by the City Council and as further defined by the Act, which invests in eligible securities as authorized by Section 2256.016 of the Act. An cntity may invest its funds and funds under its control through an eligible investment - -- " - _ ... .• • . •, .. , . . • . , . . . To-be-eligible to receive funds from and invest funds on behalf of an cntity under this infefmatiem date, of the pool; • the objectives of the pool; • the size of the pool; expire; • whether the intent of the pool is to maintain a nct asset value of one dollar and the risk of market price fluctuation; • ' • • • •• • • • : •- • . . - • .. . •_ .. • ics required for the entity to • thc performance history of thc pool, including yield average dollar weighted maturities, and expense ratios. this chapter, an investment pool must furnish to thc investment officer or other ii. the current average dollar weighted maturity, based on thc stated maturity date, of the pool; 7 iii. the current percentage of the pool's port : - : . maturities of more than one year; iv. the book value versus the market value of thc pool's portfolio, using the v. the size of the pool; vi. thc number of participants in thc pool; vii. thc custodian bank that is safekeeping the assets of the pool; ... . . . . . . .. . . ix. the yield and expense ratio of the pool; x. the portfolio managers of the pool; and 2. An entity by contract may delegate to an investment pool the authority to hold legal title 3. In this section, "yield" shall be calculated in accordance with regulations governing the registration of open end management investment companics undcr thc Investment Company Act of 1940, as promulgated from time to time by thc Federal Securities and Exchangc Commission. 4. To be cligiblc to rcccivc funds from and invest funds on behalf of an cntity undcr this chapter, a public funds investment pool created to function as a moncy market mutual stabilize a $1 net asset value. If thc ratio of the market value of the portfolio divided by the book value of the portfolio is less than 0.995 or greater than 1.005, portfolio holding:, shall be sold as necessary to maintain the ratio between 0.995 and 1.005. 5. To be eligible to rcccivc funds from and invest funds on behalf of an cntity under this a) equally of participants in the pool and other persons who do not have a business 6. To maintain eligibility to rcccivc funds from and invest funds on behalf of an entity under EXISTING INVESTMENTS The Investment Officer is not required to liquidate investments that were authorized investments at the time of purchase. Any investments currently held that do not meet the guidelines of this policy shall be reviewed to determine the ability to liquidate. If the investment cannot be liquidated because of material adverse change in the value since the time of purchase, and holding the investment to maturity does not negatively affect disbursements or cash flow, a recommendation of holding said investment to maturity is acceptable. LENGTH OF INVESTMENTSMAXIMUM MATURITIES The maximum stated maturity, from the date of purchase, for any individual investment may not exceed 5 years and the maximum 8 dollar- weighted average maturity for the pooled fund group (investment portfolio) may not exceed 2 years. DIVERSIFICATION It is the policy of the City of La Porte to diversify its investment portfolios. Assets held in the eennen-pooled investment portfolio shall be diversified to eliminate the risk of loss resulting from eee -over- concentration of assets in a specific maturity, e- specific issuer or a specific class of securities. Diversification strategies shall be determined and revised periodically by the Fiscal Affairs Committee. In establishing specific diversification strategies, the following general policies and constraints ski . - . - - . - - -- sector. Securities shall be selected which provide for stability of income and reasonable liquidity. The City shall continually invest a portion of the portfolio in readily available ongoing obligations. Treasury bill and notes, or insured and collateralized certificates of deposits. The Fiscal Affairs Committee shall condu . • •• • - . - - - - _ . - , . FINANCIAL INSTRUMENTS Maximum allowable percentages of the total portfolio for investments are stated as follows: Investment Type Maximum Limit 1. Investment Pools 100% 2. Money Market Accounts 10% 3. Certificates of Deposit 60% 4. U.S. Government Securities 80% 5. U.S. Agency Securities 80% 3- M Securities 20% 7. Repurchase Agreements 50% 8. Bankers' Acceptances Beads 3320% 9. Commercial Paper 3325% IVII. SELECTION OF FINANCIAL INSTITUTIONS AND BROKER DEALERS BIDDING PROCESSSELECTION OF FINANCIAL INSTITUTIONS — Depositories shall be selected through the City's banking services procurement process, which shall include a formal request for proposal (RFP) issued every five (5) years. In selecting depositories, the services available, service costs, and the credit worthiness of institutions shall be considered, and the Director of Finance shall conduct a comprehensive review of prospective depositories' credit characteristics and financial history. 