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Investment Advisory Staff Reports 05/02/18MEETING OF THE INVESTMENT ADVISORY/OVERSIGHT JOINT COMMITTEE MEETING Wednesday, May 2, 2018 3:00 p.m. - 4:00 p.m. Finance Conference Room Meeting called by: Robert Foley, Chair Facilitator: Robert Foley Type of meeting: Quarterly Meeting Minutes taken by: Diane Hornsby Attendees: .Robert Foley, Ken Romero, Larry Sallinger (IAC) Richard Rohm, Rick Otto, Will Kolbow (IOC) Josephine Chan, Diane Hornsby (Staff) Please read: The attached Please bring: The attached ----- Agenda Topics----- 1. Call to Order Robert Foley 2. Approval of Minutes, Meeting of February 7, 2018 Robert Foley 3. Rate Summary April 2017 - March 2018 Josephine Chan 4. Investment Portfolio Update Josephine Chan 5. Treasurer's Investment Reports for January, February, and March Josephine Chan 2018 6. Discussion on Proposed Changes to the Investment Policy Josephine Chan 7. Sales Tax Update Will Kolbow 8. California Forecast: Sales Tax Trends and Economic Drivers Will Kolbow 9. City Update Rick Otto 10. Next Meeting Date- Wed., August 1, 2018 Robert Foley 11. Public Comment 12. Adjournment Robert Foley MINUTES INVESTMENT ADVISORY (IAC) COMMITTEE INVESTMENT OVERSIGHT (IOC) COMMITTEE Wednesday, February 7, 2018, 3:00 p.m. - Finance Conference Room PRESENT: IAC COMMITTEE Robert Foley, Chair Ken Romero Larry Sallinger IOC COMMITTEE (non-voting) Richard Rohm, City Treasurer Will Kolbow, Finance Director Rick Otto, City Manager STAFF Josephine Chan, Investment/Revenue Officer Diane Hornsby, Executive Assistant 1. Call to Order Chairman Robert Foley called the meeting to order at 3:00 p.m. 2. Approval of Meeting Minutes of November 1, 2017 Mr. Foley moved to approve; Mr. Romero seconded; motion carried. 3. Rate Summary Highs and lows for various investments during period of January through December 2017. Action: Received and filed 4. Investment Portfolio Update A report showing City's portfolio's investment percentages in various areas, as of January 30, 2018. Action: Received and filed 5. Treasurer's Investment Reports for October, November, and December 2017 Explanation of disbursements, investment activity, and sales tax revenue by month. Action: Received and filed. 6. Sales Tax Update Major sales tax categories, comparing latest quarter to corresponding quarter of previous year. Action: Received and filed. 7. California Economic & Business Review i) Chapman Economic & Business Review ii) California Forecast: Sales Tax & Economic Drivers Action: Received and filed. DATE OF J I - Minutes of the Joint Meeting of the Investment Advisory and Investment Oversight Committees, February 7, 2018 8. City Update A verbal report on city projects being planned and in progress, i.e., completion of Lemon/Chapman parking structure; Council approval of apartment project on West Katella; and grand reopening of Yorba Park on April 7. 9. Next meeting date Wednesday, May 2, 2018, at 3:00 p.m. in the Finance Conference Room. 10. Public Comment - It was agreed to mail agenda packets one week before meetings instead of two weeks. 11. Adjournment-The meeting was adjourned at 3:28 p.m. Robert Foley, Chair Investment Advisory Committee Richard Rohm, City Treasurer Investment Oversight Committee Distribution: Mayor and City Council Finance Director, IOC Investment Advisory Committee City Manager, IOC City Treasurer, IOC 2 Investment/Revenue Officer City Clerk RATE SUMMARY April 2017 to March 2018 Month , , , .. �'.. . �- -. u.s. rreuu,:y" lolcf:;}t�.(i �:� I i!J :UUF Endlr,g ,_· s moiiJh �. e month ;,� ,�-? 'C•'t "" .\ Ylelcl ":� YIRU' . .,, ·.� .... Apr-17 0.80% 0.99% 1.28% 1.45% 1.81% 0.88% May-17 0.98% 1.08% 1.28% 1.44% 1.75% 0.93% Jun-17 1.03% 1.14% 1.38% 1.55% 1.89% 0.98% Jul-17 1.07% 1.13% 1.34% 1.51% 1.84% 1.05% Aug-17 1.01% 1.08% 1.33% 1.44% 1.70% 1.08% Sep-17 1.06% 1.20% 1.47% 1.62% 1.92% 1.11% Oct-17 1.15% 1.28% 1.60% 1.73% 2.01% 1.14% Nov-17 1.27% 1.44% 1.78% 1.90% 2.14% 1.17% Dec-17 1.39% 1.53% 1.89% 1.98% 2.20% 1.24% Jan-18 1.46% 1.66% 2.14% 2.29% 2.52% 1.35% Feb-18 1.65% 1.86% 2.25% 2.42% 2.65% 1.41% Mar-18 1.73% 1.93% 2.27% 2.39% 2.56% 1.52% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 �3 month -+-6 month ---2 year _....3 year �5 year �LAIF DATE OF I I Investment Portfolio Update As of 4-24-18 Instruments a sto Maturi LAIF $ 28,200,000 20.4% Money Market Mutual Fund - Treasury Sweep 106,070 0.1% Commercial Paper 0% Medium Term Note 1 year 5,999,286 4.3% 2 year 10,000,003 7.2% 3 year 10,000,000 7.2% 4 year 2,000,000 1.4% 27,999,289 20.2% Federal Agency 1 year 10,000,000 7.2% 2 year 26,000,000 18.8% 3 year 10,997, 124 8.0% 4 year 27,996,512 20.2% 5 year 7,000,000 5.1% Total 81,993,636 59.3% Total $ 138,298,995 100.0% ..... -.- DATE OF I- w w::, :.: ..J a: <( �> 0 0 R "' g <O "' 000 000 g�R ONO o- U'l CD O O> 0 NN� a5 ci Na, 000 0 0 0 ci N ci 0 ..... 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(JJ s CD 'O ;;::: ;;::: CD O 0. :::, c· � 3 ;;::: ..., "' � ;I, 3 !!t z ;;::: O c: CD C '!!. "Tl c: :::, 0. "Tl "Tl "Tl 5 5' 5' "' "'"' :::, :::, :::, " "" ?l: � � (JJ (JJ (JJ CD Cl) CD < < < c=r n· n· CD CD CD "' CJ) CJ) "Tl -i :i: 0 r '< CD 2 .. s z "Tl "Tl "Tl 5' 5" 5 "'"' "' :::, :::, :::, "" " �� (JJ (JJ (JJ CD CD Cl) < < < n· er o· CD CD CD CJ)"' "' "Tl 5· "' :::, " � (JJ (1) < 11' CD "' "Tl )> :i: 'O r 'O CD ffi' ;;::: ..., z -i 0 � "'D 0 � s· CIJ .. iii ::, n .. iii cc .. Q. .. "C 0 .. g a 3 n � ... Q. g ::, Q. !" Jl ��:�� b' �� g��ggg�g��gg�gg��m ;: 0 � J> c -< Jl sn =i -i -< 0 Date: May 8, 2018 AGENDA ITEM Reviewed/Verified By: norable Mayor and City Manager mbers of the City Council Finance Director 7JviJi7 kOtto To Be Presented By: Manager x Cons Calendar City Mgr Rpts hardA.Ro�� >-- - Council Reports - Legal Affairs >-- Treasurer' Boards/Cmtes Public Hrgs - - liam M. Kolbow . Admin Reports Plan/Environ Ric City Wil Finance Director FROM: TO: Ho Me THRU: Ric City 11. SUBJECT MONTHLY TREASURER'S REPORTS FOR JANUARY, FEBRUARY, AND MARCH 2018. 12. SUMMARY Presentation of three monthly Treasurer's Reports to the City Council after the end of the quarter covered by the reports. 13. RECOMMENDEDACTION Receive and file. 14. FISCAL IMPACT No fiscal impact as a result of this action. ! s, STRATEGIC PLAN GOAL(S) 2d. Be a Fiscally Healthy Community - Effectively manage and develop City assets. 16. GENERAL PLAN IMPLEMENTATION NIA 11. DISCUSSION and BACKGROUND The City's current Statement of Investment Policy has been adopted by the City Council of the City of Orange as Resolution 11005 and is in accordance with the California Government Code DATE OF ................... - Sections 53600 ET Seq. Per the Investment Policy, three monthly investment reports are to be submitted to the City Council within 45 days following the end of the quarter. As required by the City's present Investment Policy, the City Treasurer's report delineates all investments made by the City Treasurer for the City, its special funds, and the Successor Agency funds, by investment type and by broker. The monthly Compliance Report certifying compliance of all investments with both the Government Code and the City's Investment Policy is included. The Investment Portfolio Statement accurately reflects all investments held by the City and its agents as of the end of the month. This investment data is also presented in other summary and graphic form. A reconciliation between total cash and investments and total cash per the General Ledger is also included. All of the three monthly Treasurer's Reports have been reviewed by the Investment Advisory Committee (IAC). SUMMARY OF CHANGES IN TREASURER'S CASH AND INVESTMENTS Treasurer's Operating Cash & Investments'!' Balance @ 12/31/2017 Monthly Activity: Cash Received Cash Disbursed $131,424, 184 47,660,480 (43,172,024) Balance@ 3/31/2018 $135,912,640 OJ Includes operating cash and investments (valued at cost). Does not include deposits with administrators, imprest cash, fiscal agent cash and investments, and deferred compensation. For the month of January 2018 The January cash receipts exceeded cash disbursements by $4,588,818. The City received $6,458,225 in property tax in lieu of motor vehicle license fees, $6,617, 100 in property tax revenue ($4,528,691 for the City and $2,088,409 as property tax increment collected for the Successor Agency), and $2,968,000 in sales tax revenue. During the month, large disbursements included payments totaling $3, 127,816 to Orange County Water District for pumping assessments, $1,731,258 to PERS for employee benefits, $769,683 to Kasa Construction for Yorba Park renovation, and $581,907 to Municipal Water District of Orange County for purchased water. In the month of January, no investments were purchased, matured or were called. The City's balance in L.A.I.F. on January 31 was $24,700,000 or an increase of $3,700,000 due to cash receipts exceeding cash disbursements. , DATE OF � Jz,//K ITEM NO .. � �PAGE MEETING--=�L�-- For