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HomeMy WebLinkAboutResolution No. 03-12 CITY OF THE COLONY, TEXAS RESOLUTION NO. ~)3 A RESOLUTION AMENDING THE INVESTMENT POLICY FOR THE CITY OF THE COLONY AS ADOPTED BY RESOLUTION NO. 02-18 ON THE 6th DAY OF MAY, 2002; AND PROVIDING AN EFFECTIVE DATE WHEREAS, the City Council must review and approve the Investment Policy within ninety (90) days after the end of each fiscal year; NOW, THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF THE CITY OF THE COLONY, TEXAS: Section 1. The City Council of the City of The Colony hereby approves an amendment to the Investment Policy of the City of The Colony as adopted by Resolution No. 02-18 on the 6th day of May, 2002. Section 2. That the new investment policy is attached hereto in its entirety Section 3. That this resolution shall become effective immediately from and after its passage and approval. PASSED AND APPROVED this 5th day of May 2003. ATTEST: Bernetta Henville-Shannon, Mayor Patti A. Hicks, TRMC, City Secretary CITY OF THE COI,ONY INVF.,qTMENT POI,ICY I. SCOPE OF POIJlCy This investment policy shall govern the investment activities of all funds of the City of The Colony ("the City"), excluding any specific funds cited hereafter. This policy serves to satisfy the state statute requirement to define and adopt a formal investment policy. A. FUNDS INCLUDED: All financial assets of all current funds of the City and any new funds created in the future, unless specifically exempted, will be administered in accordance with the objectives and restrictions set forth in this policy. These funds are accounted for in the City's Annual Financial Report and include: General Fund, Enterprise Funds, Capital Project Funds, Special Revenue Funds, Trust and Agency Funds. B. FUNDS EXCLUDED: This policy shall not govern funds, which are managed under separate investment programs. This policy excludes Employee Retirement and Pension Funds administered or sponsored by the City and excludes defeased bond funds held in trust escrow accounts. The City will maintain responsibility for these funds as required by Federal and State law and the City Charter and Code. C. POOLING OF FUNDS: Except for cash in certain restricted and special funds, the City will consolidate cash balances from all funds to maximize investment earnings. Investment income will be allocated to the various funds based on their respective percentage participation and in accordance with generally accepted accounting principles. D. ADDITIONAL REQUIREMENTS: In addition to this policy, bond funds (to include capital project, debt service, and reserve funds) will be managed by the governing debt ordinance and the provisions of the Internal Revenue Code applicable to the issuance of tax-exempt obligations and the investment of debt proceeds. E. REVIEW AND AMENDMENT OF THE POLICY: The City Council shall review this investment policy and investment strategies not less than annually as required by state law. A resolution stating the review has been completed and recording any changes made to either the policy or strategy statements must be adopted by the City Council. II. PRI IDENCF, Investments shall be made with judgement 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 the 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 of funds, rather than a consideration as to the prudence of a single investment. Investment officers acting in accordance with written procedures and this investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion to the City Manager and the City Council, and appropriate action is taken by the investment officers and their oversight managers to control adverse developments in accordance with the terms of this policy. III. OBIECTIVEg OFPOIJCY The primary objectives of the City's investment program in order of priority shall be preservation and safety of principal, liquidity, and yield: A. SAFETY: The foremost and primary objective of the City's investment program is the preservation and safety of capital of the overall portfolio. Each investment transaction will seek first to ensure that capital losses are avoided, whether the loss occurs from the default of a security or from erosion of market value. The objectives will be to mitigate credit risk and interest rate risk. To control credit risk, investments should be limited to the safest types of securities. Financial institutions, broker/dealers and advisers who serve as intermediaries, shall be pre-qualified by the City. The credit ratings of investment pools and individual securities will be monitored to assure compliance with this policy and state law. To control interest rate risk, the City will structure the investment portfolio so that securities mature to meet cash requirements for ongoing operations and will monitor marketable securities daily. Should an issuer experience a single step downgrade of its credit rating by a nationally recognized credit rating agency within 90 days of the position's maturity, the Investment Officer may approve the holding of the security to maturity. B. LIQUIDITY: The City's investment portfolio will remain sufficiently liquid to enable the City to meet operating requirements that might be reasonably anticipated. Liquidity will be achieved by matching investment maturities with forecasted cash flow funding requirements, by investing in securities with active secondary markets and by diversification of maturities and call dates. Furthermore, since