Investment and Cash Management Policy

TABLE OF CONTENTS

  1. POLICY

    2. It is the policy of the City of Lawrence 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 of Lawrence and conforming to all state, county, and local statutes governing the investment of public funds.

  2. SCOPE

    3. This policy applies to the cash management and investment activities of the City of Lawrence, Kansas, except for the debt service funds, reserve funds and other financial assets held by various fiscal agents and trustees as provided by the appropriate bond ordinance. The financial assets of all other funds shall be administered in accordance with the provisions of this policy.

  3. DELEGATION OF AUTHORITY

    4. Responsibility for the management of the City’s investment portfolio is delegated to the director of Finance by the City Manager. The director of Finance will establish and maintain written procedures for the operation of the cash management and investment program consistent with this policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the director of Finance.

  4. PERFORMANCE STANDARDS

    5. The City of Lawrence recognizes that effective cash management is an integral component of good financial management. Therefore, it is the policy of the City that funds deemed idle, based on projected cash flow, be invested in a manner that seeks to maximize their productivity until such time as they are needed for the operations of the City. Investments shall be at the highest rates obtainable at the time of investment, within the limitations of the law and our prudent investment policy. The City’s investment portfolio shall be designed and managed in accordance with the responsibility of ensuring the public’s trust and consistent with state and local laws.

      1. Safety – The primary tenet of the City of Lawrence investment strategy is ensuring the safety of principal. Cash investments of the City of Lawrence shall be undertaken in a manner that seeks to maximize investment income while ensuring the preservation of capital in the portfolio.

      2. Return on Investment – The investment portfolio shall be designed to attain, at a minimum, a market-average rate of return throughout budgetary and economic cycles, taking into account the City’s investment risk constraints, State statutes and the cash flow needs of the City’s operations. Investments will be made at the highest rates obtainable at the time of investment, within the limitations of the law and the City’s prudent investment policy.

      3. Liquidity – The City of Lawrence’s investment portfolio shall remain sufficiently liquid to enable the City to meet all operating requirements and expenses.

    Other types of investments may be added to this list as changes to the statutes governing such investments are revised. The above instruments may be purchased from eligible banks, savings and loans, primary dealers and the State Treasurer’s Office.

  5. INTERNAL CONTROLS

    6. The director of Finance shall establish a system of written internal controls, which shall be reviewed annually by the independent auditor. These controls shall be designed to prevent loss of public funds due to fraud, error, misrepresentation, or imprudent actions.

  6. PRUDENCE

    7. All participants in the investment process shall seek to act responsibly as custodians of the public trust. Investment officials shall avoid any transaction that might impair public confidence in the effectiveness of the government of the City of Lawrence.

    The standard of prudence to be used by investment officials shall be the "prudent investor" rule, which 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."

    The rule shall be applied in the context of managing the entire portfolio.

    Investment officers acting in accordance with written procedures and exercising due diligence shall be relieved of personal responsibility for a specific security’s credit risk or market price changes, providing deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

  7. LEGAL AUTHORITY AND LIMITATIONS OF INVESTMENT INSTRUMENTS

    8. All investments purchased under this policy shall be governed by K.S.A. 12-1675, et. seq. and all revisions thereto, as may be made by the Kansas Legislature. Investments are limited to a maximum of two years unless the City’s investment policy is approved by the State of Kansas Pooled Money Investment Board, in which case investments could be for up to four years. Below is a summary of acceptable investments under the current law:

      1. Certificates of Deposit (CD’s) – Instruments issued by banks or savings and loans that state specified sums have been deposited for specified periods of time and at specified rates of interest. Certificates of deposit are required to be backed by acceptable collateral securities as dictated by Kansas Statutes. The maximum maturity is two years unless the City’s investment policy is approved by the State of Kansas Pooled Money Investment Board (PMIB), in which case the maturity may be up to four years.

      2. Repurchase Agreements (REPOs) – Contractual agreements between the City and commercial banks, trust companies, state or federally chartered savings and loan associations or federally chartered savings banks. The repurchase agreement (repo) issuer receives cash and, in turn, sells securities to the City. The City agrees to resell the securities to the issuer on a specific future date at the original purchase price plus a negotiated interest payment. Repurchase agreements are required to be backed by acceptable collateral securities as dictated by Kansas Statutes. If the City’s investment policy is approved by the PMIB, a repurchase agreement may be executed with a primary dealer.

        3. Prior to entertaining bids for repurchase agreements, the City will require that a Master Repurchase Agreement with the vendor and a Custodial Agreement with a third party trustee be executed.

      3. U.S. Treasury Obligations – These obligations must mature within two years from date of purchase and are guaranteed as to principal by the United States government. If the City’s investment policy is approved by the PMIB, the maximum maturity may be four years.

      4. U.S. Government Agency Securities – Indirect obligations of the federal government, issued by the Government National Mortgage Association and the Small Business Administration. These securities are backed by the full faith and credit of the United States government. The maximum maturity is four years. The City’s investment policy must be approved by the PMIB prior to the purchase of U.S. Government Securities.

