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R2008-028 2008-02-25RESOLUTION NO. R2008-28 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS, ADOPTING AN AMENDED INVESTMENT POLICY, INVESTMENT STRATEGY AND APPROVED BROKERS IN ACCORDANCE WITH CHAPTER 2256 OF THE GOVERNMENT CODE ("PUBLIC FUNDS INVESTMENT ACT"). WHEREAS, the Public Funds Investment Act codified in Government Code Chapter 2256 governs local government investment; and WHEREAS, the Public Fund Investment Act (Section 2256.005a), as amended, requires the City to adopt an Investment Policy and Investment Strategy by rule, order, ordinance or resolution governing the investment of funds under its control; and WHEREAS, the Public Fund Investment Act (Section 2256.005e), requires the governing body to review and adopt that Investment Policy and Investment Strategy by rule, order, ordinance or resolution not less than annually, recording any changes made thereto; now, therefore, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS: Section 1. That the City of Pearland has complied with the requirements of the Public Funds Investment Act and the Investment Policy. The modified Investment Policy and Invest Strategy are attached hereto as Exhibit "A" and Exhibit "B" and are hereby adopted effective immediately. PASSED, APPROVED, AND ADOPTED this 25th day of February A.D., 2008. TOM REID MAYOR RE Y '•~ ~ ;!{ ATTEST: `~ 04`': ~-; ~_.. `y U NGe~F~'NC~f RK/IC 'Y S ! RETARY APPROVED AS TO FORM: ~~ ~ ~~- ~-,.- DARRIN M. COKER CITY ATTORNEY Exhibit "A" Resolution No. R2008-028 CITY OF PEARLAND, TEXAS INVESTMENT POLICY AND INVESTMENT STRATEGY ADOPTED FEBRUARY 12, 2007 TABLE OF CONTENTS 1.0 INVESTMENT AUTHORITY AND SCOPE OF POLICY 1.01 Purpose 1.02 Policy 1.03 Scope 1.04 Delegation of Responsibility 1.05 Ethics & Conflict of Interest 1.06 Investment Committee 2.0 INVESTMENT OB]ECTIVES 2.01 Objective 2.02 Safety of Principal 2.03 Liquidity 2.04 Diversification 2.05 Yield 2.06 Maturity 2.07 Investment Training 2.08 Quality and Capability of Investment Management 2.09 Investment Strategy 2.10 Cash Management 3.0 AUTHORIZED INVESTMENT 3.01 Authorized Investments 3.02 Unauthorized Investments 3.03 Investments with Required Ratings 4.0 INVESTMENT CONTROLS 4.01 Selection of Investment Broker/Dealers 4.02 Certification 4.03 Delivery vs. Payment 4.04 Internal Control and Annual Audit 4.05 Standard of Care 4.06 Competitive Bidding 4.07 Portfolio Diversification 4.08 Electronic Funds Transfer 4.09 Selling of Securities before Maturity 5.0 ARBITRAGE 6.0 INVESTMENT REPORTING 7.0 INVESTMENT COLLATERAL AND SAFEKEEPING 7.01 Collateral or Insurance 7.02 Safekeeping of City Securities 8.0 INVESTMENT POLICY ADOPTION GLOSSARY ATTACHMENT A -Broker/Dealer Certification ATTACHMENT B -Approved List of Broker/Dealers CITY OF PEARLAND INVESTMENT POLICY 1.0 INVESTMENT AUTHORITY AND SCOPE OF POLICY 1.01 Purpose To establish and provide specific policy and guidelines for the conduct of the investment program of the City of Pearland. 1.02 Policy It is the policy of the City of Pearland (the "City") to invest public funds in a manner, which will provide safety of principal while earning the highest reasonable market return in meeting the daily cash flow demands of the City. All funds will be invested in compliance with all state and local statutes and all Governmental Accounting Standards Board Statements, and related financial accounting standards. This policy satisfies the requirement of the Public Funds Investment Act (PFIA), Texas Government Code 2256. 1.03 Scope This Investment Policy shall apply to all the funds and investments of the City as well as any other funds held in custody by the City, and include the following funds: 1. General Fund 2. Special Revenue Funds 3. Capital Project Funds 4. Enterprise Funds 5. Trust & Agency Funds 6. Debt Service Funds 7. Internal Service Funds 8. Component Units, excluding those that have adopted a separate investment policy. Current component units include: a. Pearland Economic Development Corporation b. Tax Increment Reinvestment Zone #2 c. Development Authority of Pearland 9. Any other funds or component units as created by the City. These funds, as well as funds that may be created from time-to-time, shall be administered in accordance with the provisions of this policy. All funds invested under this policy shall be considered as a pooled group for investment purposes. Deferred compensation and the retirement system assets the City sets aside or holds for its employees are not subject to this policy. 1.04 Delegation of Investment Authority The Director of Finance and Assistant ~ Director _of Finance ar_e_ hereby_ ueiecea: F~na~~e designated as Investment Officers for the City. The City may use other employees or the services of a contractor to aid the investment officer(s) in the execution of their duties. Otherwise, unless authorized by law, no other individual(s) has the authority to deposit, withdraw, transfer or manage the investments of the City. The City may designate a registered investment advisor to invest for the City and act as an additional Investment Officer. Authority granted to a person(s) to deposit, withdraw, invest, transfer or manage the City's investments is effective until rescinded by City Council or until termination of the person's employment or contract. The Director of Finance is responsible for the management of the investment program. The Investment Officers are responsible for the daily operations of the investment function. The Director of Finance shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. 