HomeMy WebLinkAboutPolicy F-10 - Investment GuidelinesDeschutes County Board of Commissioners
1300 NW Wall St., Suite 200, Bend, OR 97701-1960
(541) 388-6570 -Fax (541) 385-3202 -www.deschutes.org
AGENDA REQUEST & STAFF REPORT
For Board Business Meeting of December 11,2013
DATE: December 5, 2013.
FROM: Wayne Lowry pill(" Finance 6559
TITLE OF AGENDA ITEM:
Approve updated Investment Policy -Board policy F-I 0
PUBLIC HEARING ON THIS DATE? No
BACKGROUND AND POLICY IMPLICATIONS:
The County's investment policy was last updated in September 2012. This most current review
represents a wholsale change of the format of the policy to conform to the model investment policy
established and recommended by the Oregon Short Term Fund Board. This policy revision establishes
authorized investments consistent with the ORS, allows the purchase of securities with maturities up to
5 years and establishes a maximum portfolio average maturity of 2 years. The policy also establishes
broker selection criteria and procedures and reporting requirements.
The proposed policy was presented to the Investment Advisory Committee on October 24 and it was
reviewed by the Oregon Short Term Fund Board on October 10. The proposal was also discussed with
the Board of County Commissioners at their worksession on December 2.
FISCAL IMPLICATIONS:
The updated policy will give the investment officer more flexibility on investment choices and allow
for better management of the County investment portfolio.
RECOMMENDATION & ACTION REQUESTED:
Authorize the County Administrator to approve the updated Investment Policy -Board policy F-I0
ATTENDANCE: Wayne Lowry, Finance Director
DISTRIBUTION OF DOCUMENTS:
None
Deschutes County Proposed Investment Policy
I. Purpose
This Investment Policy defines the parameters within which funds are to be invested by
Deschutes County. Deschutes County's purpose is to provide County Level Services for a large
portion of Central Oregon. This policy also formalizes the framework, pursuant to ORS
294.135, for Deschutes County's investment activities to ensure effective and judicious
management offunds within the scope of this policy.
These guidelines are intended to be broad enough to allow designated investment staff to
function properly within the parameters of responsibility and authority, yet specific enough to
adequately safeguard the investment assets.
II. Governing Authority
Deschutes County's investment program shall be operated in conformance with Oregon Revised
Statutes and applicable Federal Law. Specifically, this investment policy is written in
conformance with ORS 294.035; 294.040; 294.052; 294.135; 294.145; and 294.810. All funds
within the scope of this policy are subject to these statutes and regulations established by the
State of Oregon. Any revisions or extensions of these sections of the ORS shall be assumed to
be part of this Investment Policy immediately upon being enacted.
III. Scope
This policy applies to activities of Deschutes County with regard to investing the financial assets
of all County funds including County Service Districts and Trust Funds. Investments of
employees' retirement funds, deferred compensation plans, and other funds are not covered by
this policy. The amount of funds falling within the scope of this policy over the next three years
is expected to range between $90 million and $170 million.
IV. General Objectives
The primary objectives, in priority order, of investment activities shall be:
1. Preservation of Invested capital
Investments shall be undertaken in a manner that seeks to ensure the preservation of
capital in the overall portfolio. The goal is to mitigate credit risk and interest rate risk.
2. Liquidity
The investment portfolio shall remain sufficiently liquid to meet all reasonably anticipated
operating requirements. Furthermore, the portfolio should consist largely of securities with
active secondary or resale markets. A portion of the portfolio also may be placed in the
Oregon Short Term Fund which offers next-day liquidity. Where possible and prudent, the
portfolio should be structured so that investments mature concurrent with anticipated
demands.
