CITY COUNCIL: Resolution Updating Financial Policies & Set a Maximum Level for each of the Reserve Funds

Meeting Date: February 5, 2013

Prepared by: Jason Stilwell

City Council

Agenda Item Summary

Name: Consideration of a Resolution updating financial policies and set a maximum level for each of the reserve funds.

Description: The City's adopted financial policies embody the values of the City, provide stability in a changing financial environment, and provide an enduring framework for financial decision making. Further, they establish City Council direction to allow staff to provide sound fiscal planning and continued management of fiscal integrity. The City's financial policies are divided into five categories: Capital Budget Policies, Operating Management, Reserve Policy, Debt Policies, and Investment Policies.

Staff Recommendation: Adopt the Resolution updating the financial policies (Attachment "A") and set a maximum level for each of the reserve funds.

Important Considerations: The goal of these policies is to promote an extended financial planning horizon to increase awareness of future potential challenges and opportunities; to set aside reserves for contingencies, replacement of capital equipment, and other similar needs; to maintain the effective buying power of fees and charges and increasing cost recovery where directed to do so; to be accountable for meeting standards for
financial management and efficiency in providing services; to plan for the capital needs of the community; to maintain manageable levels of debt while furthering quality bond ratings; and to communicate to residents and customers on how the community goals are being addressed. The proposed policy amendments have been reviewed by the City Treasurer.

Attachments:
Staff Report
Resolution
Attachment "A" --Suggested Revised Financial Policies
Original Version of the Financial Policies for comparison
Reviewed by:


Jason Stilwell, City Administrator Date

CITY OF CARMEL-BY-THE-SEA

STAFF REPORT

TO: MAYOR BURNETT AND COUNCIL MEMBERS
FROM: JASON STILWELL, CITY ADMINISTRATOR
DATE: FEBRUARY 5, 2013
SUBJECT: FINANCIAL POLICIES

RECOMMENDATION: Consider and adopt resolution updating financial policies and set maximum level for each of the reserve funds.

SUMMARY: The City has adopted financial policies approved by resolution of the City Council. The policies embody the values of the City, provide stability in a changing financial environment, and provide an enduring framework for financial decision making. A best practice is for the City Council to review and update the policies biannually.  These policies will guide the operating plan and budget development process and will be included in the Fiscal Year 2013-2014 operating plan and budget book.

DISCUSSION: The City of Carmel-by-the-Sea has strong financial policies that establish City Council direction to allow staff to provide sound fiscal planning and continued management of fiscal integrity. Financial policies are the best way to ensure the City's long-term fiscal health and enable decisions to be made based on articulated policies and values. The f inancial policies are divided into five cat egories: Capital Budget Policies, Operating Management, Reserve Policy, Debt Pol icies, and Investment Policies.