1.05 Ethics and Conflict of Interest Investment Officers shall refrain from personal business activities that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Investment Officers who have a personal business relationship with a business organization seeking to sell an investment to the City and who have anyone related within the second degree by affinity or consanguinity to an individual seeking to sell an investment to the City shall file a statement disclosing that personal interest to the Director of Finance, City Manager, the City Council and the Texas Ethics Commission. An Investment Officer has a personal business relationship with a business organization if: 1) the investment officer owns 10% or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization; 2) funds received by the investment officer from the business organization exceed 10% of the investment officer's gross income for the previous year; or 3) the investment officer has acquired from the business organization during the previous year investments with a book value of $2,500 or more for the personal account of the investment officer. 1.06 Investment Committee The City shall establish an Investment Committee for the purpose of reviewing investment policies and procedures, investment strategies, and investment performance. The members of the Committee shall consist of the City Manager, Assistant City Manager as designated by the City Manager, Director of Finance, and Assistant ._Director _of Fina_nce. The City Manager shall be the Chairman of the Committee. The Investment Committee shall review quarterly investment reports and annually review the recommended changes to the Investment Policy and Investment Strategy and review the list of brokers authorized to engage in investment transactions with the City. 2.0 INVESTMENT OBJECTIVES AND STRATEGY 2.01 Objective City investments shall be made in accordance with federal and state laws, this Investment Policy and ordinances of the City. The City's investment portfolio shall be designed with the objective of attaining a market rate of return in accordance with its designated benchmark based on the City's cash flow requirements throughout budgetary and economic cycles, commensurate with the City's investment risk constraints and the cash flow characteristics of the portfolio. 2.02 Safety of Principal The primary objective of the City's investment program is to ensure the safety of all funds. To attain this objective, it is the City's intent to invest in the safest types of securities, pre-qualify broker/dealers, financial institutions, and advisors and to hold all investments until maturity in order to ensure the return of all invested principal unless as stipulated in Section 4.09 of the policy. 2.03 Liquidity The City's investment must be based on a cash flow analysis, which will provide the liquidity necessary to pay all expected and unexpected obligations. Liquidity shall be achieved by matching investment Deleted: Finance maturities with budgetary and economic cycles. A portion of the portfolio will be maintained in liquid short-term investments that can be converted to cash if necessary to meet disbursement requirements. Investment pools and no-load money market mutual funds provide daily liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. 2.04 Diversification The City of Pearland shall diversify its portfolio to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer or a specific class of investments. Investment shall always be selected that provide for stability of income and reasonable liquidity. 2.05 Yield It will be the objective of the City to earn a reasonable market yield throughout budgetary and economic cycles within the parameters imposed by its safety and liquidity objectives, investment strategies, and state and federal law. Return on investment is of secondary importance to safety and liquidity objectives. The yield and level of risk for the portfolio will be benchmarked against the yield of the one-year Treasury gill durin4 the_comparable_ period_as well as_against_an agency_ note with_ _ , - °e~ec~a: b approximately the same maturity as the weighted average maturity of the portfolio. 2.06 Maturity The portfolio shall be structured primarily to meet City obligations and secondly to achieve a reasonable return of interest. The maximum allowable stated maturity of any individual investment owned by the City shall be three (3) years from date of purchase. The settlement date is considered the date of purchase. However, the City may collateralize its certificates of deposits and repurchase agreements using longer-dated investments not to exceed thirty (30) years. The maximum weighted average maturity based on the overall portfolio shall be.18 .months, or 547.5 days._ _ °eier~a: °"e Yeas, 2.07 Investment Training Investment Officers shall take (a) 10 hours of training within 12 months after taking office or assuming duties and (b) not less than 10 hours of training every 2 years. Training shall include education in investment controls, security risks, strategy risks, market risks, diversification, and compliance. Training must be provided by an independent source approved by the governing body or designated Investment Committee. For these purposes, courses or seminars offered by the Government Finance Officers Association, Government Finance Officers Association of Texas, Texas Municipal League, Southwest School of Government Finance, University of North Texas, Texas Association of Counties, Treasury Management Association, or the Government Treasurers Organization of Texas will satisfy the training requirements. An external auditor shall review documentation of training hours annually. 