3. Return
The investment portfolio shall be designed with the objective of attaining a market rate of
return throughout budgetary and economic cycles, taking into consideration the safety and
liquidity needs ofthe portfolio. Although return consists of both principal return (gains and
losses due to market value fluctuations) and income return (yield), this policy discourages
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active trading and turnover of investments. Investments should generally be held to
maturity
V. Standards of Care
1. Prudence.
The standard of prudence to be used by investment officials shall be the "prudent person"
standard and shall be applied in the context of managing an overall portfolio. Investment
officers acting in accordance with written procedures and this investment policy, and
exercising due diligence shall be relieved of personal responsibility for an individual
security's credit risk or market price changes, provided deviations from expectations are
reported and appropriate action is taken to control adverse developments within a timely
fashion as defined in this policy.
The "prudent person" standard states:
"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."
2. Ethics and Conflicts of Interest.
Officers and employees involved in the investment process shall refrain from personal
activity that could conflict with the proper execution and management of the investment
program, or that could impair their ability to make impartial decisions. Employees and
investment officials shall disclose any material interests in financial institutions with which
they conduct business. Disclosure shall be made to the governing body. They shall further
disclose any personal financial/investment positions that could be related to the
performance ofthe investment portfolio. Employees and officers shall refrain from
undertaking personal investment transactions with the same individual with whom business
is conducted on behalf of the County. Officers and employees shall, at all times, comply
with the State of Oregon Government Standards and Practices code of ethics set forth in
ORS Chapter 244.
3. Delegation of Authority and Responsibilities
i. Governing Body
The Board of County Commissioners will retain ultimate fiduciary responsibility for
invested funds. The governing body will receive reports, pursuant to, and with
sufficient detail to comply with ORS 294.085 and 294.155.
ii. Delegation of Authority
Authority to manage investments within the scope of this policy and operate the
investment program in accordance with established written procedures and internal
controls is granted to the Finance Director/Treasurer, hereinafter referred to as
Investment Officer, and derived from the following: ORS 294.035 to 294.053,
294.125 to 294.145, and 294.810.
No person may engage in an investment transaction except as provided under the
terms of this policy and the procedures established by the Investment Officer. The
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Investment Officer shall be responsible for all transactions undertaken and shall
establish a system of controls to regulate the activities of subordinate officials.
All participants in the investment process shall seek to act responsibly as custodians
of the public trust. No officer or designee may engage in an investment transaction
except as provided under the terms of this policy and supporting procedures.
iii. Investment Committee
The Deschutes County Board of County Commissioners established an investment
advisory committee on April 19, 1995 by resolution 95-12520 to provide guidance to
the Investment Officer and monitor investment policy compliance.
iv. Investment Adviser
The Investment Officer may engage the services of one or more external investment
managers to assist in the management ofthe County's investment portfolio in a
manner consistent with this investment policy. Investment advisers may be hired
on a non-discretionary basis. All investment transactions by approved investment
advisers must be pre-approved in writing by the Investment Officer and compliant
with this Investment Policy. If the Investment Officer hires an investment adviser to
provide investment management services, the adviser is authorized to transact with
its direct dealer relationships on behalf of Deschutes County.
VI. Transaction Counterparties, Investment Advisers and Depositories
1. Broker/Dealers
The Investment Officer shall determine which broker/dealer firms and registered
representatives are authorized for the purposes of investing funds within the scope of this
investment policy. A list will be maintained of approved broker/dealer firms and affiliated
registered representatives.
The following minimum criteria must be met prior to authorizing investment transactions.
The Investment Officer may impose more stringent criteria.
i. Broker/Dealer firms must meet the following minimum criteria:
A. Be registered with the Securities and Exchange Commission (SEC);
B. Be registered with the Financial Industry Regulatory Authority (FINRA).
C. Provide most recent audited financials.
D. Provide FINRA Focus Report filings.
ii. Approved broker/dealer employees who execute transactions with Deschutes
County must meet the following minimum criteria:
A. Be a registered representative with the Financial Industry Regulatory
Authority (FINRA);
B. Be licensed by the state of Oregon;
C. Provide certification (in writing) of having read; understood; and agreed to
comply with the most current version of this investment policy.