      5. U.S. Government Sponsored Corporation’s Instruments – Obligations of enterprises sponsored by the United States government, such as Federal Farm Credit System, Federal Home Loan Mortgage Association, Federal National Mortgage Association and the Student Loan Marketing Association. To participate, the City’s investment policy must be approved by the PMIB.

      6. Kansas Municipal Investment Pool – A pool of investments consisting of CD’s, U. S. Treasuries, U.S. Agencies, Commercial Paper, and Repurchase agreements. The pool is administered by the Pooled Money Investment Board.

      7. Temporary notes of the City of Lawrence.

      8. Commercial bank savings accounts.

    Other types of investments may be added to this list as changes to the statutes governing such investments are revised. The above instruments may be purchased from eligible banks, savings and loans, primary dealers and the State Treasurer’s Office.

  8. BOND AND TEMPORARY NOTE PROCEEDS

    9. The City of Lawrence may invest any bond or temporary note proceeds which are not immediately needed, in accordance with Kansas Statute 10-131 and the specific bond or note resolution.

    The interest received on the investment of bond and note proceeds shall used for the purpose of paying interest on the bonds or notes issued, or for paying the cost of the project for which the bonds or notes were issued.

  9. CONTRACTS WITH FINANCIAL INSTITUTIONS

    10. The City of Lawrence may invest funds with depositories having offices located in the City of Lawrence as provided by K.S.A. 9-1401. All depositories of the City of Lawrence shall execute a contract with the City of Lawrence which shall designate the requirements of serving as a depository for the City, including collateralization of City funds invested at such depository and the related safekeeping requirements of the pledged securities. The City shall have a separate contract with the "operating bank" which will execute a contract once every three years in accordance with the practice of bidding banking services every three years. Any financial institution in which the City has funds shall provide such financial data to the director of Finance as may be required by the City to evaluate the financial condition of the institution. Such data will be in the form of audited financial statements, Federal Deposit Insurance Corporation regulatory reports, and shall be provided at least annually by the financial institutions to the director of Finance. Any refusal to provide such information to the City may because for termination of the depository contract with such institution.

      1. Safekeeping of Securities – Collateral for certificates of deposit and repurchase agreements will be registered in the City’s name. The Finance director will hold all safekeeping receipts of pledged securities used as collateral for certificates of deposit and repurchase agreements. A third party institution will hold pledged securities in trust on behalf of the City’s financial institution.

        2. Safekeeping receipts of pledged securities may be faxed to the City in order to accommodate timely and legal investment transactions. The financial institution will mail the original safekeeping receipt of pledged securities on the day the fax is sent.

      2. Collateralization – The City requires full collateralization of all City investments other than direct and indirect obligations of the United States government, as stated in the State statute. The City will not allow FDIC coverage to be considered in calculating full collateralization. The City will accept as collateral for certificates of deposit securities as listed in K.S.A. 9-1402. Collateral underlying repurchase agreements is limited to obligations of the U.S. government and its agencies.

        3. The Finance director will monitor the adequacy of collateralization monthly. The City requires monthly reports with market values of pledged securities from all financial institutions with which the City has certificates of deposit or repurchase agreements.

  10. INVESTMENT RETURN OBJECTIVES

    11. Consistent with State law, the City shall seek to optimize return on investments, while minimizing risk to the principal, within the constraints of this policy.

  11. INVESTMENT PROCEDURES

    12. As required by state statute, the City of Lawrence gives preference to local financial institutions when investing idle funds. Before investing any funds, the City shall conduct a competitive bid process. Investment bids will be taken by the director of Finance, or the person designated by the director of Finance, at times when investment of idle funds would be in the best interest of the City. Funds will also be invested as required by federal regulations regarding arbitrage rebate on bond proceeds. Such bid requests will be made orally and related collateral forwarded to the City no later than 24 hours after bids are taken. All of the financial institutions within the City limits will be notified annually of the City’s investment policy, and requirements for investing if they wish to participate in the bid process. If a financial institution meets or exceeds the state calculated benchmark investment rate for a given maturity, the City will not invest in the State Municipal Investment Pool or any U.S. Treasury or Agency obligations.

  12. INVESTMENT LIMITATION PER INSTITUTION

    13. In order to protect the City from the failure of any one financial institution, the City shall not invest more than 30% of idle funds with any one financial institution. The 30% limitation does not apply to U.S. Treasury or Agency obligations held in safekeeping by an institution on behalf of the City. These obligations are backed by the U.S. Government and do not require collateral as described in Section VI (B) of this policy. The 30% limitation shall be determined prior to the solicitation of bids. If an institution exceeds the 30% limitation after the bids have been awarded, no further bids will be accepted from the financial institution until sufficient maturities have occurred to reduce their share of the portfolio to under 30%. At no time, however, will the City invest more than 10% of its portfolio in Mortgage Backed Securities.