The financial policies help ensure that the City maintains a healthy f inancial foundation into the future.
The goal of these policies is to promote:
• An extended financial planning horizon to increase awareness of future potential
challenges and opportunities.
• Setting aside reserves for contingencies, replacement of capital equipment, and
other similar needs.
• Maintaining the effective buying power of fees and charges and increasing cost
recovery where directed to do so.
• Accountability for meeting standards for financial management and efficiency in
providing services.
• Planning for the capital needs of the community.
• Maintaining manageable levels of debt while furthering quality bond ratings.
• Communication to residents and customers on how the community goals are
being addressed.
Page 1
62
Recommended Policy Updates
Staff has reviewed the adopted policies and recommends certain updates as attached.
The proposed policy changes have been provided to the City Treasurer for his review.
Capital Budget Policies
The proposed changes to the Capital Budget Policies focus on further clarifying the
relationship between the capital planning process culminating in a Capital Improvement
Plan (CIP) and the budget adoption process which appropriates funding for capital
improvements. One guideline is proposed to be amended and five new guidelines are
recommended. The proposed amendment is to distinguish capital investment from
road maintenance when calculating the investment target. The five newly proposed
guidelines:
• Links funding for the road maintenance program to the pavement condition index as a
benchmark to fund road maintenance (Capital Guideline #2).
• Makes the connection between the capital policies and the capital reserve in the reserve
policies (Capital Guideline #8).
• Makes a policy statement that public participation in the Capita l Improvement Program
is a priority concern for the City (Capital Guideline #9).
• Clarifies as a pol icy statement that, as required by the California Government Code, all
projects included in the Capital Improvement Plan shall be consistent with the City's
General Plan (Capital Guideline #10).
• Stipulates the budget process for capita l projects to help assure capital projects are
completed on schedule, that the City Council remains in charge of capital project
appropriation, and that unneeded capital funding is available for reappropriation by the
City Council (Capital Guideline #11).
Operating Management Policies
The Operating Management policies guide budget operations and expected practices.
There are three clarifications and one newly proposed guideline. The most significant
clarification (in the form of a new Operating Guideline #2) is the definition of a balanced
budget. The new proposed guideline is that the City's budget documents will meet the
standards of the Government Finance Officer's Association in terms of its value as a
policy document, operating guide, communications device, and fiscal plan.
Reserve Policies
The proposed changes to the Reserve policies reflect further specifications to Reserve
Guideline #2 relating to prudent reserves for identified liabilities; in particular language
is added to specifically define prudent reserves for the liabilities of vehicle replacement,
technology, and litigation. Language has also been added clarifying the capital reserves
(Reserve Guideline #3). The new proposed capital reserve language calls for setting
aside reserves equal to 20% of the five year CIP and dedicating year end fund balances
to capital investment. A Measure D Pension Obligation Bond reserve is a new proposal;
it is designed to set aside Measure D funding for pension bond repayment in the event
Measure D revenues fail to meet ten year estimates.
Page 2
63
Debt Policies
The Debt policies have certain refinements designed to maintain the City's strong bond
rating. Two new practices are proposed: the first is a statement recognizing the
importance of avoiding conflicts of interest (Debt Guideline #5) and the second is a
proclamation that the preferred process for issuing long term financing will be on a
competitive rather than and negotiated basis of sale (Debt Guideline #6).
Investment Policies
The Investment policies reflect certain updates to provide further protection of the
City's portfolio investments while providing investment flexibility. The proposed
language is designed to enhance safety and control in making our own investments
according to the requirements outlined in the policy while avoiding those investments
specifically prohibited. The policy changes reiterate the City's investment goals of
security, liquidity, and yield. A conflict of interest statement has been added to the
Investment policy. Internal control procedures are clarified and outlined. The
authorized investments remain conservative and provide additional investment options.
Bills of exchange, high grade commercial paper, repurchase agreements, reverse
repurchase agreements, and corporate notes are provided as additional investment
options with included constraints and limitations. Ineligible investments are explicitly
defined.
Review of Current Policies and Estimates and Setting Reserve Limits
The chart below identifies the status of the City's policies. As could be expected after
the recent difficult budget years, a number of the reserves are below established policy
targets.
• Actual capital investment is lower than established policy by nearly $800,000.
• The Fiscal Year 2012-2013 budget diverged from Operating Management
policies. The largest impact is that the budget is balanced without the stipulated
revenue buffer.
• The reserves remain strong relative to policy targets even after the difficult
economic context recently experienced. Reserve Guideline #6 calls for
establishing maximum levels of reserves. Recommended maximum levels of the
select reserves are listed on the chart below. Reserve balances meet these limits
for all but two of the select reserves. The OPEB liability is estimated to be higher
than current OPEB reserve balances. Conversely the unassigned General Fund
reserve exceeds the proposed maximum by approximately one-million dollars.
• The City remains under its debt limits. The estimate includes the issuance of the
recent pension obligation bonds.
• Investment limits are being met. At this point the City's investment pool is split
between LAIF and certificates of deposit. The certificates of deposit are below
the prescribed 30% of investments and below the 15% single issuer cost
valuation limits.
Page 3
64
Current Policies and Estimates
FY 12-13 Budget Policy Target Difference actual to policy
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Capital
Non-road & lease expenditures
3.5% of revenue
Road maintenance
Operating
5% Revenue Buffer
Half-percent Discretionary
3% Capital Outlay
Reserves
10% General Fund Reserve
10% Hostelry Reserve
Vehicle Replacement
Technology Reserve
Litigation Reserve
Capital Reserve
POB Reserve
--other maximum levels--
Debt Service
Benefit Liability
Debt Reductions
Workers' Comp
Natural Disaster
OPEB Liability
General unassigned
Debt
Indebtedness less than 15% A.V
8.25% of total expenditures
Investment
LAIF
30% Certificate of Deposits
15% Cost value limitation
TVI
WFB
Attachments:
Resolution
Financial Policies
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
288,859 $ 502,642
305,600 $ 890,000
- $ 670,218
20,000 $ 66,864
301,077 $ 430,836
1,416,165 $ 1,340,437
250,000 $ 446,300
150,000 $ 194,500
- $ 161,000
200,000 $ 350,000
1,742,364 $ 1,723,659
- $ 70,000
401,532 $ 400,000
344,292 $ 350,000
715,900 $ 720,000
192,000 $ 200,000
250,000 $ 250,000
1,084,249 $ 1,500,000
1,545,133 $ 500,000
- 440,871,917
992,253 1,181,404
5,996,964 n/a
1,993,183 2,397,044
993,183 1,198,522
1,000,000 1,198,522
Financial Policies indicating changes from current policy
Page 4
% $
57% (213,783)
34% (584,400)
0% (670,218)
30% (46,864)
70% (129,759)
106% 75,728
56% {196,300)
77% (44,500)
0% (161,000)
57% (150,000)
101% 18,705
0% (70,000)
100% 1,532
98% (5,708)
99% (4,100)
96% (8,000)
100% -
72% (415,751)
309% 1,045,133
0.00% (440,871,917)
84% {189,151)
83% (403,861)
83% (205,339)
83% (198,522)
65
CITY COUNCIL
CITY OF CARMEL-BY-THE-SEA
RESOLUTION 2013-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARMEL-BY THE-SEA UPDATING THE CITY'S FINANCIAL POLICIES
WHEREAS, the City Council has adopted financial policies which embody the values of
the City, provide stability in a changing financial environment, and provide an enduring
framework for financial decision making; and
WHEREAS, these policies should be reviewed and updated on a biannual basis; and
WHEREAS, the City's financial policies are divided into five categories: Capital Budget
Policies; Operating Management; Reserve Policy; Debt Policies; and Investment Policies, each
of which ensures that the City maintains a healthy financial foundation into the future.
NOW, THEREFORE, BE IT RESOLVED, THAT THE CITY COUNCIL OF THE
CITY OF CARMEL-BY-THE SEA DOES:
1. Adopt the financial policies as outlined in Attachment "A".
PAS SED AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF CARMELBY-
THE-SEA on this 5th day of February 2013 by the following roll call vote:
AYES: COUNCIL MEMBERS:
NOES: COUNCIL MEMBERS:
ABSENT: COUNCIL MEMBERS:
SIGNED:
JASON BURNETT, MAYOR
ATTEST:
Heidi Burch, City Clerk
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Attachment "A"
The City of Carmel-by-the-Sea has strong financial policies that provide City Council direction
to allow staff to provide sound fiscal planning and continued management of fiscal integrity. The
financial policies are divided into five categories: Capital Budget Policies, Operating
Management, Reserve Policy, Debt Policies, and Investment Policies. The City has financial
policies that are adopted by the City Council with review every two years during the budget
development process. The financial policies help ensure that the City maintains a healthy
