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Council File # � J"�i�p 2
Crreen Sheet # 3 d � t� a
RESOLU'I`ION
�NT PAUL, MINNESOTA
Presented By
aa
Referred To � Committee: Date:
1 WHEREt�,s, Minnesota Statute 118A governs the investment of public funds and provides the general
2 structure for investment activity and fiduciary responsibility; and
3
4 WHEREAS, it is in the City's best interests to further define the investment activity witlrin the guidelines of
5 an established investment policy statement; and
6
7 WHEREAS, the investment policy statement provides the following:
8 1) Written documentation of e�ectations regarding the investment of City assets.
9 Z) Investment objectives, guidelines, and standards that are consistent with the financial objectives
10 of various City fiands.
11 3) Definition and assignment of responsibilities for investment decisions and actions.
12 4) Criteria and bencl�marks for the on-going evaluation of perforxnance results and policy
13 compliance.
14 5) A framework for review and revision of investment policies as warranted by changing
15 circumstances.
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17 BE TT RESOLVED, that the Council of the City of Saint Paul does hereby adopt the following as the City's
18 policy statement establishing standards for investments. This policy supercedes all previous City investment
19 policies.
20
Yeas
Benanav v
Blakey ✓
Bostrom J
Coleman ,i
Harris �
Lantry
✓
Nays Absent Requested ,e of Financi Sexvices
By:
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Form Approved by City Attorney
Adopted by Council: % Date
Adoption Certified by Council Secretary
By: /j�/�ir��ii.��sd.✓
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� Green Sheet Green Sheet Green Sheet Green Sheet Green Sheet Green Sheet �
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FS — F�nancial services
CoMact Person & Phone:
Barb Maynard
266-8834
Must Be on Council Agenda by (Date):
13JUN-03
y
Assign
Num6er
For
Routing
Order
Green Sheet NO: 3001460
0 'nancial Services
1 inancial Services De�rtment D' ector (
�nr
2 �Ciri Attome�
3 a or's OfTice Ma or/Assistant
4 uncil
5 i Clerk Ci Clerk
Total # of Signature Pages _(Clip All Locations for Signature)
Approve updated investment policy to implement comprehensive guidelines for investment activity.
Recommendations: Approve (A) or Reject (R):
Planning Commission �
CIB Committee
Civil Service Commission
Nersonai service
initial/Date
Questions:
1. Has this person/firm ever worked under a contract for this department?
Yes No
2. Has this person/firm ever been a city employee?
Yes No
3. Does this personffirm possess a skill not normally possessed by any
current city employee?
Yes No
Explain all yes answers on separete sheet and attach to green sheet
Initiating Problem, Issues, Opportunity (Who, What, When, Where, Why): ��� �����
The City needs updated guidelines for inveshnent activiry.
JUN 2 6 2003
-�.l-�Y__AIT(� R �� �.Y
AdvantapesifApproved: �
Improved investment program resulting in greater controls, higher retums and improved communication.
Disativanfapes If Approved:
None.
Disadvantages If Not Approved:
The City will continue to operate under an outdated investment policy.
Total Amount of
Trensaction:
Fundinq Source:
CosURevenue Budgeted:
AcfiviN Number:
Financial Information:
(Explain)
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INVESTMENT POLICY STATEMENT
OF
T� CI'rY OF Sa�rr PAiri,
Adopted
TABLE OF CONTENPS
I. $COPEAI3DPURPOSE ............................................. 2
II . CoNTEXT ...................................................... 3
III. STANDaRDSOF CARE ........................................... 3-4
IV. l�UTHORITY AND RESPONSIBII,ITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-8
V. ADMINISTRATIVE AND REVIEW PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . 8-10
VI. G�RaZ, TNVES�rrr OB�cTTVas a� CoNSrRn�TS . . . . . . . . . . . . . . . 10-11
VII. GUIDELINES FOR INVES'1'MENTS IN SPECIAL PROJECTS OR PROGRAMS ..... 11-12
VIII. COMPONENT PORTFOLIOS: OBJECTIVES AND AUTHORTZED INVESTMENTS
DATLY PORTFOLIO .......................................... 12-13
SHORT TERM PORTFOLIO ..................................... 13-14
IN'I'ERMEDIATE TERM PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-15
IX TNVESTMENTMANAGERSELECTION ................................. 16
X TNVESTMENTMANAGERTERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-17
a.n: U 41u _ • :- - -`�T� .-'�'+7i r�:ifE��7
EXHIBITB: BENCHMARKDESCRIPTIONS
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I. SCOPE AND PURPOSE
TIus Investment Poficy Statement govems the investment portfolio (the "Portfolio"} of the
City of Saint Paul (the "Cit�') including the assets of the General Fund, Special Revenue
Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, Trust Funds, Agency
Funds, Internal Service Funds and any new fund created by the City Council and the
Mayor.
Tlus Investment Policy Statement ("TPS") is intended to serve the following purposes:
A. Provide written documentation of e�pectations regazding the investment of City
assets.
B. Reflect investment objectives, guidelines and standazds that are consistent with the
financial objectives ofvarious City funds.
C. Define and assign responsibilities for investment decisions and actions.
D. Establish criteria and benchmazks for the ongoing evaluauon of performa.uce results
and policy compliance.
E. Establish a framework for review and revision of investment policies as watranted by
changing circumstances.
Tlus policy supercedes all previous City investment policies and shall be reviewed on an
annual basis by the Director of the Office of Financial Services. Any significant revisions
shall be approved by the City Council and the Mayor. Any exceptions to ttris policy must
be approved prior to trade execution by the Director of the Office of Financial Services,
and reported to the Mayor and City Council.