the month of February 2018 The February cash disbursements exceeded cash receipts by $1,461,481. During the month, large disbursements included payments totaling $1,255,857 to U.S. Bank for debt service, $1,614,433 to PERS for employee benefits, and $342,843 to Municipal Water District of Orange County for purchased water. The City received $3,957,200 in sales tax revenue. In the month of February, no investments were purchased, matured or were called. The ending balance in L.A.I.F. on February 28 was $23,400,000 or a decrease of $1,300,000 due to cash disbursements exceeding cash receipts. For the month of March 2018 The March cash receipts exceeded cash disbursements by $1,361,119. The City received $4,021,050 in sales tax revenue and $1,860,64 7 in property tax revenue. Large disbursements included payments totaling $1,604,690 to PERS for employee benefits, $924,501 to U.S. Bank for debt service, $235,813 to Big Ben Engineering for pipeline renewal, and $211,947 to West Coast Arborist for street tree maintenance. In the month of March, we purchased one Federal Home Loan Bank note (2.5% for 2.25 years) The City's balance in L.A.I.F. on March 31 was $23,500,000 or an increase of $100,000 related to cash receipts exceeding cash disbursements and the investment activity during the month. CREDIT RA TING ON INVESTMENTS During this period, there was no change to the credit rating on the investments in the investment portfolio. INVESTMENT ADVISORY COMMITTEE (IAC) The most recent IAC meeting was May 2, 2018 while the next quarterly Committee meeting is to be scheduled for August 2018. js. ATTACHMENTS Attachment A - In vestment Report for January 2018 Attachment B - In vestment Report for February 2018 Attachment C - Investment Report for March 2018 DATE OF � I, /t g , DAGE _ _...;;. __ MEETlNG_-,/_:-,..__- ITEM NO.��--rn Attachment A Investment Report for January 2018 DATE OF ITEM NO. 'f __ PAGE f __ MEETING MONTHLY SUMMARY COMPLIANCE CERTIFICATE January 2018 Note: All concentration restrictions were obtained from Sections 5360 l and 53635 of the Government Code or the City's Investment Policy as of June 13, 2017, whichever was the more stringent. 1. U.S. Agencies (A) Total amount (book value) of U.S. Agency securities owned by the City = $79,992,023. (B) Total amount allowed (75% of portfolio book value) of all City investments= $101,179,792. Is (A) less than (B) at time of purchase? Yes X No _ 2. Money Market Mutual Funds (A) Total amount (book value) invested in money market mutual funds by the City= $2,215,689. (B) Total amount allowed ($15 million or 20% of portfolio book value, whichever is less) of all City investments = $15,000,000. Is (A) less than (B)? Yes X No __ 3. LAIF (A) Total amount (book value) invested in LAIF by the City= $24,700,000. (B) Total amount allowed (35% of portfolio book value) of all City investments= $47,217,236. (B) Total amount allowed (20% of portfolio book value) of all City investments= $26,981,278. 4. Commercial Paper (A) Total amount (book value) invested in commercial paper by the City=� No ---- No ---- Yes X Yes X Is (A) less than (B)? Is (A) less than (B)? 5. Medium-Term Notes (A) Total amount (book value) invested in medium-term notes by the City= $27,998,677. 7. Investment Management Agreements (A) Does the City have any investment manager or advisor agreements? (C) Total amount allowed (20% of portfolio book value) of all City investments at time of purchase = $32,399,485. 6. Excluded Investment Vehicles (A) Are any securities excluded by the Statement of Investment Policy currently included in the City's portfolio? . 0 z � No X -��- No _ Yes _ Yes X Is (A) less than (B)? I. (B) If so, was the agreement approved in advance by the City Council? Yes__ No __ (C) Has the City examined the methods and past performance of the investment manager? Yes__ No __ (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes__ No __ (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes__ No __ 8. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes__ No X (B) Does the City currently hold at least 25% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes X No ----- (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes X No ----- (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes X No _ (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes X No _ (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1461 days and 1825 days? Yes X No _ (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market 9. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? . 0 z ! .... NIA X No __ Yes ---- (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No__ N/A_=X�- Prepared By: ��Cf�t--- Ltbsei;;n; Chan Investment/Revenue Officer Audited By: We hereby certify that for the month of January 2018, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through Interactive Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: .-Ki'-"lv-cl ,A-;--&J.,_ Richard A. Rohm City Treasurer Verified By: rg'.dt� William M. 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PAGE tf __ MEETING � z f City of Orange Fiscal Agent Investments As of January 31, 2018 Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds - U.S. Bank First American Government Obligation Fund (1.19%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.19%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank First American Government Obligation Fund (1.19%) Federal National Mortgage Association (1.375%) Successor Agency 20088 Merged & Amended Tax Allocation Bonds - U.S. Bank First American Government Obligation Fund (1.19%) Federal National Mortgage Association (1.875%) Community Facilities District ·06-1 2015 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.19%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.19%) Total Fiscal Agent Cash and Investments Carrying Value 79,067 1,576,293 2,305,589 413,096 1,619,468 236 5,993,749 Market or Contract Value 79,067 1,576,293 2,305,589 413,096 1,619,468 236 5,993,749 DATE OF ITEM NO. --�_PAGE_/...._> __ ' __ MEETING � /2-/1K I Attachment B Investment Report for February 2018 DATE OF ITEM NO._=-S_PAGE_f __ <, __ tv EETl G MONTHLY SUMMARY COMPLIANCE CERTIFICATE February 2018 Note: All concentration restrictions were obtained from Sections 5360 I and 53635 of the Government Code or the City's Investment Policy as of June 13, 2017, whichever was the more stringent. 1. U.S. Agencies (A) Total amount (book value) of U.S. Agency securities owned by the City = $79,992,231. (B) Total amount allowed (75% of portfolio book value) of all City investments= $100,796,427. Is (A) less than (B) at time of purchase? Yes X No . _ 2. Money Market Mutual Funds (A) Total amount (book value) invested in money market mutual funds by the City= $3,004,022. (B) Total amount allowed ($15 million or 20% of portfolio book value, whichever is less) of all City investments = $15,000,000. Is (A) less than (B)? Yes X No __ 3. LAIF (A) Total amount (book value) invested in LAIF b.y the City= $23,400,000. (B) Total amount allowed (35% of portfolio book value) of all City investments= $47,038,333. Is (A) less than (B)? Yes X No _ 4. Commercial Paper (A) Total amount (book value) invested in commercial paper by the City= ,$.2: (B) Total amount allowed (20% of portfolio book value) of all City investments= $26,879,047. Is (A) less than (B)? Yes X No _ 5. Medium-Term Notes (A) Total amount (book value) invested in medium-term notes by the City= $27,998,983. (C) Total amount allowed (20% of portfolio book value) of all City investments at time of purchase = $32,399,485. Is (A) less than (B)? Yes X Yes _ No _ No_-=X=---- . 0 z � 7. Investment Management Agreements (A) Does the City have any investment manager or advisor agreements? 6. Excluded Investment Vehicles (A) Are any securities excluded by the Statement of Investment Policy currently included in the City's portfolio? (B) If so, was the agreement approved in advance by the City Council? Yes__ No __ (C) Has the City examined the methods and past performance of the investment manager? Yes__ No __ (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes__ No __ (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes__ No __ 8. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes__ No X (B) Does the City currently hold at least 25% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes X No ----- (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes X No ----- (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes X No ----- (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes X No ----- (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market 9. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purcha e with maturities between 1461 days and 1825 days? Yes X No _ . 