  13. INVESTMENT DIVERSIFICATION AND MATURITIES

    14. The City will limit its investment in repurchase agreements to no more than 50% of its portfolio. All other eligible investments may make up 100% of the portfolio. Investment maturities shall be scheduled to coincide with projected cash flow needs. Cash flow needs will be projected based upon the weekly amount of claims paid, the biweekly payroll and anticipated revenue.

  14. DAILY CASH MANAGEMENT PRACTICES AND POLICIES

    15. The City of Lawrence Finance Department requires that all departments collecting cash receipts, whether in cash or other forms of payment, must turn in such receipts to the Finance Department on a daily basis together with records required to verify the accuracy of such collections. No receipts will be held overnight at any location for any reason. All receipts shall be deposited daily by the Finance Department. Investment of any idle funds will be made in accordance with section VI of this policy. Any violation of this section of this policy by any employee of the City may result in disciplinary action.

  15. REPORTING REQUIREMENTS

    16. The investment officer shall generate quarterly reports for management purposes. The reports will be made available to the Lawrence City Commission as part of the quarterly financial report.

  16. ETHICS AND CONFLICTS OF INTEREST

    17. 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 City Manager any material financial interests in financial institutions that conduct business within their jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City of Lawrence.

  17. SEPARATE PROVISIONS OF POLICY AND CONFLICTS WITH KANSAS LAW

    18. The above policies shall remain in full force and effect until revoked by the City Commission. If, after adoption of this policy, there is any conflict of this policy with Kansas laws and/or statutes, current law shall dictate.

  18. INVESTMENT POLICY ADOPTION

    19. The above policies have been adopted by resolution of the City Commission and shall be available for review annually by the Commission.

  19. GLOSSARY

    20. The following is a glossary of key investing terms that appear in The City of Lawrence’s Investment Policy.

      1. Cash Flow – Cash receipts minus disbursements from a given asset, or group of assets, for a given period. An analysis of the movement of cash through a venture as contrasted with the earnings of the venture.

      2. Certificate of Deposit – A time deposit with a specific maturity evidenced by a certificate.

      3. Collateralization – Process by which a borrower pledges securities or deposits for the purpose of securing the repayment of a loan and/or security.

      4. Cost – An amount paid or required in payment for a purchase of an investment.

      5. Fannie Mae – Fannie Mae (formerly the Federal National Mortgage Association) is a private stockholder-owned 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. The corporation’s purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. Fannie Mae’s securities are also highly liquid and are widely accepted. Fannie Mae assumes and guarantees that all security holders will receive timely payment of principal and interest.

      6. Federal Home Loan Bank (FHLB) – Government-sponsored wholesale banks which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLB is to liquefy the housing-related assets of its members who must purchase stock in their district Bank.

      7. Federal Home Loan Mortgage Corporation (FHLMC) – A federal agency which purchases first mortgages from members of the Federal Reserve System and the Federal Home Loan Bank System. Commonly called “Freddie Mac.”

      8. Interest Rate – The annual rate of interest received by an investor from the issuer of fixed-income securities. The percentage of an amount of money which is paid for its use for a specified time.

      9. Internal Controls – An internal control structure designed to ensure that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is 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.

      10. Investment – Commitment of money to gain profit or interest as by purchasing securities.

      11. Investment Agreements – An agreement with a financial institution to borrow public funds subject to certain terms and conditions regarding collateralization, liquidity and interest rates.

      12. Kansas Municipal Investment Pool (KMIP) – The State of Kansas offers a Local Government Investment Pool (LGIP) entitled “State of Kansas Municipal Investment Pool,” which is governed by the State of Kansas Pooled Money Investment Board. The KMIP offers a pool of investments for local governments consisting of CD’s, U. S. Treasuries, U.S. Agencies, Commercial Paper, and Repurchase agreements.

      13. Kansas Statutes – A written law enacted by the Kansas State Legislature.

      14. Liquidity – Refers to the ability of an instrument to be converted into cash rapidly without substantial loss of value.

      15. Market Value – The price at which a security is trading and could be purchased or sold on a given day.

      16. Portfolio – Collection of securities held by an investor.

      17. Principal – The face amount or par value of a debt security. (2) One who acts as a dealer buying and selling for his own account.

      18. Repurchase agreement (Repo) – An agreement of one party to sell securities at a specified price to a second party and a simultaneous agreement of the first party to repurchase the securities at a specified price at a specified later date.

      19. Safekeeping – The holding of securities by a financial institution on behalf of the securities owners.

      20. Safety – Freedom from risk.

      21. Securities – Documents that can be traded for value; an instrument of ownership or debt used to finance government and corporate entities.

      22. Time Deposits – Another term for a savings account or certificate of deposit in a commercial bank.

      23. United States Government Securities (Treasuries) – Bonds, notes, treasury bills or other securities constituting direct obligations of, or obligations the principal of and interest on which are fully and unconditionally guaranteed as to the full and timely payment by the United States of America.

    Other types of investments may be added to this list as changes to the statutes governing such investments are revised. The above instruments may be purchased from eligible banks, savings and loans, primary dealers and the State Treasurer’s Office.