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II. CONTEXT
The Portfolio provides funding for current and future operating e�penses, a reserve to
cover unplanned shortFalls and investment income to support the activities of the City.
The Portfolio is managed in three components ("Component Portfolios") as follows:
A. Daily Portfolio: The "dail�' component ("Daily Portfolio") represents current
operating funds on which draws aze made frequently, requiring daily liquidity and
preservation of principal. The Daily Portfolio is managed intemally by the Cash
Manager.
B. Short Term Portfolio: A short-term component (Short Term Portfolio") serves as a
cushion to provide liquidity for possible shortfalls in the Daily Portfolio. Draws
against the short-term portfolio are e�pected to be infrequent. The Short Term
Portfolio is managed intemally by the Cash Manager.
C. Intermediate Term Portfolio: The balance of the Portfolio represents the intermediate
term component ("Intermediate Term Portfolio") wluch serves as a reserve for
unplanned shortfalls. In general, the Intermediate Term Portfolio is not expected to
experience withdrawals. A portion of the Intermediate Term Portfolio is managed
internally by the Treasury Manager and the balance is managed by e�emal managers.
III. STANDARDSOF CARE
A. Prudence
The standard of prudence to be used by investment officials shall be the "prudent
investor rule" and shall be applied in the context of managing the 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
e�;pectations are reported in a timely fashion and the purchase and sale of securities aze
carried out in accordance with the terms of this policy.
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Investments shall be made with judgment and care under tke circumstaaces then
prevailing wluch 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.
B. 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. All
investment officials shall disclose any material interests in financial institurions with
wluch they conduct business. Employees and officers shall refrain from undertaking
personal investment transactions with the same individual with whom business is
conducted on behalf of the City.
IV. AiITTIORTTY AND RESPONSIBILITIES
The City of Saint Pavl's Administrative Code, Chapter 2, Article 1, Section 2.02, as
amended, empowers the Director of the Office of Financial Services, wluch includes a
Treasury Section, with the investment responsibiliry for the City. Responsibility for the
operation of the investment program is delegated to the Treasury Manager, who shall act
in accordance with written procedures and internal controls for the operauon of the
investment program consistent with the IPS. The Treasi�ry Manager is assisted by the
Cash Manager. No person may engage in aa investment transaction, except as provided
under the terms of tlris policy.
A. Director ofthe Office ofFinanciat Services
The duties and responsibilities of the Director of the Office of Financial Services under
tlus IPS aze to:
l. Recommend to the City Council adoption and amendment of the 1PS.
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2. On a quarterly basis, review and approve the recommendations of the Treasury
Manager regarding:
a. Compliance of investments with the IPS
b. Performance results
c. Changes in investment managers
d. Sufficiency of funds in the Portfolio to satisfy planned expenditures.
B. Treasury Manager
The duties and responsibilities of the Treasury manager under this IPS aze to:
l. Invest the internally-managed portion of the Inteimediate Term Portfolio.
2. Monitor the performance of the total Portfolio and each sepazately-managed
portfolio against benchmarks established in the IPS and report to the Director of
the Office of Financial Services and the City Council.
3. Maintain a projection of manthly cash inflows and outflows ("Cash Flow
Projection") for determining the appropriate minimum and maximum range to
maintain in the Daily and Short Term Portfolios.
4. Review the allocation of the Portfolio among the Component Portfolios and make
any adjustments indicated under tlus IPS.
5. Review the investment activity reports for the Daily and Short Term Portfolios
prepared by the Cash Manager.
6. Review compliance of the Portfolio, as well as the individual investment
managers/mutual funds, with IPS standards and guidelines and report any
noncompliance to the Director of the Office of Financial Services.
7. Make recommendations to the Directar of the Office of Financial Services
regazding additions, deletions or changes in investment managers, mutual funds,
custodians, consultants and other service providers.
8. Review all investment costs and expenses and report to the Director ofthe Office
of Financial Services, the Mayor and the Ciry Council on an annual basis.
9. Develop and maintain the administrative procedures manual ("Administrative
Procedures Manual.")
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C. Cash Manager
The duties and responsibilities of the Cash Manager under this Il'S aze to:
1. Invest the assets of the Daily Portfolio and the Short Term Portfolio in accordance
with IPS standards and guidelines.
2. Prepare cash flow projections to determine daily excess cash to invest in short teim
securities or money market funds for operating needs.
3. Obtain competitive bids and offerings of securities to be purchased or sold.
4. Verify investment activity in the bank accounts.
5. Maintain and balance the Treasury subsidiazy investment ledger.
6. Verify broker coufirmarions to the subsidiary investment ledger.
'7. Allocate interest e arninu s to the accounts participating in the pooled investment
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8. Report investment activity to the Treasury Manager.
9. Prepare annual reports in compliance with GASB standatds.
D. Investment Consultant
An Investment Consultant may be retained by the City to provide investment advice
and assistance regarding the investments. Specific responsibilities of the Investment
Consultant may include:
l. Assist with the development and periodic review of investment policies and
procedures.
2. Conduct seazches for investment managers or mutual funds.
3. Quarterly, measure and evaluate performance results for the total portfolio and for
each separately-managed portfolio.
4. Evaluate compliance of investments with IPS guidelines and report results to the
Treasurer.
5. Analyze investment eacpenses and negotiate any investment management or
custodial fees as requested.
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6. Provide other information or reports as requested by the Treasury Manager, the
Director of the Office of Financial Services, the Mayor or the City Council.
7. Prepaze Investment Manager Guidelines.
E. Investment Managers
Any investment manager retained by the City assumes the following responsibility as a
fiduciary of the funds:
1. Compliance with the stated objectives and guidelines herein, as well as Minnesota
State Statutes.