financial foundation into the future.
The goal of these policies is to promote:
• An extended financial planning horizon to increase awareness of future potential
challenges and opportunities.
• Setting aside reserves for contingencies, replacement of capital equipment, and other
similar needs.
• Maintaining the effective buying power of fees and charges and increasing cost recovery
where directed to do so.
• Accountability for meeting standards for financial management and efficiency in
providing services.
• Planning for the capital needs of the City.
• Maintaining manageable levels of debt while furthering quality bond ratings.
• Communication to residents and customers on how the community goals are being
addressed.
CAPITAL BUDGET POLICIES
The City develops an annual five-year plan for capital improvements; it includes project design,
development, implementation, and operating and maintenance costs. Each project in the Capital
Improvement Plan (CIP) shows the estimated capital and on-going maintenance costs, known
and potential funding sources, and a design and development schedule. As used in the CIP,
projects include land acquisition, buildings and facilities construction; these projects do not have
a cost threshold. A capital outlay (fixed asset) purchase is any single item or piece of equipment
that costs more than $10,000 and has an expected useful life exceeding one year. The
development of the capital improvement plan is coordinated with the development of the
operating budget. The CIP is a planning document; the City Council appropriates funding for
capital projects in the annual operating budget. Costs for professional services needed to
implement the CIP are to be included in the appropriate year's operating budget.
Annual operating budgets should provide adequate funds for maintenance of the City's buildings
and maintenance and replacement of the City's capital equipment. The City will make all capital
improvements in accordance with an adopted and funded capital improvement program. Prior to
ratification of the capital budget for the forthcoming year by the City Council, the Planning
Commission shall review the capital improvement plan and shall advise the City Council as to its
recommendations regarding the proposed capital projects in accordance with the Government
Code.
67
Capital (Policy No. C94-0l)
Capital expenditures shall be effectively planned and controlled.
Guidelines:
1. The level of capital improvement expenditures, excluding road maintenance program
expenditures and lease payments, is established at three and one-half percent (3.5%) of
total revenues.
2. Funding for the road maintenance program should improve the pavement condition
index.
3. The City shall maintain a Five-Year Capital Improvement Program (CIP), which shall be
updated at least annually as part of the budget review process.
4. The City shall annually establish a phasing calendar for capital improvement
expenditures.
5. At least ten percent (10%) of the unrestricted funds designated for capital project
expenditures shall be set aside for unanticipated expenditures.
6. The City shall conduct periodic reviews of property and facilities to determine the
appropriate use and disposition of said property and facilities.
7. The City shall consider the ongoing impact of operations and maintenance expenses
before undertaking any capital improvement expenditure.
8. The City shall maintain a capital reserve policy as described in the Reserve Policy.
9. Public participation in the Capital Improvement Program is a priority concern for the
City.
10. All projects included in the Capital Improvement Plan shall be consistent with the City's
General Plan.
11. Capital projects that are not encumbered or completed during the fiscal year are required
to be rebudgeted to the next fiscal year and subsequently approved by the City Council.
All rebudgeted capital projects should be so noted in the proposed budget.
OPERATING MANAGEMENT (Policy No. C94-0l)
Operating revenues shall exceed operating expenditures.
Guidelines:
1. The annual operating budget shall contain a current surplus (or "revenue buffer") of at
least five percent (5%) of projected expenditures.
2. A balanced budget is a budget in which total sources meet or exceed uses.
3. An appropriated City Discretionary Account of at least one-half of one percent (0.5%) of
total projected General Fund expenditures shall be maintained.
4. Ongoing expenses shall not be funded with one-time revenues.
5. The City shall establish internal service funds for the repair, operation, and replacement
of rolling stock and data processing equipment.
6. The level of capital outlay expenditures is established at three percent (3%) of total
revenues.
7. The City shall annually establish a phasing calendar for capital outlay expenditures.
8. The City shall develop a five-year forecast of operating revenue and expenditures.
9. The City shall establish salary adjustments in conjunction with the budget process.
10. The City shall review the relationship between fees/charges and the cost of providing
services at least every three years.
11. The City's fees and charges for services shall be adjusted annually, based upon the San
Francisco-Oakland Consumer Price Index.
68
12. The City will seek to comply with suggested c1iteria of the Government Finance Officers
Association in producing a budget document that meets the Distinguished Budget
Presentation criteria.
RESERVE POLICY (Policy No. C94-0l)
The Reserve Policy is designed to develop standards for setting reserve levels for various,
significant City funds. Adequate fund balance and reserve levels are a necessary component of
the City's overall financial management strategy and a key factor in external agencies '
measurement of the City's financial strength. The City shall maintain reserves at a prudent level,
and shall use reserves appropriately.
Guidelines:
1. General Fund and Hostelry Fund reserves shall be maintained at no less than ten percent
(10%) of their annual projected revenues.
2. The City shall maintain prudent reserves for identified liabilities
• A Vehicle Replacement reserve will be maintained sufficient to replace vehicles
and heavy equipment at the end of their useful lives with the target being 1 0% of
the total City fleet replacement value.
• Technology equipment replacement reserves will be maintained sufficient to
repair covered equipment and for replacement at the end of its useful life.
• A litigation reserve will be maintained to cover potential liability for tort claims
or other litigation settlements. The target reserve balance is based on all the
known claims against the City and those claims that might have occurred, but are
not yet reported. The reserve balance shall be appropriated on an annual basis for
immediate access as authorized.
3. A general capital reserve fund will be maintained with a targeted balance of 20% of the
total five-year capital improvement plan project expenditure estimate. When available the
annual General Fund operating surplus will be dedicated to the general capital reserve. In
addition, net proceeds from the sale of City owned property will be dedicated to the
general capital reserve. Funds in the general capital reserve will be allocated through the
budget process for capital projects.
4. Reserves shall be used only for established purposes.
5. Depleted reserves shall be restored as soon as possible.
6. A maximum level for each of the reserve funds shall be established.
7. The City shall maintain reserves required by law, ordinance and/or bond covenants.
8. The City will maintain a pension obligation bond repayment reserve funded from
Measure D proceeds in an amount of $70,000 annually contributed to the reserve.
DEBT POLICIES
The City considers the use of debt financing for one-time capital improvements that benefit the
residents of Carmel-by-the-Sea when the term of the financing is no longer than the project life,
and when specific resources are found to be sufficient to provide for the debt. Use of long-term
debt is limited to capital projects or special projects or obligations that cannot be financed from
current revenues. The City has traditionally kept annual debt service payments to less than 5%
of the budget.
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Use of Long-Term Debt Policy
The City recognizes that it may need to enter into long-term financial obligations to meet the
demands of providing a high quality level of government services to our community. The
following long-term debt policy sets the considerations for issuing debt and provides guidance in
the timing and structuring of long-term debt commitments by the City.
General Practices:
1. The City will strive to maintain good relations with credit rating agencies, investors of
the City's long-term financial obligations and those in the financial community that
participate in the City's financings and demonstrate City officials are following a
prescribed financial plan. The City also will strive to maintain and, if possible, improve
its current AA- bond rating in order to minimize borrowing costs and preserve access to
credit. The City will follow a policy of full disclosure by communicating with bond
rating agencies to inform them of the City's financial condition.
2. Bond issue proposals are to be accompanied by an analysis defining how the new issue,
combined with current debt, impacts the City's debt capacity and conformance with City
debt policies. Such analysis shall include identification of the funding source, an
assessment of the ability to repay the obligation, the impact on the current budget,
commitments to future budgets, maintenance and operational impact of the facility or
asset and the impact on the City's credit rating, if any.
3. City Council must review such analysis, including existing debt level, ability to pay debt
service, impact on City services, and make a finding that use of debt is appropriate.
