S37-04 Ordinance No.S37-04
AN ORDINANCE
AMENDING THE INVESTMENT POLICY OF MUNICIPAL FUNDS
WHEREAS,the City Council of the City of Elgin passed Ordinance No. S12-99 entitled"An
Ordinance Providing for the Investment Policy of Municipal Funds" on October 27, 1999; and
WHEREAS,on September 11,2002 the City Council of the City of Elgin passed Ordinance
No. S13-02 providing for an amended investment policy of municipal funds; and
WHEREAS, in order to conform to certain government accounting standards and to
otherwise update the city's investment policy of municipal funds it is in the best interests of the city
to further amend the ordinance providing for the city's investment policy of municipal funds.
NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF
ELGIN ILLINOIS, that Ordinance No. S 13-02 passed on September 11, 2002 be and is hereby
amended to read as follows:
Section 1. SCOPE OF INVESTMENT POLICY
The provisions of this ordinance shall not apply to the investment of such funds which by law are in
the control of an officer other than the City Treasurer. All financial assets of funds, including: the
General Fund,Special Revenue Funds,Capital Project Funds,Debt Service Funds,Enterprise Funds,
Internal Service Funds,Nonexpendable Trust Funds,and such other funds that may be created from
time to time shall be administered in accordance with the provisions of this ordinance.
Any monies received for independent funds including but not limited to the Police Pension Fund and
the Fire Pension Fund shall be administered by the written order of the respective Board of Trustees
of each fund. In the absence of such orders,money received and securities held by the City of Elgin
on behalf of such funds shall be administered in accordance with the provisions of this ordinance.
Section 2. OBJECTIVES
Funds of the City shall be invested in accordance with the Public Funds Investment Act, 30 ILCS
235/01,et seq.,as amended from time to time,this ordinance,and policies and written administrative
procedures consistent with the Act and this ordinance. The purpose of this ordinance is to establish
cash management and investment guidelines for City officials responsible for the stewardship of
public funds. Primary objectives include:
a. Safety. Safety of principal is the foremost objective of the investment program.
Investments shall be undertaken in a manner that seeks to ensure the preservation of
capital in the overall portfolio. The objective will be to mitigate credit risk and interest
rate risk.
1. Credit Risk. The City will minimize credit risk,which is the risk of loss due to
the failure of the security issuer or backer, by:
• Limiting investments to the types of securities listed within this
Investment Policy.
• Pre-qualifying the financial institutions,broker/dealers, intermediaries,
and advisers with which the City will do business.
• Diversifying the investment portfolio so that the impact of potential
losses from any one type of security or from any one individual issuer
will be minimized.
2. Interest Rate Risk. The City will minimize interest rate risk,which is the risk that
the market value of securities in the portfolio will fall due to changes in market
interest rates, by:
• Structuring the investment portfolio so that securities mature to meet
cash requirements for ongoing operations, thereby avoiding the need to
sell securities on the open market prior to maturity.
• Investing operating funds primarily in shorter-term securities, money
market mutual funds, or similar investment pools and limiting the
average maturity of the portfolio in accordance with this policy.
b. Legality. All investments shall be made in conformance with Federal, State, and other
legal requirements.
c. Liquidity. The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by structuring
the portfolio so that securities mature concurrent with cash needs to meet anticipated
demands (static liquidity). Furthermore, a portion of the portfolio may be placed in
money market mutual funds or local government investment pools which offer same-day
liquidity for short-term funds.
d. Yield. The investment portfolio shall be designed with the objective of attaining a
market rate of return throughout budgetary and economic cycles,taking into account the
investment risk constraints and liquidity needs. Return on investment is of secondary
importance compared to the safety and liquidity objectives described above. The core
investments are limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed. Securities shall generally be held until
maturity with the following exceptions:
• A security with declining credit may be sold early to minimize loss of principal.
• A security swap would improve the quality, yield, or target duration in the
portfolio.
• Liquidity needs of the portfolio require that the security be sold.
e. Diversification. To avoid incurring unreasonable risks regarding specific security types
and individual financial institutions,investments shall be diversified based upon type of
funds invested and cash flow needs of the fund.
f. Public Confidence. In managing its investment portfolio City officials shall avoid any
transactions that might impair public confidence of the government of the City.
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 their probable income to be derived.
Section 3. STANDARDS OF CARE
1. Prudence
The standard of prudence to be used by investment officials shall be the "prudent
person" standard and shall be applied in the context of managing an overall portfolio.