2. Written acknowledgment of the IPS and specific account guidelines ("Manager
Guidelines") which reflect the investment manager's strategy, discipline and
performance benchmark.
3. Quarterly statement for the funds under management showing the mazket value
and cost basis of individual holdings as well as the following information relauve to
the investment manager's designated portfolio performance bencluvark:
a. Performance
b. Duration (to absolute and to worst)
c. Yield to Maturity
d. Asset/Sector Distribution
e. Average Maturity (absolute and to worst)
f. Average credit quality
F. Custodian Bank
The custodian bank ("Custodian") shall assume the following responsibilities:
1. Safekeeping of Securities: Hold all fund deposits in the appropriate accounts, and
provide Yrighly secure safekeeping of securities to minimize the risk of loss due to
theft, fire or accident.
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2. Manage a securities lending program by lending securities to approved borrowers,
arranging the terms and conditions of loans, monitoring mazket values of the
securities lent and the collateral received, reporting earnings and directing the
investment of the cash collateral.
3. Settlement of Trades: All trades, where applicable, will be executed delivery vs.
payment (DVP). Tlus ensures that securities are deposited in the eligible Suancial
insritution prior to the release of funds. Securities will be held by a tlurd party
custodian, as evidenced by safekeeping receipts.
4. Collection of Income: Provide for receipt and prompt crediting of all dividend and
interest payments received as a result of the Portfolio holdings. Monitor income
receipts to ensure that income is received when due and institute an investigative
process to track and conect late or insufficient payments, including
reimbursements for any interest lost due to custodian esor.
5. Reporting: Providing monthly reports showing individual asset holdings with
sufficient descriprive detail to include units, unit price, cost, market value, cusip
number (where available) and any other information requested by the City.
V. ADMINISTRATIVE AND REVIEW PROCEDURES
The following administrative and review procedures are intended to conuol risk and
ensure policy comptiance:
A. A quarterly report prepared by the Treasury Manager will be provided to the Director
of the Office of Financial Service, the Mayor, the Ciry Council and the Board of Water
Commissioners.
B. An anaual review of investment operations performed by the State Auditor.
C. A desk procedures manual ("Admivistrativa Procedures Manual") will be developed
and maintained to include legal authority, policies, job responsibilities, processing
investment transactions, eligible security dealers and Snancial institutions, and
securities descriptions.
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D. Review Procedures for Performance Monitoring and Policy Compliance:
1. Review of Policy: At least annually, the policies, objectives and guidelines set forth
in this document will be reviewed by the Treasury Manager and the Director of the
Office of Financial Services. Any changes will be brought to the Mayor and City
Council for approval. Key occunences that could result in a recommendation for
policy modification include:
a. Significant changes in the Cash Flow Projections or liquidity needs that may
warrant policy change(s).
b. Cl�a.uges in long-term fixed income mazket trends and pattems that are
materially different than those assumptions used to set the policy (see E�ibit
B).
c. Significant growth (or reduction) in the assets of the Portfolio.
2. Review of Investment Results: The Treasury Manager will measure and evaluate
performance at least quarterly with the extemal managers. The elements to be
included in these reviews aze as follows:
a. Evaluation of the total time-weighted return for quarterly and annual periods of
the Total Portfolio, each Component Portfolio, and each sepazate account
against benchmazks established in the IPS and the Manager Guidelines.
b. Evaluation of risk adjusted returns, using Standard Deviation as a measure of
risk, relative to the respective Performance Benchmark(s).
c. Evaluation of yield for quarterly and annual periods relative to the respective
Performance Benchmark(s).
d. Compliance of investments with the guidelines and standards in tlus IPS far
diversification and quality, as well as with statutory guidelines.
e. Review of the balances in the Component Portfolios for sufficiency in relation
to the Cash Flow Projection.
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3. Review of Investment Managers: The Treasury Manager will meet with the
Investment Managers annually to review strategy and coufirm that the managers
continue to satisfy Investment Manager selection criteria in ttris IPS.
4. Review of Investment Fees and Expenses: The fees and expenses associated with
the investment prograztt will be reviewed at least annuaily to ensure they are
reasonable and competitive.
VL GENERAL INVESTMEPiT OBJECTIVES� CONS1`RAIlVTS AND GUIDELINES
The goals of the City for the Portfolio are to preserve finaucial assets for future operating
e�penses, maintain reserves to fund unplanned shortfalls and generate income to support
the activities of the City. The investment objectives in support of these goals are as
follows:
A. Safety: Safety of principal, by mitigating credit risk and interest rate risk, is the
foremost objective ofthe investment program.
1. Credit Risk: Credit risk (the risk of loss due to the failure of the security issuer or
backer) will be m;nim;�ed by:
a. Limiting investments to issues of (or backed by) the U. S. Govemment, its
agencies or instrumentalities, States and Muuicipalities.
b. Using only those financial instituuons, broker/dealers, intermediaries and
advisers approved by the City.
c. Diversifying investments so that potenrial losses on individual securities of a
single issuer will be mininuzed.
2. Interest Rate Risk: Interest rate risk (the risk of a loss in market value due to
general changes in interest rates) will be controlled through:
a. Investing operatiqg funds primazily in shorter term securities, money mazket
mutual funds or similaz investment pools (matching maturities with cash
requirements).
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b. Establishing maximum guidelines for portfolio duration
B. Liquidity: The Portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anricipated, including matching maturities with
cash requirements. However, since all possible cash demands cannot be anticipated,
the portfolio should consist lazgely of securities with active secondary resale markets.