4. Debt service costs (COP, Lease Purchase Agreements and other contractual debt that are
backed by General Fund Operating Revenues) are not to exceed 25% of the City's
General Fund operating revenues.
5. The City recognizes that it is of the utmost importance that elected and appointed City
officials, and all others associated with the issuance of City debt, not only avoid the
reality of a conflict of interest, but the appearance thereof as well. City officials must
conduct themselves in a fashion consistent with the best interests of the City and
taxpayers.
6. Bonds will be sold on a competitive basis unless it is in the best interest of the City to
conduct a negotiated sale. Competitive sales will be the preferred method. Negotiated
sales may occur when selling bonds for a defeasance of existing debt, for current or
advanced refunding of debt, or for other appropriate reasons.
The City will consider the issuance of long-term obligations under the following conditions:
1. The City will use debt financing for one-time capital improvement projects and specific
nonrecurring equipment purchases or refunding of existing liabilities, and only under the
following circumstances:
a. When the project is included in the City's adopted five-year capital improvement
program (CIP) and is in conformance with the City's adopted General Plan.
b. When the project is not included in the City's adopted five-year capital
improvement program (CIP), but the project is an emerging critical need whose
timing was not anticipated in the five-year capital improvement program, or it is a
project mandated by State or Federal requirements.
c. When the project's useful life, or the projected service life of the equipment, will
be equal to or exceed the term of the financing.
70
d. When there are designated General Fund revenues sufficient to service the debt,
whether from project revenues, other specified and/or reserved resources, or
infrastructure cost-sharing revenues.
e. Debt fmancing (other than tax and revenue anticipation notes) is not considered
appropriate for any recurring purpose such as current operating and maintenance
expenditures.
2. The City will follow all State and Federal regulations and requirements related to bonds
and debt financing instruments regarding bond provisions, issuance, taxation and
disclosure.
3. Costs incurred by the City, such as bond counsel and financial advisor fees, printing,
underwriter's discount, and project design and construction costs, will be charged to the
bond issue to the extent allowable by law.
4. The City will monitor compliance with bond covenants and adhere to federal arbitrage
and disclosure regulations.
5. The City shall continually review outstanding obligations for opportunities to achieve
debt service savings through refunding and shall pursue refmancing when economically
feasible and advantageous.
Debt Limit
The City will keep outstanding debt within the limits prescribed by State of California statutes
and at levels consistent with credit objectives. California Government Code provides that "a city
may incur indebtedness for any municipal improvement requiring an expenditure greater than the
amount allowed for it by the annual tax levy" ( 43602). A "city shall not incur an indebtedness
for public improvements which exceeds in the aggregate 15 percent of the assessed value of all
real and personal property of the city. Within the meaning of this section "indebtedness" means
bonded indebtedness of the city payable from the proceeds of taxes levied upon taxable property
in the city" (43605). The limit is relative to the principal amount of bonds sold and delivered
(43606). The City of Carmel-by-the-Sea, Policy No C94-01 establishes "the City's debt shall
not exceed predetermined levels." The guideline in that policy is that "the City's debt service
level shall not exceed eight and one-fourth percent (8.25%) of total expenditures.
INVESTMENT POLICIES
Municipal moneys not required for immediate expenditure will be invested. The City will
maintain adequate cash availability and maximum yield on invested idle funds while insuring
that invested moneys are protected. The Carmel Municipal Code requires the City Administrator
to prepare investment policies and guidelines for adoption by the City Council. The adopted
investment policy follows.
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INVESTMENT POLICY AND GUIDELINES
C89-27
In accordance with the Municipal Code of the City of Carmel-by-the-Sea and under authority
granted by the City Council, the City Treasurer is responsible for investing the unexpended cash
in the City Treasury.
The investment of the City of Carmel-by-the-Sea funds is directed to the goals of safety, liquidity
and yield, in that order. The authority governing investments for municipal government is set
forth in the California Government Code, Sections 53601 through 53659.
The primary objective of the investment policy of the City of Carmel-by-the-Sea is SAFETY OF
PRINCIPAL. Investments shall be placed in those securities as outlined by type and maturity
sector in this document. Effective cash flow management and resulting cash investment
practices are recognized as essential to good fiscal management and control. The City's
portfolio shall be designed and managed in a manner responsive to the public trust and consistent
with state and local law. Portfolio management requires continual analysis and as a result the
balance between the various investments and maturities may change in order to give the City of
Carmel-by-the-Sea the optimum combination of necessary liquidity and optimal yield based on
cash flow projections.
The investment policy applies to all financial assets of the City of Carmel-by-the-Sea as
accounted for in the Annual Financial Report. Policy statements outlined in this document focus
on the City of Carmel-by-the-Sea's pooled funds, but will also apply to all funds under the City
Treasurer's control unless specifically exempted by statute or ordinance.
Prudence
The standard to be used by investment officials shall be that of a "prudent person" and shall be
applied in the context of managing all aspects of the overall portfolio. Investments shall be made
with judgment and care, under circumstances then prevailing, which persons of prudence,
direction 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.
It is the City's full intent, at the time of purchase, to hold all investments until maturity to insure
the return of all invested principal dollars.
Safety of principal is the foremost objective of the City. Each investment transaction shall seek
to ensure that capital losses are avoided, whether from securities default, broker-dealer default,
or from erosion of the market value.
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Liquidity
Historical cash flow trends are compared to current cash flow requirements on an ongoing basis
in an effort to ensure that the City's investment portfolio will remain sufficiently liquid to enable
the City to meet all reasonably anticipated operating requirements.
Yield
The investment portfolio should be designed to attain a market average rate of return through
budgetary and economic cycles, consistent with the risk limitations, prudent investment
principles and cash flow characteristics identified within the financial statements.
Performance Evaluation
Investment performance is continually monitored and evaluated by the City Treasurer.
Investment performance statistics and activity reports are generated on a monthly basis for
presentation to the City Administrator and City Council.
Delegation o(Authoritv
For short-term investments, the Administrative Services Director has authority to make transfers
to and from the City's Local Agency Investment Funds (LAIF) account in order to maximize
interest earned. The transfers are made from the City's general checking account to the LAJF
account, with a minimum balance maintained in the general checking account to meet daily cash
requirements.
The City Treasurer is responsible for investment of all unexpended City funds as per California
Government Code section 41000 et seq. The City Treasurer makes long-term investments after
review and approval by the Administrative Services Director and the City Administrator.
Ethics and Conflict o(lnterest
Officers and employees involved in the investment process shall refrain from personal business
activity that conflicts with the proper execution of the investment program, or impairs their
ability to make impartial investment decisions. Additionally, the City Treasurer and the members
of the investment committee are required to annually file applicable financial disclosures as
required by the Fair Political Practices Commission (FPPC).
Safekeeping o(Securities
To protect against fraud, embezzlement, or losses caused by a collapse of an individual securities
dealer, all securities owned by the City shall be held in safekeeping by a third party bank trust
department, acting as an agent of the city under the terms of a custody agreement or PSA
agreement (repurchase agreement collateral). All trades executed by a dealer will settle Delivery
vs. Payment (DVP) through the City's safekeeping agent. Securities held in custody for the City
shall be independently audited on an annual basis to verify investment holdings.
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All exceptions to this safekeeping policy must be approved by the City Treasurer in written form
and included in quarterly reporting to the City Council.
Internal Control
Separation of functions between the City Treasurer's Office and the Administrative Services
Department would be an ideal situation. Time and necessity, however, dictate a different
approach. Due to the lack of personnel dedicated to the investment function alone, a proper
balance must be maintained between Treasury activities and Administrative Services Department