0 z I w i a: �I NIA X No __ Yes ---- (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No__ NIA X -�-- Prepared By: ��C�cwi Investment/Revenue Officer Audited By: Rbsa��zman Accountant We hereby certify that for the month of February 2018, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through Interactive Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: '-Z,(.t.G�d lEi� Richard A. Rohm City Treasurer Verified By: William M. Kolbow Finance Director DATED: April 23, 2018 DATE OF ITEM NO. __...;;;J....___ PAGE __....l.._.'I M EETI NG tu UJ �::::, a: ....I ct< :E > 000 000 c::i c::i ci 000 o_ o o O o" 0 000 l{) 0) v c-J o" M T""T""C\I ggggggg gi si � � � � :g r-, Cl ...... C\J Ol ON v" a5 � a5 a5 C'i aj ,...... ,...... ........ 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"' 0 0 0 0 0 0 0 0 0 0 '?- '?- '?- '3- '3- o_ o_ � � o_ � 2 � - - City of Orange Reconciliation of Total Cash and Investments to General Ledger As of February 28, 2018 Treasurer's Operating Cash and Investments Checking, Payroll, PMA & - Wells Fargo Treasurer's Investments Cash in transit Cash Deposits with Administrators State Compensation Insurance Fund Flexible Benefits Plan - Tri-Ad Imprest Cash Fiscal Agent Cash and Investments Total Cash & Investments Total Cash and Investments per General Ledger 1 Plus Outstanding Checks Total Cash & Investments 223,379 134,395,236 (67,095) 134,551,520 72,047 23,243 134,646,810 12,070 7,275,338 141,934,218 141,510,886 423,332 141,934,218 DATE OF '5 / z./Jf' ITEM NO.___.,;;S PAGE __ i,_l __ MEETING---=�-J-:---- City of Orange Fiscal Agent Investments As of February 28, 2018 Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds - U.S. Bank First American Government Obligation Fund (1.22%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.22%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank. First American Government Obligation Fund (1.22%) Federal National Mortgage Association (1.375%) Successor Agency 20088 Merged & Amended Tax Allocation Bonds - U.S. Bank First American Government Obligation Fund (1.22%) Federal National Mortgage Association (1.875%) Community Facilities District 06-1 2015 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.22%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.22%) Total Fiscal Agent Cash and Investments Carrying Value 87,767 1,576,313 2,902,203 553,617 1,645,063 510,375 7,275,338 Market or Contract Value 87,767 1,576,313 2,902,203 553,617 1,645,063 510,375 7,275,338 1�u1 un PAnE '-.1 DATE OF MEETI NG_..;;;...�.J.-/_�.J-/_I «: Attachment C Investment Report for March 2018 rn:u wn PAGE �¥ MONTHLY SUMMARY COMPLIANCE CERTIFICATE March 2018 Note: All concentration restrictions were obtained from Sections 5360 I and 53635 of the Government Code or the City's Investment Policy as of June 13, 2017, whichever was the more stringent. 1. U.S. Agencies (A) Total amount (book value) of U.S. Agency securities owned by the City = $81,993,636. (B) Total amount allowed (75% of portfolio book value) of all City investments= $101,963,222. Is (A) less than (B) at time of purchase? Yes X No _ 2. Money Market Mutual Funds (A) Total amount (book value) invested in money market mutual funds by the City= $2,458,037. (B) Total amount allowed ($15 million or 20% of portfolio book value, whichever is less) of all City investments = $15,000,000. Is (A) less than (B)? Yes X No __ 3. LAIF (A) Total amount (book value) invested in LAIF by the City= $23,500,000. (B) Total amount allowed (35% of portfolio book value) of all City investments= $47,582,837. ' J � Is (A) less than (B)? Yes X No ---- 4. Commercial Paper (A) Total amount (book value) invested in commercial paper by the City= ,$.2: ' (B) Total amount allowed (20% of portfolio book value) of all City investments= $27,190,192. Is (A) less than (B)? Yes X No ---- 5. Medium-Term Notes (A) Total amount (book value) invested in medium-term notes by the City= $27,999,289. Is (A) less than (B)? Yes X Yes ---- No ---- No_�X __ w o � �l d z � 7. Investment Management Agreements (A) Does the City have any investment manager or advisor agreements? (C) Total amount allowed (20% of portfolio book value) of all City investments at time of purchase = $32,399,485. 6. Excluded Investment Vehicles (A) Are any securities excluded by the Statement of Investment Policy currently included in the City's portfolio? (B) If so, was the agreement approved in advance by the City Council? Yes__ No __ (C) Has the City examined the methods and past performance of the investment manager? Yes__ No __ (D) Pursuant to the agreement, does the City retain authority to make investment decisions? Yes__ No __ (E) Pursuant to the agreement, are the investments deposited with the City's custodian? Yes__ No __ 8. Maturity Limits (A) Does the City currently own any security with a maturity date in excess of five years? Yes__ No X (B) Does the City currently hold at least 25% and no more than 50% of its portfolio in securities at time of purchase with maturities equal to or less than 365 days? Yes X No ----- (C) Does the City currently hold no more than 50% of its portfolio in securities at time of purchase with maturities between 366 days and 730 days? Yes X No ----- (D) Does the City currently hold no more than 35% of its portfolio in securities at time of purchase with maturities between 731 days and 1095 days? Yes X No ----- (E) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1096 days and 1460 days? Yes X No ----- (F) Does the City currently hold no more than 30% of its portfolio in securities at time of purchase with maturities between 1461 days and 1825 days? Yes X r: No ----- 9. Issuer Limits Does each issuer of Money Market Mutual Funds continue to meet the following requirements? (i) Is each issuer registered with the Securities and Exchange Commission under the Investment Company Act of 1940? Yes No__ N/A_-"--'X=-- Yes ---- No __ NIA X . 0 z � (ii) Does the fund of each issuer carry the highest rating of at least two of the three largest national rating agencies? (iii) Has each issuer retained an investment adviser registered with the Securities and Exchange Commission with not less than five years' experience managing money market Prepared By: �lr"� [(,,art JephinChan Investment/Revenue Officer Audited By: �� R�saoGuzman Accountant We hereby certify that for the month of March 2018, the investment actions of the City of Orange comply in all respects with the requirements of the California Government Code and the City's current Investment Policy and that there is sufficient cash flow to cover the next six months' expenditures barring any catastrophic natural disasters. Market values are obtained through Interactive Data Pricing and Reference Data, the State Treasurer's Office, U.S. Trust and U.S. Bank. Certified By: ·;e LMGl A-·f?a1_-1 Richard A. Rohm City Treasurer Verified By: William M. 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I.{) ·- 0 -.::t Cf) C\J C\J Cf) m T""" 0 ti,- - - I., 0 � c, ::I - "'C c co C1) a, ,.... .c E 0 o - N en ti) � CJ) a, ,.... c: > M CJ) c s: � a, o > I., c, cu - "i: c :iE ::I � - I., ca 0 :E - 0 >, .:!:: 0 e en en en en en c, !..... !..... !..... !..... !..... ctS ctS ctS ctS ctS c Q) Q) Q) Q) Q) ·- :i.. >, >, >, >, >, :::::, T""" C\J Cf) -.::t I.{) - cu I I I I I :iE O T""" C\J Cf) -.::t City of Orange Reconciliation of Total Cash and Investments to General Ledger As of March 31, 2018 Treasurer's Operating Cash and Investments Checking, Payroll, PMA & - Wells Fargo Treasurer's Investments Cash in transit Cash Deposits with Administrators State Compensation Insurance Fund Flexible Benefits Plan - Tri-Ad Imprest Cash Fiscal Agent Cash and Investments Total Cash & Investments Total Cash and Investments per General Ledger 1 Plus Outstanding Checks Total Cash & Investments 299,083 135,950,962 (337,407) 135,912,638 72,047 15,085 135,999,770 12,070 6,947,813 142,959,653 142,190,437 769,216 142,959,653 DATE OF ITEM NO. __ «;_PAGE_3 __ 1 __ MEETING_S-£./ ....... 