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TC Res. No. 2004-03 ADOPTING AN INVESTMENT POLICYTOWN OF AVON, COLORADO RESOLUTION NO. 04-03 SERIES OF 2004 A RESOLUTION ADOPTING AN INVESTMENT POLICY WHEREAS, The Town adopted its current investment policy on October 22, 1996; and WHEREAS, The Town of Avon wishes to continue to operate a contemporary and comprehensive treasury management program; and WHEREAS, Numerous changes in public cash management and investment practices have occurred over the past several years. NOW, THEREFORE, BE IT HEREBY RESOLVED, that the Town Council of the Town of Avon, Colorado, adopts in its entirety a revised Investment Policy, a copy of which is attached. ADOPTED AND PASSED THIS 27TH DAY OF JANUARY, 2004 ~tj1®F A y 9' A TQ~Clerk TOWN OF AVON - A EST: 3(y?, (Patty cKenny By: Howard (Mac) McDevitt Mayor Pro Tern • TOWN OF AVON, COLORADO INVESTMENT POLICY January 27, 2003 1. Policy . It is the policy of the Town of Avon to invest public 'funds in a manner that will provide the highest investment return with maximum security while meeting the daily cash flow demands of the Town and conforming to all state and local statutes governing the investment of public funds. 2. Purpose The purpose of this investment policy is to establish the Town of Avon's .investment scope, standards of prudence, objectives, authority, eligible investments, safekeeping and custody requirements, diversification, and internal controls. 3. Finance Comnuttee The members of the finance committee shall meet as necessay to determine general strategies and monitor results. The finance committee shall include in its deliberations such topics as: economic outlook, portfolio diversification and maturity structure, potential risks, to the Town's funds, brokers and dealers, and the rate of return on the investment portfolio. 4. Scope This investment policy applies to all investment activities of the Town of Avon. All financial assets of -other funds, including funds that may 'be created from time to time, shall be administered in accordance with the provisions of this policy. - These funds are accounted for in the Town's Comprehensive Annual Financial Report and include: a. General Fund b. Special Revenue Funds c. Debt Service Funds d. Capital Project Funds e. Internal Service Funds I Enterprise Funds g. Trust and Agency Funds 5. Objectives The primary objectives of the Town of Avon's investment activities shall be: a. Preservation of capital and protection of investment principal. b. Maintenance of sufficient liquidity to meet anticipated cash flows. 3 Town of Avon Investment Policy Page 2 c. Diversification to avoid incurring unreasonable market risks. d. Attainment of a market rate of return. e. Conformance with all applicable Town policies, and State and Federal regulations. 6. Authority The ultimate responsibility for the investment of the funds of the Town of Avon covered by this Investment Policy resides with the Town Council. The Town Council has delegated to the Finance Director responsibility for developing policy regarding the investment and custody of the Town's funds. The Finance Director shall develop written administrative procedures and internal controls, consistent with this Investment Policy, for the operation of the Town's investment program. Such procedures shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or imprudent actions by employees of the Town. • The Finance Director may delegate the authority to conduct investment transactions and manage the operation of the investment portfolio to other specifically authorized staff members. The is Finance Director shall maintain a list of persons authorized to transact securities business for the Town. No person may engage in an investment transaction except as expressly provided under the terms of this Investment Policy. The Town may engage the support services of outside professionals in regard to its investment program, so long as it can be clearly demonstrated that these services produce a net financial advantage or necessary financial protection of the Town's financial resources. 7. Prudence The standard of prudence, as defined by the Colorado Revised Statutes (CRS), to be used for managing the Town's assets is the "prudent investor" rule applicable to a fiduciary, that states that a prudent investor "shall exercise the judgment and care, under circumstances then prevailing, which men of prudence, discretion, and intelligence exercise in the management of the property of another, not in regard to speculation but in regard to the permanent disposition of funds, considering the probable income as well as the probable safety of their capital." (CRS 15- 1-304, Standard for Investments.) The Town's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The Town recognizes that no investment is totally without risk and that the investment activities of the Town are a matter of public record. Accordingly, the Town recognizes that occasional measured losses are inevitable in a diversified • portfolio and shall be considered within the context of the overall portfolio's return, provided that Town of Avon • Investment Policy Page 3 adequate diversification has been implemented and that the sale of a security is in the best long- term interest of the Town. The Finance Director and authorized investment personnel acting in accordance with written procedures and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided that the. deviations from expectations are reported in a timely fashion to the Town Council and appropriate action is taken to control adverse developments. 