2.08 Quality and Capability of Investment Management Investment Officers shall at all times be cognizant of the standard of care and the investment objectives as set forth in the Public Funds Investment Act and the City's ,~nv_estment_,~olicy. The City shall provide investment training as required by the Act to ensure the quality and capability of investment management. Staff sets the standard of training required, which may be over the 10 hours as required by the Act. 2.09 Investment Strategy In accordance with the Act (2256.005(d)) a separate written investment strategy shall be developed for each portfolio/fund or pooled group of funds under the City's control. The strategy shall be reviewed on an annual basis with formal action by the City Council stating that the strategy has been reviewed and recording any changes made. 2.10 Cash Management Effective cash management is recognized as essential to good fiscal management. Cash management is defined as the process of managing monies in order to ensure maximum cash availability to the City for investment use. The City shall maintain a comprehensive cash management program that includes collection of accounts receivable, prudent investment of its available cash, disbursement of payments in accordance with invoice terms and the management of banking services. 3.0 AUTHORIZED INVESTMENTS 3.01 Authorized Investments Authorized investments under this policy shall be limited to the instruments listed below as authorized and defined by the Public Funds Investment Act. Deleted: i Deleted: p A. Obligations of the United States or its agencies and instrumentalities. B. Obligations of the State of Texas or its agencies and instrumentalities C. Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of the State of Texas or the United States or their respective agencies and instrumentalities. D. Collateralized certificates of deposit of banks or savings banks doing business in Texas, collateralized to 102%, and guaranteed or insured by the Federal Deposit Insurance Corporation or its successor; or secured by obligations of the United State Government, including mortgage backed securities, -which pass the bank test, but excluding those mortgage backed securities defined in Section 2256.009(b) of the Act. E. Constant dollar local government investment pools as defined by the Act (2256.016 and 2256.019) and approved by City Council resolution. F. AAA-rated, SEC registered no-load money market mutual funds and no-load mutual fund and as further defined in Section 2256.014 of the Act. G. Collateralized repurchase agreements as defined by the Public Funds Investment Act placed through a primary government securities dealer or a financial institution doing business in this state with a defined maturity date and as further defined in Section 2256.011 of the Act. H. Interest bearing checking accounts that are fully collateralized at 102% of the ledger balance. 3.02 Unauthorized Investments Specifically prohibited investments are: 1. Collateralized mortgage obligations 2. Commercial Paper, including Pools which invest in Commercial Paper 3. All swaps including but not limited to even-basis swaps, interest rate swaps 4. Forwards and futures 5. Options 6. Foreign Exchange 7. Planned amortization classes (PAC) 8. Regular floaters tied to government securities 9. Investments with various interest rate caps, floors, and collars 10. Investment pools in which the City would own more than 10% of the market value of the pool li. Any other investments that are not on the authorized investment list 3.03 Investments with Required Ratings Investments with minimum required ratings such as investment pools and no-load mutual funds do not qualify as authorized investments during the period the investment does not have the minimum rating. The City shall take all prudent measures that are consistent with its investment policy to liquidate investments that do not have the minimum rating. 4.0 INVESTMENT CONTROLS 4.01 Selection of Investment Broker/Dealers The Investment Officers will maintain a list of financial institutions, primary broker/dealers, and local government investment pools authorized by the City Council to provide investment services to the City. Annually, the City Council will approve the list of financial institutions and broker/dealers authorized to conduct business with the City. Investment Officers shall not conduct business with any firm not approved by City Council. The City will prepare a Request for Investment Services every two years at a minimum and notice of said request will be published in the City's official paper. All financial institutions and broker/dealers who desire to become qualified bidders for investment services must fill out the application and return it to the City by the stated day and time. After review of all applicants, a list of selected financial institutions and broker/dealers will be prepared by the Investment Officers and reviewed by the Investment Committee. The following may be required with the application: most recent audited financial statement, list of local government clients, and statements of qualifications. Criteria used in the selection of the authorized broker/dealers will include, but are not limited to material litigation against the firm, regulatory status of the dealer, completed packet, references from local government clients, background and expertise in investment of public funds. The top six to seven firms shall be