It is the policy of the city to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting the daily cash flow demands of the city and conforming to all state and local statutes governing the investment of public funds. (Ord. 1322, passed 12-21-99)

“Agencies.” Federal agency securities.
“Asked.” The price at which securities are offered.
“Bankers acceptance (BA).” A draft bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.
“Bid.” The price offered by a buyer of securities.
“Broker.” A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in interdealer markets.
“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 monies.
“Comprehensive annual financial report (CAFR).” The official annual report for the city. It includes five combined statements and basic financial statements for each individual fund and account group 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.
“Certificate of deposit (CD).” A time deposit with a specific maturity evidenced by a certificate. Large denomination CDs are typically negotiable.
“Coupon.” (1) The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value. (2) A certificate attached to a bond evidencing interest due on a payment date.
“Dealer.” A dealer 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.
“Delivery versus payment.” There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). 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.
“Derivatives.” (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities.)
“Discount.” The difference between the cost price of a security and its value at maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be a discount.
“Discount securities.” Noninterest bearing money market instruments that are issued at a discount and redeemed at maturity for full face value.
“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.
“Federal funds rate.” The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations.
“Federal 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 purchases and sales of government securities in the open market as a means of influencing the volume of bank credit and money.
“Federal Reserve System.” The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system.
“Federal Deposit Insurance Corporation (FDIC).” A federal agency that insures bank deposits, currently up to $100,000 per deposit.
“Federal Home Loan Banks (FHLB).” Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district bank.
“Federal National Mortgage Association (FNMA).” FNMA, like GNMA was chartered under the Federal Mortgage Association Act of 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’s purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.
“Government National Mortgage Association (GNMA OR GINNIE MAE).” Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of U.S. Government. GNMA securities are backed by FHA, VA or FMHM mortgages. The term “pass-throughs” is often used to describe Ginnie Maes.
“Illinois Funds (IPTIP).” An agency of the state that invests and distributes member funds through the State Treasurer’s Office.
“Liquidity.” A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value.
“Market value.” The price at which a security is trading and could presumably be purchased or sold.
“Master repurchase agreement.” A written contract covering all future transactions between the parties to repurchase - reverse repurchase agreements that establish each party’s rights in the transactions. A master agreement will often specify the right of the buyer-lender to liquidate the underlying securities in the event of the default by the seller-borrower.
“Maturity.” The date upon which the principal or stated value of an investment becomes due and payable.
“Money market.” The market in which short term debt instruments are issued and traded.
“Offer.” The price asked by a seller of securities.
“Open market operations.” Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary tool.
“Portfolio.” Collection of securities held by an investor.
“Prudent person rule.” An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state - the so-called legal list. In other states, the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.
“Primary dealer.” A 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 informal oversight. Primary dealers include Securities and Exchange Commission (SEC)-registered securities.
“Rate of return.” The yield obtainable on a security based on its purchase price of its current market price. This may be the amortized yield to maturity on a bond or the current income return.
“Qualified public depositories.” A financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated 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.
“Repurchase agreement (RP or REPO).” A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
“Safekeeping.” A 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 and Exchange Commission.” An agency created by Congress to protect investors in securities transaction by administering securities legislation.
“Treasury bills.” A non-interest bearing discount security issued by the U.S. Treasury to finance national debt. Most bills are issued to mature in three months, six months or one year.
“Treasury bond.” Long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than ten years.
“Treasury notes.” Medium-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of from one to ten years.
“Yield.” The rate of annual income return on an investment, expressed as a percentage. (1) “Income Yield” is obtained by dividing the current dollar income by the current market price for the security. (2) “Net Yield” or “Yield To Maturity” is the current income yield minus any premium above par of plus any discount from par in the purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond.
“Uniform net capital rule.” Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities. One reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. (Ord. 1322, passed 12-21-99)

This investment policy applies to all financial assets of the city. These funds are accounted for in the city’s comprehensive annual financial report (CAFR) and include:
Funds:
(A) General fund;
(B) Special revenue funds;
(C) Capital project funds;
(D) Enterprise funds;
(E) Trust and agency funds;
(F) Retirement/pension funds;
(G) Any new funds created by the legislative body, unless specifically exempted. (Ord. 1322, passed 12-21-99)

(A) 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.
(B) 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 the 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 in a timely fashion and appropriate action is taken to control adverse developments. (Ord. 1322, passed 12-21-99)

The primary objectives, in priority order, of the city 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. To attain this objective, diversification is required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.
(B) Liquidity. The city’s investment portfolio will remain sufficiently liquid to enable the city to meet all operating requirements which might be reasonably anticipated.
(C) Return on investment. The city’s investment portfolio shall be designed with the objective of obtaining a market rate of return throughout budgetary and economic cycles taking into account the city’s investment risk constraints and the cash flow characteristics of the portfolio. (Ord. 1322, passed 12-21-99)

