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HomeMy WebLinkAboutbocc.res.014.2022 A RESOLUTION OF THE BOARD OF COUNTY COMMISSIONERS OF PITKIN COUNTY,COLORADO, APPROVING THE REVISION OF THE PITKIN COUNTY INVESTMENT POLICY Resolution No. 014-2022 RECITALS: WHEREAS,pursuant to Section 2.8.4 (Actions) of the Pitkin County Home Rule Charter ("HRC"), all matters not required to be acted upon by ordinance or formal resolution may be acted upon by informal resolution. WHEREAS, the Board of County Commissioners of Pitkin County, Colorado, (hereinafter "the Board")has previously adopted an investment policy that established guidelines for the purchase,sale and safekeeping of investments for Pitkin County(hereinafter"the Investment Policy"). WHEREAS, the purpose of the investment policy is to specify various policies and procedures that will foster a prudent and systematic investment program designed to achieve the County's objectives of safety, liquidity and return on investment through a diversified investment portfolio. WHEREAS, the investment policy serves to organize and formalize Pitkin County's investment- related activities, while complying with all applicable statutes governing the investment of public funds. WHEREAS, the County recently retained a professional investment advisor with a new strategy for investment of County funds and the investment policy needs to be aligned with the new investment strategy. WHEREAS, the BOCC finds that it is in the best interests of the citizens of Pitkin County to approve this Resolution. NOW, THEREFORE, BE IT RESOLVED by the Board of County Commissioners of Pitkin County, Colorado that that it hereby adopts A RESOLUTION APPROVING THE REVISION OF THE PITKIN COUNTY INVESTMENT POLICY, as attached in Exhibit A, and authorizes the Chair to sign the Resolution and upon the satisfaction of the County Attorney as to form, execute any other associated documents necessary to complete this matter. INTRODUCED, READ AND ADOPTED ON THE 23RD DAY OF FEBRUARY 2022. ATTEST: BOARD OF COUNTY COMMISSIONERS By J i& fiAl By: FVaun.lit, ,Jatalfu Julia Ely Francie Jacober, Vice Chair Deputy County Clerk Date: Feb-23-2022 APPROVED AS TO FORM: MANAGER APPROVAL 106, Et/ PIu1iis M.affiu, John Ely, County Attorney Phylis Mattice for Jon Peacock, County Manager INVESTMENT POLICY ADOPTED FEBRUARY 23,2022 CONTENTS I. INTRODUCTION 5 II. Scope 5 III. Prudence 5 IV. Objectives 6 V. Delegation of Authority 6 VI. Ethics and Conflicts of Interest 7 VII. Internal Controls 7 VIII. Authorized Financial Institutions, Depositories and Broker/Dealers 8 IX. Delivery, Safekeeping and Custody 9 X. Competitive Transactions 9 XI. Authorized Investments 9 XII. Prohibited Investment Vehicles and Practices 13 XIII. Investment Pools/Mutual Funds 13 XIV. Maximum Maturity 14 XV. Risk Management and Diversification 14 XVI. Review of Investment Portfolio 15 XVII. Performance Evaluation 15 XVIII. Reporting 16 XIX. Review of Investment Policy 17 GLOSSARY OF INVESTMENT TERMS 18 I. INTRODUCTION The purpose of this investment policy is to specify various policies and procedures that will foster a prudent and systematic investment program designed to achieve Pitkin County's objectives of safety, liquidity and return on investment through a diversified investment portfolio. This policy also serves to organize and formalize Pitkin County's investment-related activities, while complying with all applicable statutes governing the investment of public funds. This policy is written to incorporate industry best practices and recommendations from sources such as the Government Finance Officers Association (GFOA) and the Association of Public Treasurers (APT). This investment policy was endorsed and adopted by the Pitkin County Board of County Commissioners (hereinafter referred to as "the Commissioners") and is effective as of the 9th day of January, 2019, and replaces any previous versions. II. Scope The provisions of this Policy shall apply to all investable funds of Pitkin County, Colorado (hereinafter referred to as "the County") except the Pitkin County Public Employee's Retirement Fund(invested pursuant to C.R.S. § 24-54-101, et seq.) and the donated Pitkin County Library Capital Reserve (invested pursuant to C.R.S. § 15-1-1101, et seq.). • Proceeds of debt issuance shall be invested in accordance with the County's general investment philosophy as set forth in this policy;however,such proceeds are to be invested pursuant to the permitted investment provisions of their specific bond indentures. POOLING OF FUNDS Except for cash in certain restricted and special funds, the County will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. III. Prudence The standard of prudence to be used for managing the County's assets is the "prudent person standard"which states, "fiduciaries...shall exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion, and intelligence exercise in the management of the property of another, not in regard to speculation but in regard to the permanent disposition of funds, considering the probable income as well as the probable safety of capital." (C.R.S. § 15-1-304, Standard for Investments). The County's overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The County shall recognize that no investment is totally riskless and that the investment activities of the County are a matter of public record. Accordingly,the County recognizes that occasional measured losses may occur in a diversified portfolio and shall be considered within