C. Rehun: The investment portfolio shall be managed with the objective of attaining a
rate of return throughout budgetary and economic cycles consistent with the
ob}ectives of principal preservation, liquidity (in A and B above) and avoidance of
realized losses. Return on investment is of secondary importance compared to safety
and liquidity. The total annualized return for each Component Portfolio is expected to
exceed the total return of the performance benchmark established in this IPS for each
Component, wlule maYimizing the portion of return derived from current income. The
return for the Total Portfolio is e�ected to exceed the total return on the Composite
Bencluvark (representing the dollar-weighted composite of the three Component
Portfolio benchmazks).
D. Loss Avoidance: Investment transactions shall seek to ensure that capital losses are
auoided. In the event of a need to liquidate any security prior to maturity,
consideration shall be given to selecting securities that auoid or minimize the
realization of capital losses. Exceptions due to credit deterioration may be acceptable
if such transactions were executed under guidelines listed herein and notification is
made to the Director of the Office of Financial Services, the Mayor and City Council.
VII. GUIDELINES FOR INVESTMENTS IN SPECIAL PROJECT5 OR PROGRAMS
The City, from time to time, may authorize projects or special purpose financings to
further a particular social or economic development program through the use of City funds
as capital, collateral or financing. A typical program may entail depositing fixuds at local
banks to support neighborhood lending or low-income housing. To carry out such
projects or programs, City fixnds may be allocated to investments in local banking
institutions or other investments that otherwise fall outside of this policy statement. The
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Treasury Manager is authorized to implement investment strategies in support of such
projects or programs upon direction from the Director of the Office of Financial Services,
with notification made to the City CounciI, All investments purchased under such
programs must comply with Minuesota Statutes 118A, and investments that fall outside of
tlus policy's portfolio weighting constraints require notification to the Mayor and City
Council prior to trade execution.
VIII. COMPONENT PORTFOLIO5: OBJECTIVE3� CONSTRAIlVTS AND AUTHORIZED
INVESTMENTS
A. Daily Portfolio: The Daily Portfolio provides liquidity for operating expenses and
other expenditures reflected in the annual Cash Flow Projection maintained by the
Treasury Manager. The objectives aze preservation of principal, liquidity to meet daily
needs and a competitive yield as measured by the performance benchmazk for the
Daily PortfoGo.
1. Minnesota Statutes: Investments shall satisfy Mnnesota Statutes governing
municipal investment, specifically Mivuesota Statutes Chapter 118A, a copy of
wluch is attached as Exhibit A.
2. Time Horizon: The Daily Portfolio is intended to fund daily withdrawals as well as
planned withdrawals wittrin a 12-month period.
3. Liquidity: Investments must provide liquidity as needed on a daily basis.
4. Risk Tolerance: Investments must satisfy liquidiTy requirements without risk of
principal loss.
5. Retum: Investments should generate total returus that are competitive within the
pazameters (above) for liquidity and risk tolerance.
6. Performance Benchmark: 30-day T Bil1.
7. Authorized Investments and Guidelines: Subject to Minnesota Statutes Chapter
118A, the following investments are authorized:
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Weighting Constraints
Commerciai Paper Up to 100% Maximum of $SMM in a single issuer
Bankers Acceptances Up to 50% Maximum of $5MM in a single issuer
Certificates of Up to $IONIIv1* Collateralized at
Deposit 110%; one year maximum term
Repurchase Up to 100% A Master Repurchase Agreement must
Agreements be executed with the counter party.
102% collateral required.
Treasury Bills Up to 100%
Agency Notes Up to 100% No more than 20% of total portfolio
per agency
Money Market Funds Up to 100% S.E.C. Rule 2a7
*The maYimum holding of CDs in the total portfolio, including the daily and
intermediate, shall not exceed $10 million.
8. Diversification: Subject to the guidelines in A 7(above), the Daily Portfolio should
be diversified to eliminate the risk of loss resulting from over-concentration of
assets in a specific issuer, maturity or class of securities.
9. Commercial Paper: At the time of purchase, securities from a single issuer shall not
exceed 5% (or the lesser of $SMM per issuer) of the total daily portfolio and shall
be rated the lughest credit quality by two of the following rating agencies:
Standard and Poor (A-1), Fitch (F1), and Moody's (P-1). In the event that the 5%
issuer guideline is exceeded through trading activities, written notification shall be
made to the Director of the Office of Financial Services and made available to the
City Council and Mayor.
B. Short Term Portfolio: The Short Term Portfolio serves as a cusluon to cover
operating expenses or unplanned shortfalls that occur in the Daily Portfolio. The
investment objectives are principal preservation, liquidiry to fund cash outflows when
needed and a return that exceeds the performance benchmark established in this IPS.
1. Minnesota Statutes: Investments shall satisfy Minnesota Statutes governing
municipal investment, specifically Minuesota Statutes Chapter 118A, a copy of
which is attached as E�ibit A.
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2. Time Horizon: The Short Term Portfolio is intended to fund occasional shortfalls
in the Daily Portfolio. Since the potential outflows are e�ected to be infrequent,
the time horizon for investments is between one and three yeazs.
3. Liquidity: Investments must provide liquidity as directed.
4. Risk Tolerance: Investments should satisfy liquidiry requirements without risk of
principal loss.
5. Duration: To satisfy the parameters for liquidity and risk tolerance (above), the
ma�mum duration of the portfolio is 130% of the benclimark duration.
6. Return: The total return should exceed the total retum of the Performance
Benchmark, with emphasis on current income.