functions. The City Treasurer will make the appropriate arrangements to buy and sell securities,
which are deemed permissible by the Laws of the State of California as time permits. The
Administrative Services Director and/or City Administrator will have the power as granted under
the section titled Delegation of Authority in the absence of the City Treasurer. The
Administrative Services Director will have the authority to enter into agreements on securities so
long as written policies set by the City Treasurer and State Legislature are followed.
The investment portfolio and all related transactions are reviewed and balanced to appropriate
general ledger accounts by the Administrative Services Director on a monthly basis._An
independent analysis by an external auditor shall be conducted annually to review internal
control, account activity, and compliance with government policies and procedures.
Reporting
The City Treasurer shall review and render monthly rep01ts to the City Administrator and the
City Council which shall include the face amount of the cash investment, the classification of the
investment, the name of the institution or entity, the rate of interest, the maturity date, and the
current market value and accrued interest to date due for all securities.
Qualified Broker/Dealers
The City shall transact business only with banks and broker/dealers that are properly licensed
and in good standing. The Administrative Services Director and the City Treasurer shall
investigate dealers who wish to do business with the City to determine if they are adequately
capitalized and if they market securities appropriate to the City's needs.
The City Treasurer shall annually send a copy of the current investment policy to all
broker/dealers approved to do business with the City. Confirmation of receipt of the City's
policy by the broker/dealer shall be considered evidence that the broker/dealer understands the
City's investment policies and intends to sell the City only appropriate investments authorized by
this investment policy.
Collateral Requirements
Collateral is required for investments in certificates of deposit. In order to reduce market risk,
the collateral level will be at least 11 0% of market value of principal and accrued interest.
In order to conform with the provisions of the Federal Bankruptcy Code which provides for
liquidation of securities held as collateral, the only securities acceptable as collateral shall be
certificates of deposit, commercial paper, eligible banker's acceptances, medium term notes or
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securities that are the direct obligations of, or are fully guaranteed as to principal and interest by,
the United States or any agency of the United States.
Authorized Investments
Investment of City funds is governed by the California Government Code Sections 53600 et seq.
Within the context of the limitations, the following investments are authorized as further limited
herein:
1) United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit
of the United States are pledged for payment of principal and interest. There is no
percentage limitation of the portfolio which can be invested in this category, although a
five-year maturity limitation is applicable.
2) United States agency bonds or obligations issued by the Government National Mortgage
Association (GNMA), the Federal Farm Credit Bank (FFCB), the Federal Home Loan
Bank (FHLB), the Federal National Mortgage Association (FNMA), the Student Loan
Marketing Association (SLMA), and the Federal Home Loan Mortgage Company
(FHLMC). There is no percentage limitation of the portfolio which can be invested in
this category, although a five-year maturity limitation is applicable.
3) Local Agency Investment Fund (LAIF) which is a State of California managed
investment pool may be used up to the maximum permitted by the California State Law.
LAIF is a demand account so no maturity limitation is required.
Investments detailed in items 4 through 10 are further restricted to percentage of the cost value of
the portfolio in any one-issuer name to a maximum percentage of 15%. The total value invested
in any one issuer shall not exceed 5% of the issuer's net worth. Again, a five-year maximum
maturity is applicable unless further restricted by this policy.
4) Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise
known as bankers acceptances. Bankers acceptances purchased may not exceed 270 days
to maturity or 40% of the cost value of the portfolio.
5) Commercial paper rated P1 by Moody's Investor Services, A1 by Standard and Poor's or
Fl by Fitch, and issued by domestic corporations having assets in excess of
$500,000,000.00 and having an AA or better rating on its long term debentures as
provided by Moody's or Standard and Poor's. Purchases of eligible commercial paper
may not exceed 180 days to maturity nor represent more than 10% of the outstanding
paper of the issuing corporation. Purchases of commercial paper may not exceed 15% of
the cost value of the portfolio.
6) Negotiable certificates of deposit issued by nationally or state chartered bank or state or
federal savings institutions. Negotiable certificates of deposit shall be rated in a category
of "A" or its equivalent or better by two Nationally Recognized Statistical Rating
Organizations. Purchases of negotiable certificates of deposit may not exceed 30% of the
total portfolio. A maturity limitation of five years is applicable.
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7) Repurchase agreements, which specify terms and conditions, may be transacted with
banks and broker dealers. The maturity of repurchase agreements shall not exceed 90
days. The market value of the securities used as collateral for the repurchase agreements
shall be monitored by the investment staff and shall not be allowed to fall below 102% of
the value of the repurchase agreement. A Public Securities Agreement Master
Repurchase Agreement is required between the City of Carmel-by-the-Sea and the broker
dealer or financial institution for all repurchase agreements transacted.
8) Reverse repurchase agreements which specify terms and conditions may be transacted
with broker dealers and financial institutions but cannot exceed 20% of the portfolio
value on the date entered into. The City may enter into a reverse repurchase agreement
only to fund short term liquidity needs. The term of reverse repurchase agreements may
not exceed 90 days.
9) Time deposits, non-negotiable and collateralized in accordance with the California
Government Code, may be purchased through banks or savings and loan associations.
Since time deposits are not liquid, no more that 25% of the investment portfolio may be
invested in this type of investment.
1 0) Medium Term Corporate Notes, with a maximum maturity of five years may be
purchased. Secmities eligible for investment shall be rated A or higher by Moody's or
Standard and Poor's rating services. Purchase of medium term notes may not exceed 30%
of the market value of the portfolio and not more than 15% of the market value may be
invested in notes issued by one corporation. Commercial paper holdings should also be
included when calculating the 15% limitation.
Ineligible investments are those that are not described herein, including, but not limited to:
common stocks and long term (over five years maturity) notes and bonds are prohibited from use
in this portfolio unless specifically allowed both by state law and City Council approval. It is
noted that special circumstances may arise where these methods of investment may become
necessary. When this becomes necessary, the City Council will be asked to take the appropriate
action to ratify the means of investment necessary, provided that it is allowable by California
Code.
Legislative Changes
Any State of California legislative actions that further restrict allowable maturities, investment
type, or percentage allocations will supersede any of the material presented herein. In this case,
the applicable law will become pa11 and parcel of this investment policy.
Interest Earnings
All moneys earned and collected from investments authorized in this policy shall be allocated
monthly to the General Fund and various special funds of the City which legally require interest
proration or when City Council action dictates such proration. This distribution will be based on
the cash balance in the fund as a percentage of the entire pooled portfolio.
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Policy Review
The City of Carmel-by-the-Sea's investment policy shall be approved by resolution of the City
Council. This investment policy shall be reviewed at least annually to ensure its consistency
with the overall objectives of preservation of principal, liquidity and yield, and its relevance to
current law and financial and economic trends. Any amendments to the policy, other than State
and Federal laws, which automatically supersede the relevant sections, shall be forwarded to the
City Council for approval by resolution.
Original Version for Comparison
The City of Carmel-by-the-Sea has strong fFinancial pManagement Policies that provide City
Council direction to allow staff to provide sound fiscal planning and continued management of
fiscal integrity. The financial policies are divided into five categories: Capital Budget Policies,
Operating Management, Reserve Policy, Debt Policies, and Investment Policies. The City has
fFinancial pManagement Policies that are adopted by the City Council with review every two
years during the budget development process. The Ffinancial Management Ppolicies help
ensure that the City maintains a healthy financial foundation into the future.
The goal of these policies is to promote:
• An extended financial planning horizon to increase awareness of future potential
challenges and opportunities.
• Setting aside reserves for contingencies, replacement of capital equipment, and other
similar needs.