9 The City shall select financial institutions from which the City may purchase certificates of deposit in accordance with the Act and this policy and will have a written depository agreement with the selected institution. The Investment Officer shall monitor the fiscal condition of financial institutions where certificates of deposit are held. INSURABILITY Banks and Savings & Loans Associations seeking to establish eligibility for PRIMARY DEALERS AND APPROVED LIST AUTHORIZED FINANCIAL BROKER/DEALERS AND INSTITUTIONS The Investment Officer shall maintain a list of broker /dealers and financial institutions authorized to provide investment services. These may include primary dealers or regional dealers that qualify under Securities & Exchange Commission Rule 15C3 -1 (uniform net capital rule). For brokers and dealers of government securities, .. e .. - - ' - - Federal Reserve Bank of New York, also known as "primary government . securities dealers," .. • . ... • .. • • - . All financial institutions and broker /dealers who desire to become qualified bidders for investment transactions must submit: audited financial statements, proof of National Association of Security Dealers certification, and proof of state registration. Before engaging in investment transactions with a financial institutions or broker /dealers, the Investment Officer shall have received, from a Qualified Representative of said firm, a signed Certification Form. (Exhibit B) This form shall attest that the individual responsible for the City's account with that firm has (1) received and reviewed the investment policy of the entityCity; and (2) acknowledged that the business organization has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the entity City and the organization that are not authorized by the entity's City's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the entity's City's entire portfolio or requires an interpretation of subjective investment standards. Investment Officers of the City may not acquire or otherwise obtain any authorized investment described in the investment policy from a person who has not delivered a signed Certification Form. The Fiscal Affairs Committee shall at least annually review, revise, and adopt a list of qualified broker /dealerss and other financial institutions that are authorized to engage in investment transactions with the City. (Exhibit A) COMPETITIVE BIDDING All investment transactions must be competitively transacted and executed with broker /dealers or financial institutions that have been authorized by the City. The City will obtain at least three competitive offers. Exception: New issues will not be required to be competitively transacted as all broker /dealers would show the same price and yield. IXVIII.. • .. .. ' . • ! .. ! ! COLLATERAL INSURANCE OR COLLATERALIZATION OF PUBLIC DEPOSITS Collateralization requirements are governed by the Texas Government Code Chapter 2257 (Public Funds Collateral Act). All bank deposits, certificates of deposit, and repurchase agreements shall be 10 secured by pledged collateral. In order to anticipate market changes and provide a level of security for all funds, the required minimum collateral level will be ::, . : .. • :,- : - • • . - of deposit shall be collateralized with a market value equal to no less than 102% of the deposits plus accrued interest less than an amount insured by FDIC. Rcpurchasc agreements shall be monitored daily. Collateral levels should be monitored an maintained by the financial institution. E ffee of t he plcdgcd collateral shall be maintained by the Director of Finance or a third party financial institution. Repurchase agreements shall be documented by specific agreement noting the collateral pledged in each agreement and should be monitored daily. Collateral shall be reviewed monthly to assure the market value of the securities pledged equals or exceeds the related bank balances. Collateral shall always be held by an independent third party with whom the City of La Porte has a current custodial agreement. Evidence of the pledged collateral shall be maintained by a written agreement. A safekeeping receipt must be supplied to the City of La Porte for any transaction involving sales /purchases /maturities of securities and/or underlying collateral, which the City of La Porte will retain. The right of collateral substitution is granted provided the substitution has prior approval of the City and is followed by the delivery of an original safekeeping receipt to the City, and replacement collateral is received prior to the release of original collateral. COLLATERAL DEFINED The City of La Porte shall accept only the following securities as collateral: A. FDIC insurance coverage; B. United States Treasuries and Agencies; C. Texas State, City, County, School or Road District bonds with a remaining maturity of ten received a rating of not less than A or its equivalent; C. Obligations, including letters of credit, of the United States or its agencies and instrumentalities. ED. Other securities as approved by the Fiscal Affairs Committee. SUBJECT TO AUDIT All collateral shall be subject to inspection and audit by the Director of Finance or the City's independent auditors_ IX. SAFEKEEPING AND CUSTODY SAFEKEEPING AGREEMENT All securities owned by the City shall be held in the City's designated third party safekeeping. The third party custodian shall be required to issue safekeeping receipts to the City listing each specific security, description, maturity, cusip number yield and/or coupon and other pertinent information. Each safekeeping receipt shall clearly indicate that the instrument is held for the City of La Porte. All safekeeping arrangements shall be documented by the Investment Officer. DELIVERY VERSUS PAYMENT All investment transactions, with thc exception of local - - - - - - - -, - . .. . - . • - , shall be pH-el:lased executed using on a the delivery versus payment— methed basis. That is, funds shall not be wired or paid until verification has been made that the collateral was received by the Trustee. The collateral shall be held in the name of the City or held on behalf of thc City. The Trustee's records shall assure the 11 notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. X. MANAGEMENT AND INTERNAL CONTROLS The Director of Finance shall establish a system of internal controls, which shall be reviewed by an independent auditor. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees or Investment Officers of the City. Controls and managerial emphasis deemed most important that shall be employed where practical are: A. Control of collusion: B. Separation of duties: C. Separation of transaction authority from accounting and record keeping. D. Custodian safekeeping receipts records management: E. Avoidance of physical delivery securities: F. Clear delegation of authority to subordinate staff members: G. Documentation on investment bidding events: H. Written confirmation of telephone- transactions for investments and wire transfers: I. Reconcilement and comparisons of security receipts with the investment subsidiary records: J. Compliance with investment policies: K. Accurate and timely reports, - L. Validation of investment maturity decisions with supporting cash flow data, - M. Adequate training and development of Investment Officers: O. Review of financial condition of all brokers, dealers and depesitery- financial institutions: P. Staying informed about market conditions, changes, and trends that require adjustments in investment strategies: COMPLIANCE AUDIT The City of La Porte shall perform, in conjunction with its annual financial audit, a compliance audit of management controls on investments and adherence to the entity's established investment policies. The audit shall include a formal review of the quarterly investment reports by an independent auditor and the results reported to the governing body by the independent auditor. Also, the governing body shall review its investment policy and investment strategy not less than annually and adopt a written instrument by rule, order, ordinance, or resolution stating that it has reviewed the investment policy and strategy, and recorded any changes made to them. 12 Exhibit A City of La Porte Approved List of Brokers/Dealers and Investment Pools Brokers/Dealers Coastal Securities Wells Fargo Morgan Stanley, Inc. Investment Pools TexPool LOGIC Investment Pool TexSTAR Exhibit B BROKER/DEALER CERTIFICATION FORM As required by Texas Government Code 2256.005 (k -1) CITY OF LA PORTE, TEXAS This certification is executed on behalf of (the Investor) and (the Dealer) pursuant to the Public Funds Investment Act, Chapter 2256, Government Code, Texas Codes Annotated (the Act) in connection with investment transactions conducted between the Investor and Dealer. The Undersigned Qualified Representative of the Dealer hereby certifies on behalf of the Dealer that: 1. The Dealer Qualified Representative is duly authorized to execute this Certification on behalf of the Dealer, and 2. The Dealer Qualified Representative has received and reviewed the Investment Policy furnished by the Investor, and 3. The Dealer has implemented reasonable procedures and controls in an effort to preclude investment transactions conducted between the Dealer and the Investor that are not authorized by the entity's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the entity's entire portfolio or requires an interpretation of subjective investment standards. Dealer Qualified Representative Signature Name (Printed): Title: Date: Exhibit C City of La Porte, Texas Investment Strategy Statement The City of La Porte, Texas (the "City ") will strive to administer and invest its pooled funds at the highest investment return possible while always taking into account the primary goals of preservation of principal and liquidity of funds invested consistent with the City's investment policy. The City's funds, which are pooled together and constitute the investment portfolio, include all financial assets of all funds managed by the City, including but not limited to receipts of tax revenues, charges for services, bond proceeds, interest incomes, loans and funds received by the City where the City performs a custodial function. The City will never invest its funds in a security that is deemed unsuitable to the financial requirements of the City. Maturities will be staggered in a manner that meets the cash flow needs of the City. The primary investment objective is the preservation and safety of principal. Each investment transaction shall seek first to ensure that principal losses are avoided, whether they are from security defaults or erosion of market value. The City's investment portfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with forecasted cash flow requirements and by investing in securities with active secondary markets. The City shall always maintain a highly diversified investment portfolio in order to reduce the amount of credit and market risk exposed to the City's portfolio. After first considering safety and liquidity, the City's investment portfolio shall be designed with the objective of regularly exceeding the average rate of return on U.S. Treasury Bills at a maturity level comparable to the City's weighted average maturity in days. The City shall seek to augment returns above this threshold consistent with risk limitations identified in the City's investment policy and prudent investment principles.