the context of the overall portfolio's return, provided that adequate diversification has been implemented and that the sale of a security is in the best long-term interest of the County. The County's Treasurer and authorized investment personnel 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 that the deviations from expectations are reported in a timely fashion to the Commissioners and appropriate action is taken to control adverse developments. IV. Objectives The overriding objectives of the program are to preserve principal, provide sufficient liquidity, and manage investment risks, while seeking a market-rate of return. • SAFETY. Safety of principal is the foremost objective of the investment program. Investments will be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the County will diversify its investments by investing funds among a variety of securities. • LIQUIDITY. The investment portfolio will remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. • RETURN ON INVESTMENTS. The investment portfolio will be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints for safety and liquidity needs. V. Delegation of Authority Authority to manage the County's investment program is derived from Colorado Revised Statutes (C.R.S. § 24-75-601.1). The Commissioners are responsible for the adoption of this Policy. Management responsibility for the administration of this Policy is hereby delegated to the County's Treasurer. The Treasurer shall develop written administrative procedures and internal controls, consistent with this Policy, for the operation of the County's investment program. Such procedures shall be designed to prevent losses of public funds arising from fraud,employee error,misrepresentation by third parties, or imprudent actions by employees of the County. The Treasurer may delegate the authority to conduct investment transactions and manage the operation of the investment portfolio to specifically authorized staff members. No person may engage in an investment transaction except as expressly provided under the terms of this Policy. The County may engage the support services of advisors, consultants and professionals in regard to its investment program, so long as it can be clearly demonstrated that these services produce a net financial advantage or necessary financial protection of the County's financial resources. Investment Advisors shall be registered with the Securities Exchange Commission under the Investment Advisors Act of 1940. Advisors shall be selected using the County's authorized purchasing procedures for selection of professional services. Advisors may be granted discretion to purchase and sell investment securities subject to the provisions of this Policy, but shall not, under any circumstances, take custody of any County funds or securities. VI. Ethics and Conflicts of Interest All participants in the investment process shall act as custodians of the public trust. Investment officials shall recognize that the investment portfolio is subject to public review and evaluation. Thus employees and officials involved in the investment process shall refrain from personal business activity that could create a conflict of interest or the appearance of a conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the County Manager any material interests in financial institutions with which they conduct business, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking any personal investment transactions with the same individual with whom business is conducted on behalf of the County. VII. Internal Controls The Treasurer is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the entity are protected from loss, theft or misuse. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and(2)the valuation of costs and benefits requires estimates and judgments by management. Periodically an independent analysis by an external auditor shall be conducted to review internal controls, account activity and compliance with policies and procedures. VIII. Authorized Financial Institutions,Depositories and Broker/Dealers Public deposits will be made only in qualified public depositories pursuant to the Public Deposit Protection Act (CRS 11-10.5-101, et seq.) for banks and the Savings and Loan Association Public Deposit Protection Act (CRS 11-47-101, et seq.). To the extent practicable,the Treasurer shall endeavor to complete investment transactions using a competitive bid process whenever possible. The Treasurer will determine which financial institutions are authorized to provide investment services to the County. It shall be the County's policy to purchase securities only from authorized institutions and firms. The Treasurer shall maintain procedures for establishing a list of authorized broker/dealers and financial institutions which are approved for investment purposes that are selected through a process of due diligence as determined by the County. Approved broker/dealers and the firms they represent shall be licensed to do business in the State of Colorado and as such are subject to the provisions of the Colorado Revised Statutes, including but not limited to C.R.S. § 24-75-604. Due diligence inquiry shall determine whether such authorized broker/dealers, and the individuals covering the County are reputable and trustworthy, knowledgeable and experienced in public agency investing and able to meet all of their financial obligations. To be eligible, a firm must meet at least one of the following criteria: 1. Be recognized as a Primary Dealer by the Federal Reserve Bank of New York or have a primary dealer within its holding company structure; 2 . Report voluntarily to the Federal Reserve Bank of New York, 3 . Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1 (Uniform Net Capital Rule) . All financial institutions which desire to become qualified bidders for investment transactions (and which are not dealing only with the investment adviser) must supply the Treasurer with audited financials and a statement certifying that the institution has reviewed Colorado Revised Statutes 24-75-601, et seq. and the County's investment policy. The Treasurer will conduct an annual review of the financial condition and registrations of such qualified bidders. Selection of broker/dealers used by an external investment adviser retained by the County will be at the sole discretion of the adviser. The County may purchase commercial paper from direct issuers even though they are not on the approved broker/dealer list as long as the paper meets the criteria outlined in item #3 of the section"XI"titled"Authorized Investments." IX. Delivery, Safekeeping and Custody Delivery-versus-Payment (DVP). All investment transactions shall be conducted on a delivery-versus-payment basis. Safekeeping and Custody. To protect against potential losses due to failure of individual securities dealers, and to enhance access to securities, interest payments and maturity proceeds, all cash and securities in the County's portfolio shall be held in safekeeping in the County's name by a third party custodian, acting as agent for the County under the terms of a custody agreement executed by the bank and the County. All investment transactions will require a safekeeping receipt or acknowledgment generated from the trade. A monthly report will be received by the County from the custodian listing all securities held in safekeeping with current market data and other information. The only exceptions to the foregoing shall be depository accounts and securities purchases made with: (i)local government investment pools; (ii)time certificates of deposit,and, (iii) money market mutual funds, since the purchased securities are not deliverable. The County may utilize the services of the Depository Trust Corporation (DTC) as a depository for delivery of securities not wired through the Federal Reserve system. X. Competitive Transactions Where possible, transactions with broker/dealers shall be selected on a competitive basis with at least three broker/dealers contacted, and their bid or offering prices shall be recorded. If there is no other readily available competitive offering, best efforts will be made to document quotations for comparable or alternative securities. 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. XI. Authorized Investments Except as specifically defined in this Policy, all investments of the County shall be made in accordance with applicable laws contained in the Colorado Revised Statutes, as amended: C.R.S. § 11-10.5-101, et seq., Public Deposit Protection Act; C.R.S. § 11-47-101, et seq., Savings and Loan Association Public Deposit Protection Act; C.R.S. § 24-75-601,et seq.,Funds-Legal Investments;C.R.S. §24-75-603,Depositories,and C.R.S. § 24-75-702, Local governments-authority to pool surplus funds. Any revisions or extensions of these sections of the Colorado Revised Statutes will be assumed to be part of this Investment Policy immediately upon the effective date thereof. The credit quality of any eligible investment will be evaluated using the following Nationally Recognized Statistical Rating Organizations (NRSROs): Standard & Poor's, Moody's or Fitch(or any of their successor agencies). The County has further defined the following types of securities and transactions as eligible for use by the County: 1. U.S. TREASURY SECURITIES fully guaranteed by, or for which the full credit of the United States Treasury is pledged for payment. • Maturities shall not exceed five years from the date of trade settlement. • There are no limits on the dollar amount or percentage that the County may invest in U.S. Treasuries. 2. FEDERAL AGENCY AND U.S. GOVERNMENT-SPONSORED ENTERPRISE (GSE) SECURITIES issued by or fully guaranteed as to principal and interest by federal agencies or U.S. GSEs. • Maturities shall not exceed five years from the date of trade settlement. • No more than 75%of the total portfolio may be invested in federal agency and GSE securities. • No more than 25% of the total portfolio may be invested in any single Agency/GSE issuer. 3. CORPORATE OR BANK SECURITIES denominated in United States dollars. • Maturities shall not exceed three years from the date of trade settlement. • At the time of purchase must carry at least two credit ratings from the above mentioned NRSROs and are not rated below: a. "Al,P1, or Fl"or their equivalents if the security is a money market instrument such as commercial paper or bankers' acceptance; or b. "AA- or Aa3" or their equivalents if the security is any other kind of security. • At no time shall the book value of investments in corporate and bank securities total more than 25% of the total book value of the County's portfolio with no greater than 5%exposure to any single issuer. • No subordinated security may be purchased. • No security issued by a corporation or bank that is not organized and operated within the United States may be purchased without authorization by Commissioners to invest in such securities. 