8. Ethics and Conflicts of Interest Elected officials and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or that could impair or create the appearance of an impairment of their ability to make impartial investment decisions. Investment officials and employees shall disclose to the Town Manager any material financial interests they have in financial institutions that conduct business with the Town, and they shall subordinate their personal investment transactions to those of the Town. • 9. Internal Control The Finance Director shall establish a system of internal controls to ensure the integrity of the investment process. The system shall be designed to prevent loss of public funds through fraud, error, misrepresentation by third parties, or imprudent actions by elected officials and employees of the Town. The system of internal controls shall be reviewed periodically by the Town's independent auditor. 10. Authorized Securities and Transactions All investments shall be made in accordance with Colorado Revised Statutes as follows: CRS 11-10.5-101, et seq., Public Deposit Protection Act; CRS 11-47-101, et seq., Savings and Loan Association Public Deposit Protection Act; CRS 24-75-601, et seq., Funds - Legal Investments; CRS 24-75-603, et seq., Depositories; CRS 24-75-701 and 702, et seq., Investment Funds - Local Government Pooling. Any revisions or extensions of these sections of the CRS will be assumed to be part of this Investment Policy immediately upon being enacted. Only the following types of securities and transactions shall be eligible for use by the Town: a. U.S. Treasury Obligations: Treasury Bills, Treasury Notes, Treasury Bonds, and Treasury Strips with a final maturity not exceeding five years from the date of purchase. b. Federal Agency Securities: Debentures and mortgage-backed securities with a stated . final maturity not exceeding five years from the date of purchase issued by the Government National Mortgage Association (GNMA). 6 Town of Avon Investment Policy • Page 4 c. Federal Instrumentality Securities: Debentures, discount notes, callable, step-up, and stripped principal or coupons with a final maturity not exceeding five years from the date of purchase issued by the following only: Federal Farm Credit Bank (FFCB), Federal Home Loan Bank (FHI.B), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA). d. Repurchase Agreements with a termination date of 180 days or less collateralized by U.S. Treasury securities or Federal Instrumentality securities listed above with a final maturity not exceeding ten years. For the purpose of this section, the term collateral shall mean purchased securities under the terms of the PSA Bond Market Trade Association Master Repurchase Agreement as modified by the Town's Master Repurchase Agreement Annex. The purchased securities shall have a minimum market value including accrued interest of 102 percent of the dollar value of the transaction. Collateral shall be held in the Town's third-party custodian bank as safekeeping agent, and the market value of the collateral securities shall be marked-to-the market daily. Repurchase Agreements shall be entered into only with counterparties who have executed a Master Repurchase Agreement with the Town and who are recognized as Primary Dealers with the Federal Reserve Bank of New York. Primary Dealers approved as Repurchase Agreement counterparties shall have a short-term credit rating of at least A-1 • or the equivalent and a long-term credit rating of at least A or the equivalent by each service that rates the firm. e. Commercial Paper with an original maturity of 270 days or less that is rated at least A-1 by Standard & Poor's, P-1 by Moody's, or F1 by Fitch at the time of purchase by each service that rates the commercial paper. If the commercial paper issuer has senior debt outstanding, the senior debt must be rated at least A by Standard Poor's, A2 by Moody's, or A by Fitch by each service that rates the issuer. No more than 5% of the Town's total portfolio may be invested in the commercial paper of any one issuer, and the aggregate investment in commercial paper shall not exceed 20% of the Town's total portfolio. f. General Obligation Debt with a final maturity not exceeding five years issued by any state of the United States or any political subdivision, institution, department, agency, instrumentality, or authority of any state that is rated at least A by Standard & Poor's, A by Moody's or A by Fitch at the time of purchase by at least one such service that rates the entity. g. Revenue Obligation Debt with a final maturity not exceeding five years issued by any state of the United States or any political subdivision, institution, department, agency, instrumentality, or authority of any state that is rated at least AA by Standard & Poor's, Aa by Moody's or AA by Fitch at the time of purchase by at least one such service that rates the entity. U Town of Avon . Investment Policy Page 5 h. Local Government Investment Pools organized under CRS 24-75-701 and CRS 24-75- 702 that are "no-load" (no commission fee charged on purchases or sales of shares); have a constant net asset value of $1.00; limit assets of the fund to U.S. Treasury obligations, Federal Instrumentality securities, repurchase agreements collateralized by U.S. Treasury or Federal Instrumentality securities, and commercial paper; have a maximum stated maturity and weighted average maturity in accordance with Federal Securities Regulation 2a-7; and have a rating of AAAm by Standard & Poor's, Aaa by Moody's, or AAANI+ by Fitch. Money Market Funds registered under the Investment Company Act of 1940 that are "no-load" (no commission fee charged on purchases or sales