all possible cash demands cannot be anticipated, the portfolio, or portions thereof may be placed in money market mutual funds or local government investment pools, which offer same day liquidity for short-term funds. C. YIELD: The City's investment portfolio will be designed with the objective of regularly meeting or exceeding the average rate of return on three month U.S. Treasury Bills. The investment program will seek to augment returns above this threshold consistent with risk constraints identified herein, cash flow characteristics of the portfolio and prudent investment principles. Investments are limited to relatively low risk securities in anticipation of eaming a fair return relative to the risk being assumed. Marketable securities shall not be sold prior to maturity with the following exceptions: 1. A security with declining credit may be sold early to minimize loss of principal. 2. A security swap that would improve the quality, yield or target duration in the portfolio. 3. Liquidity needs of the portfolio require that the security be sold. 4. If market conditions present an opportunity for the City to benefit from the sale. Funds held for future capital projects will be invested in such a way as to try to produce enough income to offset inflationary construction cost increases. However, such funds will never be unduly exposed to market price risks that would jeopardize the assets available to accomplish their stated objective, or be invested in a manner inconsistent with applicable federal and state regulations. Yields on debt proceeds that are not exempt from federal arbitrage regulations are limited to the arbitrage yield of the debt obligation. Investment officials will seek to preserve principal and maximize the yield of these funds in the same manner as all other city funds. However, it is understood that if the yield achieved by the city is higher than the arbitrage yield, positive arbitrage income will be averaged over a five year period and netted against any negative arbitrage income and the net amount shall be rebated to the federal government as required by current federal regulations. D. RISK OF LOSS: All participants in the investment process will seek to act responsibly as custodians of the public trust. Investment officials will avoid any transactions that might impair public confidence in the City's ability to govern effectively. The governing body recognizes that in a diversified portfolio, occasional measured losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. IV. RK~PON,~IRII.ITY AND CONTROl, A. DELEGATION: Oversight management responsibility for the investment program has been delegated to the Director of Finance, to establish written procedures and controls for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation 3 of authority to persons responsible for the dally cash management operation, the execution of investment transactions, overall portfolio management and investment reporting. B. SUBORDINATES: All persons involved in investment activities shall be referred to as "Investment Officials". No person shall engage in an investment transaction except as provided under the terms of this policy, the procedures established by the Director of Finance and the explicit authorization by the City Manager to withdraw, transfer, deposit and invest the City's funds. The City Council, by resolution, has authorized the City Manager to appoint these individuals. The Director of Finance shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of subordinate Investment Officials. C. CONFLICTS OF INTEREST: Investment officials and employees involved in the investment process will refrain from personal business activity that could conflict with proper execution and management of the investment program, or which could impair their ability to make impartial investment decisions. Investment officials and employees shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the City. D. DISCLOSURE: Investment officials and employees shall disclose to the City Manager any material financial interest in financial institutions that conduct business with the City. Investment officials and employees shall further disclose any material, personal investment positions that could be related to the performance of the City's investment portfolio. Investment officials and employees shall subordinate their personal investment transactions to those of this jurisdiction, particularly with regard to the timing of purchases and sales. An investment official who is related within the second degree by affinity or consanguinity to individuals seeking to sell an investment to the City shall file a statement disclosing that relationship, with the Texas Ethics Commission and the City Council. E. INVESTMENT TRAINING: The Director of Finance and any other investment officials shall have finance, accounting or related degree and knowledge of treasury functions. Investment officials must attend investment training not less than once in a two-year period and receive not less than ten hours of instruction relating to investment responsibilities. This investment training may be from educational seminars held by GFOA, GTOT, MTA, GFOAT, AICPA, and TML or any other training approved by the City Council. All investment officials of the City shall attend at least one training session relating to their cash management and investment responsibilities within 12 months after assuming these duties for the City. Training must