4. MONEY MARKET MUTUAL FUNDS registered under the Investment Company Act of 1940,provided they: • Have a constant daily net asset value per share of$1.00; • Are "no-load" (i.e.: no commission or fee shall be charged on purchases or sales of shares)and charge no 12b1 fees; • Limit assets of the fund to securities authorized by state statute; • Have a maximum stated maturity and weighted average maturity in accordance with Rule 2a-7 of the Investment Company Act of 1940; and • Have a rating of AAAm by Standard and Poor's or AAA by Moody's, or AAA/V-1+by Fitch Investors Service or have assets of one billion dollars or more. 5. LOCAL GOVERNMENT INVESTMENT POOLS authorized under C.R.S. §24-75-701,et seq.,provided they: • Have a constant daily net asset value per share of$1.00; • Are "no-load" (i.e., no commission or fees shall be charged on purchases or sales of shares)and charge no 12b1 fees; • Limit assets of the fund to securities authorized by state statute; • Have a maximum stated maturity and weighted average maturity in accordance with Rule 2a-7 of the Investment Company Act of 1940; and • Have a rating of AAAm by Standard and Poor's or AAA by Moody's or AAA/V-1+by Fitch Investors Service. • No more than 25%of the total portfolio may be invested in any single local government investment pool. 6. CERTIFICATES OF DEPOSITS with a maturity not exceeding five years in any bank that is a member of the Federal Deposit Insurance Corporation(FDIC). • Certificates of deposit that exceed FDIC insurance limits shall be collateralized as required by the Public Deposit Protection Act or the Savings and Loan Association Public Deposit Protection Act. • No more than 30%of the total portfolio may be invested in certificates of deposit. • No more than 15%of the total portfolio may be invested in any one issuer. 7. REPURCHASE AGREEMENTS collateralized with marketable U.S. Treasury, Agency or GSE securities listed in items#1 &2 above and maintained at a market value plus accrued interest of at least 102%of the dollar value of the repurchase agreement. • Repurchase agreements are subject to a Master Repurchase Agreement between the County and the provider of the repurchase agreement. The Master Repurchase Agreement will be substantially in the form developed by the Securities Industry and Financial Markets Association(SIFMA). • Repurchase agreements shall be entered into only with dealers who have executed an approved Master Repurchase Agreement with the County and who are recognized as primary dealers with the Federal Reserve Bank of New York or have a primary dealer within their holding company structure. • For the purpose of this section, the term collateral shall mean purchased securities under the terms of the Master Repurchase Agreement and shall be delivered versus payment to the County's custodian bank for safekeeping on behalf of the County. • The collateral for the repurchase agreement may not have a maturity in excess of five years. • The market value plus accrued interest of the collateral securities shall be marked-to-the-market no less frequently than weekly. • The County may utilize Tri-party Repurchase Agreements provided that the County is satisfied that it has a perfected interest in the securities used as collateral and that the County has a properly executed Tri-party Agreement with both the counterparty and custodian bank. • The maximum maturity of the repurchase agreement shall not exceed one year. 8. MUNICIPAL SECURITIES of state or local governments with a maturity not exceeding five years from the date of trade settlement. • General obligation and revenue obligation securities of this state or any political subdivision of this state must be rated at the time of purchase at least"AA"or its equivalent by at least two NRSROs. • General obligation and revenue obligation securities of any other state or political subdivision of any other state must be rated at the time of purchase at least"AA"or its equivalent by at least two NRSROs. • No more than 30% of the total portfolio may be invested in municipal securities. • No more than 5%of the total portfolio may be invested in the securities of any single issuer. 9. SUPRANATIONALS,provided that: • Issues are U.S. dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the World Bank. • The securities are rated at the time of purchase at least "AA" or its equivalent by an NRSRO. • No more than 30% of the total portfolio may be invested in these securities. • No more than 10%of the portfolio may be invested in any single issuer. • The maximum maturity does not exceed five (5)years. XII. Prohibited Investment Vehicles and Practices State law notwithstanding, any investments not specifically authorized pursuant to this approved Investment Policy are prohibited, including but not limited to: • Futures and options • Investment in inverse floaters,range notes, or mortgage derived interest-only strips • Investment in any security that could result in a zero interest accrual if held to maturity • Trading securities for the sole purpose of speculating on the future direction of interest rates • Purchasing or selling securities on margin • The purchase of foreign currency denominated securities XIII. Environmental, Social, Governance and Socially Responsible Investing(ESG/SRI) In the event all general objectives mandated by state law are met and created equal, investments in corporate securities and depository institutions will be evaluated for social and environmental concerns. Investments are encouraged in entities that support equality of rights regardless of sex, race, age, disability, religion, or sexual orientation, as well as those entities that practice environmentally sound and fair labor practices. Investments are prohibited in entities that receive a significant portion of their revenues from the manufacture of tobacco products, exploration and extraction of fossil fuels, firearms, or weapons not used in our national defense. XIV. Investment Pools/Mutual Funds The County shall conduct a thorough investigation of any local government investment pool or money market mutual fund prior to making an investment, and on a continual basis thereafter. The following general questions should be addressed: 1. A description of eligible investment securities, and a written statement of investment policy and objectives. 