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iii. Periodic (at least annual) review of all authorized broker/dealers and their
respective authorized registered representatives will be conducted by the
Investment Officer. Factors to consider would be:
A. Pending investigations by securities regulators.
B. Significant changes in net capital.
C. Pending customer arbitration cases.
D. Regulatory enforcement actions.
2. Investment Advisers
A list will be maintained of approved advisers selected by conducting a process of due
diligence.
i. The following items are required for all approved Investment Advisers:
A. The investment adviser firm must be registered with the Securities and
Exchange Commission (SEC) or licensed by the state of Oregon; (Note:
Investment adviser firms with assets under management> $100 million
must be registered with the SEC, otherwise the firm must be licensed by the
state of Oregon)
B. All investment adviser firm representatives conducting investment
transactions on behalf of Deschutes County must be registered
representatives with FINRA;
C. All investment adviser firm representatives conducting investment
transactions on behalf of Deschutes County must be licensed by the state of
Oregon;
D. Certification, by all of the adviser representatives conducting investment
transactions on behalf of Deschutes County, of having read, understood and
agreed to comply with this investment policy.
ii. A periodic (at least annual) review of all authorized investment advisers will be
conducted by the Investment Officer to determine their continued eligibility within
the portfolio guidelines. Factors to consider would be:
A. Pending investigations by securities regulators.
B. Significant changes in net capital.
C. Pending customer arbitration cases.
Regulatory enforcement actions.
3. Depositories
i. All financial institutions who desire to become depositories must be qualified
Oregon Depositories pursuant to ORS Chapter 295.
4. Competitive Transactions
i. The Investment Officer shall obtain and document competitive bid information on
all investments purchased or sold in the secondary market. Competitive bids or
offers should be obtained, when possible, from at least three separate
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brokers/financial institutions or through the use of a nationally recognized trading
platform.
ii. In the instance of a security for which there is no readily available competitive bid or
offering on the same specific issue, the Investment Officer shall document
quotations for comparable or alternative securities.
iii. When purchasing original issue instrumentality securities, no competitive offerings
will be required as all dealers in the selling group offer those securities at the same
original issue price. However, the Investment Officer is encouraged to document
quotations on comparable securities.
iv. If an investment adviser provides investment management services, the adviser
must retain documentation of competitive pricing execution on each transaction
and provide upon request.
VII. Administration and Operations
1. Delivery vs. Payment
All trades of marketable securities will be executed (cleared and settled) by delivery vs.
payment (DVP) to ensure that securities are deposited in the County's safekeeping
institution prior to the release of funds.
2. Third-Party Safekeeping
Securities will be held by an independent third-party safekeeping institution selected by the
County. All securities will be evidenced by safekeeping receipts in the County's name. Upon
request, the safekeeping institution shall make available a copy of its Statement on
Standards for Attestation Engagements (SSAE) No. 16.
3. Internal Controls.
The investment officer is responsible for establishing and maintaining an adequate internal
control structure designed to reasonably assure that invested funds are invested within the
parameters of this Investment policy and, protected from loss, theft or misuse. SpeCifics for
the internal controls shall be documented in writing. The established control structure shall
be reviewed and updated periodically by the Investment Officer.
The concept of reasonable assurance recognizes that the cost of a control should not exceed
the benefits likely to be derived and the valuation of costs and benefits requires estimates
and judgments by management.
lhe internal controls shall address the following points at a minimum:
i. Compliance with Investment Policy
ii. Control of collusion.
iii. Separation of transaction authority from accounting and record keeping.
iv. Custodial safekeeping.
v. Avoidance of physical delivery of securities whenever possible and address control
requirements for physical delivery where necessary.
vi. Clear delegation of authority to subordinate staff members.
vii. Confirmation of transactions for investments and wire transfers in written or
digitally verifiable electronic form.
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viii. Dual authorizations of wire and automated clearing house (ACH) transfers
ix. Staff training
x. Review, maintenance and monitoring of security procedures both manual and
automated.
4. An external auditor in conjunction with the annual County audit shall review compliance
with Oregon state law and Deschutes County policies and procedures.