of shares); have a constant net asset value of $1.00; limit assets of the fund to U.S. Treasury obligations, Federal Instrumentality securities, repurchase agreements collateralized by U.S. Treasury or Federal Instrumentality securities, and commercial paper; have a maximum stated maturity and weighted average maturity in accordance with Federal Securities Regulation 2a-7; and have a rating of AAAm by Standard & Poor's, Aaa by Moody's, or AAAN1+ by Fitch. j. Time Certificates of Deposit with a maturity not exceeding one year in any state bank, • national bank, or state or federal savings and loan association located in Colorado that is a member of the Federal Deposit Insurance Corporation, and meets the credit criteria set forth in the section of this Investment Policy, "Selection of Financial Institutions as Depositories and as Providers of General Banking Services." Certificates of deposit that exceed FDIC insurance limits shall be collateralized as required by the Public Deposit Protection Act or the Savings and Loan Association Public Deposit Protection Act. It is the intent of the Town that the foregoing list of authorized investments be strictly interpreted. Any deviation from this list shall have advance approval by the Town Council in writing. 11. Investment Diversification It is the intent of the Town to diversify the investments within the portfolio to avoid incurring unreasonable risks inherent in over investing in specific instruments, individual financial institutions or maturities. The asset allocation in the portfolio should however, be flexible depending upon the outlook for the economy, the securities market and the Town's anticipated cash flow needs. Diversification strategies and guidelines shall be determined and revised periodically by the Finance Committee. 12. Investment Maturity and Liquidity • To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. Unless matched to a specific cash flow requirement, the Town will not invest in securities maturing more than five years from the date of purchase. The Town shall Town of Avon Investment Policy • Page 6 maintain at least 15% of its total investment portfolio in investments maturing in 120 days or less. At least 10% of the portfolio shall be invested in overnight investments or securities that can be sold to raise cash on one day's notice. 13. Selection of Broker Dealers and Financial Institutions Acting as Broker/Dealers The Finance Director shall maintain a list of authorized broker/dealers and financial institutions that are approved for investment purposes, and it shall be the policy of the Town to purchase securities only from those authorized institutions and firms. To be eligible, a firm must meet at least one of the following criteria: a. Be recognized as a Primary Dealer by the Federal Reserve Bank of New York, or b. Report voluntarily to the Federal Reserve Bank of New York, or c. Meet the securities dealer's capital adequacy requirements of the New York Federal Reserve Bank and provide written certification to the Town that the requirements have been met on a continuous basis for the previous twelve-month period. Broker/dealers and other financial institutions will be selected by the Finance Director on the basis of their expertise in public cash management and their ability to provide service to the • Town's account. Each broker/dealer, bank or savings and loan that has been authorized by the Finance Director shall be required to submit and annually update a Town approved Broker/Dealer Information Request form that includes the firm's most recent financial statements. The Finance Director shall maintain a file of the most recent Broker/Dealer Information forms submitted by each firm approved for investment purposes. Broker/Dealers shall also attest in writing that they have received a copy of this Policy. The Town may purchase commercial paper from direct issuers even though they are not on the approved broker/dealer list as long as they meet the criteria outlined in the Section, "Authorized Securities and Transactions" of this Investment Policy. 14. Competitive Transactions Each investment transaction shall be competitively transacted with broker/dealers who have been authorized by the Town. At least three broker/dealers shall be contacted for each transaction and their bid and offering prices shall be recorded. If the Town is offered a security for which there is no other readily available competitive offering, then the Treasurer will document quotations for comparable or alternative securities. When purchasing original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price. • g Town of Avon Investment Policy Page 7 15. Selection. of Financial Institutions as Depositories and as Providers of General Banking Services The Finance Director shall maintain a list of authorized financial institutions that are approved.to provide depository and other banking services for the Town. To be eligible for authorization, a bank must be a member of the FDIC and must meet the minimum credit criteria (described " below) of credit analysis provided by commercially available bank rating services. Banks failing to meet the minimum criteria, or in the judgment of the Finance Director no longer offering adequate safety to Town, may be removed from the list. The Town shall utilize the commercially available bank rating services of PMA Financial Network, Inc. or Sheshunoff Information Services to perform a credit analysis on banks seeking authorization. Data obtained from the bank rating services will -include factors covering overall rating, liquidity, credit quality, interest rate spread, profitability, and