2,t�1_3 _ City of Orange Fiscal Agent Investments As of March 31, 2018 Fiscal Agent Cash and Investments Assessment District 95-1 1996 Limited Obligation Improvement Bonds- U.S. Bank First American Government Obligation Fund (1.37%) Community Facilities District 91-2 2013 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.37%) Federal National Mortgage Association (1.25%) Successor Agency 2008A Merged & Amended Tax Allocation Bonds - U.S. Bank First American Government Obligation Fund (1.37%) Federal National Mortgage Association (1.375%) Successor Agency 20088 Merged & Amended Tax Allocation Bonds - U.S. Bank First American Government Obligation Fund (1.37%) Federal National Mortgage Association (1.875%) Community Facilities District 06-1 2015 Special Tax Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.37%) US Treasury Bond (4.375%) Successor Agency 2014A Merged & Amended Tax Allocation Refunding Bonds - U.S. Bank First American Government Obligation Fund (1.37%) Total Fiscal Agent Cash and Investments Carrying Value 78,904 2, 119,231 2,305,713 417,114 2,026,798 53 6,947,813 Market or Contract Value 78,904 2,119,231 2,305,713 417,114 2,026,798 53 6,947,813 ITEM N0._5 __ PAGE ! , ��I�� /"/It Discussion on Proposed Changes to the Investment Policy • Staff recommends no changes be made to the investment policy for FY 18-19. • Staff requests input from the Committee for any proposed investment policy changes. Last year we updated the investment policy to increase the portfolio limit in federal agencies at time of purchase from 70% to 75%. . ._ ........... I ...... ...... _ I DATE OF . ·-----·· ......... "'I .. J, ·� Dated: June 13, 2017 CITY OF ORANGE STATEMENT OF INVESTMENT POLICY Fiscal Year 2017-18 1.0 INVESTMENT POLICY OVERVIEW 1.1 POLICY It is the policy of the City of Orange ("City") to invest public funds in a manner which will provide foremost for the safety of principal while meeting the short- and long-term cash flow demands of the City and conforming to all statutes governing the investment of City funds. Annually, in accordance with California Government Code ("CGC") Section 53646, the Treasurer will render to the City Council a Statement of Investment Policy for consideration and approval at a public meeting. Any investment currently held at that time that does not meet the guidelines of this policy, as changed from time to time by the City Council, shall be exempt from the requirements of this policy. However, at the investment's maturity or liquidation, such funds shall be reinvested only as provided by this policy. 1.2 PURPOSE This Statement of Investment Policy ("SIP") is set forth by the City for the following purposes: a) To establish a clear understanding for the City Council, Investment Committees, City management, responsible employees, citizens and third parties, of the objectives, policies and guidelines for the investment of the City's idle and surplus funds. b) To offer guidance to investment staff, brokers and any external investment advisors on the investment of City funds. 1.3 INVESTMENT OBJECTIVES Within the overriding requirement of compliance with all Federal, State and local laws governing the investment of moneys under the control of the Treasurer, and as specified in the CGC Section 53600.5, when investing, reinvesting, purchasing, acquiring, exchanging, selling and managing public funds, the primary objectives, in priority order, of the investment activities shall be: a) Safety: Safety of principal is the foremost objective of the investment program. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. I DATE OF , I I ...... b) Liquidity: The investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements which might be reasonably anticipated. c) Return on Investments: The investment portfolio shall be designed and managed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment objectives, authorized investments and the cash flow needs of the City. The Treasurer's monthly reports shall include benchmark reporting to define "a market rate of return"; which shall be one of the indices published in a financial journal of wide circulation that are most comparable to the Treasurer's portfolio. The benchmark shall be used solely as a reference tool. The Treasurer shall not add additional risk to the portfolio in order to attain or exceed the benchmark. 1.4 PRUDENCE Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs; not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. The standard of prudence to be used by investment officials shall be the "prudent investor" standard (CGC Section 53600.3) and shall be applied in the context of managing an overall portfolio. The Treasurer and other investment employees, acting within the intent and scope of the SIP and other written procedures, and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in the immediately following Treasurer's Report and appropriate action is taken to control adverse developments. When a deviation poses a significant risk to the City's financial position, the City Council shall be notified immediately. 1.5 ETHICS Elected officials, City officers and employees and any other individuals involved in the investment operations are prohibited from personal business activity that could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions, or which could give the appearance thereof. Furthermore, these same individuals are prohibited from undertaking personal investment transactions with any individual with whom business is conducted on behalf of the City. 2.0 OPERATIONS AND PROCEDURES 2.1 SCOPE a) This SIP applies to all financial assets of the City. These funds are accounted for in the Comprehensive Annual Financial Report (CAFR) and include: General Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, and Internal Service Funds. b) This SIP specifically exempts and does not apply to the following financial assets and investment activities of the City: 2 (1) The City's Deferred Compensation Plan is excluded because it is managed by a third party administrator and invested by individual plan participants. (2) Proceeds of City or other debt issues in possession of a trustee or fiscal agent are not considered to be part of the financial assets covered by this policy. These bond proceeds shall be invested in accordance with the requirements and restrictions outlined in the bond documents. 2.2 DELEGATION OF AUTHORITY a) The City Council's authority to manage the investment program is derived from CGC Sections 53600 et seq. b) In accordance with the City of Orange Municipal Code Chapter 2.26, management responsibility for the investment program is hereby delegated to the Treasurer, who shall establish written procedures for the operation of the investment program consistent with this SIP. Under the provision of CGC Section 53600.3, the Treasurer is a trustee and a fiduciary subject to the prudent investor standard. c) The Treasurer may delegate all, or a portion of, his/her investment authority to a Deputy City Treasurer. Prior to the delegation of the investment authority to a Deputy City Treasurer, the City Treasurer shall notify the City Council and request confirmation of the delegation. Delegation of investment authority will not remove or abridge the Treasurer's investment responsibility. d) The City Council may engage the services of one or more external investment managers to assist in the management of the City's investment portfolio in a manner consistent with the City's objectives and in accordance with this SIP. Such external managers may provide advice and effectuate trades upon specific authorization for each transaction. Such managers must be registered under the Investment Advisors Act of 1940 and must have not less than five years' experience investing in the securities and obligations authorized by the CGC Section 53601, and with assets under management in excess of five hundred million dollars ($500,000,000). The Treasurer shall review Form ADV of any investment advisor prior to engagement by the City Council. This Section does not preclude the Treasurer from retaining portfolio consultants within existing authority. 2.3 INVESTMENT OVERSIGHT COMMITTEE a) Chapter 2.50 of the Orange Municipal Code establishes an Investment Oversight Committee (IOC). The terms and provisions of said Chapter 2.50 are incorporated into this SIP by reference as though fully set forth herein. The IOC consists of the Treasurer, the City Manager or designee, and the Director of Finance. The Treasurer is required to act as Chair of the IOC, with the City Manager as Vice Chair. The IOC is required to act by majority vote. 3 b) The roe shall, at least annually and more often if directed by the City Council or agreed by a majority of the IOC, review the City Council's adopted SIP and report to the City Council its recommendations for any changes, additions or deletions to the SIP. c) The roe shall monitor the implementation of the City Council's adopted SIP and annually submit a compliance report to the City Council. d) The roe shall review reports to the City Council from the Investment Advisory Committee and prepare responses as required. e) The roe shall meet and report quarterly to the City Council summanzing the roe meetings and the recommendations of the Investment Advisory Committee. Such report shall contain an unedited copy of the Investment Advisory Committee's recommendations. 