selected to appear on the City's approved list. If, after a firm is selected, they no longer qualify to appear on the City's approved dealer list, or provide services inconsistent with acceptable levels, the Investment Officers may recommend City Council to remove the firm from the approved list and replace it with the next qualified candidate based on the previous Request for Investment Services ranking. Should an approved bank merge with or be acquired by another bank while on the City's approved list, the new bank must agree to meet the same collateralization and certification requirements, or the bank shall be removed from the approved list. 4.02 Certification A written copy of this Investment Policy shall be presented to any firm seeking to engage in a financial transaction with the City. The authorized representative of the firm shall execute a written instrument substantially in the form of Attachment A of this Policy and to the effect that the representative has: 1. received and thoroughly reviewed the investment policy of the City; and 2. acknowledged that the organization has implemented reasonable procedures and controls in effort to preclude investment transactions that are not authorized by the City's Investment Policy except to the extent that the authorization is dependent on an analysis of the makeup of the City's entire portfolio or requires interpretation of subjective investment standards. The Investment Officer(s) may not transact business with any firm that has not executed and returned this certification. (2256.005(1). The City may contract with a registered investment advisor for the management of the City's portfolio. The advisor shall review the Policy and execute all transactions in accordance with the provisions and controls of the Policy. 4.03 Delivery vs. Payment Settlement It shall be the policy of the City that all securities shall be purchased on a °Delivery vs. Payment" (DVP) basis, except for investment pools and mutual funds. By so doing, City funds are not released until the City or its approved custodian has received the securities purchased or pledged. 4.04 Internal Control and Annual Audit The Director of Finance or designee shall establish a system of internal controls. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation of third parties, or imprudent actions by employees of Investment Officers of the City. Controls and managerial emphasis deemed most important include the following: Imperative Controls: A. Safekeeping receipts and record management B. Documentation of investment bidding C. Written confirmations D. Reconciliation and comparisons of security receipts with investments and bank records E. Compliance with investment policies F. Accurate and timely reporting G. Adequate training and development of Investment Officers Controls Where Practical A. Control of collusion B. Segregation of duties C. Clear delegation of authority D. Staying informed about market conditions, changes and trends that require adjustments in investment strategies. The City, in conjunction with its annual financial audit, shall perform a compliance audit of management controls on investments and adherence to the City's established investment policies. This annual audit shall be performed by an external auditor and will include formal review of the quarterly reports. 4.05 Standard of Care Investments shall be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. In determining whether an investment officer has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration: 1. the investment of all funds over which the officer had responsibility rather than a consideration as to the prudence of a single investment; and 2. whether the investment decision was consistent with the City's Investment Policy. The Director of Finance and the Investment Officers are not personally responsible for changes in the market. 4.06 Competitive Bidding All purchases of investments will be placed after receiving competitive quotes from at least three financial institutions, broker/dealers, investment pools or any combination thereof. Quotes will be accepted either written or electronically, or a combination thereof. An exception to this rule may be made when time limitations preclude the bidding process. The investment will be made with the broker/dealer offering the greatest return and quality to the City. If three bids/offers are solicited but three responses are not received within the time frame specified in the solicitation of the bid/offer, the Investment Officer may act based on the responses received as long as the solicitation of and failure to receive the bids/offers is documented. Any investments purchased must have the signature of at least two Investment Officers, when both are present. 4.07 Portfolio Diversification The City will diversify its investments by security type, institution, and broker/dealer. Requests for bids/offers from broker/dealers shall rotate among approved broker/dealers to ensure that the same brokers are not solicited for every bid/offer request, and to ensure competition among broker/dealers. With the exception of U.S Treasury Securities and interest bearing checking accounts that are fully collateralized, no more than 75% of the City's total investment portfolio will be invested in a single security type. If the City elects to participate in more than one investment pool, the total percent invested in all pools shall not exceed the maximum percent allowed. Diversification requirements are as follows: Investment Type Repurchase Agreements Certificates of Deposit US Treasury Bills/Notes Other US Government Securities Authorized Investment Pools No-Load MM Mutual Funds No-Load Mutual Funds Sweep Accounts/DDA** Maximum Investment Up to 50% Up to 50% Up to 100% Up to 75% Up to 75% in total Up to 50% Per PFIA Up to 100% ** Fully collateralized at 102% of value 4.08 Electronic Funds Transfer The City may use electronic means to transfer or invest all funds collected or controlled by the City. 4.09 Selling Of Securities Before Maturity While it is the City's intent to hold securities to maturity to ensure safety of principal, if the City needs to sale securities in order to meet disbursement needs or to' take advantage of interest rates, the City Manager and the Director of Finance must both approve the sale of the security. 