7. Performance Benchmazk: Lehman 1-3 Year Government Index
8. Authorized Investments and Guidelines: Subject to Miunesota Statutes Chapter
118A, the following investments are authorized:
Weighting Constraints
U.S. Treasury Up to 100% Maximum maturity of 36 months
Securities
Agency Securities Up to 100% Maximum maturity of 36 months
9. Diversification: Subject to the guidelines in B 8(above), the Short Term Portfolio
should be diversified to elimina.te the risk ofloss resulting from over-concentration
of assets in a specific maturity.
C. Intermediate Term Portfolio: The Intermediate Term Portfolio serves as a reserve to
fund unplanned shortfalls or capital needs. The investment objectives aze principal
preservatioq liquidity to fund cash outflows that may be unplanned and a total retum
that exceeds the Performauce Benchmark.
1. Minuesota Statutes: Investments shall satisfy Miunesota Statutes governing
municipal investment, specifically Minnesota Statutes Chapter 118A, a copy of
which is attached as Exhibit A.
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2. Time Horizon: The Intermediate Term Portfolio serves as a reserve for unplanned
shortfalls or capital requirements. Withdrawals are generally not anticipated;
therefore, the time horizon for investments is longer than three years.
3. Liquidity: Investments must provide liquidity as needed.
4. Risk Tolerance: Investments should satisfy liquidity requirements with the
objective of minimi�ing any realized principal loss.
5. Duration: To satisfy the parameters for liquidity and risk tolerance (above), the
maximum duration of the portfolio is 125% of the bencl�mark duration.
6. Return: Investments should generate total retums that exceed the total return of
the Performance Bencbmark, with an emphasis on yield m�xim;�ation.
7. Performance Benchmazk:
Extemal Managers: 80% Lehman Intermediate Government Index / 20% 15-
yeaz MBS Index
Internal Portfolio: 100% Lelunau Intermediate Government Index
8. Authorized Investments and Guidelines: Subject to Minnesota Statutes 118A, the
following investments are authorized:
Weighting Constraints
U.S. Treasury Up to 100%
Securities
Agency Securities Up to 100% No more than 20% in a single issue
Structured Agency Up to 80% No more than 20% in a single issue
Notes
Agency Pass Up to 40% No more than 10% in a single issue
Throughs
Agency CMOs Up to 20% No more than 5% in a single issue
Municipal Securities Up to 25% No more than 5% in a single issue
Certificates of Up to $lOMM* Collateralized at
Deposit 110%; three year maximum term
*The ma.�mum holding of CDs in the total portfolio, including the daily and
intermediate, shall not exceed $10 million.
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9. Diversification: Subject to the guidelines in C 8(above), the Intermediate Term
Portfolio should be diversified to elinunate the risk of loss resulting from over-
concentration of assets in a specific issuer, maturity or class of securities.
IX. SELECTION OF EXTERNAL INVE5TMENT MANAGERS FOR INTERMEDIATE TERM
PORTFOLIO
Criteria for selecuon of Investment Managers and Mutual Funds are:
A. Adherence to a clearly-articulated investment strategy and discipline.
B. A m;nirrn,m five-year perfonnance track record: A Manager's performance will be
compared to the appropriate benchmark designated in this IPS. Performance will be
evaluated on a risk-adjusted basis considering annual returns, cumulauve annualized
returns, standard deviation of returns and a measure of performance in down-market
cycles.
C. History of the fiim: Organizational structure, assets under management, clientele in the
municipal and government sector and the tenure of key portfolio manager(s)
responsible for the performauce track record.
D. Negotiated Fees.
E. Firm Insurance.
F. Contributions and distributions can be accommodated without materially affecting
performance.
G. Ability to comply with Minnesota Statutes Chapter 118A.
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X. TERNIINATION OF EXTERNAL INVESTMENT MANAGETtS FOR THE INTERMEDIATE
TERM PORTFOLIO
A. Investment managers will be reviewed for possible replacement on an ongoing basis.
Reasons for replacement may include, but aze not limited to, the following:
1. Failure to outperform the designated benchmazk on a risk adjusted basis, after fees,
over the investment Time Horizon or a matket cycle.
2. Significant under-performance relative to the designated Performance Benchmark
over a two- to three-yeaz period or a mazket cycle.
3. Change in firm ownerslup or loss of key personnel.
4. A real or perceived change in investment style or discipline.
5. A violation of the standards and guidelines in this IPS or the Manager Guidelines.
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Exhibit A
Minnesota Statutes 2002, Chapter 118A.
Copyright 2002 by the Office of Revisor of Statutes, State of Minnesota.
==118A.01
118A.01 Definitions.
subdivision l. Application. The definitions in this
section apply to sections 118A.01 to 118A.06.
Subd. 2. Government entity. (a) "Government entity"
means a county, city, town, school district, hospital district,
public authority, public corporation, public commission, special
district, any other political subdivision, except an entity
whose investment authority is specified under chapter 11A or
356A.
(b) For the puxposes of sections 118A.02 and 118A.03 only, the
term includes an American Indian tribal government entity
located within a Eederally recognized American Indian
reservation.
Subd. 3. Financial institution. "Financial
institution" means a savinqs association, commercial bank, trust
company, credit union, or industrial loan and thrift company.
Subd. 4. Public funds. "Public funds" means all
qeneral, special, permanent, trust, and other funds, regardless
of source or purpose, held or administered by a government
entity, unless otherwise restricted.
HIST: 1996 c 399 art 1 s 2; 1999 c 151 s 39
==118A.02
118A.02 Depositories; investing: sales, proceeds, immunity.
subdivision 1. Designation; delegation. (a) The
governing body of each government entity shall designate, as a
depository o£ its Punds, one or more financial institutions.
(b) The governing body may authorize the treasurer or chief
financial ofPicer to:
(1) designate depositories of the funds;
(2) make investments o£ Punds under sections 118A.01 to
118A.06 or other applicable law; or
(3) both desiqnate depositories and make investments as
provided in this subdivision.