2. A description of interest calculations and how it is distributed, and how gains and losses are treated. 3. A description of how the securities are safeguarded(including the settlement processes), and how often the securities are priced and the program audited. 4. A description of who may invest in the program,how often,what size deposit and withdrawal are allowed. 5. A schedule for receiving statements and portfolio listings. 6. Are reserves,retained earnings, etc. utilized by the pool/fund? 7. A fee schedule,and when and how is it assessed. 8. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? XV. Maximum Maturity To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities. The County will not invest in securities maturing more than 5 years from the date of trade settlement (3 years for corporate securities), unless the Commissioners have by resolution granted authority to make such an investment. XVI. Risk Management and Diversification MITIGATING CREDIT RISK IN THE PORTFOLIO Credit risk is the risk that a security or a portfolio will lose some or all of its value due to a real or perceived change in the ability of the issuer to repay its debt. The County will mitigate credit risk by adopting the following strategies: • The diversification requirements included in the "Authorized Securities and Transaction"section of this policy are designed to mitigate credit risk in the portfolio. • No more than 5% of the total portfolio may be invested in securities of any single issuer per each category in"Authorized Securities and Transaction" section of this policy, except where the issuer is the U.S. Government, its Agencies and GSEs or where the security is Money Market Mutual Funds or Local Government Investment Pools or where the security is a certificate of deposit collateralized as required by the Public Deposit Protection Act or the Savings and Loan Association Public Deposit Protection Act. • The County may elect to sell a security prior to its maturity and record a capital gain or loss in order to improve the quality,liquidity or yield of the portfolio in response to market conditions or the County's risk preferences. • If securities owned by the County are downgraded by a nationally recognized statistical ratings organization(NRSRO)to a level below the quality required by this Investment Policy, it will be the County's policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. • If a security is downgraded, the Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the economic outlook for the issuer,and other relevant factors. • If a decision is made to retain a downgraded security in the portfolio, its presence in the portfolio will be monitored and reported monthly to the Commissioners. MITIGATING MARKET RISK IN THE PORTFOLIO Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The County recognizes that, over time, longer-term portfolios have the potential to achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return. The County will mitigate market risk 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. The County further recognizes that certain types of securities, including variable rate securities, securities with principal pay downs prior to maturity, and securities with embedded options,will affect the market risk profile of the portfolio differently in different interest rate environments.The County,therefore,adopts the following strategies to control and mitigate its exposure to market risk: • The County shall maintain at least 10%of its total portfolio in instruments maturing in 90 days or less to provide sufficient liquidity for expected disbursements. • The maximum percent of callable securities (does not include "make whole call" securities as defined in the Glossary) in the portfolio will be 20%. • The maximum stated final maturity of individual securities in the portfolio will be five years, except as otherwise stated in this policy. The duration of the portfolio will at all times be approximately equal to the duration (typically, plus or minus 20%) of a Market Benchmark, an index selected by the County based on the County's investment objectives, constraints and risk tolerances. XVII. Review of Investment Portfolio The Treasurer shall periodically,but no less than quarterly,review the portfolio to identify investments that do not comply with this investment policy and establish protocols for reporting major and critical incidences of noncompliance to the Commissioners. XVIII.Performance Evaluation The investment portfolio shall be designed to attain a market-average rate of return throughout budgetary and economic cycles, taking into account the County's risk constraints, the cash flow characteristics