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.
The "prudent person" standard states that, "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."
2. Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from personal
business activity that could conflict with the proper execution and management of the
investment program, or that could impair their ability to make impartial decisions.
Employees and investment officials shall disclose any material interests in financial
institutions with which they conduct business. They shall further disclose any personal
financial/investment positions that could be related to the performance of the investment
portfolio. Employees and officers shall refrain from undertaking personal investment
transactions with the same individual(s)with whom business is conducted on behalf of
the City.
3. Delegation of Authority
Management administrative responsibility for the investment program is vested in the
Treasurer who shall establish written procedures for the operation of the Investment
Program consistent with these policies. Such procedures shall include explicit
delegation of authority to persons responsible for investment transactions. No person
may engage in an investment transaction except as provided under the terms of this
policy and procedures established by the Treasurer. The Treasurer shall be responsible
for all transactions undertaken and shall establish a system of controls to regulate the
activities of subordinate officials.
Section 4. CASH MANAGEMENT
The City's policy regarding cash management shall be based upon the fact that there is a time value
to money. Temporarily idle cash may be invested for a period of one day to an excess of one year
depending upon when the money is authorized to be needed. Accordingly,the Treasurer shall cause
to be prepared written cash management procedures which shall include,but not be limited to, the
following:
A. Receipts
All monies due the City shall be collected as promptly as possible. Monies that are received
shall be deposited in an approved financial institution no later than the next business day
after receipt by the City. Amounts that remain uncollected after a reasonable length of time
shall be subject to any available legal means of collection.
B. Disbursements
Any disbursements to suppliers for goods or services or to employees for salaries and wages
shall be contingent upon an available budget appropriation. All disbursements shall be
supported by proper documentation and approved by the City Council.
C. Cash Forecast
At least monthly, a cash forecast shall be prepared using the expected revenue sources and
items of expenditure to project cash requirements over the fiscal year. The forecast shall be
updated from time to time to identify the probable investable balances that will be available.
D. Pooling of Cash
Except for cash in certain restricted and special accounts, pool the cash of various funds to
maximize investment earnings. Interest income earned from investments will be allocated to
the various funds based on their respective participation.
Section 5.ACCOUNTING
The City shall maintain its accounting records based on the basis of Fund and Account Groups,each
of which is considered a separate accounting entity. All investment transactions shall be recorded in
the various funds of the City in accordance with Generally Accepted Accounting Principles as
promulgated by the Government Accounting Standards Board. Accounting treatment shall include:
• Investments with a maturity equal to or less than one year when purchased will be
carried at cost or amortized cost. Investments with a maturity greater than one year
when purchased will be reported at fair value.
• Premium or discount shall be amortized over the life of the investment.
• Gains or losses of investments in all funds shall be recognized at the time of
disposition of the security.
Section 6. INTERNAL CONTROLS
The Treasurer shall establish a written procedure of internal controls. The internal controls shall be
reviewed by an independent certified public accountant in conjunction with the annual examination
of the financial statements of the City. 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 and officers of the City of Elgin.
Section 7. INVESTMENT SELECTION
The City of Elgin may invest in any type of security allowed by law as set out in the Illinois
Compiled Statutes, Chapter 30 ILCS 235/2. Approved investments include:
• Bonds, notes, certificates of indebtedness, treasury bills, treasury strips or other securities,
including obligation of the Governmental National Mortgage Association, which are
guaranteed by the full faith and credit of the government of the United States of America,or
other similar obligations of the United States of America or its agencies.
• Interest bearing savings accounts, interest bearing certificates of deposit or interest bearing
time deposits or any other investment constituting direct obligations of any institution as
defined by the Illinois Banking Act and is insured by the Federal Deposit Insurance
Corporation.
• Illinois Public Treasurer's Investment Pool
• Short-term obligations of corporations (commercial paper) organized in the United States
with assets exceeding $500 million and rated at the time of purchase at the highest
classification established by at least two standard rating services. Must mature within 180
days from the date of purchase.
• Short-term discount obligations of the Federal National Mortgage Association or in shares of
other forms of securities legally by savings and loan associations incorporated under the laws
of this state or any other state or under the laws of the United States. Investments may be
made only in those savings and loan associations of which the shares, or investment
certificates are insured by the Federal Deposit Insurance Corporation.
