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Resolution No. 2022-09 Updating the City Investment Policy - Approved 041222Page 1 of 2 RESOLUTION NO. 2022-09 A RESOLUTION of the City Council of Bainbridge Island, Washington, relating to updating the City’s Investment Policy. WHEREAS, the City Council (“Council”) is responsible for setting financial policies for the City of Bainbridge Island (“City”); and WHEREAS, state law, including Chapter 35A.33 RCW, provides guidance for budgets in Code Cities; and WHEREAS, in accordance with Chapter 35A.34 RCW and Chapter 2.82 BIMC, the City prepares a biennial budget with a mid-biennial review; and WHEREAS, the City Administration (“Administration”) requested, as part of the 2023- 2024 biennial budget process, that the Council update the financial and budgetary policies that were adopted by the City prior to 2022; and WHEREAS, the City Council has determined that section 3.12.010 of the Bainbridge Island Municipal Code (“BIMC”)relates to the contents of the City’s investment policy WHEREAS, the City of Bainbridge Island periodically invests excess funds in the Kitsap County Investment Pool; and WHEREAS, Chapter 3.12 BIMC includes the adoption of the City’s investment program; and WHEREAS, Chapter 3.12 BIMC directs that any modifications to the City’s investment program policies must be approved by the City Council; and WHEREAS, the Council last updated the City’s Investment in December 1993 through the passage of Resolution No. 1993-52 and was amended through the passage of Resolution No. 2021-19 that revised Section 5 Delegation of Authority; and WHEREAS, the City Council now desires to replace and update the City’s Investment Policy to reflect changes in City Code, clarify certain sections, and incorporate current best practices. NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF BAINBRIDGE ISLAND DOES RESOLVE AS FOLLOWS: Section 1. The investment policy adopted by Resolution No. 1993-52 and revised by Resolution No. 2021-19 is hereby repealed in its entirety and replaced as shown on Exhibit A, which is attached hereto and incorporated herein by this reference as if set forth in full. Section 2. This Resolution shall take effect and be in force immediately upon its passage. Page 2 of 2 PASSED by the City Council this 12th day of April, 2022. APPROVED by the Mayor this 12th day of April, 2022. Joe Deets, Mayor ATTEST/AUTHENTICATE: Christine Brown, MMC, City Clerk FILED WITH THE CITY CLERK: April 8, 2022 PASSED BY THE CITY COUNCIL: April 12, 2022 RESOLUTION NO. 2022-09 Exhibit A – Investment Policy Page 1 of 11 INVESTMENT POLICY Effective Date: April 12, 2022 Page 2 of 11 I. POLICY It is the policy of the City of Bainbridge Island (“City”) to invest public funds in a manner which will provide maximum security with the highest investment return while meeting the City’s daily cash flow demands and conforming to all federal, state, and local laws and regulations governing the investment of public funds. The City’s primary investment objectives in order of priority shall be safety, liquidity, and yield (return on investment). II. Governing Authority The City’s investment authority derives from the Revised Code of Washington (“RCW”), including: • RCW 35A.40.050 – “Fiscal; - Investment of Funds” • RCW 39.58 – “Public funds – deposits and investments” • RCW 39.59 – “Public Funds – Authorized Investments” • RCW 43.250 – “Investment of Local Government Funds – Separately Managed Accounts” • Bainbridge Island Municipal Code (“BIMC”) - Chapter 3.12 “Investment of City Funds” III. Scope This policy applies to all financial assets of the City. These funds are reported for in the City’s Annual Comprehensive Financial Report. Should bond covenants be more restrictive than this policy, such funds shall be invested in full compliance with those restrictions. IV. Objectives The primary objectives of investment activities, in order of priority, shall be safety, liquidity, and return: 1. Safety Safety of principal is the foremost objective of the City’s investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. a. Credit Risk The City will minimize credit risk, which is the risk of loss of all or part of the investment due to the failure of the security issuer or backer, by: • Limiting investments to the types of securities listed in Section VIII of this investment policy. • Prequalifying and conducting ongoing due diligence of the financial institutions, broker/dealers, intermediaries, and advisors with which the City will do business in accordance with Section VI. Page 3 of 11 • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. b. Interest Rate Risk The City will minimize interest rate risk, which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates, by: • Structuring the investment portfolio so that security maturities match cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity. • Investing primarily in shorter-term securities, or similar investment pools, and limiting individual security maturity as well as the average maturity of the portfolio in accordance with Section IX. 2. Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively, a portion of the portfolio may be placed in local government investment pools which offer same-day or next-day liquidity for short-term funds. 3. Return on Investment The return on the City’s investment portfolio is of secondary importance compared to the safety and liquidity objectives described above. The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, considering the investment risk constraints and liquidity needs. Securities shall generally be held until maturity with the following exceptions: • A security with declining credit may be sold early to minimize loss of principal. • Selling a security and reinvesting the proceeds may be undertaken to improve the quality, yield, or target duration of the portfolio; and • Unanticipated liquidity needs may require a security be sold. V. Standards of Care 1. Prudence Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. The standard of prudence to be used by investment officials shall be the “Prudent Person” standard and shall be applied in the context of managing an overall portfolio under prevailing economic conditions at the moment of investment commitments. Investment officers acting in accordance with written procedures and the investment policy and Page 4 of 11 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 minimize adverse developments. In determining whether an Investment official has exercised prudence with respect to an investment decision, the determination shall take into consideration the investment of all funds over which the official had responsibility rather than the prudence of a single investment, and, whether the investment decision was consistent with this investment policy. 2. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the City Manager any material interests in financial institutions that conduct business with the City. They shall further disclose any personal financial/investment positions that could be related to the performance of the 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 City. 3. Delegation of Authority a. Governing Body Ultimate responsibility and authority for investment of City funds resides with the City Council who have the authority to direct the management to the City’s investment program. b. Authority Overall management of the City’s investment program is delegated by the Council to the Director of Finance and Administrative Services (“Director”) who shall act in accordance with established written procedures and internal controls for the operation of the investment program consistent with this investment policy. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Director. The Director, or their designee, shall be responsible for all transactions undertaken in the portfolio based on the liquidity and cash flow requirements of the City and their respective funds. In addition, the Director, or their designee, shall establish a system of controls to regulate the activities of subordinate officials. c. Investment Advisor The City may engage the services of an external investment advisor, and the State Treasurer’s Separately Managed Account services, to assist with the management of the City’s investment portfolio in a manner consistent with the City’s objectives and this investment policy. Such advisors shall provide recommendations and advice regarding the City’s investment program including but not limited to advice related to the purchase and sale of investments in accordance with this investment policy. Page 5 of 11 VI. Authorized Financial Institutions, Depositories, and Broker/Dealers Selection of a primary bank for the City general banking services will be made by the City Council. The Director shall maintain a list of financial institutions and depositories authorized to provide investment services. In addition, a list will be maintained of approved security broker/dealers selected by creditworthiness and/or other factors, such as Financial Industry Regulatory Authority (“FINRA”) broker check. Additions and deletions to the lists will be at the sole discretion of the City. This responsibility may be placed with the investment advisor and the approved lists provided to the City as updates occur. Broker/dealers will be limited to those that meet three or more of the following: • Financial institutions approved by the State of Washington Public Deposit Protection Commission (“PDPC”) and that meet all regulatory capital requirements. • Primary broker/dealers recognized by the Federal Reserve. • Non-primary broker/dealers qualified under Security Exchange Commission (“SEC”) rule 15C3-1 and that are a certified member of FINRA (not applicable to Certificate of Deposit counterparties). • Proof of state registration. • Certification of having read, understood, and agreed to compliance with the City’s investment policy. • Evidence of adequate insurance coverage. Investment advisors must be registered under the Investment Advisor Act of 1940, must act in a non-discretionary capacity, and must receive prior approval from the City for all investment transactions. VII. Safekeeping and Custody 1. Delivery vs. Payment All trades of marketable securities will be executed by delivery vs. payment (“DVP”) to ensure securities are deposited in an eligible custodial account prior to release of funds. 