2.4 AUTHORIZED FINANCIAL INSTITUTIONS AND DEALERS a) Institutions eligible to transact investment business with the City shall include only the following: ( 1) Primary government dealers as designated by the Federal Reserve Bank; (2) Nationally or state-chartered banks; (3) The Federal Reserve Bank; and ( 4) Direct issuers of securities eligible for purchase by the City. b) Selection of financial institutions and broker/dealers authorized to engage in transactions with the City shall be at the sole discretion of the City Treasurer. The Treasurer will maintain a list of financial institutions authorized to provide investment services to the City. c) The City Treasurer shall obtain information from qualified financial institutions to determine if the institution makes markets in securities appropriate for the City's needs, can assign qualified sales representatives and can provide written agreements to abide by the conditions set forth in the City of Orange SIP. Investment accounts with all financial institutions shall be standard non- discretionary accounts and may not be margin accounts. d) All financial institutions which desire to become qualified bidders for investment transactions must supply the Treasurer with the following: ( 1) Audited financial statements for the institution's three most recent fiscal years; (2) At least three references from California local agencies whose portfolio size, investment objectives and risk preferences are similar to the City's; 4 (3) A statement certifying that the institution has reviewed the CGC Sections 53600 et seq. and the City's SIP, and that all securities offered to the City shall comply fully and in every instance with all provisions of the Code and with this SIP; and, ( 4) Completed Broker/Dealer Questionnaire. e) The Treasurer shall conduct an annual review of the financial condition of qualified institutions. In addition, a current financial statement is required to be on file for each qualified institution. f) Public deposits shall be made only in qualified public depositories within the State of California as established by State law. Deposits shall be insured by the Federal Deposit Insurance Corporation (FDIC) or, to the extent the amount exceeds the insured maximum, shall be collateralized with securities in accordance with State Jaw. 2.5 COLLATERAL REQUIREMENTS CGC Sections 53652 and 53667 require depositories to post certain types and levels of collateral for public funds on deposit above the FDIC insurance amounts. The collateral requirements apply to bank deposits, both active (checking and savings accounts) and inactive (non-negotiable time certificates of deposit). 2.6 SAFEKEEPING AND DELIVERY a) To protect against fraud, embezzlement, or losses caused by collapse of individual securities dealers, all securities owned by the City shall be held in safekeeping by the City's custodial bank, a third party bank trust department, acting as agent for the City under the terms of a custody agreement, and shall be evidenced by safekeeping receipts. b) All security transactions entered into by the City shall be conducted on a standard delivery-versus-payment (DVP) basis, which ensures that securities are deposited with the third party custodian prior to the release of funds. All securities purchased or acquired shall be delivered to the City by book entry, physical delivery or by third party custodial agreement as required by CGC Section 53601. Investments in the State Pool or money market mutual funds are undeliverable, and are not subject to delivery or third party safekeeping requirements. c) On a daily basis, investment trades shall be verified against the bank transactions and broker confirmation tickets to ensure accuracy. On a monthly basis, the custodial asset statement is reconciled with the month end portfolio holdings. On an annual basis, the external auditor confirms investment holdings. 5 3.0 PERMITTED INVESTMENTS AND RISK MANAGEMENT 3.1 INVESTMENTS AUTHORIZED The City, as empowered by CGC Sections 53601 et seq. and 16429.1, hereby authorizes the City Treasurer to select investments from among the following: (1) United States Treasury notes, bonds, bills or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest. (Limits: Maximum maturity at purchase 5 years; no other limits.) (2) Obligations issued by banks for cooperatives, federal land banks, federal intermediate credit banks, the Federal Home Loan Bank, the Tennessee Valley Authority, the Federal National Mortgage Association, or other instruments of, or issued by, a federal agency or a United States government-sponsored enterprise. In every case, any issue purchased must be fully guaranteed as to principal and interest by the full faith and credit of the United States, or the issuing federal agency. (Limits: Maximum maturity at purchase 5 years; maximum concentration 75% of portfolio at time of purchase with no more than 35% of total portfolio in any single agency and excluding completely Government National Mortgage Association bonds; i.e., GNMA's.) (3) Shares of beneficial interest issued by diversified management companies that are Money Market Mutual Funds, registered with the Securities and Exchange Commission under the Investment Company Act of 1940 investing in the securities and obligations authorized by CGC Sections 53601(b) and (e) only (i.e., U.S. Government issues only). Such Funds must either carry the highest rating of at least two of the three largest national rating agencies, or such funds must have retained an investment adviser registered with the Securities and Exchange Commission with not less than five year's experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). (Limits: maximum 90 days Weighted Average Maturity; maximum concentration $15 million, or 20%, of portfolio, whichever is less.) (4) State of California Local Agency Investment Fund (LAIF) is permitted, with the knowledge that the fund may invest in some vehicles allowed by statute but not otherwise authorized by the City Council in this SIP. The Treasurer shall obtain from the State Treasurer, no less than quarterly, reports providing sufficient detail to adequately judge the risk inherent in the LAIF portfolio, and shall inform the City Council immediately of any risks noted that may warrant reconsideration of this investment vehicle. (Limits: Maximum concentration 35% of total portfolio for all accounts. This maximum limit is increased to 40% of total portfolio when there is an influx of large deposits resulting from called bonds. The 40% limit is allowed 6 for the next 30 days after the bonds are called so that the City can purchase other investments to bring the allowable percentage back to the 35%.) (5) Investment in new Government sponsored pools will be subject to due diligence. A thorough investigation of the pool is required prior to investing, and on a continual basis. (6) Funds held under the terms of a Trust Indenture or other contract or debt issuance agreement may be invested according to the provisions of those indentures or agreements. (7) Certificates of Deposit approved by the California AB 2011 are permitted. (Limits: The bill allows investment up to January 1, 2021; a maximum concentration 30% of total portfolio.) (8) Commercial Paper of prime quality having the highest ranking or the highest letter and number rating provided by a national rating agency issued by a domestic corporation having assets in excess of $500,000,000 and having an "A" or better rating on its debt other than commercial paper as provided by a national rating agency. (Limits: Maximum maturity of 270 days or less; maximum concentration 20% of portfolio and no more than 5% of the book value of the portfolio funds to a single issuer at time of purchase.) (9) Medium-term notes issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. (Limits: Maximum maturity at purchase 5 years; must be rated "AA-" or better by a nationally recognized rating agency; maximum concentration 20% of portfolio at time of purchase.) 3.2 PROHIBITED INVESTMENT VEHICLES AND PRACTICES The City Treasurer is prohibited from the following: a) Borrowing for investment purposes ("Leverage") is prohibited. b) Buying or selling securities "on Margin" is prohibited. c) Investing in any instrument, which is commonly known as a "derivative" instrument (options, futures, swaps, caps, floors, collars, U.S. Treasury zero coupon bonds, U.S. Treasury strips, interest only bonds, interest-only strips derived from mortgage pools), or any investment that may result in a zero interest accrual, even if held to maturity, is prohibited. 7 d) Under the provisions of CGC Sections 53601.6 and 53631.5, the City shall not invest any funds covered by this SIP in instruments known as Structured Notes (e.g. inverse floaters, leverage floaters, structured CD's, range notes, equity-linked securities). Any such investments are prohibited. e) Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. f) State law notwithstanding, any investments not specifically described herein under Subsections 3 .1 a) through 3 .1 c) are prohibited. 