5.0 Arbitrage Arbitrage rebate provisions require that the City compute earnings on investments from each issue of bonds on an annual basis to determine if a rebate to the IRS is required. The City is required to perform specific calculations relative to the actual yield earned on the investment of the funds and the yield that could have been earned if the funds had been invested at a rate equal to the yield on the bonds sold by the City. The regulations require extreme precision in the monitoring and recording facets of the investments as a whole, and particularly as it relates to yields and computations to insure compliance. Failure to comply can dictate that the bonds become taxable, retroactively from the date of issuance, or subject the City to severe penalties. The City's investment position as it relates to arbitrage regulations is as follows: Investments on bond proceeds will be made with safety of principal and liquidity in mind, but with a competitive rate of return. When project timing and cash flows allow, bond proceeds may be invested in instruments allowed under Section 3.0, if the investment can be purchased solely with the individual bond proceeds, and not commingled with operating funds or multiple issues. All investments purchased with bond funds shall be documented clearly and reported to the City's arbitrage consultant for tracking and review. Arbitrage rebate calculations will be performed annually on all debt issues and funds set aside annually for any positive arbitrage. Arbitrage will be rebated to the IRS, as necessary. 6.0 Investment Reporting The Investment Officers shall report to City Council on no less than a quarterly basis in accordance with the Act (2256.023). The report shall include a detailed listing of all purchases, sales, and payments and a description of each security held as well as management summary information. The report must be prepared and signed by all Investment Officers and contain a statement of compliance with regard to the City's Investment Policy and the Act (2256.023). Market prices used to determine market value in the investment reports shall be obtained from an independent source. 7.0 INVESTMENT COLLATERAL AND SAFEKEEPING 7.01 Collateral The Investment Officer(s) or Investment Advisor shall ensure that all City funds in time and demand deposits, certificates of deposits and/or repurchase agreements are insured or collateralized consistent with the Public Funds Collateral Act (Texas Government Code 2257) and federal law as well as the then current bank depository contract. The City chooses to accept collateral based on the list of investments authorized under the Public Funds Investment Act. The right of collateral substitution is granted with the approval of the Director or Assistant Director of Finance. The Director or Assistant Director of Finance may approve and release pledged collateral. The City shall request additional collateral in the event Investment Officer(s) deems that deposits or investments are not sufficiently protected by the pledged collateral. Collateral will equal 102% of the ledger balance of time and demand deposits, plus principal and accrued interest on certificates of deposit, and repurchase agreements and be held by an independent party outside the bank's or counter-parties' holding company. Pledged collateral will be evidenced by original safekeeping receipts~whichare held at the Federal Reserve Bank and readily available to the Citv. The bank and/or counter-party will be responsible for the monitoring and maintaining of margin levels at all times. 7.02 Safekeeping All City securities shall be held in independent safekeeping by the City, the City's depository bank or a City approved custodian in a third party financial institution. All safekeeping will be evidenced by original safekeeping receipts. Safekeeping receipts shall be maintained by the Investment Officer(s), and shall be available for review upon request. 8.0 INVESTMENT POLICY ADOPTION . Deleted:. Deleted: The City's investment ,policy shall be adopted by_ resolution annually by ; - Deietea: the City Council. The policy shall be reviewed annually by the Deleted: p Investment Committee. Any modifications made thereto must by approved by the City Council and documented by formal action. GLOSSARY Accrued Interest: Term designating the interest due on a bond or other fixed income security that must be paid by the buyer of a security to its seller. Agency: A security, almost always debt, issued by a corporation sponsored by the U.S. Government. Examples: bonds of the Tennessee Valley Authority. Agency Notes: One to two year obligations offered at a discount from par by U.S. Government Agencies, such as the Federal National Mortgage Association, the Federal Home Administration, and the Farm Credit System. Bid: The price offered by a buyer of securities -when you are selling securities, you ask for a bid. Broker: A broker brings buyers and sellers together for a commission. Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a certificate. Collateral: Evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. Component Unit: Based on generally accepted account principles, the Pearland Economic Development Corporation, TIRZ #2, and the Development Authority of Pearland are considered component units of the City, and as such are included in the City's annual financial reports. Confirmation: Commonly called a "confirm." The confirmation is a notice to a customer that payment is due on a purchase, or that net proceeds are available on a sale of securities. Federal securities law requires that a confirmation be sent promptly following each purchase and sale. Conflict of Interest: Term used to describe a financial situation where a person prejudicially places personal affairs before those of constituents that the person is supposed to serve or represent. Coupon: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. Current Maturity: Used to designate the remaining lifetime of an already outstanding bond. Dealer: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. Delivery versus Payment: Delivery of securities first, with an exchange of money for the securities after delivery. Derivatives: (a) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying indices or securities, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security. Discount: The difference between the cost price of a security and its maturity value when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. Discount Securities: Non-interest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value. Example: U.S. Treasury Bills. Discount Yield: Measurement of return that computes interest on face value of security rather than on the dollar amount invested. Used in figuring yield on U.S. Treasury Bills. Diversification: Dividing investment funds among a variety of securities offering independent returns. Equivalent Bond Yield: Used to compare the discount yield on money market securities to the coupon yield on government bonds. Face Value: The dollar amount that appears on the face of the bond certificate. It is the dollar amount the issuer promises to pay to the holder at maturity. Also called par value. Federal Credit Agencies: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals. Examples: S&L's, small business firms, students, farmers, farm cooperatives. Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per depositor. Federal Funds Rate: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. Federal Home Loan Bank (FHLB): Government sponsored wholesale banks (currently 12 regional banks), which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance companies. The mission of the FHLB is to liquefy the housing related assets of its members who must purchase stock in their district Bank. Federal National Mortgage Association (FNMA or Fannie Mae): FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. FNMA, is a private stockholder-owned corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. Federal Open Market Committee (FOMC): Consists of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. Federal Reserve System: The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. Financial Assets: Cash and other assets that, in the normal course of operations, will become cash. Government National Mortgage Association (GNMA or Ginnie Mae): A fixed income security that represents an undivided interest in a pool of federally insured mortgages put together by GNMA. GNMA securities are commonly backed by FHA or VA mortgages. Liquidity: A liquid assets is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable sizes can be done at those quotes. Local Government Investment Pool (LGIP): An entity created under the public funds investment act to invest public funds jointly on behalf of the entities that participate in the pool and whose investment objectives in order of priority are 1) preservation and safety of principal, 2) liquidity, and 3) yield. Market Value: The price at which a security is trading and could presumably be purchased or sold. Master Repurchase Agreement: A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establishes each party's rights in the transactions. Maturity: The date upon which the principal or stated value of an investment becomes due and payable. Money Market: The market in which short-term debt instruments (bills, commercial paper, etc.) with cone-year maturity or less, and often 30-days or less, are issued and traded. Offer: The price asked by a seller of securities. Overnight Repo: A repurchase agreement with expiration set for the following business day. Par Value: The dollar amount that appears on the face of the bond certificate. It is the dollar amount the issuer promises to pay to the holder at maturity. Also, called face value. Portfolio: Collection of securities held by an investor. Primary Dealer: A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria, including capital requirements and participation in Treasury auctions. Principal: The face amount (par value) of a debt security. Rate of Return: The yield obtainable on a security based on its purchase price or its current market price. For bonds and notes, it is the coupon rate divided by the price. Repurchase Agreement (REPO): A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Safekeeping: A services to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vault