Developing An Investment Policy

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Developing An Investment Policy

• Diane Reichard, CPA, CGFO, CGFO
• Finance Director
• City of Temple Terrace
• SOGF November 18, 2008

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Temple Terrace, FloridaTampa Bay area, I-4,
I-75, I-275
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Temple Terrace Demographics

• 7.02 square miles
• Population 24,490
• One of three cities in Hillsborough County
• City built around a golf course
• Water/Sewer and Sanitation Services
• Downtown Redevelopment District

• Governmental services
• Police fire
• Streets and infrastructure
• Library
• Recreation
• Planning zoning
• Code Enforcement
• Finance and Administration

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Temple Terrace Demographics

• Incorporated 1925
• Council-Manager
• Utility customers 11,600

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Temple Terrace Finances

• Finance Director reports to City Manager
• Budget - 52 million
• 5-year capital improvement plan - 32 million
• Investment portfolio - 20 million

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Investment PortfolioNovember 2007
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Investment Portfolio November 2008
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Investment Portfolio Another Option
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Introduction

• What is your portfolio?
• Where does the money come from?
• Who is responsible?

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Statutory Guidance

• Florida law
• Florida Statutes 218.415 and 280
• Allowable securities
• Security maturity
• Credit quality
• Bank deposits
• FDIC insurance
• Collateralization

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Investment Policy Roadmap

• Investment Policy Basics
• State/local laws
• Scope
• Risks
• Objectives
• Standards of Care
• Investment Committee

• Financial Institutions
• Safekeeping
• Internal controls
• Investment instruments
• Investment limitations
• Reporting
• Policy approval

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Investment Policy Basics

• GFOA guidance
• Goals safety, liquidity, yield
• Implementing portfolio management policy
• Evaluate credit risk
• Structure maturities based on cash flow
• Identify portfolio segmentation
• Liquidity - money market, pooled investments
• Enhanced cash - 90 days to 18 months
• Reserves - longer term 18 months to 5 years

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Investment Policy Basics

• Get samples from other organizations
• Internet
• Colleagues
• FGFOA web site
• GFOA sample investment policy

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Policy Model

• Government Finance Officers Association
• [phone] www.gfoa.org
• Search for Sample Investment Policy
• Association of Public Treasurers
• [phone] www.aptusc.org
• Apply for policy certification for 200
• Within application see Model Investment
  Policy
• Florida Government Finance Officers Association
• [phone] www.fgfoa.org
• View Resources for Sample Documents
• Florida Association of County Clerks
• www.myflclerks.com
• Select Palm Beach County (mypalmbeachclerk.com
  Finance link)

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Scope of Policy

• Fund type
• General
• Revenue
• Enterprise
• Trust funds
• Exclusions
• What funds are excluded
• Debt service reserve funds?

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Objectives

• Safety of principal
• Security type
• Bank deposits
• SBA
• Liquidity
• Money market funds, SBA
• Yield
• Market influenced
• Watch credit risk

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Standards of Care

• Prudent investor rule
• 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.
• Ethics policy
• Conflicts of interest
• Delegation of authority

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Financial Institutions

• Source of security investments
• Primary dealers/regional dealers
• Capital strength, references, audited financial
  statements
• Banks
• Capital
• Assets
• Management
• Credit rating

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Investment Instruments

• List allowable investments
• Define terms
• Credit criteria (Moodys,SP)
• Maturity restrictions - may vary by fund
• Security list

• Treasuries
• Agencies
• Money market funds, SBA
• Repurchase agreements
• Securities lending

• Callable/puttable securities
• Commercial paper
• Mutual funds
• Bank deposits
• CDs

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Investment Strategy

• Diversification
• Maturity
• Credit
• Issuer
• Competitive bids for securities
• Bloomberg
• Fund type
• Strategy may differ based on purpose of fund

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Custody/Safekeeping

• Third party safekeeping/custody is essential
• Securities should be held in an acceptable
  custody/safekeeping arrangement
• Ownership of securities should be evidenced by a
  safekeeping receipt or securities should be held
  in a trust custody account