3.3 MITIGATING RISK IN THE PORTFOLIO a) Credit Risk: ( 1) The City will diversify its investments in accordance with the limits set forth in Subsection 3.1 of this SIP to diminish the credit risk resulting from concentrations. (2) The City, on occasion, may sell a security prior to its maturity (recording a gain or loss) in order to improve the risk structure, liquidity and yield of the portfolio in response to market conditions. (3) If securities owned by the City that are rated by a major national rating agency are downgraded by either Moody's, S&P or Fitch, it shall be the City's policy to review immediately the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. If a decision is made to retain a downgraded security in the portfolio, its presence in the portfolio will be reported to the IOC and the City Council and be monitored on a continuous basis. b) Market Risk: While the City recognizes that longer term portfolios achieve higher returns, longer term portfolios have higher volatility of total return. The City will limit market risk by limiting the concentrations, volume and duration of its longer term investments, as well as limiting them to funds which are not needed for current year cash flow purposes. ( 1) Maturities selected shall provide for stability of income and liquidity, and shall not exceed 5 years from the date of purchase. The City shall structure its investment portfolio as a maturity ladder. Funds not required for purposes of meeting cash flow needs shall be invested in permitted securities so that selected percentages of the portfolio mature each year to a maximum of five years. (2) Portfolio maturities shall be managed to avoid undue concentration at time of purchase in any specific maturity sector with at least 15% of the portfolio must be invested from one to 365 days and no more than 50% in 8 this maturity sector, no more than 50% of the portfolio be invested from 366 days to 730 days, no more than 35% of the portfolio be invested from 731 days to 1095 days, no more than 30% of the portfolio be invested from 1096 days to 1460 days, and no more than 30% of the portfolio be invested from 1461 days to 1825 days. (3) The City may, on occasion, sell a security prior to its maturity (recording a gain or loss) in order to diminish the portfolio's exposure to market risk. 4.0 REPORTING, REVIEW AND AUDITS 4.1 MONTHLY REPORTS a) The Treasurer shall submit three monthly investment reports to the City Council, and they shall be submitted within 45 days following the end of the quarter. The monthly reports shall include a complete description of the portfolio, the type of investments, the issuers, maturity dates, par and dollar amounts invested on all securities, the current market values of each component of the portfolio, the source of the portfolio valuation, investments and moneys held by the City, and shall additionally include a description of any of the City's funds, investments, or programs, that are under the management of contracted parties, including lending programs. b) The report shall also include performance measures as recommended by the Association for Investment Management and Research (AIMR). These shall include a presentation of Total Return using accrual accounting, and a Time- weighted Rate of Return using a monthly valuation and one of the AIMR approved methods of calculation. The report shall also include a presentation of Yield to Maturity. c) The report shall also include the performance of the benchmark described in Subsection 1.3 c) of this SIP as a basis of comparison for the City's portfolio. d) The report shall also include the following certifications: ( 1) All investment actions executed since the last report have been made in full compliance with the SIP. (2) The City will meet its expenditure obligations for the next six months is required by CGC Sections 53646(b)(2) and (3). 4.2 INTERNAL CONTROLS The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the City are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. Internal controls shall be in writing and shall address the following points: separation of transaction authority from accounting and record keeping, 9 safekeeping of assets and written confirmation of telephone transactions for investments and wire transfers. 4.3 ANNUAL AUDIT The Treasurer shall insure that the City's annual process of independent review by an external auditor will include an appropriate investment review to assure compliance with this policy and acceptable internal controls. The audit shall be presented to the City Council upon its completion. 4.4 SPECIAL AUDITS The City Council may at any time order an audit of the investment portfolio and/or the Treasurer's investment practices. 5.0 INVESTMENT POLICY ADOPTION The SIP shall be reviewed annually by the City Council for consistency with the City's overall investment objectives regarding preservation of principal, liquidity, return, relevance to current law as well as to current financial and economic trends. Any modifications necessary must be approved separately by the City Council. The SIP shall then be adopted in its entirety, as amended, within 120 days of the fiscal year end by resolution and vote of the City Council at a public meeting. 5.1 INVESTMENT POLICY CERTIFICATION The 1999-2000 version of this investment policy was certified by the Municipal Treasurer's Association of the United States and Canada, in June 2000. Recommended changes have been incorporated. In the event of any significant changes in legislation that will require significant changes to the SIP, the City will resubmit the new policy for re-certification. 10 GLOSSARY AGENCIES: Federal agency securities ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer. BENCHMARK: A segment of the securities market with characteristics similar to the subject portfolio. It is used to compare portfolio performance to the performance of the appropriate segment of the market. ( e.g. 1-Year T-Bill rate) BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. 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. Large-denomination CD's are typically negotiable. COLLATERAL: Securities, 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 moneys. COMMERCIAL PAPER: Short-term, negotiable unsecured promissory notes of corporations. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Orange. It includes five combined statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. 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. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. 11 DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT: The difference between the cost price of a security and its maturity 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 a discount and redeemed at maturity for full face value; e.g., US Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals; e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal agency that insures bank deposits, currently up to $250,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Federal funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations. The Federal Home Loan banks play a role analogous to that played by the Federal Reserve Banks vis-a-vis member commercial banks. FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. 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. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporations' 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 seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The committee periodically meets to set Federal Reserve guidelines regarding 12 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, DC, 12 regional banks and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage banks, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages. The term "pass-throughs" is often used to describe Ginnie Maes. LIQUIDITY: A liquid asset 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 size can be done at those quotes. LOCAL AGENCY INVESTMENT FUND (LAIF): A pooled investment vehicle for local agencies in California sponsored by the State of California and administered by the State Treasurer. MARKET CYCLE: A market cycle is defined as a period of time which includes a minimum of two consecutive quarters of falling interest rates followed by a minimum of two consecutive quarters of rising interest rates. MARKET VALUE: The price at which a security is traded and could presumably be purchased or sold. MATURITY: The date upon which the principal or states value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate of deposit which can be sold in the open market prior to maturity. OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. PORTFOLIO: Collection of securities held by an investor. 13 PRIMARY DEALER: group of government securities dealers who submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities broker-dealers, banks, and a few unregulated firms. PRUDENT INVESTOR STANDARD: Governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds pursuant to CGC Sections 53600 et seq. are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, and managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of the CGC Sections 53600 et seq. and considering individual investments as part to an overall strategy, a trustee is authorized to acquire investments as authorized by law. QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not claim exemption from the payment of any sale or compensating use or ad valorem taxes under the laws of this state, which has aggregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit which cannot be sold prior to maturity. TOTAL RATE OF RETURN: Represents growth (or decline) in the value of a portfolio, including both capital appreciation and income, as a proportion of the starting market value. TIME-WEIGHTED RATE OF RETURN: A modified measurement of Total rate of Return which eliminates the effect of the timing of funds flows to and/or from a security or portfolio. 