for protection. Secondary Market: A market made for the purchase and sale of outstanding issues following the initial distribution. Securities and Exchange Commission: Agency created by Congress to protect investors in security related transactions by administering securities legislation. Sell: To transfer ownership for a monetary consideration. The term is used in conjunction with the disposition of stocks, bonds, or other financial assets. Structured Notes: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations that have imbedded options (e.g.: call features, step-up coupons, floating rate coupons, derivative based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. Treasury Bills: Anon-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months, or one year. Treasury Bonds: Long-term coupon bearing U.S. Treasury Securities issued as direct obligations of the U. S. Government and having initial maturities of more than 10 years. Treasury Notes: Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to ten years. Uniform Net Capital Rule: Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. ATTACHMENT A CERTIFICATION BY BUSINESS ORGANIZATION This certification is executed on behalf of City of Pearland (the Investor) and (the Business Organization) pursuant to the Public Funds Investment Act, Chapter 2256, Texas Government Code (the Act) in connection with investment transactions conducted between the Investor and the Business Organization. The undersigned Qualified Representative of the Business Organization hereby certifies on behalf of the Business Organization that: The undersigned is a Qualified Representative of the Business Organization offering to enter into an investment transaction with the Investor as such terms are used in the Public Funds Investment Act, Chapter 2256, Texas Government Code and 2. The Qualified Representative of the Business Organization has received and reviewed the Investment Policy furnished by the Investor and 3. The Qualified Representative of the Business Organization has implemented reasonable procedures and controls in an effort to preclude imprudent investment transactions conducted between the Business Organization and the Investor that are not authorized by the entity's investment policy, except to the extent that this authorization is dependent on an analysis of the makeup of the entity's entire portfolio or required an interpretation of subjective investment standards. 4. The Business Organization will rely upon instructions from only the persons authorized on behalf of the City of Pearland as stated in the Investment Policy and City's resolution designating investment officers. Qualified Representative of the Business Organization Signature: Name: Title: Date: ATTACHMENT B APPROVED/AUTHORIZED LIST OF BROKER/DEALERS Coastal Securities, LP Wachovia Securities, LLC Raymond James & Associates Duncan-Williams, Inc. JP Morgan Securities, Inc. Frost Bank Wells Fargo Bank Capital One Bank Pearland State Bank Exhibit "B" Resolution No. R2008-028 CITY OF PEARLAND INVESTMENT STRATEGY The City of Pearland shall adopt by resolution a separate written investment strategy for each of the funds under its control. For Investment purposes, the City shall use a "Pooled Fund Group" which means that all funds under the City's control shall be treated as one fund. INVESTMENT STRATEGY I. Suitability Investments are to be purchased based on the financial requirements of the City. The City of Pearland shall strive to maintain the level of investment of all fund balances, reserves and bond funds as close as possible to 100%. Any investment eligible in the Investment Policy is suitable for all City funds, including component units. II. Safety of Principal Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. All investments shall be of high quality with no perceived default risk. It is the City's full intent, at the time of purchase, to hold all investments until maturity in order to ensure the return of all invested principal. III. Liquidity The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements that might be reasonably anticipated. Liquidity shall be achieved by matching investment maturities with budgetary and economic cycles, and forecasted cash flow requirements. A portion of the portfolio will be maintained in liquid short-term securities that can be converted to cash if necessary to meet disbursement requirements. Investment pools and money market mutual funds provide daily liquidity and may be utilized as a competitive yield alternative to fixed maturity investments. IV. Marketability The City shall invest in securities that, if the need arises, can be liquidated before maturity. Investments will never be prematurely sold at less than book value plus accrued interest, without the approval of the Director of Finance and the City Manager. V. Diversification The City will diversity its investments by security type and by broker/dealer. With the exception of U.S. Treasury securities and fully collateralized demand deposit accounts, no more than 75% of the City's total investment portfolio will be invested in a single security type. VI. Yield The investment portfolio shall obtain a competitive rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City shall attempt to obtain an acceptable return provided that the requirements of safety and liquidity are first met. The yield of the one-year U.S. Treasury Bill shall be a yield objective or benchmark as well as benchmarked against an agency note with maturity, which approximates the weighted average maturity of the portfolio.