Subd. 2. Sale; proceeds; immunity, if loss. (a) The
treasuxer or chief financial o£ficer oP a government entity may
at any time sell obligations purchased puxsuant to this section
and the money received Prom such sale, and the interest and
pro£its or loss on such investment shall be credited or charged,
as the case may be, to the £und £rom which the investment was
made.
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(b) Neither such official nor government entity, nor any
other official responsible for the custody o£ such funds, sha11
be personally liable for any loss sustained from the deposit or
investment of £unds in accordance with the provisions of
sections 118A.04 and 118A.05.
HIST: 1996 c 399 art 1 s 3
==118A.03
118A.03 When and what collateral requixed.
Subdivision 1. For deposits beyond insurance. To the extent
that funds deposited are in
excess of available federal deposit insurance, the government
entity shall require the financial institution to furnish
collateral security or a corporate surety bond executed by a
company authorized to do business in the state,
_SVhA 9 Tn liPn nf cnrP1 bond_ Th fO�IOW�II(j, drE
the allowable Porms of collatexal in lieu of a corporate surety
bond:
(1) United States government treasury bills, treasury
notes, treasury bonds;
(2) issues of United States government agencies and
instrumentalities as quoted by a recognized indust.cy quotation
service available to the government entity;
(3) genexal obligation securities of any state or local
govexnment with taxing powers which is xated "A" or better by a
national bond rating service, or revenue obligation securities
of any state or local government with taxing powers which is
rated "AA" or better by a national bond rating seivice;
(4) irrevocable standby letters of credit issued by Federal
Home i,oan Banks to a municipality accompanied by written
evidence that the bank's public debt is rated "AA" or bettex by
Moody's Investors Sexvice, Inc., ox Standard &> Poor's
corporation; and
(5) time deposits that are Pully insured by the Federal
Deposit Insurance Corporation.
Subd. 3. Amount. The total amount o£ the collateral
computed at its market value shall be at least ten percent more
than the amount on deposit plus accrued interest at the close of
the business day. The financial institution may furnish both a
surety bond and col�ateral aqgregating the required amount.
Subd. 4. Assignment. Any collateral pledged shall be
accompanied by a wxitten assignment to the government entity
from the financial institution. The written assignment shall
recite that, upon de£ault, the financial institution shall
release to the government entity on demand, free of exchange or
any other charges, the collateral pledged. Interest earned on
assigned collateral will be remitted to the £inancial
institution so long as it is not in default. The government
entity may sell the collatexal to recover the amount due. Any
surplus £rom the sale of the collateral shall be payable to the
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financial institution, its assigns, or both.
Subd. 5_ Withdrawal of excess collateral. A
financial institution may withdraw excess collateral or
substitute other collateral after qiving written notice to the
governmental entity and receiving confirmation. The authority
to return any delivered and assigned collateral rests with the
government entity.
Subd. 6. De£ault. For pu=poses of this section,
default on the part o£ the financial institution includes, but
is not limited to, £ailure to make interest payments when due,
failure to pxomptly deliver upon demand all money on deposit,
less any early withdrawal penalty that may be required in
connection with the withdrawal of a time deposit, ox closure of
the depository. If a£inancial institution closes, all deposits
shall be immediately due and payable. It shall not be a default
under this subdivision to require prior notice of withdrawal if
such notice is required as a condition of withdrawal by
applicable £ederal law or regulation.
Subd. 7. Sa£ekeepinq. All collateral shall be placed
in safekeeping in a restricted account at a Federal Reserve
Bank, or in an account at a trust department of a commercial
bank or other financial institution that is not owned or
controlled by the financial institution furnishing the
collateral. The selection shall be approved by the government
entity.
HIST: 1996 c 399 art 1 s 4
==118A.04
118A.04 Investments.
Subdivision 1. What may be invested. Any public funds, not
presently needed for
other purposes or restricted for other purposes, may be invested
in the manner and subject to the conditions provided for in this
section.
Subd. 2. United States securities. Public funds may
be invested in governmental bonds, notes, bills, mortqages
(excluding high-risk mortgage-backed securities), and other
securities, which are direct obligations or are guaranteed or
insured issues of the United States, its agencies, its
instrumentalities, or organizations created by an act of
congress.
Subd. 3. State and local securities. Funds may be
invested in the following:
(1) any security which is a general obligation o£ any state
or local government with taxing powers which is rated "A" or
better by a national bond rating service;
(2) any security which is a revenue obligation of any state
or 1oca1 government with taxing powers which is rated "�" or
better by a national bond rating service; and
(3) a general obligation o£ the Minnesota housing £inance
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agency which is a moral obligation of the state of Minnesota and
is rated "A" or better by a national bond rating agency.
Subd. 4. Commercial papers. Funds may be invested in
commercial pape= issued by United States corporations or their
Canadian subsidiaries that is rated in the highest quality
category by at least two nationally recognized rating aqencies
and matuxes in 270 days or less.
Subd. 5. Time deposits. Funds may be invested in
time deposits that are £ully insured by the Federal Deposit
Insurance Coxporation or bankers acceptances of United States
banks.
Subd. 6. High-risk mortgage-backed securities. For
the purposes of this section and section 118A.05, "high-risk
mortgage-backed securities" are:
(a) interest-onlv or principal-onlv mortqaqe-backed
secuxities; and
(b) any mortgage derivative security that:
(1) has an expected average li£e greater than ten years;
(2) has an expected average li£e that:
(i) will extend by more than four years as the result of an
immediate and sustained parallel shi£t in the yield curve of
plus 300 basis points; or
(ii) will shorten by moxe than six years as the result of
an immediate and sustained parallel shift in the yield curve of
minus 300 basis points; or
(3) will have an estimated change in price of more than 17
percent as the result of an immediate and sustained parallel
shift in the yield curve o£ plus or minus 300 basis points.