14 TREASURY BILLS: A non-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 BOND: Long-term U.S. Treasury securities having initial maturities of more than 10 years. TREASURY NOTES: A non-interest bearing discount security issued by the US Treasury to finance the national debt. Most bills are issued to mature in one, two, three, five or ten years. YIELD: The rate of annual income return on an investment, expressed as a percentage. YIELD TO MATURITY is the calculated rate of return based upon the present value of the cash flow from each interest payment, plus the present value of the cash flow from the investment's redemption value at maturity vs. the purchase price. 15 and Food Drugs --·- . . ..-r� II 3rd Quarter 2016 II 3rd Quarter 2017 County Restaurants Building and State and and Pools Hotels Construction REVENUE COMPARISON Two Quarters - Fiscal Year To Date 2016-17 2017-18 Point-of-Sale $18,207,795 $18,785,057 County Pool 3,322,234 2,386,681 State Pool 6,544 2,540 Gross Receipts $21,536,574 $21,174,278 Business and Industry General Consumer Goods DATE OF _ ... l . J .... _ City of Orange Sales Tax Update Autos Fuel and and Service Transportation Stations $0 Advantage Funding NIKE Factory Store Transportation Ralphs Financing Best Buy Red Hawk Fire & Security Cal ply SC Fuels David Wilsons Ford Selman Chevrolet David Wilsons Villa Stadium Nissan Ford DMG Corporation Target Enterprise Rent A Thompson Building Car Materials Foundation Building Toyota Lease Trust Materials Toyota Scion of Home Depot Orange Kia of Orange Verco Decking Mazda of Orange Village Nurseries MS International Wal mart First Quarter &ceipts for Fourth Quarter Sales (October - December 2017) SALES TAX BY MAJOR BUSINESS GROUP Tor 25 PRODUCERS IN ALPH,BETIC�L ORDER $400,000 $800,000 $2,000,000 $2,400,000 $1,600,000 $1,200,000 Q4 2011 City of Orange Sales Tax Update SALES PER CAPITA Rr.vENl'E Bv Bt'SINEss GRot:P Orange This Quarter 12% Pools 12% .... ... ·- 1- Calffornia '-- - Q3 Q3 16 17 ,..: .. - County Q3 15 - � = --- ---- - 1- Q3 14 Orange $0 Fuel $8,000 $6,000 $4,000 $2,000 - • - AulosfTrans. 18% *In thousands of dollars Orange County Hdl State Business Type Q3 '17* Change Change Change Building Materials 714.9 5.8% 2.4% 5.6% Casual Dining 550.8 -1.1% 2.6% 2.3% Contractors 374.2 37.1% 1.1% 6.5% Department Stores 165.8 2.6% -5.8% -7.5% Discount Dept Stores - CONFIDENTIAL- 5.7% 6.1% Electronics/Appliance Stores 212.9 -2.4% 2.9% 0.3% Family Apparel 333.0 14.3% 4.6% 1.7% Grocery Stores 185.2 7.1% 0.8% 0.6% Light lndustriaVPrinters 155.7 -21.6% -2.6% -4.0% Medical/Biotech 178.1 3.3% -2.8% --0.2% New Motor Vehicle Dealers 1,466.8 -1.9% 0.4% 0.9% Petroleum Prod/Equipment - CONFIDENTIAL- 7.3% 28.4% Quick-Service Restaurants 413.5 7.2% 6.7% 4.8% Service Stations 558.8 7.3% 5.5% 9.2% Shoe Stores 172.4 5.3% 1.0% -1.0% Total All Accounts 9,447.3 3.8f, 2.8'/e 4.1% "*'""""'' ._ C:+e+a Dn.nl 411n1"111tinn 1 ?U1 1 A•L ? ,.,. A A•L not required to collect the tax for purchases in an adjacent jurisdiction if the retailer has no physical presence in that jurisdiction. The resulting loss to local governments projected by the State Board of Equalization in 2016-17 was $756 Million in uncollected tax revenues and losses to the state of $697 Mi 11 ion: (https:/ /www.boe.ca.gov/ legdiv/pdf/e-commerce-2017F.pdf). Congress has refused to act on nu- merous attempts to seek legislative relief over the last two decades. However, three justices - Clarence Thomas, Neil Gorsuch and Anthony Kennedy have recently expressed doubts about the Quill decision with Kennedy noting in 2015, chat the ruling has produced a "startling revenue shortfall" in many states as well as "unfairness to local retailers and customers." In January 2018, the U.S. Supreme Court agreed to hear arguments in the case of South Dakota v. Wayfoir Inc. where Wayfoir is challenging the State's recently adopted requirement that retailers collect and remit, or pay, sales tax on purchases made by South Dakota residents. Oral arguments are scheduled for April with a decision expected by the end of June 2018. 0RA�GE TOP 15 BL:Sl:\ESS TYPES California Overall Factored for accounting anomalies, statewide fourth quarter receipts from local government's one cent sales tax were 4.4% higher than the holiday quarter of 2016. Rising fuel prices and solid gains from building/construction supplies, restau- rants and e-commerce were the primary contributors to the overall increase. A healthy quarter for auto sales and con- struction equipment were additional factors. Tax revenues from general consumer goods sold through brick and mortar stores rose a modest 1 o/o over last year's comparable quarter while receipts from online sales increased 13.2%. Performance for the inland areas of the state were generally stronger than the coastal areas which had earlier recovered from the previous downturn. Nexus Issue to be Revisited In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota that businesses lacking a physical presence or "nexus" in a state cannot be required to collect or remit that state's taxes. This does not excuse buyers from paying a corresponding use tax but the costs of enforcement, particularly on smaller purchases, is difficult and local brick and mortar retailers are placed at a competitive disadvantage. California has been more effective at collecting use tax than most states with an aggressive program of audit- ing major business purchases, requir- ing CPA's to report unpaid use tax on client's annual returns and requiring businesses with annual gross receipts of $100,000 or more to register for the purposes of reporting use tax. The Scace has also increased the number of out-of-state sellers required to collect sales tax through broader definitions of what constitutes physical presence including a requirement chat larger internet retailers collect and remit sales tax if paying a commission for customer referrals obtained via a link on a California seller's website. Still, the estimated revenue losses are substantial particularly for agencies with voter-approved transactions tax California Forecast: Sales Tax Trends and Economic Drivers COMPANIES April 2018 Hdl provides relevant information and analyses on the economic forces affecting California's local government agencies. In addition, Hdl's Revenue Enhancement and Economic Development Services help clients to maximize revenues. Hdl serves over 400 cities, counties and special districts in California and across the nation. 0 • DATE OF ITEM NO._�_PAGE __ I _MEETING 5 2- Hdl9 2017/18 2018/19 Most analysts expect minor gains in revenue over the next several quarters as demand for replacement vehicles stabilizes after a decade of growth during the extended recovery from the Great Recession. Pricier new vehicles are competing with a surplus of nearly new cars returned to dealer's lots at the end of their lease terms. Sales and leases at the State's new car dealers currently represent almost 70% of the group's revenue followed by used car dealers and automotive supply stores. Longer term projections are clouded by expected interest rate increases and international trade uncertainty. The industry foresees continued expansion in both residential and commercial construction for the next several years but attention is being paid to rising mortgage interest rates. Labor is the largest cost driver behind land prices in residential construction. Material prices are expected to rise 2-3% in 2018 exclusive of any significant impacts from the new steel and aluminum tariffs. The large number of SB- 1 funded projects should measurably boost sales of materials, especially those used in paving jobs. Manufacturers are reporting a backlog of orders for equipment and supplies from industries other than those in the consumer and food-related sectors which appear to be leveling off. Solid gains are expected for road construction and transportation- related equipment. Online fulfillment warehouses and order desks are included in this group and account for over half of this segment's growth. c r,;�Jt'!.; , -.;,,, · · · · · 0 • •••• ,.. , • , • •• , •• , •• -·= ,. · r ... - ·.:,, __, · · • ··· � , · . , , ..-,,��··· · , ,,•,ls rA_t>_p(�,:� .. • - '• '_,, .·-., t,'.;,J(, ··+.- ' ,' ,,',,;;,,• . ...- '",E,-.,"-''>- 25°/o ��· _ '.\�__ ,l .... • ,-; "•"', ., ... 1:..,, • : , _J:':i· �' ,, ,,<(,., - ·�� ... 