include education in investment controls, security risks, strategy risks, market risks, and compliance with state investment statutes. V. AIITHORIZED INVI~,qTMF, NT~q Funds of the City may be invested in the following investments, as authorized by Chapter 2256 of the Government Code of the State of Texas, known as the "Public Funds Investment Act", and as authorized by this investment policy. Investments not specifically listed below are not authorized: A. Obligations of the United States or its agencies and instrumentalities; B. Direct obligations of this state or its agencies; C. Other obligations, the principal and interest of which are unconditionally guaranteed or insured by, the State of Texas or the United States or its instrumentalities; D. Obligations of states, agencies, counties, cities, and other political subdivisions of any state, rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; E. Certificates of Deposit that are issued by a state or national bank or savings and loan domiciled in the State of Texas and that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured as to principal by obligations described in the preceding clauses or in any other manner and amount provided by law for City deposits; F. Fully Collateralized Repurchase or Reverse Repurchase Agreements that have a defined termination date, are fully secured by obligations described in the preceding paragraphs (A) through (D) of this section of the policy, allowed by the Public Funds Investment Act or any other subsequent Texas public investment laws, and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas. Money received by the City under the terms of a Reverse Repurchase Agreement, by law, shall be used to acquire additional authorized investments, but may not have a term to exceed 90 days nor be used as a leveraged transaction (proceeds used to purchase an investment whose final maturity date exceeds the expiration date of the reverse). All transactions shall be governed by a Master Repurchase Agreement signed by the City and the dealer or financial institution. G. No-Load Money Market Mutual Funds regulated by the Securities and Exchange Commission that have a dollar-weighted average stated maturity of 90 days or less, invest exclusively in obligations authorized by the preceding paragraphs (A) through (F) of this section of the policy, and include in their investment objectives the maintenance of a stable net asset value of $1 for each share. No more than an aggregate 80% of the City's monthly average fund balance, excluding bond proceeds, reserves and debt service funds may be invested in money market mutual funds either separately or collectively with mutual funds. No more than 10% of the City's funds may be invested in any one money market mutual fund; and H. Local Government Joint Investment Pools of political subdivisions in the State of Texas which comply with the guidelines described below: 5 (1) The requirements of Article 4413(32c), Section 4(d) of the Texas Revised Civil Statutes must be met; (2) The investment pool must be continuously rated no lower than AAA or AAA-m or an equivalent rating by at least one nationally recognized rating service; (3) The requirements of Section 2256.016 of the Texas Public Investment Act must be met by the investment pool and the information required must be furnished to the investment officer of the City; (4) The investment pool must have a dollar-weighted average maturity of 90 days or less. (5) The investment pool may invest only in obligations listed in the preceding paragraphs (A) through (G). VI. INVF~gTMI~NT REPORTg The Director of Finance shall submit quarterly an investment report including an analysis of the status of the current investment portfolio and detailed investment transactions made over the last quarter. This report will be prepared in a manner, which will allow the City to ascertain whether investment activities during the reporting period have conformed to the investment policy. The report should be provided to the City Council and the City Manager. The City Council shall review investment strategies, portfolio diversification, maturity structure, economic outlook, rate of return on the portfolio, and compliance with the investment policy by reviewing these reports quarterly and by any discussions with city staff. The reports shall be formally reviewed at least annually by an independent auditor if there have been marketable securities in the portfolio. The result of the review shall be reported to Council by that auditor. If there have been no marketable securities in the portfolio, this review by an auditor is not required. The quarterly investment report must be presented within 90 days of the end of the quarter reporting period. The report must contain the following information: A. Investment position of the City on the date of the report; B. A signature of each investment official of the City; C. A summary statement prepared in compliance with generally accepted accounting principles, of each pooled fund or individual portfolio, sorted by type of asset, that states the fully accrued income for the reporting period; beginning market value for the reporting period; additions and changes to the market during the period; ending market value for the period; and the resulting change in market value that may have occurred and a comparison of the same to the previous quarter; D. A comparison of book value vs. market value and the unrealized gain or loss