2. Safekeeping All securities will be held in the City’s name by an independent third-party custodian selected by the City. This safekeeping institution shall annually provide a copy of their most recent report on internal controls. 3. Internal Controls The City shall establish a system of internal controls, designed to prevent the loss of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by City employees and officers. The internal controls are subject to review by the City’s independent external auditor. Page 6 of 11 VIII. Suitable and Authorized Investments The City may only invest in those securities and deposits authorized by statute. Authorized investments include: • U.S. Treasury obligations which carry the full faith and credit guarantee of the United States government. • U.S. government agency obligations that have a liquid market with a readily determinable market value. • Certificates of deposit with financial institutions qualified under the State of Washington PDPC, as qualified to hold public deposits at the time of investment. • Municipal debt of the State of Washington and any local government in the State of Washington which have, at the time of investment, one of the three highest credit ratings of a nationally recognized credit rating agency. • Municipal debt of other states or local governments of a state other than the State of Washington which have, at the time of investment, one of the three highest credit ratings of a nationally recognized credit agency. • State of Washington Local Governmental Investment Pool (LGIP). • Local County investment pools operating in the State of Washington as defined under the RCW 36.29.020. Bank Collateralization Washington State provides for collateralization of certificates of deposit with qualified public depositories. The State Treasurer’s Office administers the PDPC which manages the collateralization program. Chapter 39.58 RCW prohibits certificates of deposit with financial institutions that are not qualified public depositories. IX. Investment Diversification and Constraints 1. Diversification It is the policy of the City to diversify its investment portfolios. To eliminate risk of loss resulting from the overconcentration of assets in specific maturities, issuers, or classes of securities, the City’s investment portfolio shall be diversified by maturity, issuer, and security type. In establishing specific diversification strategies, the following general constraints shall apply: U.S. Treasury Obligations 100% State of Washington Local Governmental Investment Pool 100% U.S. Government Agency Obligations 90% Other Washington State County government investment pools 70% Certificates of deposit in PDPC qualified public depositories 40% Municipal debt of the State of Washington or any local government in the State of Washington 20% Municipal debt of other states or local governments of a state other than the State of Washington 15% Page 7 of 11 2. Maximum Maturities To the extent possible, and to preclude sales of securities that could result in a loss, the City shall attempt to match its investments with anticipated cash flow needs. Because of the inherent difficulties in accurately forecasting cash flow needs, a portion of the portfolio should be continuously invested in readily available funds to ensure appropriate liquidity is maintained to meet ongoing obligations. A. To this extent, at least 20% of the portfolio, at the time of investment, will be comprised of investments maturing within a year. B. Satisfying this requirement, remaining funds may be invested in authorized securities not to exceed five years in maturity, except when compatible with a specific fund’s investment needs. C. To ensure additional liquidity and provide for ongoing market opportunity the weighted average maturity and modified duration of the overall portfolio shall not exceed three years without the prior written approval of the Director. Due to fluctuations in the aggregate surplus funds balance, maximum percentages for a single issuer or investment type may be exceeded at a point in time after the purchase of a single issuer or investment type. 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. X. Reporting 1. Methods The Director, or designee, shall prepare an investment report at least semi-annually, including a management summary that provides an analysis of the status of the current investment portfolio. The management summary will be prepared in a manner which allows the City to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report shall be posted on the Finance Department’s website and include the following: • A listing of individual securities held at the end of the reporting period by authorized investment category. • Performance of portfolio as compared to applicable benchmarks. • Percentage of the total portfolio which each type of investment represents. • A statement that the investment portfolio complies with the investment policy and is meeting the investment policy objectives. 