VIII. Suitable and Authorized Investments
1. Permitted Investments
The following investments are permitted pursuant to ORS 294.035, 294.040, and ORS
294.810. (Note: Permitted investments may be more restrictive than ORS 294.035 and
294.810).
• US Treasury Obligations: U.S. Treasury and other government obligations that carry the
full faith and credit guarantee of the United States for the timely payment of principal
and interest.
• US Agency Obligations: Senior debenture obligations of us federal agencies and
instrumentalities or U.S. government spansored enterprises (GSE).
• Oregon Short Term Fund.
• Corporate Indebtedness
1. Commercial Paper issued under the authority afsection 3(a)2 or 3(a)3 of the
Securities Act of1933.
2. Corporate Bonds
• Municipal Debt
• Bonkers Acceptances
• Qualified Institution Time Deposits/Savings Accounts/Certificates of Deposit.
2. Approval of Permitted Investments
If additional types of securities are considered for investment, per Oregon state statute they
will not be eligible for investment until this Policy has been amended and the amended
version adopted by Deschutes County.
3. Prohibited Investments
i. Private Placement or ttl44A" Securities
Private placement or "144A" securities are not allowed. For purposes of the policy,
SEC Rule 144A securities are defined to include commercial paper privately placed
under section 4(a)(2) of the Securities Act of 1933.
ii. US Agency Mortgage-backed Securities
US agency mortgage-backed securities such as those securities issued by FNMA and
FHLMC are not allowed.
iii. Securities Lending
The County shall not lend securities nor directly participate in a securities lending
program.
4. Demand Deposits and Time Deposits
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i. All demand deposits and time deposits (Examples of time deposits are: certificates
of deposit and savings accounts) shall be held in qualified Oregon depositories in
accordance with ORS Chapter 295 .
ii. Demand depos its in qualified depository institutions are considered cash vehicles
and not investments and are therefore outside the scope and restrictions of th is
policy. Pursuant to ORS 294.035(3)(d), time deposits, certificates of deposit and
savings accounts are considered investments and within the scope of this policy.
IX. Investment Parameters
1. Credit Risk
Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a
real or perce ived change in the ability of the issuer to repay its debt. Credit risk will be
mitigated by the following guidelines:
i . Diversification
It is the policy of Deschutes County to diversify its investments. Where appropriate,
exposures will be limited by security type; maturity; issuance, issuer, and security
type, Allowed security types and Investment exposure lim itations are detailed in the
table below.
ii. Recognized Credit Ratings
Investments must have a rating from at least two of the following nationally
recognized statistical ratings organizations (NRSRO): Moody's Investors Service;
Standard & Poor's; and Fitch Ratings Service as detailed in the table below. Ratings
used to apply the guidelines below should be investment level ratings and not issuer
level ratings .
iii. Portfolio Average Credit Rating
The minimum weighted average credit rating of the portfolio's rated investmb1ts
shall be Aa/AA/AA by Moody's Investors Service; Standard & Poor's; and Fitch
Ratings Service respectively.
iv. Exposure Constraints and Minimum Investment Credit Ratings.
The following table limits exposures among investments permitted by this policy.
US Treasury Obligations 100% None
US Agency Securities 100%
Per Age (Senior Obligations Only) 33%
Oregon Short Term Fund
Bankers' Acceptances A1+/P1/F1+
Time Deposits/Savings 50%
Accounts/Certificates of Deposit(2)
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Per Institution 25%
Corporate Debt (Total) 25%(3)
Corporate Commercial Paper
Per Issuer 5.0%(4) A1/P1/F1
Corporate Bonds
Per Issuer 5.0%(4) A/A/A
Municipal Debt 25%
Municipal Bonds Aa/AA/AA
(1) 25% Maximum per ORS 294.035(D)
(2) As authorized by ORS 294.035(3)(d)
(3) 35% Maximum per ORS 294.035(D)
(4) 5% Maximum per ORS 294 .035(D)
v. Restriction on Issuers With Prior Default History
Per ORS 294.040, the bonds of issuers listed in ORS 294.035 (3)(a) to (c) may be
purchased only if there has been no default in payment of either the principal of or
the interest on the obligations of the issuing county, port, school district or city, for
a period of five years next preceding the date of the investment.
