Title
Recommendation to Approve the City of Alameda Investment Policy. (Finance 2410)
Body
To: Honorable Mayor and Members of the City Council
From: Kevin Kennedy, City Treasurer
Re: Approve the City of Alameda Investment Policy
BACKGROUND
Section 5-2 of the Alameda City Charter requires the City Treasurer to annually recommend to the City Council, at a public meeting, an Investment Policy for the Council's approval. Staff is proposing an update to the Policy to conform to recent changes to the California Government Code which regulates the instruments in which a local agency may invest. The Investment Advisory Committee (the City Treasurer, Finance Director, as representative of the City Manager's representative, and the Finance Supervisor) has reviewed and recommends these proposed changes to the City's Investment Policy.
DISCUSSION
The City's Investment Policy affirms the fiduciary responsibility to safeguard public assets and identify opportunities for a systematic investment process. Priority is placed first on securing safety of principal and the liquidity needed for payroll and other City obligations, then on yield of the investment.
The City's Investment Policy is reviewed annually by the City Treasurer and Finance Director and is attached to this report (Exhibit 1). The policy has been developed in accordance with standards and policies established by the California Debt and Investment Advisory Commission (CDIAC) and the Association of Public Treasurers of the United States and Canada (APTUSC), and has been certified by the APTUSC. Investment reports are provided after each quarter end and include the market value of securities and a statement confirming that current liquidity is adequate to meet expenditures for the next six months, as required by the California Government Code.
While no changes to the City's Investment Policy are required at this time, staff is proposing the following additions to the Policy which it believes will help create additional investment opportunities:
1. Supranationals
Year-to-date, there has been one key revision to the Government Code Sections that regulate local agency investments. AB 1933, which took effect January 1, 2015, added subsection (q) to Government Code Section 53601. This subsection allows local agencies, such as the City, to invest in the debt issued by three supranational organizations.
Supranationals are U.S. dollar denominated obligations issued by three multi-facility agencies: the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Inter-American Development Bank (IADB). If utilized, Government Code Section 53601(q) requires that they must have a rating of "AA", must not mature beyond 5 years and must not exceed 30 percent of the total investment portfolio. The Investment Advisory Committee is recommending the use of this category but at an amount not to exceed 10% of the portfolio. This category has been used by the Local Agency Investment Fund (LAIF) for several years. The City's Investment Advisors recommend employing this category in order to enhance the diversity of the portfolio while maintaining safety and liquidity.
2. Asset-Backed Securities
A second change in the City's investment policy is the inclusion of Asset-Backed Securities (ABS) as permitted by Government Code Section 53601(o). ABS are bonds created from various types of consumer debt. When consumers borrow money, the loans become an asset on the books of the entity that extended the credit. The lending entity can then bundle these assets with those of similar characteristics (e.g., maturity and delinquency risk) and sell them to investors. Returns on these securities come from customer payments on their outstanding loans. The primary types of ABS are auto loans, leases, credit card receivables and student loans. Mortgages and home equity loans have been purposefully excluded because of the risk associated with these types of investments. During the last recession losses were primarily associated with these securities. In order to invest in Asset-Backed Securities, they must be rated "AA" or better with the issuer of the security rated at least "A", must not mature beyond 5 years, and may not exceed 20% of the portfolio per Government Code Section 53601(o).
After discussion with the Investment Advisors, the Investment Advisory Committee is recommending the inclusion of ABS in the City's investment portfolio but at a smaller percentage of the portfolio than the 20% maximum allowed by the Government Code. The Investment Advisory Committee is recommending the use of this category but in an amount not to exceed 10% of the portfolio. This reduced percentage will limit any sector-specific risk to the overall portfolio while providing the opportunity to increase diversification and potentially enhance yield
The Investment Advisory Committee continues to review the portfolio and its performance on a regular basis. It is through these discussions that the Committee has developed these recommendations which are reflected in the attached Investment Policy.
FINANCIAL IMPACT
There is no financial impact as a result of the approval of the Investment Policy.
ENVIRONMENTAL REVIEW
This activity is not a project and is exempt from the California Environmental Quality Act (CEQA) pursuant to section 15378 (b)(4) of the CEQA Guidelines, because it involves governmental fiscal activities (approval of the investment policy), which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
RECOMMENDATION
Approve the City of Alameda Investment Policy.
Respectfully submitted,
Kevin Kennedy, City Treasurer
Elena Adair, Finance Director
Financial Impact section reviewed,
Elena Adair, Finance Director
Exhibit:
1. Investment Policy