at the end of the period and the comparison to the previous period by asset type and fund type invested. E. State the duration or average maturity of each portfolio; F. State the accounting fund or pooled group fund for which individual investments were acquired, by name or number or both; G. State the compliance of the investment portfolio as it relates to the investment strategy expressed in the City's investment policy and compliance with ail laws governing the City's investments; H. Disclose the investment income earned and yields, by portfolio; I. Disclose the investment income earned, by accounting fund; J. Demonstrate the diversification of the City's investments; and K. Provide a summary of economic activity and recent financiai market conditions. L. Provide a listing of brokers and financial institutions with whom the City conducts business. The Director of Finance is responsible for the recording of investment transactions and the maintenance of the investment records with reconciliation of the accounting records of investments carried out by an individuai reporting to the accounting manager. Information to maintain the investment program and the reporting requirements is derived from various sources such as broker/deaier research reports, newspapers, financiai on-line market quotes, direct communication with broker/deaiers, govemment investment pools and financiai consulting services. VII. PORTFOI.IO ANII)INVE~qT1VIF. NT A~ET PARA1VIF. TER~ A. BIDDING PROCESS FOR INVESTMENTS: Investment officiais for the City may accept bids for certificates of deposit and for ail marketable securities either oraily, in writing, electronicaily, or in any combination of these methods. The investment official will strive to receive two to three price quotes on marketable securities being sold, but may allow one broker/deaier to sell at a predetermined price under certain market conditions. Investments purchased shail be shopped competitively between approved financial institutions and broker/deaiers. Security swaps are ailowed as long as maturity extensions, credit quaiity changes and profits or losses taken are within the other guidelines set forth in this policy. B. MAXIMUM MATURITIES: The City will manage its investments to meet anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than five years from the date of purchase. The City shail adopt weighted average maturity limitations consistent with the investment objectives. C. MAXIMUM DOLLAR-WEIGHTED AVERAGE MATURITY: Under most market conditions, the composite portfolio will be managed to achieve a one-year or less dollar-weighted average maturity. However, under certain market conditions, investment officiais may need to shorten or lengthen the average life or duration of the portfolio to protect the City. The maximum-dollar weighted average maturity based on the stated finai maturity, 7 authorized by this investment policy for the composite portfolio of the City shall be three years. D. DIVERSIFICATION: It is the policy of the City to diversify its investment portfolios. Assets held in each investment portfolio shall be diversified to eliminate the risk of loss resulting from one concentration of assets in a specific maturity, a specific issuer or a specific class of securities. Diversification strategies shall be determined and revised periodically by the City Council. In establishing specific diversification strategies, the following general policies and constraints shall apply: 1) Portfolio maturities and potential call dates shall be staggered in a way that protects interest income from the volatility of interest rates and that avoids undue concentration of assets in a specific maturity or callable sector. Securities shall be selected which provide for stability of income and reasonable liquidity. 2) Risk of market price volatility shall be controlled through maturity diversification such that aggregate realized price losses on instruments with maturities exceeding one (1) year shall not be greater than coupon interest and investment income received from the balance of the portfolio. 3) The portfolio may be comprised of 100% of U.S. government obligations, 100% Repurchase Agreements, or 100% in an authorized government investment pool. Other asset types shall be limited to no more than 25% of the portfolio. 4) The City Council shall review diversification strategies and establish or confirm guidelines on a quarterly basis regarding the percentages of the total portfolio that may be invested in securities other than treasuries, agencies, repurchase agreements and investment pools. The City Council shall review the quarterly investment reports and evaluate the probability of market and default risk in various investment sectors as part of its consideration. E. PRICING: Market prices for investments acquired for the City's Investment Portfolio shall be priced using independent pricing sources and the market value monitored at least monthly. When purchasing an investment at least three broker quotes will be required. A complete report including market value will be provided quarterly to the City Council. VIII, gEI,lZ, C. TION OF DF, POglTOR¥: FINANC. IAI, INgTITIITIONg AND BROKER/DEA I.ERg A. BIDDING PROCESS: Depositories shall be selected through the City's banking services procurement process, which shall include a formal request for proposal (RFP) issued not less than every five years with a typical contract being for three (3) years with options to extend