2. Liquidity Risk
Liquidity risk is the risk that an investment may not be easily marketable or redeemable.
The following strategies will be employed to mitigate liquidity risks :
i . The value of at least 10% of funds available for investing or three months of
budgeted operating expenditures will be invested in the Oregon Short Term Fund,
with a quatified depository institution, or investments maturing in less than 30days
to provide sufficient liquidity for expected disbursements.
ii. Funds in excess of liquidity requirements are allowed for investments maturing in
"' 1, greater than one year . However, longer-term investments tend to be less liquid
than shorter term investments . Portfolio investment maturities will be limited as
follows:
Total Portfolio Maturity Constraints:
Maturity Constraints Minimum % of Total Portfolio
Under 30 days 10% or three months Estimated
Operating Expenditures
Under 1 year 25%
Under 5 years 100%
Weighted Average Maturity of Portfolio 2.0 ye ars
iii. Reserve or Capital Improvement Project funds may be invested in securities
exceeding the maximum term if the maturities of such investments are made to
coincide as nearly as practicable with the expected use of the funds.
iv. Larger issuance sizes enhance liquidity as there are likely to be a greater number of
investors. Issuance sizes above a minimum amount qualify a corporate or
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municipal debt bond issuance for index eligibility. Index eligible bonds have a
significantly larger investor base which improves liquidity.
v. Limiting investment in a specific debt issuance improves secondary market liquidity
by assuring there are other owners of the issuance .
US Agency Securities
Corporate Debt
Corporate Commercial Paper
Co rate Bonds
50%
25%
25%
3. Interest Rate Risk
Longer-term investments have the potential to achieve higher returns but are also likely to
exhibit higher market value volatility due to the changes in the general level of interest rates
over the life of the investment(s). Interest rate risk will be mitigated by providing adequate
liquidity for short term cash needs, and by making longer-term investments only with funds
that are not needed for current cash flow purposes. Certain types of securities, including
variable rate securities, securities with principal pay-downs prior to maturity, and securities
with embedded options, will affect the interest rate risk profile of the portfolio differently in
different interest rate environments. The following strategies will be employed to control
and mitigate adverse changes in the market value of the portfolio due to changes in interest
rates:
i. Where feasible and prudent, investment maturities should be matched with
expected cash outflows to mitigate market risk.
ii. To the extent feasible, investment maturities not matched with cash outflows,
including liquidity investments under one year, should be staggered to mitigate re
investment risk.
iii. No commitments to buy or sell securities may be made more than 14 days prior to
the anticipated settlement date, or receive a fee other than interest for future
deliveries.
iv. The maximum percent of callable securities in the portfolio shall be 25%;
v. The maximum stated final maturity of individual securities in the portfolio shall be
five years, except as otherwise stated in this policy.
vi. The maximum portfolio average maturity (measured with stated final maturity) shall
be 2 .0 years.
X. Investment of Proceeds from Debt Issuance
1. Investments of bond proceeds are restricted under bond covenants that may be more
restrictive than the investment parameters included in this policy. Bond proceeds shall be
invested in accordance with the parameters of this policy and the applicable bond
covenants and tax laws.
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2. Funds from bond proceeds and amounts held in a bond payment reserve or proceeds fund
may be invested pursuant to ORS 294.052. Investments of bond proceeds are typically not
invested for resale and are maturity matched with outflows. Consequently, surplus funds
within the scope of ORS 294.052 are not subject to this policy's liquidity risk constraints
within section IX (2).
XI. Investment of Reserve or Capital Improvement Funds
1. Pursuant to ORS 294.135(1)(b), reserve or capital Improvement project funds may be
invested in securities exceeding three years when the funds in question are being
accumulated for an anticipated use that will occur more than 18 months after the funds are
invested, then, upon the approval of the governing body of the county, the maturity of the
investment or investments made with the funds may occur when the funds are expected to
be used.