All investments, except for the Illinois Public Funds or similar type of investments/money market
pools, shall be selected on the basis of competitive bids. Financial Institutions located within the
City of Elgin will be awarded a bid if the local bid is not less than the prevailing rate.
Section 8.DIVERSIFICATION OF MATURITIES
The City shall diversify its use of investment instruments to avoid incurring unreasonable risks
inherent in over investing in specific instruments, individual financial institutions or maturities.
Maturities selected shall provide for stability of income and reasonable liquidity.
A. Diversification by Instrument Percent of Portfolio
U.S. Treasury Obligations 100%
(Bills, Notes, &Bonds)
U.S. Government Agency Securities and' 50%
Instrumentalities of Government
Sponsored Corporations
Bankers Acceptances (Bas) 25%
Repurchase Agreements (REPOs) 35%
(monies in the Public Funds
or other Money Market funds
are not to be included in this
limitation)
Certificates of Deposit (CDs) 100%
Commercial Banks/Savings & Loans
Certificates of Deposit(CDs) 25%
Credit Unions
Illinois Public Funds 75%
(or similar types of investment/
Money Market pools)
Commercial Paper(CP) 33%
B. Diversification by Financial Institution
Bankers Acceptances (BAs)
No more than 25% of the total portfolio with any one institution.
Repurchase Agreements (REPOs)
No more than 25% of the total portfolio with any one institution.
Certificates of Deposit (CDs) - Commercial Banks, Savings &Loan Associations,
Credit Unions
No more than 25% of the total portfolio with any one institution.
Local Government Investment Pool - The Illinois Public Funds or similar type
investment/money market pools.
No more than $30,000,000.
C. Maturity Scheduling
Investment maturities for operating funds shall be scheduled to coincide with anticipated
cash flow needs, taking into account large routine expenditures (payroll, accounts payable,
bond payments) as well as considering sizable blocks of anticipated revenue (sales tax,
property tax). Investment maturities in the General Fund and Special Revenue Funds shall
be limited to a maximum maturity of 36 months from the date of purchase. Investments in
other funds may be purchased with maturities to match future projects or liability
requirements.
Notwithstanding,the provisions of the above paragraph,no investment in any fund shall have
a maturity date greater than the period allowed by the Illinois Compiled Statutes, City
ordinance, or by other standards of this policy.
D. Delivery vs. Payment
All trades where applicable will be executed by delivery vs. payment (DVP)to be sure that
securities are deposited in an eligible financial institution prior to the release of funds.
Securities will be held by a third party custodian as evidenced safekeeping receipts.
E. Safekeeping
Securities will be held by a independent third-party custodian selected by the entity as
evidenced by safekeeping receipts in the City of Elgin's name. The safekeeping institution
shall annually provide a copy of their most recent report on internal controls (Statement of
Auditing Standards No. 70, or SAS 70).
Section 9. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
Before the City invests its surplus funds, a competitive "bid" process shall be conducted. If a
specific maturity date is required, either for cash flow purposes or for conformance to maturity
guidelines, bids will be requested for instruments which meet the maturity requirement. If no
specific maturity is required, a market trend (yield curve) analysis will be conducted to determine
which maturities would be most advantageous.
Section 10. QUALIFIED INSTITUTIONS
The City will maintain a listing of financial institutions authorized to provide investment services. In
addition, a list also will be maintained of approved security brokers/dealers selected by credit
worthiness. All financial institutions and brokers/dealers who desire to become qualified for
investment transactions must supply the following as appropriate:
A. Audited financial statements
B. Proof of National Association of Securities Dealers
(NASD) Certification.
C. Proof of State Registration
D. Certification of having read&understood and agreeing to
comply with the City's investment policy
E. Evidence of adequate insurance coverage
An annual review of the financial condition and registration of qualified financial institutions and
broker/dealers will be conducted by the Treasurer.