2. Performance Standards The investment portfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a Page 8 of 11 market/economic environment of stable interest rates, considering investment risk constraints and cash flow/liquidity needs. An appropriate benchmark shall be established against which portfolio performance shall be compared on a regular basis. The benchmark shall be reflective of the actual securities being purchased and risks undertaken and shall have a similar weighted average maturity as the portfolio. XI. Approval of Investment Policy The City’s investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed at least biennially by the Director, or designee, to ensure its consistency with respect to the overall objectives of safety, liquidity, and return, and its relevance to current laws and financial practices. Any proposed amendments shall be reviewed by the Director and City Manager and forwarded to the City Council for consideration and adoption. XII. Glossary ASSET – Available funds, for payment of debts. AVERAGE MATURITY – A weighted average of the expiration dates for a portfolio’s securities. An income fund's volatility can be managed by shortening or lengthening the average maturity of its portfolio. BOND – A long-term debt security, or IOU, issued by a government or corporation that generally pays a stated rate of interest and returns the face value on the maturity date. BROKER – A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides. CERTIFICATES OF DEPOSIT – Certificates of Deposit, familiarly known as CDs, are certificates issued against funds deposited in a bank for a definite period of time and earning a specified rate of return. Certificates of Deposit bear rates of interest in line with money market rates current at the time of issuance. COLLATERAL – Property (as securities) pledged by a borrower to protect the interest of the lender. COUNTY INVESTMENT POOL (Washington State) – An investment option available to municipalities who invest, by law, through a County Treasurer and other public entities who sign Investment Services Agreements with the Treasurer. To participate in the Pool, a participant must enact an ordinance or adopt a resolution and sign an Investment Services Agreement with a County Treasurer’s Office. CREDIT QUALITY – Measurement of a bond issuer’s financial strength. This measurement helps an investor understand an issuer’s ability to make timely interest payments and repay the loan principal at maturity. Generally, the higher a bond issuer’s credit quality, the lower the interest rate paid by the issuer because the risk of default is lower. Credit quality ratings are provided by nationally recognized rating agencies. CREDIT RISK – The risk another party to an investment transaction will not fulfill its obligations. Credit Page 9 of 11 risk can be associated with the issuer of a security, a financial institution holding the entity's deposit, or a third-party holding securities or collateral. Credit risk exposure can be affected by a concentration of deposits or investments in any one investment type or with any one party. CUSTODIAN – An independent third party (usually bank or trust company) that holds securities in safekeeping as an agent for the investor. DEALER – A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DELIVERY VS PAYMENT – There are two methods of delivery of securities: Delivery vs. payment and delivery vs. receipt (also called free). Delivery vs. payment is delivery of securities with an exchange of money for the securities. Delivery vs. receipt is delivery of securities with an exchange of a signed receipt for the securities. DIVERSIFICATION – Investing in a variety of securities and institutions to minimize market risk. EFFECTIVE RATE – The yield you would receive on a debt security over a period of time taking into account any compounding effect. FEDERAL AGENCY SECURITIES – Several government-sponsored agencies, in recent years, have issued short and long-term notes. Such notes typically are issued through dealers, mostly investment banking houses. The main issuing institutions are the Federal National Mortgage Association (FNMA), the Federal Home Loan Bank System (FHLB), and the Federal Farm Credit Bank System (FFCB). FEDERAL DEPOSIT INSURANCE (FDIC) – A Federal institution that insures bank deposits. The current limit is up to $100,000 per depository account. FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) – An independent, nongovernmental organization that writes and enforces rules governing registered brokers and broker-dealer firms in the United States. Its stated mission is "to safeguard the investing public against fraud and bad practices." It is considered a self-regulatory organization. GOVERNMENT SECURITY – Any debt obligation issued by the U.S. government, its agencies, or instrumentalities. Certain securities, such as Treasury bonds are backed by the government as to both principal and interest payments. Other securities, such as those issued by the Federal Home Loan Mortgage Corporation, or Freddie Mac, are backed by the issuing agency. LIQUIDATION – Conversion into cash. LIQUIDITY – Refers to the ease and speed with