capital adequacy. ,T6, be eligible for designation to provide banking services, a financial institution shall qualify as a depository of public funds in Colorado as defined in CRS"2475-603, and provide the Town certification of such qualification and shall meet at least one of the following credit criteria: a. have a Sheshunoff Peer Group Rating of 30 or better on a scale of zero to 99 with 99 being the highest quality for the most recent.reporting quarter; or b. have a PMA Financial Network, Inc. overall rating of three or better on a scale of one to five with one being the highest quality for the most recent reporting quarter. The Finance Director shall maintain a file of the most recent credit rating analysis 'repo'rts performed for each approved financial institution by one of the above listed rating firms. Credit analyses shall be performed at least semi-annually on all approved banks. 16. Safekeeping and-Custody The Finance Director shall approve one or more financial. institutions to provide,safekeeping and custodial services for the Town. A Town approved Safekeeping Agreement shall be executed with each custodian bank prior to utilizing that bank's safekeeping services. To be eligible for designation as the Town's safekeeping and custodian bank, a financial institution shall meet at least one of the following criteria: a. have a Sheshunoff Peer Group Rating of 20 or better on a scale of zero to 99 with 99 being the highest quality for the most recent reporting,quarter; or b. have a PMA Financial Network, Inc. overall rating of three minus or better on a scale of one to 'five with one being the, highest quality for the most recent reporting quarter. The Finance Director shall maintain a file of the credit rating,analysis reports performed for each approved financial institution. a Town of Avon Investment Policy Page 8 The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery versus payment basis. Ownership of all securities shall be perfected in the name of the Town, and sufficient evidence to title shall be consistent with modern investment, banking and commercial practices. All investment securities, except certificates of deposit, local government investment pools and money market funds purchased by the Town will be delivered by either book entry or physical delivery and will be held in third-party safekeeping by the Town's approved custodian bank, its correspondent bank or the Depository Trust Company (DTC). All Fed wireable book entry securities owned by the Town shall be evidenced by a safekeeping receipt or a customer confirmation issued to the Town by the custodian bank stating that the securities are held in the Federal Reserve system in a Customer Account for the custodian bank which will name the Town as "customer." All DTC eligible securities shall be held in the custodian bank's Depository Trust Company (DTC) participant account and the custodian bank shall issue a safekeeping receipt evidencing that the securities are held for the Town as "customer." Y All non-book entry (physical delivery) securities shall be held by the custodian bank's is correspondent bank and the custodian bank shall issue a safekeeping receipt to the Town evidencing that the securities are held by the correspondent bank for the Town as "customer." The custodian bank shall furnish the Town monthly reports of security holdings and safekeeping activity. 17. Portfolio Performance The Town's investment portfolio shall be designed to attain a market value rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flow requirements. The performance of the portfolio shall be compared to the average yield on the U.S. Treasury security that most closely corresponds to the portfolio's weighted average effective maturity. When comparing the performance of the Town's portfolio, all fees involved with managing the portfolio shall be included in the computation of the portfolio's rate of return net of fees. 18. Reporting The Finance Director shall prepare quarterly an investment report listing the investments held by the Town and the market value of those investments. The report shall include a summary of investment earnings and performance results during the period. • ~O Town of Avon Investment Policy Page 9 19. Policy Revisions This Investment Policy shall be reviewed periodically by the Finance Director and amended by the Town Council as conditions warrant. • %k Town of Avon Memo To: Honorable Mayor and Town Council Ewd! Larry Brooks, Town Manager F'rom: Scott Wri ght, Finance Directo Date: January 22, 2004 Re: Resolution 04-03 Adoption of New Investment Policy Summary: The purpose of an investment policy is to establish the investment scope, objectives, delegation of authority, standards of prudence, reporting requirements, internal controls, eligible investments and transactions, diversification requirements, risk tolerance, and safekeeping and custodial procedures for the investment of funds of the Town. As was discussed during MBIA's presentation to Council in November, one of MBIA's services is to review the Town's current investment policy. While the fundamentals of the Town's current policy remain unchanged, financial markets, investment technology, state statutes and general securities laws have all changed over the past several years. This revised investment policy has been updated and expanded to encompass these changes. The Town Attorney has reviewed and approved this policy and Clifton Gunderson will review the policy during the course of their upcoming audit. Please find attached Resolution No. 0403 adopting a revised investment policy for the Town. Town Manager Comments: 64~ n Page 1