XII. Guideline Measurement and Adherence
1. Guideline Measurement
Guideline measurements will use par value of investments.
2. Guideline Compliance:
i. If the portfolio falls outside of compliance with adopted investment policy
guidelines or is being managed inconsistently with this policy, the Investment
Officer shall bring the portfolio back into compliance in a prudent manner and as
soon as prudently feasible.
ii. Violations of portfolio guidelines as a result of transactions; actions to bring the
portfolio back into compliance and; reasoning for actions taken to bring the
portfolio back into compliance shall be documented and reported to the Board of
County Commissioners.
iii. Due to fluctuations in the aggregate surplus funds balance, maximum percentages
for a particular issuer or investment type may be exceeded at a point in time.
Securities need not be liquidated to realign the portfolio; however, consideration
should be given to this matter when future purchases are made to ensure that
appropriate diversification is maintained.
XIII. Reporting and Disclosure
1. Compliance
The Investment Officer shall prepare a report at least monthly that allows the Board of
County Commissioners to ascertain whether investment activities during the reporting
period have conformed to the investment policy. The report will also be provided to the
investment advisory committee. The report will include, at a minimum, the following:
i. A listing of all investments held during the reporting period showing: par/face value;
accounting book value; market value; type of investment; issuer; credit ratings; and
yield to maturity (yield to worst if callable).
ii. Average maturity of the portfolio at period-end.
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iii. Maturity distribution of the portfolio at period-end.
iVa Average portfolio credit quality of the portfolio at period-end.
v. Average weighted yield to maturity (yield to worst if callable investments are
allowed) of the portfolio,
vi. Distribution by type of investment.
vii. Transactions since last report.
viii. Distribution of transactions among financial counterparties such as broker/dealers.
ix. Violations of portfolio guidelines or non-compliance issues that occurred during the
prior period or that are outstanding. This report should also note actions (taken or
planned) to bring the portfolio back into compliance.
2. Performance Standardsl Evaluation
At least annually, the Investment Officer shall report comparisons of investment returns to
relevant alternative investments and comparative Bond Indexes. The performance of the
portfolio should be compared to the performance of alternative investments such as
available certificates of deposit; the Oregon Short Term Fund; US Treasury rates; or against
one or more bond indices with a similar risk profile (e.g., Bond indexes comprised of high
grade investments and maximum maturities of three years).
When comparing performance, all fees and expenses involved with managing the portfolio
shall be included in the computation of the portfolio's rate of return.
3. Marking to Market.
The market value of the portfolio shall be calculated at least monthly and a statement of the
market value of the portfolio shall be included in the monthly report.
4. Audits
Management shall establish an annual process of independent review by the external
auditor to assure compliance with internal controls. Such audit will include tests deemed
appropriate by the auditor.
XIV. Policy Maintenance and Considerations
1. Review
The investment policy shall be reviewed at least annually to ensure its consistency with the
overall objectives of preservation of principal, liquidity and return, and its relevance to
current law and financial and economic trends.
The annual report should also serve as a venue to suggest policies and improvements to the
investment program, and shall include an investment plan for the coming year.
2. Exemptions
Any investment held prior to the adoption of this policy shall be exempted from the
requirements of this policy. At maturity or liquidation, such monies shall be reinvested as
provided by this policy.
3. Policy Adoption and Amendments
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I '
I
This investment policy and any modifications to this policy must be formally approved in I
writing by the Board of County Commissioners.
rhis policy must be submitted to the Oregon Short Term Fund (OSTF) Board for review if:
i. This policy allows maturities beyond 18 months unless the funds are being
accumulated for a specific purpose, including future construction projects, and upon
approval of the Board of County Commissioners, the maximum maturity date
matches the anticipated use of the funds (ORS 294.135(1)(b) and 294.135(3)).
And either:
A. This policy has never been submitted to the OSTF Board for comment;
Or
B. Material changes have been made since the last review by the OSTF Board.
Regardless of whether this policy is submitted to the OSTF Board for comment, this policy
shall be re-submitted not less than annually to the Board of County Commissioners for
approval.
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