• Maintaining the effective buying power of fees and charges and increasing cost recovery
where directed to do so.
• Accountability for meeting standards for financial management and efficiency in
providing services.
• Planning for the capital needs of the community.
• Maintaining manageable levels of debt while furthering quality bond ratings.
• Communication to residents and customers on how the community goals are being
addressed.
CAPITAL BUDGET POLICIES
The City develops an annual five-year plan for capital improvements; it includes project design,
development, implementation, and operating and maintenance costs. Each project in the
Capital Improvement Plan (CIP) shows the estimated capital and on-going maintenance costs,
known and potential funding sources, and a design and development schedule. As used in the
CIP, projects include land acquisition, buildings and facilities construction; these projects do not
have a cost threshold. A capital outlay (fixed asset) purchase is any single item or piece of
equipment that costs more than $10,000 and has an expected useful life exceeding one year.
The development of the capital improvement pbudget lan is coordinated with the development
of the operating budget. The CIP is a planning document; the City Council appropriates funding
for capital projects in the annual operating budget. Costs for professional services needed to
implement the CIP are to be included in the appropriate year’s operating budget.
Annual operating budgets should provide adequate funds for maintenance of the City’s
buildings and maintenance and replacement of the City’s capital equipment. The City will make
all capital improvements in accordance with an adopted and funded capital improvement
program. Prior to ratification of the capital budget for the forthcoming year by the City Council,
the Planning Commission shall review the capital improvement plans contained within the
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proposed budget and shall advise the City Council as to its recommendations regarding the
proposed capital projects in accordance with the Government Code.
Capital (Policy No. C94-01)
Capital expenditures shall be effectively planned and controlled.
Guidelines:
1. The level of capital improvement expenditures, excluding road maintenance program
expenditures and lease payments, is established at three and one-half percent (3.5%) of
total revenues.
2. Funding for the road maintenance program should improve the pavement condition
index.
3. The City shall maintain a Five-Year Capital Improvement Program (CIP), which shall be
updated at least annually as part of the budget review process.
4. The City shall annually establish a phasing calendar for capital improvement
expenditures.
5. At least ten percent (10%) of the unrestricted funds designated for capital project
expenditures shall be set aside for unanticipated expenditures.
6. The City shall conduct periodic reviews of property and facilities to determine the
appropriate use and disposition of said property and facilities.
7. The City shall consider the ongoing impact of operations and maintenance expenses
before undertaking any capital improvement expenditure.
8. The City shall maintain a capital reserve policy as described in the Reserve Policy.
9. Public participation in the Capital Improvement Program is a priority concern for the
City.
10. All projects included in the Capital Improvement Plan shall be consistent with the City’s
General Plan.
8.11. Capital projects which are not encumbered or completed during the fiscal year
are required to be rebudgeted to the next fiscal year and subsequently approved by the
City Council. All rebudgeted capital projects should be so noted in the proposed budget.
FINANCIAL POLICIES
The City recognizes that its primary revenue sources are locally generated, especially TOT and
sales tax revenue, and for the most part this revenue is largely generated by non-residents.
Efforts to ensure continued reliability in these revenue sources need to be maintained and with
additional efforts to develop and diversify other revenue sources as applicable. The City
actively practices monitoring, auditing and collecting all locally generated taxes.
The City shall maintain a General Fund balance equivalent to at least 10 percent of the General
Fund budget in each fiscal year.
The City Council shall appropriate sufficient funds annually in the budget process to provide for
an annual audit of the City’s previous fiscal year finances.
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OPERATING MANAGEMENTONS (Policy No. C94-01)
Operating revenues shall exceed operating expenditures.
Guidelines:
1. The annual operating budget shall contain a current surplus (or “revenue buffer”) of at
least five percent (5%) of projected expenditures.
2. A balanced budget is a budget in which total sources meet or exceed uses.
3. An appropriated City Discretionary Account of at least one-half of one percent (0.5%) of
total projected General Fund expenditures shall be maintained.
4. Ongoing expenses shall not be funded with one-time revenues.
5. The City shall establish internal service funds for the repair, operation, and replacement
of rolling stock and data processing equipment.
6. The level of capital outlay expenditures is established at three percent (3%) of total
revenues.
7. The City shall annually establish a phasing calendar for capital outlay expenditures.
8. The City shall develop a five-year forecast of operating revenue and expenditures.
9. The City shall establish salary adjustments in conjunction with the budget process.
10. The City shall review the relationship between fees/charges and the cost of providing
services at least every three years.
11. The City’s fees and charges for services shall be adjusted annually, based upon the San
Francisco-Oakland Consumer Price Index.
12. The City will seek to comply with suggested criteria of the Government Finance Officer’s
Association in producing a budget document that meets the Distinguished Budget
Presentation criteria.
RESERVES POLICY (Policy No. C94-01)
The Reserve Policy is designed to develop standards for setting reserve levels for various,
significant City funds. Adequate fund balance and reserve levels are a necessary component of
the City’s overall financial management strategy and a key factor in external agencies’
measurement of the City’s financial strength. The City shall maintain reserves at a prudent
level, and shall use reserves appropriately.
Guidelines:
1. General Fund and Hostelry Fund reserves shall be maintained at no less than ten
percent (10%) of their annual projected revenues.
2. The City shall maintain prudent reserves for identified liabilities
• A Vehicle Replacement reserve will be maintained sufficient to replace vehicles
and heavy equipment at the end of their useful lives with the target being 10%
of the total City fleet replacement value.
• Technology equipment replacement reserves will be maintained sufficient to
repair covered equipment and for replacement at the end of its useful life.
• A litigation reserve will be maintained to cover potential liability for tort claims
or other litigation settlements. The target reserve balance is based on all the
known claims against the City and those claims that might have occurred, but are
not yet reported. The reserve balance shall be appropriated on an annual basis
for immediate access as authorized. .
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3. A general capital reserve fund will be maintained with a targeted balance of 20% of the
total five-year capital improvement plan project expenditure estimate. When available
the annual General Fund operating surplus will be dedicated to the general capital
reserve. In addition, net proceeds from the sale of City owned property will be
dedicated to the general capital reserve. Funds in the general capital reserve will be
allocated through the budget process for capital projects.
2.4. Reserves shall be used only for established purposes.
3.5. Depleted reserves shall be restored as soon as possible.
4. A maximum level for each of the reserve funds shall be established.
6.
5.
7. The City shall maintain reserves required by law, ordinance and/or bond covenants.
8. The City will maintain a pension obligation bond repayment reserve funded from
Measure D proceeds in an amount of $70,000 annually contributed to the reserve.
DEBT POLICIES
The City considers the use of debt financing for one-time capital improvements which benefit
the residents of Carmel-by-the-Sea when the term of the financing is no longer than the project
life, and when specific resources are found to be sufficient to provide for the debt. Use of
long-term debt is limited to capital projects or special projects or obligations that cannot be
financed from current revenues. The City has traditionally kept annual debt service payments
to less than 5% of the budget.
Use of Long-Term Debt Policy
The City recognizes that it may need to enter into long-term financial obligations to meet the
demands of providing a high quality level of government services to our community. The
following long-term debt policy sets the considerations for issuing debt and provides guidance
in the timing and structuring of long-term debt commitments by the City.
General Practices:
1. The City will strive to maintain good relations with credit rating agencies, investors of
the City’s long-term financial obligations and those in the financial community that
participate in the City’s financings and demonstrate City officials are following a
prescribed financial plan. The City also will strive to maintain and, if possible, improve its
current AA- bond rating in order to minimize borrowing costs and preserve access to
credit. The City will follow a policy of full disclosure by communicating with bond rating
agencies to inform them of the City's financial condition.
2. Bond issue proposals are to be accompanied by an analysis defining how the new issue,