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Internal controls

• Investment officer is responsible for maintaining
  internal control structure
• Key issues
• Collusion
• Separation of activities
• Security safekeeping
• Wire transfer authority
• Transaction confirmations
• Review and monitoring

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Internal Control

• Separate record keeping and transaction
• Custodial safekeeping
• Written confirmations
• Procedures for transactions
• Criteria for selection
• Who to call
• Required forms
• Competitive bids
• Transfer funds

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Investment Committee

• Composition
• Who, how many members, terms
• Role
• Authority
• Meetings
• Monthly/quarterly
• Agenda
• Economy, investment analysis

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Cash Flow Analysis

• What is a cash budget?
• Key issues
• Early test of the operating budget
• Used to obtain projections for investment
  purposes
• Formal financial plan

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Cash Flow Analysis

• What are the tools used?
• Historical data from General Ledger
• Previous years bank statements
• Current year budget
• Capital projects spending expectations
• Summary of current investment maturities and
  coupon payments

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Cash Flow Analysis

• 2008 2009 2010 2011
• Beginning Balance 200 230 250 300
• Property Tax 150 200 250 270
• Other Revenue 10 30 50 40
• Payables/Payroll (100) (110) (120) (130)
• Capital Projects (30) (100) (100) (150)
• Debt Service (30) (50)
• Projected Net Change 30 20 50 (20)
• Projected Portfolio Balance 230 250 300
  280

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Control Credit Risk

• Evaluate and make decisions
• Develop investment policies
• Develop administrative systems and internal
  controls
• Know investments
• Credit (default risk issuer will be unable to
  redeem the investment at maturity)

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Control Credit Risk

• Compile list of pre-approved issuers
• Establish minimum credit rating
• AI/PI
• Long-term debt rating of at least A
• Limit purchases to issuers with 500 million in
  total assets
• Monitor trends in issuers financial condition
• www.fitchibca.com
• www.moodys.com
• www.standardpoors.com

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Control Interest Rate Risk

• Interest rate risk changes in financial market
  will reduce value of debt
• Interest rate risk can be minimized
• Limit investments in portfolio to rapid market
  swings
• Diversify maturities in portfolio
• Structure portfolio securities mature to meet
  cash flow requirements

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Strategy for Negative Trend

• Hold or sell
• Upper management support
• Document decision

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Control Liquidation Risk

• Liquidity risk investment cannot be sold
• Before its maturity
• Without incurring significant loss in price
• How to avoid risk?
• Restrict maturities to type of funds
• Purchase securities with an active secondary
  market
• Prepare cash flow forecast

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Details

• Have someone on staff or a good firm
• Dont be caught guessing

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Performance Measurement

• Benchmarking
• Allows a government to measure performance,
  control risk, establish accountability
• Can vary for each entity/fund
• Must be appropriate - can only be established
  after policy is developed and objectives
  identified
• Single fund may have multiple benchmarks
• Liquidity benchmarks Fed funds, 3 month T-bill
• Other benchmarks Merrill Lynch indices, Lehman
  Brothers, Citicorp, constant maturity treasuries
• 1-3 year
• 3-5 year

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Common Benchmarks for Public Funds

• SP LGIP Index
• Money market fund index
• Constant Maturity Treasury rates
• Merrill Lynch U.S. Treasury Indexes
• Salomon U.S. Treasury Benchmark Indexes
• Lehman Brothers Government Bond Indexes

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Demonstrate Benchmarks

• 2007 2008 2009 2010
• Performance
• Weighted Maturity (days)
• Amortized Cost
• Fair Value
• Benchmarks

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Where To Find Benchmarks

• Wall Street Journal
• Barrons
• Bloomberg
• Internet
• U.S. Treasury Department

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Questions
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Contact

• Diane Reichard
• Finance Director
• City of Temple Terrace
• 11250 N. 56th Street
• Temple Terrace, Florida 33617
• 813-506-6410
• dreichard_at_templeterrace.com