Section 11. COLLATERAL
The City requires that funds on deposit in excess of FDIC limits be secured by some form of
collateral. Any of the following assets would be acceptable as collateral:
-U.S. Government Securities
-Obligations of the Federal Agencies
-Obligations of the Federal Instrumentalities
-Obligations of the State of Illinois
-Obligations of the City of Elgin
-General Obligation Municipal Bonds rated "A" or better
-Any other collateral identified in Illinois Complied
Statutes as acceptable
-Any other Collateral identified by the Treasurer of the
State of Illinois
The amount of collateral provided shall not be less than 105% of the fair market value of the net
amount of public funds secured. The ratio of fair market value of collateral to the amount of funds
secured shall be reviewed weekly and additional collateral will be requested when the ratio declines
below the level required. Alleged collateral will be held by the City of Elgin or in safekeeping or
evidenced by a safekeeping agreement. The City desires to establish and maintain joint custody
accounts with depository institutions and the Federal Reserve. The minimum amount in the joint
custody account shall be equal to 105% of those investments currently on deposit with each
individual institution in excess of$100,000. If collateral is held in safekeeping, it maybe held by a
third party or by an escrow agent of the pledging institution. Collateral agreements will preclude the
release of the pledged assets without an authorized signature from the City of Elgin, but they will
allow for an exchange of collateral of like value.
Section 12. REPORTING REQUIREMENTS
The Treasurer shall generate monthly reports for management purposes. In addition, the City
Council will be provided quarterly reports which will include data on investment instruments being
held, as well as any narrative necessary for clarification.
The monthly report shall include, at a minimum:
1. Principal and type of investment by fund
2. Earnings for the current month and year to date
3. Annualized yield
4. Current market value of portfolio
The annual financial report of the City shall include all required information of the Governmental
Accounting Standards Board Statement#40 as updated.
Section 13. POLICY CONSIDERATIONS
This policy shall be reviewed on an annual basis. Any changes must be approved by the investment
officer and formally adopted by the governing body of the City of Elgin.
Section 14. That this ordinance shall be in full force and effect upon its passage.
•a1
Ed Schock, Mayor
Presented: December 15, 2004
Passed: December 15, 2004
Omnibus Vote: Yeas: 6 Nays: 0
Recorded: December 16, 2004
Published:
Attest:
irA.-e--C-,U,/,--
Dolonna Mecum, City Clerk
11
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% City of Elgin Agenda Item No.
J4'9 TED FE$^- E i
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November 24, 2004 G , 0101
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TO Mayor and Members of the City Council !4 ;M14 ' 1 k_F,
lifill9-- FINANCIALLY STABLE CITYGOVE[WMENT
EFFICIENT SERVICES
FROM: David M. Dorgan, City Manager
AND QUALITY INFRASTRUGTURE
James R.Nowicki, Fiscal Services Director
SUBJECT: Revision to City's Investment Policy Ordinance#S13-02
PURPOSE
The purpose of this memorandum is to provide the Mayor and members of the City Council with
information to consider revising the investment policy for the City of Elgin.
RECOMMENDATION
t„.. It is recommended that the Mayor and members of the City Council approve the recommended
revisions to the City's Investment Policy(Ordinance#S 13-02).
BACKGROUND
The City's Investment Policy (Ordinance #S13-02) is in place to protect the safety of the
principal invested by the City and to limit the risk of loss of principal and interest.
With the amendment of General Accounting Standards Board (GASB) Statement No. 3 (replaced
by GASB No. 40) which addresses "Deposit and Investment Risk Disclosures," it was
determined to be an appropriate time for the City to review and update its investment policy
(revised policy attached).
The resulting recommended revisions are summarized below and are more thoroughly addressed
in the respective sections within the policy:
1. Credit Risk
2. Interest Rate Risk
3. Liquidity
4. Yield
With the safety of principal being the main objective of the City's investment program, the
eill above four items needed to be clearly defined.
Ow Revision to City's Investment Policy Ordinance#S13-02
November 24, 2004
Page 2
5. Standard of Care
This section of the policy was modified to combine the Standard of Prudence and Ethical
Conduct within the same heading. Further clarification of the City's position on these issues
was made.
6. Summarization of Illinois Statute Approved Investments
Upon the recommendation of the City's auditors, this section now provides a summarization
of the qualified investments the City most commonly utilizes rather than just referring to
State Statutes.
7. Policy Considerations
This section was added to formally require a review of the Investment Policy on an annual
basis.
The implementation of these changes to the City's investment policy will keep the policy current
with GASB Statement#40.
COMMUNITY GROUPS/INTERESTED PERSONS CONTACTED
None.
FINANCIAL IMPACT
There are no costs involved to implement these changes.
LEGAL IMPACT
\ANYIVNone.
ALTERNATIVES
1. Approve and implement the changes to the City's Investment Policy.
2. Do not approve the changes to the City's Investment Policy.
Respectfully submitted for Council consideration.
Attachment
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