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HomeMy WebLinkAboutItem 06.ci Date: July 2, 2012 Item No. AMENDMENTS TO CITY OF LAKEVILLE POLICY MANUAL RELATING TO DEBT POLICY AND INVESTMENT POLICY Proposed Action Staff recommends adoption of the following motion: Move to approve Debt Policy and Investment Policy. Passage of this motion will approve Debt Policy and Investment Policy, Overview Debt Policy. A debt management policy improves the quality of decisions, provides justification for the structure of debt issuance, identifies policy goals, and demonstrates a commitment to long -term financial planning, including a multi -year capital plan. Adherence to a debt management policy signals to rating agencies and the capital markets that a government is well managed and should meet its obligations in a timely manner. Debt levels and their related annual costs are important long -term obligations that must be managed within available resources. An effective debt management policy provides guidelines for a government to manage its debt program in line with those resources. Investment Policy. The Finance Department is recommending modifications to the Investment Policy. Changes to the Policy are consistent with Government Finance Officers Association policy guidelines and City of Lakeville practices. The Finance Committee recommended City Council approval of the Debt Policy and Investment Policy, Primary Issues to Consider The credit rating agencies look favorably upon cities that have an approved debt and investment policy. Supporting Information eHer, Fi nce Director Financial Impact: - N/A budgeted: N/A Source: N/A Related Documents (CIP, ERP, etc.): Notes: LAKEVILLE, MINNESOTA Debt Policy The purpose of this policy is to establish parameters and provide guidance governing the issuance, management, continuing evaluation of and reporting on all debt obligations issued by the City of Lakeville and to provide for the preparation and implementation necessary to assure compliance and conformity with this policy. i. Debt Limits a State of Minnesota Statutes limit the legal debt obligations to 3% of the City's taxable market value for certain debt instruments. 2. Debt Management Policy a Where possible, the City will endeavor to pledge special assessments, state -aid payments, utility revenues or other non -tax revenues to debt service payments. The City will endeavor to minimize the use of property tax revenues to support debt service, except in those cases where the assets being financed have city -wide benefit. b Limiting long -term borrowing to capital improvements or other long -term projects which cannot, and appropriately should not, be financed from current revenues. c Debt will not be used to finance current operations. 3. Debt Structures Practices a The City will endeavor to keep the total maturity length of general obligation bonds equal to or less than 20 years and at least 50% of the principal shall be retired within 10 years. In all cases, the maturity shall be shorter than the useful life of the related assets. b Debt will be structured to achieve the lowest possible net cost to the City, the given market conditions, the nature of the capital project, and the revenue source pledged to the repayment. 4. Debt Issuance Practices a The City will generally market its bond issues on a competitive bid basis. However, negotiated financings may be used due to significant market volatility, the use of unusual or complex financing, credit quality issues or financings of very small or very large size. b In the event of a negotiated bond sale process, the City will seek to establish a competitive selection of financial institutions, unless the transaction's size is very small. 5. Debt Management Practices a The City will periodically review all outstanding debt to determine refunding opportunities. Refunding will be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding. Potential refunding benefits include reductions in future interest costs, restructuring debt to better fit evolving revenue sources and restructuring legal covenants. Refunding with a negative interest cost savings will not be considered unless there is a compelling public policy objective. The refunding will be considered on a case -by case basis. b The City will maintain frequent and regular communications with bond rating agencies about its financial conditions. 6. Interfund Borrowing a Interfund borrowing for periods of more than one year shall only be undertaken for capital expenditures. A reasonable payment schedule for repayment of the borrowed amounts and enforceable covenants, established to ensure recourse if the schedule is not adhered to, shall be approved by the City Council. Interest charges may be included to compensate the lending fund for the use of its financial resources. Interest charges for interfund loans, utilizing tax increment bonding will follow Minnesota Statutes Section 469.178, Subd. 7. Interfund borrowing that does not meet the criteria noted above shall not be considered as a loan in financial reports. 7. Regulatory Compliance a The issuance of municipal bonds requires compliance with federal and state laws. Of particular note are federal requirements relating to full and timely disclosure and rebate /arbitrage. b Policy Compliance Responsibility: While the Mayor and City Council have ultimate responsibility for policy compliance, professional assistance will be provided by the City's Finance Director. C Disclosure: • The City will follow requirements relating to initial and ongoing disclosure of information deemed appropriate for each of its bond issues. • The City will assign a member of its professional staff as being responsible for all disclosure compliance requirements. • The City will maintain records relating both to the initial issuance, the timing and use of proceeds and the ongoing use of financed assets so as to ensure the continuance of the tax - exempt status of its bond issues. • The City will comply with all federal rebate and arbitrage regulations. It will take steps to issue its tax exempt bonds in a manner which facilitates compliance, and where appropriate, seek eligibility for permitted safe harbor exemptions. CITY OF LAKEVILLE LAKEVILLE, MINNESOTA INVESTMENT POLICY POLICY 4.01 INVESTMENTS 1.00 PURPOSE The purpose of this Policy Statement is to establish standards governing the investment of City funds. It is the policy of the City to invest funds in a manner which provides for the following in order of importance: Safety, Liquidity, and Yield (return on investment that conforms to all federal, state and local regulations governing the investments of public funds). 