Authority to manage the city’s investment program is derived from the state statutes. Management responsibility for the investment program is delegated to the finance clerk, who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include reference to: safekeeping, PSA repurchase agreements, wire transfer agreements, collateral/depository agreements and banking service agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment except as provided under the terms of this policy and the procedures established by the finance clerk. The finance clerk shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. (Ord. 1322, passed 12-21-99)

Officers and employees involved in the investment process shall refrain from personal business activity that could 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 finance clerk any material financial interests in financial institutions that conduct business within this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the city’s portfolio. Employees and officers shall subordinate their personal investment transactions to those of the city, particularly with regard to the time of purchases and sales. (Ord. 1322, passed 12-21-99)

(A) The finance clerk will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness who maintain an office in the state. These may include “primary” dealers or regional dealers that qualify under the Securities and Exchange Commission Rule 15C3-1. No public deposit shall be made except in a qualified public depository as established by state laws.
(B) All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the finance clerk with the following:
(1) Audited financial statements;
(2) Proof of National Association of Security Dealers Certification; and
(3) Proof of state registration.
(C) An annual review of the financial condition and registrations of qualified bidders will be conducted by the finance clerk.
(D) A current audited financial statement is required to be on file for each financial institution and broker/dealer in which the city invests. (Ord. 1322, passed 12-21-99)

The city is empowered by state statute to invest in the certain types of securities as provided in the Illinois Compiled Statutes. (Ord. 1322, passed 12-21-99)

A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. There shall be a questionnaire developed which will answer the following general guidelines:
(A) A description of eligible investment securities, and a written statement of investment policy and objectives;
(B) A description of interest calculations and how it is distributed, and how gains and losses are treated;
(C) A description of how securities are safeguarded (including the settlement processes), and how often are the securities priced and the program audited;
(D) A description of who may invest in the program, how often, what size deposit and withdrawal;
(E) A schedule for receiving statements and portfolio listings;
(F) Are reserves, retained earnings, etc. utilized by the pool/fund?;
(G) A fee schedule, and when and how it is assessed;
(H) Is the pool/fund eligible for bond proceeds and/or will it accept such proceedings? (Ord. 1322, passed 12-21-99)

(A) Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse) agreements. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be no less than 102% of the market value of principal and accrued interest.
(B) The city chooses to limit collateral to the limits provided in the Illinois Compiled Statutes.
(C) Collateral will always be held by an independent third party with whom the entity has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to the city and retained.
(D) The right of collateral substitution is granted. (Ord. 1322, passed 12-21-99)

All security transactions, including collateral for repurchase agreements, entered into by the city shall be conducted on a deliver-versus-payment (DVP) basis. Securities will be held by a third party custodian designated by the finance clerk and evidenced by safekeeping receipts. (Ord. 1322, passed 12-21-99)

The city will diversify its investments by security type and institutional. With the exception of U.S. Treasury securities and authorized pools, no more than 50% of the city’s total investment portfolio will be invested in a single security type or with a single financial institution. (Ord. 1322, passed 12-21-99)

(A) To the extent possible, the city will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the city will not directly invest in securities maturing more than five years three months from the date of purchase. However, the city may collateralize its repurchase agreements using longer-dated investments not to exceed five years three months to maturity.
(B) Reserve funds may be invested in securities exceeding five years three months if the maturity of such investments are made to coincide as nearly as practicable with the expected use of the funds. (Ord. 1322, passed 12-21-99)

The finance clerk shall establish an annual process of independent review by an external auditor. This review will provide internal control by assuring compliance with policies and procedures. (Ord. 1322, passed 12-21-99)

The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, taking into account the city’s investment risk constraints and cash flow needs. (Ord. 1322, passed 12-21-99)

The city’s investment strategy is active. Given this strategy, the basis used by the finance clerk to determine whether market yields are being achieved shall be the 90-day national average CD as published in newspapers of national circulation. (Ord. 1322, passed 12-21-99)

(A) The finance clerk is charged with the responsibility of including a market report on the investment activity and returns in the city’s monthly financial report.
(B) The finance clerk shall, also, provide to the city council a quarterly investment report which provides a clear picture of the status of the current investment portfolio. The management report should include comments on the fixed income markets and economic conditions, discussions regarding restrictions on percentage of investment by categories, possible changes in the portfolio structure going forward and thoughts on investment strategies. Schedules in the quarterly report should include the following:
(1) A listing of individual securities held at the end of the reporting period by authorized investment category;
(2) Average life and final maturity of all investments listed;
(3) Coupon, discount or earnings rate;
(4) Par value, amortized book value and market value;
(5) Percentage of the portfolio represented by each investment category. (Ord. 1322, passed 12-21-99)

The city’s investment policy shall be adopted by ordinance of the city’s legislative authority. The policy shall be reviewed on an annual basis by the finance committee of the city council and any modifications made thereto must be approved by the city council. (Ord. 1322, passed 12-21-99)