Subd. 7. Temporary general obligation bonds. Funds
may be invested in genexal obligation temporary bonds o£ the
same governmental entity issued under section 429.091,
subdivision 7, 469.178, subdivision 5, or 475.61, subdivision 6.
Subd. 8. Debt service £unds. Funds held in a debt
service fund may be used to purchase any obligation, whether
general or special, of an issue which is payable Erom the Pund,
at such price, which may include a premium, as shall be agreed
to by the holdex, or may be used to redeem any obligation of
such an issue prior to maturity in accordance with its terms.
The securities repxesenting any such investment may be sold by
the governmental entity at any time, but the money so received
remains part of the fund until used for the purpose for which
the fund was created. Any obligation held in a debt sexvice
fund from which it is payable may be canceled at any time unless
otherwise provided in a resolution or other instrument securing
obligations payable from the fund.
Subd. 9. Broker; statement and receipt. (a) For the
purpose o£ this section and section 118A.05, the term "broker"
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means a broker-dealer, broker, or agent o£ a government entity,
who transfers, purchases, se11s, or obtains securities fox, or
on behal£ o£, a government entity.
(b) Prior to completing an initial transaction with a
broker, a government entity shall provide annually to the broker
a written statement oP investment restrictions which shall
include a pxovision that all future investments are to be made
in accordance with Minnesota Statutes qovexning the investment
o£ public Punds.
(c) A bxoker must acknowledge annually receipt of the
statement of investment restrictions in writing and agree to
handle the government entity's account in accordance with these
restrictions. A government entity may not enter into a
transaction with a broker until the broker has provided this
written agreement to the government entity.
(d) The state auditor shall prepare uniform noti£ication
forms which shall be used by the government entities and the
brokers to meet the requirements of this subdivision.
HIST: 1996 c 399 art 1 s 5
==118A.05
118A.05 Contracts and agreements.
Subdivision 1. May enter into. In addition to other
authority granted in
sections 118A.01 to 118A.06, govexnment entities may enter into
contracts and agreements as Pollows.
Subd. 2. Repurchase agreements. Repurchase
agreements consisting of collateral allowable in section
118A.04, and reverse repurchase agreements may be entered into
with any o£ the following entities:
(1) a financial institution qualified as a"depository" of
public funds of the government entity;
(2) any other financial institution which is a member of
the Federal Reserve System and whose combined capital and
surplus equals or exceeds $10,000,000;
(3) a primary reporting dealer in United States government
securities to the Federal Reserve Bank of New York; or
(4) a securities broker-dealer licensed pursuant to chapter
80A, or an a££iliate of it, regulated by the securities and
exchange commission and maintaining a combined capital and
surplus of $40,000,000 or more, exclusive of subordinated debt.
Reverse agreements may only be entered into £or a period of
90 days or less and only to meet short-term cash £low needs. In
no event may reverse repurchase agreements be entered into £or
the purpose o£ generating cash £or investments, except as stated
in subdivision 3. �
Subd. 3. Securities agreements. Securities
lending agreements, including custody agreements, may be entered
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into with a financial institution meeting the qualifications of
subdivision 2, clause (1) or (2), and having its principal
executive of£ice in Minnesota. Securities lending txansacti4ns
may be entered into with entities meeting the qualifications of
subdivision 2 and the collateral for such transactions shall be
restricted to the secuxities described in this section and
section 118A.04.
Subd. 4. Minnesota joint powers investment trust.
Government entities may enter into agreements or contracts for:
(1) shaxes of a Minnesota joint powers investment trust
whose investments are restricted to securities described in this
section and section 118A.04;
(2) units of a short-term investment fund established and
administered pursuant to regulation 9 0£ the o££ice of the
Comptroller of the Currency, in which investments are restricted
to GPt�.nritiP� dPSrritnPrl in Yhiv sPrYion and Gect�on ��BA 04•
(3) shares o£ an investment company which is registered
under the Federal Investment Company Act of 1940 and which holds
itself out as a money market fund meeting the conditions o£ rule
2a-7 of the Securities and Exchange Commission and is rated in
one of the two highest rating categories £or money market £unds
by at least one nationally recognized statistical iating
organization; or
(4) shares o£ an investment company which is registexed
under the Federal Investment company Act of 1940, and whose
shares are registered under the Federal Securities Act o£ 1933,
as long as the investment company's fund receives the highest
credit rating and is rated in one o£ the two highest risk ratinq
categories by at least one nationally xecognized statistical
rating organization and is invested in £inancial instruments
with a final maturity no longer than 13 months.
Subd. 5. Guaranteed investment contracts. Agreements
or contracts fox guaranteed investment contracts may be entered
into if they are issued or guaranteed by United States
commercial banks, domestic branches o£ £oreiqn banks, United
States insurance companies, or their Canadian subsidiaries. The
credit quality of the issuer's or guarantor's short- and
long-term unsecured debt must be xated in one of the two highest
categories by a nationally recognized rating agency. should the
issuer's ox guarantor's credit quality be downgraded below "A",
the government entity must have withdrawal rights.
AIST: 1996 c 399 art 1 s 6; 1997 c 219 s 1; 2000 c 493 s 1
==118A.06
118A.06 Sa£ekeeping; acknowledgements.