of the portfolio, and state and local laws, ordinances or resolutions that restrict investments. The Treasurer shall monitor and evaluate the portfolio's performance relative to market benchmark, which will be included in the Treasurer's periodic report. The Treasurer shall select an appropriate, readily available index to use as a market benchmark. XIX. Reporting SEMI-ANNUAL REPORTS The Treasurer will submit a semi-annual investment report to the Commissioners which provides full disclosure of the County's investment activities within 60 days after the end of the quarter. These reports will disclose, at a minimum, the following information about the County's portfolio: 1. An asset listing showing par value, cost and independent third-party fair market value of each security as of the date of the report, the source of the valuation, type of investment, issuer, maturity date, and interest rate. 2. Transactions for the period. 3. A description of the funds, investments and programs (including lending programs) managed by contracted parties (i.e. local government investment pools, outside money managers and securities lending agents) 4. A one-page summary report that shows: a. Average maturity of the portfolio and modified duration of the portfolio; b. Maturity distribution of the portfolio; c. Percentage of the portfolio represented by each investment category; d. Average portfolio credit quality; and, e. Time-weighted total rate of return for the portfolio for relevant periods compared to the County's market benchmark returns for the same periods; 5. A statement of compliance with the Investment Policy, including a schedule of any transactions or holdings which do not comply with this Policy or with Colorado Revised Statutes, including a justification for their presence in the portfolio and a timetable for resolution. ANNUAL REPORTS A comprehensive annual report will be presented to the Commissioners. This report will include comparisons of the County's return to the market benchmark return, suggest policies and improvements that might enhance the investment program, and will include an investment plan for the coming year. XX. Review of Investment Policy The investment policy will be reviewed at least annually within 120 days of the end of the fiscal year,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. Any recommended modifications or amendments shall be presented by the Treasurer to the Commissioners for their consideration and adoption. GLOSSARY OF INVESTMENT TERMS AGENCIES. Shorthand market terminology for any obligation issued by a government-sponsored entity(GSE), or afederally related institution.Most obligations of GSEs are not guaranteed by the full faith and credit of the US government. Examples are: FFCB. The Federal Farm Credit Bank System provides credit and liquidity in the agricultural industry. FFCB issues discount notes and bonds. FHLB. The Federal Home Loan Bank provides credit and liquidity in the housing market. FHLB issues discount notes and bonds. FHLMC. Like FHLB, the Federal Home Loan Mortgage Corporation provides credit and liquidity in the housing market. FHLMC, also called "FreddieMac" issues discount notes, bonds and mortgage pass-through securities. FNMA. Like FHLB and FreddieMac, the Federal National Mortgage Association was established to provide credit and liquidity in the housing market. FNMA, also known as "FannieMae," issues discount notes,bonds and mortgage pass-through securities. GNMA. The Government National Mortgage Association,known as "GinnieMae," issues mortgage pass-through securities, which are guaranteed by the full faith and credit of the US Government. PEFCO.The Private Export Funding Corporation assists exporters. Obligations of PEFCO are not guaranteed by the full faith and credit of the US government. TVA. The Tennessee Valley Authority provides flood control and power and promotes development in portions of the Tennessee, Ohio, and Mississippi River valleys. TVA currently issues discount notes and bonds. ASKED. The price at which a seller offers to sell a security. ASSET BACKED SECURITIES. Securities supported by pools of installment loans or leases or by pools of revolving lines of credit. AVERAGE LIFE. In mortgage-related investments, including CMOs, the average time to expected receipt of principal payments, weighted by the amount of principal expected. BANKER'S ACCEPTANCE. A money market instrument created to facilitate international trade transactions. It is highly liquid and safe because the risk of the trade transaction is transferred to the bank which"accepts"the obligation to pay the investor. BENCHMARK. A comparison security or portfolio. A performance benchmark is a partial market index, which reflects the mix of securities allowed under a specific investment policy. BID. The price at which a buyer offers to buy a security. BROKER. A broker brings buyers and sellers together for a transaction for which the broker receives a commission. A broker does not sell securities from his own position. CALLABLE. A callable security gives the issuer the option to call it from the investor prior to its maturity. The main cause of a call is a decline in interest rates. If interest rates decline since an issuer issues securities,it will likely call its current securities and reissue them at a lower rate of interest. Callable securities have reinvestment risk as the investor may receive its principal back when interest rates are lower than when the investment was initially made. CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs may be marketable. CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement service that allows local agencies to purchase more than $250,000 in CDs from a single financial institution(must be a participating institution of CDARS)while still maintaining FDIC insurance coverage. CDARS is currently the only entity providing this service. CDARS facilitates the trading of deposits between the California institution and other participating institutions in amounts that are less than $250,000 each, so that FDIC coverage is maintained. COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase agreement. Also, securities pledged by a financial institution to secure deposits of public monies. COLLATERALIZED MORTGAGE OBLIGATIONS(CMO).Classes of bonds that redistribute the cash flows of mortgage securities(and whole loans)to create securities that have different levels of prepayment risk, as compared to the underlying mortgage securities. COMMERCIAL PAPER. The short-term unsecured debt of corporations. COST YIELD.The annual income from an investment divided by the purchase cost.Because it does not give effect to premiums and discounts which may have been included in the purchase cost, it is an incomplete measure of return. COUPON. The rate of return at which interest is paid on a bond. CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a timely manner due to changes in the condition of the issuer. CURRENT YIELD. The annual income from an investment divided by the current market value. Since the mathematical calculation relies on the current market value rather than the investor's cost, current yield is unrelated to the actual return the investor will earn if the security is held to maturity. DEALER. A dealer acts as a principal in security transactions, selling securities from and buying securities for his own position. DEBENTURE. A bond secured only by the general credit of the issuer. DELIVERY VS.PAYMENT(DVP). A securities industry procedure whereby payment for a security must be made at the time the security is delivered to the purchaser's agent. DERIVATIVE. Any security that has principal and/or interest payments which are subject to uncertainty(but not for reasons of default or credit risk)as to timing and/or amount, or any security which represents a component of another security which has been separated from other components ("Stripped" coupons and principal). A derivative is also defined as a financial instrument the value of which is totally or partially derived from the value of another instrument, interest rate, or index. DISCOUNT.The difference between the par value of a bond and the cost of the bond,when the cost is below par. Some short-term securities, such as T-bills and banker's acceptances, are known as discount securities. They sell at a discount from par, and return the par value to the investor at maturity without additional interest. Other securities, which have fixed coupons, trade at a discount when the coupon rate is lower than the current market rate for securities of that maturity and/or quality. DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive exposure to any one source of risk. DURATION. The weighted average time to maturity of a bond where the weights are the present values of the future cash flows.Duration measures the price sensitivity of a bond to changes in interest rates. (See modified duration). FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks. The Federal Reserve Bank through open-market operations establishes it. FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes monetary policy and executes it through temporary and permanent changes to the supply of bank reserves. LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings at a rate higher than the cost of borrowing. LIQUIDITY. The speed and ease with which an asset can be converted to cash. LOCAL AGENCY INVESTMENT FUND (LAIF). A voluntary investment fund open to government entities and certain non-profit organizations in California that is managed by the State Treasurer's Office. LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer's Office Local Agency Investment Fund(LAIF)to county pools,to Joint Powers Authorities(JPAs). These funds are not subject to the same SEC rules applicable to money market mutual funds. MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the remaining debt early. Unlike a call option, with a make whole call provision, the issuer makes a lump sum payment that equals the net present value (NPV) of future coupon payments that will not be paid because of the call. With this type of call, an investor is compensated, or "made whole." MARGIN.The difference between the market value of a security and the loan a broker makes using that security as collateral. MARKET RISK. The risk that the value of securities will fluctuate with changes in overall market conditions or interest rates. MARKET VALUE. The price at which a security can be traded. MARKING TO MARKET. The process of posting current market values for securities in a portfolio. MATURITY. The final date upon which the principal of a security becomes due and payable. MEDIUM TERM NOTES.Unsecured, investment-grade senior debt securities of major corporations which are sold in relatively small amounts on either a continuous or an intermittent basis. MTNs are highly flexible debt instruments that can be structured to respond to market opportunities or to investor preferences. MODIFIED DURATION. The