which an asset can be converted into cash without a substantial loss in value. LOSS – The excess of the cost or book value of an asset over selling price. MARKETABILITY – Ability to sell large blocks of money market instruments quickly and at competitive prices. MARKET RISK – The risk associated with declines or rises in interest rates which cause an investment in a fixed-income security to increase or decrease in value. The risk that the market value of an investment, collateral protecting a deposit, or securities underlying a repurchase agreement will decline. Page 10 of 11 MARKET VALUE – The price at which a security is trading and could presumably be sold. MATURITY – The point in time when a security becomes due and the principal and interest or final coupon payment is paid to the investor. MUNICIPAL DEBT – Debt securities issued by states, cities, counties, and other governmental entities with funds typically used for capital projects. Generally, interest on municipal bonds is exempt from federal income taxes and often from state and local taxes also. NATIONALLLY RECOGNIZED RATING AGENCY – A credit rating agency that issues credit ratings the U. S Securities and Exchange Commission permits other financial firms to use for certain regulatory purposes. NET WORTH – A financial institutions available funds after total liabilities have been deducted from total assets. PRUDENCE – The ability to govern and discipline oneself using reason. Shrewdness in the management of affairs. The ability to use skill and good judgment in the use of resources. PUBLIC FUND INTEREST BEARING INVESTMENT ACCOUNTS – Bank accounts with Qualified Public Depositories which pay a rate of interest on the balance maintained. Used in diversifying the investment portfolio and commonly used as part of a liquidity portfolio. QUALIFIED PUBLIC DEPOSITORY – 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. REGISTERED SECURITY – A security that has the name of the owner written on its face. A registered security cannot be negotiated except by the endorsement of the owner. SAFEKEEPING – A service to customers, usually by banks, for a fee where securities and valuables of all types and descriptions are held in the bank's vaults for protection, or in the case of book entry securities, are held and recorded in the customer's name and are inaccessible to anyone else. SECURITIES – Bonds, notes, mortgages, or other forms of negotiable or non-negotiable instruments. SECURITIES AND EXCHANGE COMMISION (SEC) – A U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception. The SEC consists of five commissioners who serve staggered five-year terms. No more than three of the commissioners may belong to the same political party. SETTLEMENT DATES – The day when payment is due for a securities purchase. For stocks and mutual funds bought through an investment dealer, settlement is normally five business days after the trade date. Bonds and options normally settle one business day after the trade date and mutual fund shares purchased directly by mail or wire settle on the day payment is received. STATE OF WASHINGTON LOCAL GOVERNMENT INVESTMENT POOL (LGIP) – The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment Page 11 of 11 and reinvestment. THIRD-PARTY SAFEKEEPING – A safekeeping arrangement whereby the investor has full control over the securities being held and the dealer or bank investment department has no access to the securities being held. TIME DEPOSIT – Interest-bearing deposit at a savings institution that has a specific maturity. TREASURY BILLS – Treasury bills are short-term debt obligations of the U.S. Government. They offer maximum safety of principal since they are backed by the full faith and credit of the United States Government. Treasury bills, commonly called "T-Bills," account for the bulk of government financing, and are the major vehicle used by the Federal Reserve System in the money market to implement national monetary policy. TREASURY BONDS – is a marketable, fixed-interest U.S. government debt security with a maturity of more than ten years. Treasury bonds make payments semi-annually, and the income received is only taxed at the federal level. Treasury bonds are known in the market as primarily risk-free due to the lack of default risk of the U.S. government. U.S (UNITED STATES) TREASURY OBLIGATIONS – Federally guaranteed obligations are debt securities issued by the United States government and considered risk-free because they receive the full faith and credit of the federal government. These include Treasury bonds, Treasury notes and Treasury bills. U.S. (UNITED STATES) AGENCY OBLIGATIONS – A debt security issued by a federal or federally sponsored agency. Federal agencies are backed by the full faith and credit of the U.S. Government. Federally Sponsored Agencies (FSAs) are backed by each agency with a market perception that there is an implicit government guarantee. (Also see FEDERAL AGENCY SECURITIES and GOVERNMENT SECURITY) UNDERLYING SECURITIES – Securities transferred in accordance with a repurchase agreement. VENDOR – A business or individual who provides a service or product at a cost.