combined with current debt, impacts the City’s debt capacity and conformance with City
debt policies. Such analysis shall include identification of the funding source, an
assessment of the ability to repay the obligation, the impact on the current budget,
commitments to future budgets, maintenance and operational impact of the facility or
asset and the impact on the City’s credit rating, if any.
3. City Council must review such analysis, including existing debt level, ability to pay debt
service, impact on City services, and make a finding that use of debt is appropriate.
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4. Debt service costs (COP, Lease Purchase Agreements and other contractual debt which
are backed by General Fund Operating Revenues) are not to exceed 25% of the City’s
General Fund operating revenues.
5. The City recognizes that it is of the utmost importance that elected and appointed City
officials, and all others associated with the issuance of City debt, not only avoid the
reality of a conflict of interest, but the appearance thereof as well. City officials must
conduct themselves in a fashion consistent with the best interests of the City and
taxpayers.
6. Bonds will be sold on a competitive basis unless it is in the best interest of the City to
conduct a negotiated sale. Competitive sales will be the preferred method. Negotiated
sales may occur when selling bonds for a defeasance of existing debt, for current or
advanced refunding of debt, or for other appropriate reasons.
The City will consider the issuance of long-term obligations under the following conditions:
1. The City will use debt financing for one-time capital improvement projects and specific
nonrecurring equipment purchases or refunding of existing liabilities, and only under
the following circumstances:
a. When the project is included in the City’s adopted five-year capital improvement
program (CIP) and is in conformance with the City’s adopted General Plan.
b. When the project is not included in the City’s adopted five-year capital
improvement program (CIP), but the project is an emerging critical need whose
timing was not anticipated in the five-year capital improvement program, or it is
a project mandated by State or Federal requirements.
c. When the project’s useful life, or the projected service life of the equipment, will
be equal to or exceed the term of the financing.
d. When there are designated General Fund revenues sufficient to service the debt,
whether from project revenues, other specified and/or reserved resources, or
infrastructure cost-sharing revenues.
e. Debt financing (other than tax and revenue anticipation notes) is not considered
appropriate for any recurring purpose such as current operating and
maintenance expenditures.
2. The City will follow all State and Federal regulations and requirements related to bonds
and debt financing instruments regarding bond provisions, issuance, taxation and
disclosure.
3. Costs incurred by the City, such as bond counsel and financial advisor fees, printing,
underwriter’s discount, and project design and construction costs, will be charged to the
bond issue to the extent allowable by law.
4. The City will monitor compliance with bond covenants and adhere to federal arbitrage
and disclosure regulations.
5. The City shall continually review outstanding obligations for opportunities to achieve
debt service savings through refunding and shall pursue refinancing when economically
feasible and advantageous.
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Debt Limit
The City will keep outstanding debt within the limits prescribed by State of California statutes
and at levels consistent with credit objectives. California Government Code provides that “a
city may incur indebtedness for any municipal improvement requiring an expenditure greater
than the amount allowed for it by the annual tax levy” (43602). A “city shall not incur an
indebtedness for public improvements which exceeds in the aggregate 15 percent of the
assessed value of all real and personal property of the city. Within the meaning of this section
"indebtedness" means bonded indebtedness of the city payable from the proceeds of taxes
levied upon taxable property in the city” (43605). The limit is relative to the principal amount
of bonds sold and delivered (43606). The City of Carmel-by-the-Sea, Policy No C94-01
establishes “the City’s debt shall not exceed predetermined levels.” The guideline in that policy
is that “the City’s debt service level shall not exceed eight and one-fourth percent (8.25%) of
total expenditures.
INVESTMENT POLICIES
Municipal moneys not required for immediate expenditure will be invested. The City will
maintain adequate cash availability and maximum yield on invested idle funds while insuring
that invested moneys are protected. The Carmel Municipal Code requires the City
Administrator to prepare investment policies and guidelines for adoption by the City Council.
The adopted investment policy follows.
INVESTMENT POLICY AND GUIDELINES
C89-27
Policy
In accordance with the Municipal Code of the City of Carmel-by-the-Sea and under authority
granted by the City Council, the City Treasurer is responsible for investing the unexpended cash
in the City Treasury.
The investment of the City of Carmel-by-the-Sea funds is directed to the goals of safety,
liquidity and yield, in that order. The authority governing investments for municipal
government is set forth in the California Government Code, Sections 53601 through 53659.
The primary objective of the investment policy of the City of Carmel-by-the-Sea is SAFETY OF
PRINCIPAL. Investments shall be placed in those securities as outlined by type and maturity
sector in this document. Effective cash flow management and resulting cash investment
practices are recognized as essential to good fiscal management and control. The City’s
portfolio shall be designed and managed in a manner responsive to the public trust and
consistent with state and local law. Portfolio management requires continual analysis and as a
result the balance between the various investments and maturities may change in order to give
the City of Carmel-by-the-Sea the optimum combination of necessary liquidity and optimal yield
based on cash flow projections.
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Scope
The investment policy applies to all financial assets of the City of Carmel-by-the-Sea as
accounted for in the Comprehensive Annual Financial Report (CAFR). Policy statements
outlined in this document focus on the City of Carmel-by-the-Sea’s pooled funds, but will also
apply to all funds under the City Treasurer’s control unless specifically exempted by statute or
ordinance.
Prudence
The standard to be used by investment officials shall be that of a “prudent person” and shall be
applied in the context of managing all aspects of the overall portfolio. Investments shall be
made with judgment and care, under circumstances then prevailing, which persons of
prudence, direction 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.
It is the City’s full intent, at the time of purchase, to hold all investments until maturity to insure
the return of all invested principal dollars.
Safety
Safety of principal is the foremost objective of the City. Each investment transaction shall seek
to ensure that capital losses are avoided, whether from securities default, broker-dealer
default, or from erosion of the market value.
Liquidity
Historical cash flow trends are compared to current cash flow requirements on an ongoing basis
in an effort to ensure that the City’s investment portfolio will remain sufficiently liquid to
enable the City to meet all reasonably anticipated operating requirements.
Yield
The investment portfolio should be designed to attain a market average rate of return through
budgetary and economic cycles, consistent with the risk limitations, prudent investment
principles and cash flow characteristics identified within the financial statements.
Performance Evaluation
Investment performance is continually monitored and evaluated by the City Treasurer.
Investment performance statistics and activity reports are generated on a monthly basis for
presentation to the City Administrator and City Council.
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Delegation of Authority
For short-term investments, the Administrative Services Director has authority to make
transfers to and from the City’s Local Agency Investment Funds (LAIF) account in order to
maximize interest earned. The transfers are made from the City’s general checking account to
the LAIF account, with a minimum balance maintained in the general checking account to meet
daily cash requirements.
The City Treasurer is responsible for investment of all unexpended City funds as per California
Government Code section 41000 et seq. The City Treasurer makes long-term investments after
review and approval by the Administrative Services Director and the City Administrator.
Ethics and Conflict of Interest
Officers and employees involved in the investment process shall refrain from personal business
activity that conflicts with the proper execution of the investment program, or impairs their
ability to make impartial investment decisions. Additionally, the City Treasurer and the
members of the investment committee are required to annually file applicable financial
disclosures as required by the Fair Political Practices Commission (FPPC).
Safekeeping of Securities
To protect against fraud, embezzlement, or losses caused by a collapse of an individual
securities dealer, all securities owned by the City shall be held in safekeeping by a third party
bank trust department, acting as an agent of the city under the terms of a custody agreement
or PSA agreement (repurchase agreement collateral). All trades executed by a dealer will settle
Delivery vs. Payment (DVP) through the City's safekeeping agent. Securities held in custody for