percent change in price for a 100 basis point change in yields. Modified duration is the best single measure of a portfolio's or security's exposure to market risk. MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, commercial paper, and banker's acceptances) are issued and traded. MORTGAGE PASS-THROUGH SECURITIES.A securitized participation in the interest and principal cash flows from a specified pool of mortgages. Principal and interest payments made on the mortgages are passed through to the holder of the security. MUNICIPAL SECURITIES. Securities issued by state and local agencies to finance capital and operating expenses. MUTUAL FUND. An entity which pools the funds of investors and invests those funds in a set of securities which is specifically defined in the fund's prospectus. Mutual funds can be invested in various types of domestic and/or international stocks,bonds,and money market instruments, as set forth in the individual fund's prospectus. For most large, institutional investors, the costs associated with investing in mutual funds are higher than the investor can obtain through an individually managed portfolio. NEGOTIABLE CD. A short-term debt instrument that pays interest and is issued by a bank, savings or federal association, state or federal credit union, or state-licensed branch of a foreign bank. Negotiable CDs are traded in a secondary market and are payable upon order to the bearer or initial depositor(investor). PREMIUM. The difference between the par value of a bond and the cost of the bond,when the cost is above par. PREPAYMENT SPEED. A measure of how quickly principal is repaid to investors in mortgage securities. PREPAYMENT WINDOW. The time period over which principal repayments will be received on mortgage securities at a specified prepayment speed. PRIMARY DEALER. A financial institution (1) that is a trading counterparty with the Federal Reserve in its execution of market operations to carry out U.S. monetary policy, and (2) that participates for statistical reporting purposes in compiling data on activity in the U.S. Government securities market. PRUDENT PERSON (PRUDENT INVESTOR) RULE. A standard of responsibility which applies to fiduciaries. In California,the rule is stated as "Investments shall be managed with the care, skill, prudence and diligence, under the circumstances then prevailing, that a prudent person, acting in a like capaTown and familiar with such matters,would use in the conduct of an enterprise of like character and with like aims to accomplish similar purposes." REALIZED YIELD.The change in value of the portfolio due to interest received and interest earned and realized gains and losses. It does not give effect to changes in market value on securities, which have not been sold from the portfolio. REGIONAL DEALER. A financial intermediary that buys and sells securities for the benefit of its customers without maintaining substantial inventories of securities and that is not a primary dealer. REPURCHASE AGREEMENT. Short-term purchases of securities with a simultaneous agreement to sell the securities back at a higher price. From the seller's point of view, the same transaction is a reverse repurchase agreement. SAFEKEEPING. A service to bank customers whereby securities are held by the bank in the customer's name. STRUCTURED NOTE.A complex,fixed income instrument,which pays interest,based on a formula tied to other interest rates, commodities or indices. Examples include inverse floating rate notes which have coupons that increase when other interest rates are falling, and which fall when other interest rates are rising, and "dual index floaters," which pay interest based on the relationship between two other interest rates - for example, the yield on the ten-year Treasury note minus the Libor rate. Issuers of such notes lock in a reduced cost of borrowing by purchasing interest rate swap agreements. SUPRANATIONAL. A Supranational is a multi-national organization whereby member states transcend national boundaries or interests to share in the decision making to promote economic development in the member countries. TOTAL RATE OF RETURN.A measure of a portfolio's performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains, and losses in the portfolio. U.S.TREASURY OBLIGATIONS. Securities issued by the U.S. Treasury and backed by the full faith and credit of the United States. Treasuries are considered to have no credit risk, and are the benchmark for interest rates on all other securities in the US and overseas. The Treasury issues both discounted securities and fixed coupon notes and bonds. TREASURY BILLS. All securities issued with initial maturities of one year or less are issued as discounted instruments, and are called Treasury bills. The Treasury currently issues three- and six-month T-bills at regular weekly auctions. It also issues"cash management"bills as needed to smooth out cash flows. TREASURY NOTES. All securities issued with initial maturities of two to ten years are called Treasury notes, and pay interest semi-annually. TREASURY BONDS. All securities issued with initial maturities greater than ten years are called Treasury bonds. Like Treasury notes, they pay interest semi-annually. VOLATILITY. The rate at which security prices change with changes in general economic conditions or the general level of interest rates. YIELD TO MATURITY. The annualized internal rate of return on an investment which equates the expected cash flows from the investment to its cost.