Investments, contracts, and agreements may be held in
safekeeping with:
(1) any Fedexal Reserve Bank;
(2) any bank authorized under the laws of the United States
or any state to exercise corporate trust powers, including, but
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not limited to, the bank Prom which the investment is purchased;
(3) a primary reporting dealer in United States government
securities to the Federal Reserve Bank of New York; or
(4) a securities broker-dealer having its principal
executive of£ice in Minnesota, licensed under chapter 80A, or an
af£iliate of it, and regulated by the Securities and Exchange
commission; provided that the government entity's ownership of
all securities is evidenced by written acknowledgments
identi£ying the securities by the names of the issuers, maturity
dates, interest rates, CUSIP number, ox othex distinguishing
marks.
HIST: 1996 c 399 art 1 s 7
==118A.07
118A.07 Additional investment authority.
Subdivision l. Authority provided. As used in this
section, "governmental entity" means a city with a population in
excess of 200,000 or a county that contains a city of that
size. If a governmental entity meets the requirements of
subdivisions 2 and 3, it may exercise additional investment
authority under subdivisions 4, 5, and 6.
Subd. 2. Written policies and procedures. Prior to
exercising any additional authority under subdivisions 4, 5, and
6, the governmental entity must have written investment policies
and procedures governing the following:
(1) the use o£ ox limitation on mutual bond £unds or other
securities authorized or permitted investments under law;
(2) specifications for and limitations on the use of
derivatives;
(3) the £inal maturity of any individual security;
(4) the maximum average weighted life of the port£olio;
(5) the use o£ and limitations on reverse repurchase
agreements;
(6) credit standards £or financial institutions with which
the government entity deals; and
(7) credit standards for investments made by the government
entity.
subd. 3. Oversight process. Pxio.r to exercising any
authority under subdivisions 4, 5, and 6, the governmental
entity must establish an oversight process that provides fox
review of the government entity's investment strategy and the
composition of the £inancial port£olio. This process shall
include one or more of the £ollowing:
(1) audit reviews;
(2) internal or external investment committee reviews; and
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(3) internal management control.
Additionally, the governing body o£ the governmental entity
must, by xesolution, authoxize its tx'easurer to utilize the
additional authorities under this section within their
prescribed limits, and in conformance with the written
limitations, policies, and procedures of the governmental entity.
If the governing body of a governmental entity exercises
the authority provided in this section, the treasurer o£ the
qovernmental entity must annually report to the governing body
on the findinqs o£ the oversight process required under this
subdivision. IP the governing body intends to continue to
exercise the authority provided in this section for the
following calendar year, it must adopt a resolution a££irming
that intention by Decembex 1.
Subd. 4. Re urchase a reements. A overnment entit
may enter into repurchase agreements as authorized under section
118A.05, provided that the exclusion o£ moxtgage-backed
securities defined as "high-risk mortgage-backed secuxities"
under section 118A_04, subdivision 6, shall not apply to
repurchase agreements under this authority if the margin
requirement is 101 percent or more.
Subd. 5. Reverse repurchase agreements.
Notwithstanding the limitations contained in section 118A.05,
subdivision 2, the county may enter into reverse repurchase
agreements to:
(1) meet cash £low needs; or
(2) generate cash for investments, pxovided that the total
securities owned shall be limited to an amount not to exceed 130
percent o£ the annual daily avexage of general investable monies
for the £iscal year as disclosed in the most recently available
audited financial report. Excluded from this limit are:
(i) securities with maturities of one year or less; and
(ii) securities that have been xeversed to maturity.
There shall be no limit on the term oP a reverse repurchase
agreement. Reverse repurchase agreements shall not be included
in computing the net debt oP the governmental entity, and may be
made without an election or public sale, and the interest
payable thexeon shall not be subject to the limitation in
section 475.55. The interest shall not be deducted or excluded
from gross income o£ the recipient Por the purpose o£ state
income, corporate franchise, or bank excise taxes, or if so
provided by federal law, for the purpose of federal income tax.
Subd. 6. Options and futures_ A government entity
may enter into futures contracts, options on futures contracts,
and option agreements to buy or sell securities authorized under
1aw as legal investments Por counties, but only with respect to
securities owned by the govexnmental entity, including
securities that are the subject of reverse repurchase agreements
under this section that expire at or before the due date of the
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option agreement.
HIST: 1996 c 399 art 1 s 8
==118A.08
118A.08 No superseding e££ect.
Except as provided in Laws 1996, chapter 399, article 1,
section 11, sections 118A.01 to 118A.06 shall not supersede any
general or special law relating to the deposit and investment of
public £unds.
HIST: 1996 c 399 art 1 s 9
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b3-lol0�
Ezhibit B
Benchmark Descriptions
30 Day Treasury Bill
Definition: Retums aze provided by the Federal Reserve.
Lehman Brothers 1-3 Year Government Index
Definition: Securities in the U. S. Government Index with a maturity from 1 up to (but not
including) 3 years.
Lehman Brothers 15 Year Mortga¢e Backed Securities Index or
Merrill Lvnch 15 Xear Mort�age Backed Securities Index
Definition: Pass-through securities with an original maturity of 15 yeazs.
Lehman Brothers Intermediate Government Index
Definition: Securities issued by the U.S. Government (Treasury and Agency secwities)
having a maturity from 1 up to, but not including l0yeazs.
Return and Risk (1993 to 2002)
15
Intertnediate
73YearGOVte g0lntGOV/20
Retum
8
7
6
5
4 • 30 �ay TBill
3
0
2 3
Risk
Retum Risk
30 �ay TBiil 4.18 0 35
L3 VearGOVt 6.08 7 64
Intertnediate Govt 6.91 2 98
iSYearMBS 7.24 2.89
801ntGOV/2015YrM8 6.98 2.92