the City shall be independently audited on an annual basis to verify investment holdings.
All exceptions to this safekeeping policy must be approved by the City Treasurer in written form
and included in quarterly reporting to the City Council.
Internal Control
Separation of functions between the City Treasurer's Office and the Administrative Services
Department would be an ideal situation. Time and necessity, however, dictate a different
approach. Due to the lack of personnel dedicated to the investment function alone, a proper
balance must be maintained between Treasury activities and Administrative Services
Department functions. The City Treasurer will make the appropriate arrangements to buy and
sell securities, which are deemed permissible by the Laws of the State of California as time
permits. The Administrative Services Director and/or City Administrator will have the power as
granted under the section titled Delegation of Authority in the absence of the City Treasurer.
The Administrative Services Director will have the authority to enter into agreements on
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securities so long as written policies set by the City Treasurer and State Legislature are
followed.
The investment portfolio and all related transactions are reviewed and balanced to appropriate
general ledger accounts by the Administrative Services Director on a monthly basis. An
independent analysis by an external auditor shall be conducted annually to review internal
control, account activity, and compliance with government policies and procedures.
Reporting
The City Treasurer shall review and render monthly reports to the City Administrator and the
City Council which shall include the face amount of the cash investment, the classification of
the investment, the name of the institution or entity, the rate of interest, the maturity date,
and the current market value and accrued interest to date due for all securities.
Qualified Broker/Dealers
The City shall transact business only with banks, savings and loans and broker/dealers that are
properly licensed and in good standing. The Administrative Services Director and the City
Treasurer shall investigate dealers who wish to do business with the City to determine if they
are adequately capitalized and if they market securities appropriate to the City’s needs.
The City Treasurer shall periodically annually send a copy of the current investment policy to all
broker/dealers approved to do business with the City. A signed cConfirmation of receipt of the
City’s policy by the broker/dealer shall be considered evidence that the broker/dealer
understands the City’s investment policies and intends to sell the City only appropriate
investments authorized by this investment policy.
Collateral Requirements
Collateral is required for investments in certificates of deposit. In order to reduce market risk,
the collateral level will be at least 110% of market value of principal and accrued interest.
In order to conform with the provisions of the Federal Bankruptcy Code which provides for
liquidation of securities held as collateral, the only securities acceptable as collateral shall be
certificates of deposit, commercial paper, eligible banker’s acceptances, medium term notes or
securities that are the direct obligations of, or are fully guaranteed as to principal and interest
by, the United States or any agency of the United States.
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Authorized Investments
Investment of City funds is governed by the California Government Code Sections 53600 et seq.
Within the context of the limitations, the following investments are authorized as further
limited herein:
1) United States Treasury Bills, Bonds, and Notes or those for which the full faith and credit
of the United States are pledged for payment of principal and interest. There is no
percentage limitation of the portfolio which can be invested in this category, although a
five-year maturity limitation is applicable.
2) United States agency bonds or oObligations issued by the Government National
Mortgage Association (GNMA), the Federal Farm Credit Bank (FFCB), the Federal Home
Loan Bank (FHLB), the Federal National Mortgage Association (FNMA), the Student Loan
Marketing Association (SLMA), and the Federal Home Loan Mortgage Company
(FHLMC). There is no percentage limitation of the portfolio which can be invested in this
category, although a five-year maturity limitation is applicable.
3) Local Agency Investment Funds (LAIF) which is a State of California managed investment
pool may be used up to the maximum permitted by the California State Law. LAIF is a
demand account so no maturity limitation is required.
Investments detailed in items 4 through 10 are further restricted to percentage of the cost
value of the portfolio in any one-issuer name to a maximum percentage of 15%. The total value
invested in any one issuer shall not exceed 5% of the issuersissuer’s net worth. Again, a fiveyear
maximum maturity is applicable unless further restricted by this policy.
4) Bills of exchange or time drafts drawn on and accepted by commercial banks, otherwise
known as bankers acceptances. Bankers acceptances purchased may not exceed 270
days to maturity or 40% of the cost value of the portfolio.
5) Commercial paper rated P1 by Moody's Investor Services, A1 by Standard and Poor's or
F1 by Fitch, and issued by domestic corporations having assets in excess of
$500,000,000.00 and having an AA or better rating on its long term debentures as
provided by Moody's or Standard and Poor's. Purchases of eligible commercial paper
may not exceed 180 days to maturity nor represent more than 10% of the outstanding
paper of the issuing corporation. Purchases of commercial paper may not exceed 15% of
the cost value of the portfolio.
4)6) Negotiable certificates of deposit issued by nationally or state chartered bank or
savings association or federal association or a state or federal credit union state or
federal savings institutions. Negotiable certificates of deposit shall be rated in a
category of “A” or its equivalent or better by two Nationally Recognized Statistical
Rating Organizations. A five-year maturity limitation is applicable. Purchases of
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negotiable certificates of deposit may not exceed 30% of the total portfolio. A maturity
limitation of five years is applicable.
7) Repurchase agreements, which specify terms and conditions, may be transacted with
banks and broker dealers. The maturity of repurchase agreements shall not exceed 90
days. The market value of the securities used as collateral for the repurchase
agreements shall be monitored by the investment staff and shall not be allowed to fall
below 102% of the value of the repurchase agreement. A Public Securities Agreement
Master Repurchase Agreement is required between the City of Carmel-by-the-Sea and
the broker dealer or financial institution for all repurchase agreements transacted.
8) Reverse repurchase agreements which specifies terms and conditions may be
transacted with broker dealers and financial institutions but can not exceed 20% of the
portfolio value on the date entered into. The City may enter into a reverse repurchase
agreement only to fund short term liquidity needs. The term of reverse repurchase
agreements may not exceed 90 days.
5)9) Time deposits, non-negotiable and collateralized in accordance with the
California Government Code, may be purchased through banks or savings and loan
associations. Since time deposits are not liquid, no more that 25% of the investment
portfolio may be invested in this type of investment.
10)Medium Term Corporate Notes, with a maximum maturity of five years may be
purchased. Securities eligible for investment shall be rated A or higher by Moody's or
Standard and Poor's rating services. Purchase of medium term notes may not exceed
30% of the market value of the portfolio and not more than 15% of the market value
may be invested in notes issued by one corporation. Commercial paper holdings should
also be included when calculating the 15% limitation.
Ineligible investments are those that are not described herein, including, but not limited to:
common stocks and long term (over five years maturity) notes and bonds are prohibited from
use in this portfolio unless specifically allowed both by state law and City Council approval. It is
noted that special circumstances may arise where these methods of investment may become
necessary. When this becomes necessary, the City Council will be asked to take the appropriate
action to ratify the means of investment necessary, provided that it is allowable by California
Code.
Legislative Changes
Any State of California legislative actions that further restricts allowable maturities, investment
type, or percentage allocations will supersede any of the material presented herein. In this
case, the applicable law will become part and parcel of this investment policy.

Interest Earnings
All moneys earned and collected from investments authorized in this policy shall be allocated
monthly to the General Fund and various special funds of the City which legally require interest
proration or when City Council action dictates such proration. This distribution will be based on
the cash balance in the fund as a percentage of the entire pooled portfolio.
Policy Review

The City of Carmel-by-the-Sea’s investment policy shall be approved by resolution of the City
Council. This investment policy shall be reviewed at least annually to ensure its consistency
with the overall objectives of preservation of principal, liquidity and yield, and its relevance to
current law and financial and economic trends. Any amendments to the policy, other than
State and Federal laws, which automatically supersede the relevant sections, shall be
forwarded to the City Council for approval by resolution.