the contract for two additional years. In 8 selecting depositories, the credit worthiness of institutions shall be considered, and the Director of Finance shall conduct a comprehensive review of prospective depositories credit characteristics and financial history. No public deposit shall be made except in a qualified public depository as established by state depository laws. The depository bank bid will not include bids for investment rates on certificates of deposit. Certificate of deposit rates will be shopped competitively between qualified financial institutions in accordance with the manner in which all other types of investment assets are purchased. B. INSURABILITY: Banks and Savings and Loan Associations seeking to establish eligibility for the City's competitive certificate of deposit purchase program, shall submit financial statements, evidence of federal insurance and other information as required by the Investment Officials of the City. C. AUTHORIZED DEPOSITORY, FINANCIAL INSTITUTIONS AND BROKER/DEALERS: The Director of Finance will maintain a list of financial institutions and broker/dealers selected by credit worthiness, who are authorized to provide investment services to the City. These finns may include all primary broker/dealers and those regional broker/dealers who qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule) and meet other financial credit criteria standard in the industry. The Director of Finance shall select broker/dealers from the approved list to conduct most daily City investment business. These firms will be selected based on the firm's competitiveness, participation in agency selling groups and the experience and background of the salesperson handling the account. The finns will be reviewed quarterly by the Director of Finance and changed as appropriate. All financial institutions and broker/dealers who desire to become qualified bidders for investment transactions must supply the Director of Finance with the following: 1) Audited financial statements; 2) Proof of National Association of Securities Dealers (N.A.S.D.) Certification; 3) Proof of registration with the State of Texas Securities Board; 4) Resumes of all sales representatives who will purchase or sell securities or otherwise represent the financial institution or broker/dealer firm in their dealings with the City; and 5) Texas Public Funds Investment Act Acknowledgments from a Business Organization "Qualified Representative" of the financial institution or broker/dealer and all sales representatives on the City's account that they have received read, and understood and agree to comply with the City's investment policy. The qualified representative shall execute a written instrument acceptable to the City and the business organization. A list of these approved financial institutions and broker/dealers shall be maintained in an appendix of this Investment Policy document. The City Council will include the broker/dealer-approved list as part of their annual review. IX. CfHJJATERAIJZATION OF CITY'~q DEPC},qlTS A. INSURANCE OR COLLATERAL PLEDGED: Collateralization shall be required on depository bank deposits, certificates of deposit, and repurchase (and reverse) agreements in accordance with the "Public Funds Collateral Act" and depository laws. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will not be less than 102% of market value of principal and accrued interest, less an amount of $100,000, which represents insurance by the FDIC or FSLIC on certain types of bank deposits. Evidence of the pledged collateral shall be documented by a safekeeping agreement or a master repurchase agreement with the collateral pledged clearly listed in the agreement and safekeeping confirmations. The master repurchase agreement must be executed and in place prior to the investment of funds. Collateral shall be monitored daily to ensure that the market value of the securities pledged equals or exceeds the related deposit or investment balance. B. COLLATERAL DEFINED: The City shall accept only the following insurance and securities as collateral for cash deposits, certificates of deposit, and repurchase agreements: 1) FDIC insurance coverage. 2) Obligations of the United States of America, its agencies and instrumentalities. 3) Other obligations, the principal of and interest on which are unconditionally guaranteed or insured by the State of Texas or the United States of America or its agencies and instrumentalities. 4) Obligations of states, agencies thereof, counties, cities, and other political subdivisions of any state having been rated as to investment quality by a nationally recognized investment rating firm and having received a rating of no less than A or its equivalent. 5) Other securities specifically authorized by depository law or by the City Council. C. COLLATERAL SAFEKEEPING AGREEMENT: The City shall not accept, as depository collateral, any security that is not specifically allowed to be held as a direct investment by the City's portfolio and that the maximum maturity of the collateral securities may be no greater than ten years. 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. The safekeeping agreement must clearly define the responsibility of the safekeeping bank. The safekeeping 10 institution shall be the Federal Reserve Bank or an institution not affiliated with the financial institution or broker/dealer that is pledging the collateral. The safekeeping agreement shall include the authorized signatories of the City and the firm pledging collateral. D. AUDIT OF PLEDGED COLLATERAL: All collateral shall be subject to verification and audit by the Director of Finance or the City's independent auditors. X, ~qAFF. Ki~.EPING AND C. II,qTODY OF INVF.