2.00 Governing Authority Investments will be made in accordance with Minn. Stat. §118A governing the investment of public funds. 3.00 Scope This directive applies to all investments made by the City, irrespective of fund. 3.01 Pooling of Funds a) Except for cash in certain restricted and special funds, the City will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. b) Investment income from pooled investments will be allocated annually to the various funds based on their average monthly cash balances and in accordance with Minnesota state statutes and generally accepted accounting principles. 4.00 Objectives 4.01 Cash Management Cash management is essential to a good investment program. It is defined as the process of managing monies in order to insure maximum cash availability and maximum yield on short-term investment of pooled idle cash. The City shall maintain a comprehensive cash management program based on the following guidelines: a) Daily cash balances will be calculated based on the previous day's cash receipts, disbursements, and wire transfers and reviewed for investment opportunity. b) Investment records will be reviewed and updated daily for investment purchases, sales, or maturities. c) Investment records will be balanced to the financial records at the end of each month. 4.02 Investment Management The primary objectives, in priority order, of investment activities shall be safety, liquidity, yield, and public trust. a) Safety 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. i. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The City will minimi credit risk by: • Investing only in securities that meet the ratings requirements set by state statute. Requiring brokers /dealers to certify having agreeing to comply with the City's investment policy. ii. Concentrated Credit Risk - Diversity It is the policy of the City to diversify its investment portfolio to mitigate concentrated credit risk. Concentration of credit risk is the risk of loss that may be caused by over - concentration of investments in a specific issuer or class of securities. The City will limit exposure to concentration of credit risk by diversifying investments maturity, issuer and class of security. Diversification strategies shall be determined and revised periodically by the Finance Director. In establishing specific diversification strategies, the following general policies and constraints shall apply: • Portfolio maturities shall be staggered to avoid undue concentration of assets in a specific maturity sector. • Maturities selected shall provide for stability of income and reasonable liquidity. • Liquidity shall be assured through practices ensuring that the next disbursement date and payroll date are covered through maturing investments or marketable U.S. Treasury bills. • Positions in securities having potential default risk (e.g., commercial paper) shall be limited in size. iii. Interest Rate Risk Interest rate risk is the risk that changes in the market interest rates will adversely affect the fair value of an investment. The City will limit exposure to interest rate risk by limiting the need to sell securities on the open market prior to maturity. The maximum maturities will be as follows: • Total weighted average maturity will not exceed 5 years. • The maturity of any investment will not exceed 15 years. • Exceptions to the maximum maturities is for reserve funds established pursuant to bond indentures which may be invested to a maturity date that coincides as nearly as practicable with the expected use of the funds. b) Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the cash component of the portfolio so that securities mature concurrent with forecasted cash flow needs (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively, 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. c) Yield Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is 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 exceptions of selling a security with declining credit early to minimize loss of principal or selling a security early to meet liquidity needs. The City's investment portfolio shall be designed with the objective of regularly meeting or exceeding a performance benchmark, which could be the average return on three -month U.S. Treasury bills, the Wells Fargo Advantage Government Money Market Fund, or the average rate on Fed funds. These indices are considered benchmarks for lower risk investment transactions and therefore comprise a minimum standard for the portfolio's rate of return. The investment program shall seek to augment returns above this threshold, consistent with liquidity needs and risk limitations identified herein and prudent investment principles. d) Public Trust All participants in the City's investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction which might impair public confidence in the City's ability to govern effectively. All investments purchased by the City are expected to be held until maturity. 5.00 Standards of Care 5.01 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." 5.02 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 with whom business is conducted on behalf of the City. 5.03 Delegation of Authority Authority to manage the investment program is granted to the City's Finance Director within the legal parameters as defined by Minn. Stat. §I18A.02. Responsibility for the operation of the investment program is hereby delegated to the Finance Director, who shall act in accordance with established written procedures and internal controls for the operation of the investment program consistent with this investment policy. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 6.00 Investment Portfolio and Authorized Investments Investment activity will focus upon protection of taxpayer dollars and investment income, consistent with statutory authorization and financial prudence. The City will conduct its investment transactions with several legal competing, reputable investment security dealers and qualifying banks. The City will invest only in the following instruments or those others that may subsequently be permitted by State Statute. a. United States Treasury obligations b. Federal Agency Securities c Certificates of Deposit (C.D.'s) d. Commercial Paper C. Banker's Acceptance f. Money Market Funds g. State and local securities The City will not purchase investments that, at the time of investment, cannot be held to maturity. This does not mean that an investment cannot be sold prior to maturity. 7.00 Authorized Financial Institutions, Depositories, and Brokers/Dealers Cash management and investing activities include controlling the level of bank balances and selecting financial institutions. In accordance with Minn. Stat. §118A.02, subd. 1, the City Council will approve the depositories and security dealers. The approval will be based on a recommendation from the Finance Director who will conduct a comprehensive review of the prospective financial institutions credit characteristics and financial history and ensure the financial institutions are of the classification listed in Minn. Star. §118A.01, subd 3. Prior to completing an initial transaction with a broker, a qualified representative of the organization will certify having read, understood and agreeing to comply with the City's investment policy by providing the City a fully executed "Notification to Broker and Certification by Broker" form. Updated `Notification to Broker and Certification by Broker" forms will be required annually and whenever changes are made to the Investment Policy. Additional qualifications will be required for: 7.01 Commercial Paper and Bankers Acceptances Although authorized by Minnesota law, commercial paper and bankers acceptances carry more credit risk than instruments of the federal government or federal agencies. Because of this additional credit risk, the City of Lakeville will require: a) Commercial Paper i. Commercial Paper shall be restricted to issues, which mature in 270 days or less with a rating of A -1 (Moody's), P -1 (Standard & Poor's), or F -i (Fitch) among at least two of the three rating agencies. ii. Commercial Paper shall be purchased only from dealers who report to the Federal Reserve Bank of New York or from qualifying batiks. iii. Commercial Paper shall not be purchased unless the yield is greater than United States Treasury Obligations or Federal Agency Issues. b) Bankers Acceptances i. Bankers Acceptances shall be restricted to the top 40 banks in the United States (as measured by deposits). ii. The broker, dealer, or banker shall verify that the Bankers Acceptance is eligible for repurchase by the Federal Reserve System. iii. Bankers Acceptances should not be purchased unless the yield is greater than United States Treasury Obligations or Federal Agency Issues. 8.00 Safekeeping and Custody 8.01 Insurance or Collateral a) Custodial Credit Risk Deposits Deposit custodial credit risk is the risk of loss due to failure of the depository bank. Minn. Stat. §118A.03 minimizes deposit custodial risk by requiring all deposits in excess of federal deposit insurance (FDIC) be collateralized in the amount of 110% of the deposits. In addition, a federal statutory requirement [12 U.S.C. §1823(e)] requires a written assignment identifying the collateral be approved by the depository's board of directors or loan committee and be an official record of the depository. It is the policy of the City to require full collateralization on all demand deposit accounts, including checking accounts and non - negotiable certificates of deposit. To determine adequate coverage, the collateral shall be computed at its market value and compared to City's deposit value at the end of the banking day. The City will obtain the necessary documentation to show compliance with state law and a perfected security interest under federal law. ii. Investments Investment custodial credit risk is the risk of loss due to failure of the security dealer. The City will minimize investment custodial credit risk by permitting brokers that obtained investments for City to hold them only to the extent there is SIPC and excess SIPC coverage available. Securities purchased that exceed available SIPC coverage shall be transferred to the City's custodian. 8.02 Delivery vs. Payment All trades of marketable securities will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in an eligible financial institution prior to release of the funds. 8.03 Safekeeping Securities will be held by an independent third -party custodian selected by the City as evidenced by safekeeping receipts in the City's name or held on behalf of the City. The Trustee's records shall assure the notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. 8.04 Internal Controls The Director of Finance is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misappropriation. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. Accordingly, the Director of Finance shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures or alternatively, compliance should be assured through the City annual independent audit. The internal controls structure shall address the following points: a. Control of collusion b. Separation of transaction authority from accounting and recordkeeping c. Custodial safekeeping d. Avoidance of physical delivery securities e. Clear delegation of authority to subordinate staff members f. Written or electronic confirmation of investment transactions and wire transfers