'J.!J:-�.u o Like many evolving markets, food and drug stores are increasingly reaching customers who demand greater convenience and the ability to save time by offering consumers robust product options around the clock. Grocery consumer preferences are trending away from one store loyalty, instead shopping multiple outlets for specific products including locally grown and artisanal goods. Cannabis taxes are being remitted; local impacts will vary based upon decisions to ban or allow these businesses in each community. While U.S. shale production growth in the North and South Dakota (Bakken} area continues, extraction from the West Texas/ Permian basin is also driving U.S. output higher. This development is helping offset OPEC output caps, keeping global crude oil prices in the mid $60 range. California is beginning the normal summer blend pricing cycle with statewide averages expected to be $3.50/gallon or more by mid-2018. It appears there will be at least one ballot measure in November to overturn SB- 1 the legislation action that increased statewide excise tax on gas and diesel fuels. Statewide quarterly performance was slightly positive, up 1% for 2017. Forward looking companies are reaping dividends from billions in e-commerce technology investments supporting online orders and customer selected delivery alternatives. Traditional department stores along with interior mall merchants may see further declines due to slower foot traffic and changing consumer behavior. Niche retailer expansion (such as specialty shops and off-price apparel} is expected this coming year. Restaurant sales accelerated at the end of the year as the strong labor market and ebullient stock market induced consumers to spend. Though still below the average rate of growth experienced in recent years, the uptick is a positive sign for the future. In addition, restaurant operators are now reporting they are more optimistic about future sales going up than they have been in several years. In 2000, online activity accounted for 4% of general consumer goods taxes; by the end of last year this figure has risen 16%. Internet sellers, many of whom posted record activity in the fourth quarter, are poised to gain market share at the expense of traditional brick and mortar stores. Focused attention given to consumer preferences, buying habits and behaviors are expected to yield greater pools revenues across several business sectors. Out of state equipment acquisition could accelerate in part due to lower corporate tax rates . • =""'1' .. -�,,- ..... '; c- •• • ·;·,,. -�- ' : ••• •• , •• ;> ,., .... ' • ' • • • '.,' ,·, .. -.y�1"···j;J 3 001. ��·.,··:p\wnt1;.'U�. '� 1. ' ••• : .. , �. w .' • "v.': ··. 1 ,' � r.:- :� �? · 'r .... ¥:. �_ft��l:!J'_:,·-.�1 • i'O Proposition 172 projections vary from statewide Bradley-Burns calculations due to the state's utilization of differing collection periods in its allocation to counties. No retroactive accounting adjustments are anticipated prior to 2018/19 when the California Department of Tax and Fee Administration will have migrated to a new information management platform. HdL forecasts a �atewide increase of 3.40% for Fiscal Year 2017/18 and a ga_in of 2.93% in 2018/19. ,+ � BEACON ECONOMICS National and Statewide - April 2018 ECONOMIC DRIVERS 2017/18 2018/19 Despite all the political tumult of the last several months, the U.S. economy was a smooth-running machine last year. The nation's economy grew at a solid, steady pace throughout the year, with overall output expanding by a reasonable 2.3% over 2016 levels, and later this year, the current economic expansion will become the second longest on record. Despite the strong momentum, the start of 2018 has been far less sanguine. Volatility returned to the financial markets with a bang, which have made little headway since the start of the year. Beacon Economics still expects 2018 to end up being a robust year for growth. With the nation's unemployment rate below what economists refer to as 'full employment' and job openings still near an all- time high, businesses will have to figure out how to expand output despite being unable to fill all their available positions. Labor shortages along with last year's federal tax cuts will lead companies to invest in labor saving technologies (e.g. invest in capital). The U.S. unemployment rate is now 4.1 %, as low as it has been in 45 years, and likely to edge down still further given slow growth in the nation's labor force. Throughout much of this expansion, California has outpaced the nation and many states in terms of economic growth and job gains. Improvements in its unemployment rate have been fueled by strength in many of its key industries. California began 2018 on a high note with January employment numbers showing the largest yearly job gain in 18 months. Growing at a 2.4% year- to-year rate in January, the state added 400,000 jobs with the Health Care, Natural Resources and Construction, and Leisure and Hospitality sectors accounting for over half of this increase. These sectors will continue to figure prominently in California's job growth throughout this year and next. With California hitting its lowest unemployment rate since 1976, wage gains in the state have been on the rise. Average weekly wages in California increased by 4.3% in 2017, the largest increase in the last 1 O years. With steady job growth and limited increases in the labor force expected this year, the unemployment rate will remain low and workers are almost guaranteed to see wages rise again. And it is too soon to gauge the effects of the hike in the statewide minimum wage as pay hikes are currently being driven by the scarcity of labor more than anything else. In looking at California's long-term challenges, the housing problem must be near the top of the list because of its significance for so many of the state's residents and its economy. While Californians clearly understand that high home prices limit affordability, the obvious solution seems less clear: high prices reflect scarcity that can only be addressed through increases in supply. California's median home price was $464,000 in the fourth quarter of 2017, nearly double that of the United States, where the median price stood at just over $250,000. Since 1990, California's median home price has routinely been significantly higher than that of the nation. The state is estimated to. need about 200,000 new housing units built per year, yet it has barely seen more than 100,000 units come on line in each of the last few years. Construction activity is expected to increase moderately this year and next but will still fall short of what the state needs. SB-35 has lent new urgency to a problem that has festered for many years, and very likely will force local jurisdictions to rethink their housing strategy. In response, local jurisdictions must first acknowledge that population growth is an inevitable part of their future. They must take steps to understand what that growth will look like, plan adequately, and, finally, execute on those plans. Doing so will go a long way toward addressing the state's housing needs while also ensuring its long-run economic energy and vitality. Hd� Hdl Companies 1340 Valley Vista Drive, Suite 200 Diamond Bar, California 91765 Telephone: 909.861.4335 • 888.861.0220 Fax: 909.861.7726 California's allocation data trails actual sales activity by three to six months. Hdl compensates for the lack of current information by reviewing the latest reports, statistics and perspectives from fifty or more economists, analysts and trade associations to reach a consensus on probable trends for coming quarters. The forecast is used to help project revenues based on statewide formulas and for reference in tailoring sales tax estimates appropriate to each client's specific demographics, tax base and regional trends. (? � BEACON ECONOMICS SOUTHERN CALIFORNIA OFFICE 5777 West Century Boulevard, Suite 895 Los Angeles, California 90045 Telephone: 310.571.3399 Fax: 424.646.4660 E-Fax: 888.821.4647 Beacon Economics, LLC has proven to be one of the most thorough and accurate, economic research/analytical forecasters in the country. They regularly provide national, state, regional, and sub- regional economic analysis/forecasting to clients ranging from the State of California to private hedge funds to major universities. Their evaluation of the key drivers impacting local economies and tax revenues provides additional perspective to HdL's quarterly consensus updates. The collaboration and sharing of information between Beacon Economics and HdL helps both companies enhance the accuracy of the work that they perform for their respective clients. nd tax revenues provides additional perspective to HdL's quarterly consensus updates. The collaboration and sharing of information between Beacon Economics and HdL helps both companies enhance the accuracy of the work that they perform for their respective clients. "Good information leads to good decisions:'