~qTMENT A~R~ET? All security transactions, including collateral for repurchase (reverse) agreements entered into by the City shall be conducted using the delivery vs. payment (DVP) basis. That is, funds shall not be wired or paid until verification has been made that the correct security was received by the safekeeping bank. The safekeeping or custody bank is responsible for matching up instructions from the City's investment officials on an investment settlement with what is wired from the broker/dealer, prior to releasing the City's designated funds for a given purchase. The security shall be held in the name of the City or held on behalf of the City in a bank nominee name. Securities will be held by a third party custodian designated by the Director of Finance and evidenced by safekeeping receipts. The safekeeping bank's records shall assure the notation of the City's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the City. A safekeeping agreement must be in place, which clearly defines the responsibilities of the safekeeping bank. Wires or ACH transactions to and from government investment pools and money market mutual funds are the only exception to the DVP method of settlement. XI. MANAGE1VIF~NT AND INTERNAL CONTR(~I,S The Director of Finance shall establish a system of internal controls which shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees or Investment Officials of the City. Controls and managerial emphasis deemed most important that shall be employed where practical are: A. Control of collusion. B. Separation of duties. C. Separation of transaction authority from accounting and record keeping. D. Custodian safekeeping receipts records management. E. Avoidance of bearer-form securities. 13. F. Clear delegation of authority. G. Documentation of investment bidding events. H. Written confirmations from broker/dealers and financial insfitutons. I. Reconcilements and comparisons of security receipts with the investment subsidiary records. J. Compliance with investment policies. K. Accurate and timely investment reports as required by law and this policy. L. Validation of investment maturity decisions with supporting cash flow data. M. Adequate training and development of Investment Officials. N. Verification of all investment income and security purchase and sell computations. O. Review of financial condition of all broker/dealers, and depository institutions. P. Staying informed about market conditions, changes, and trends that require adjustments in investment strategies. The above list of intemal controls represents only a partial list of a system of internal controls. An annual process of independent review by an external auditor shall be established. This review will provide internal control by assuring compliance with laws, policies and procedures. This annual compliance audit is required by the "Public Funds Investment Act" [Section 2256.005 (m)]. XII. INVESTMENT POI.ICY ADOPTION The City's investment policy shall be adopted by resolution of the City Council. The policy and general investment strategy statements shall be reviewed on an annual basis by the City Council and any modifications made thereto must be approved by the City Council. XIII. INVESTMENT ~TRATEGY ,qTATEMENT~ A. ACTIVE VS. PASSIVE STRATEGY: The City intends to pursue an active portfolio management philosophy with investment functions carried out either by in-house City staff or by an outside portfolio manager investing the City's funds with oversight by the Director of Finance. Active management means that the financial markets will be monitored and investments will be purchased and sold based on the market conditions, liquidity parameters and legal constraints. Any marketable securities that may be purchased by the City shall have active secondary markets. Securities may be purchased as a new issue or in the secondary markets. Securities may be sold before they mature if market conditions 12 present an opportunity for the City to benefit from the trade or if changes in the market warrant the sale of securities to avoid future losses. Securities may be purchased with the intent from the beginning, to sell them prior to maturity or with the expectation that the security would likely be called prior to maturity under the analyzed market scenario. Market and credit risk shall be minimized by diversification. Diversification by market sector and security types, as well as maturity will be used to protect the City from credit and market risk in order to meet liquidity requirements. The portfolio will be structured to benefit from anticipated market conditions and to achieve a reasonable return. Relative value between asset groups shall be analyzed and pursued as part of the active investment program within the restrictions set forth by this policy. The portfolio may be comprised of 100% of direct government obligations, 100% repurchase agreements or 100% in an authorized government investment pool. Other asset types shall be limited to no more than 25% of the portfolio. SPECIFIC INVESTMENT STRATEGIES FOR EACH TYPE OF FUND GROUP OF THE CITY ARE AS FOLLOWS: B. OPERATING FUNDS: Operating Funds shall have as their primary objective to assure that anticipated cash outflows are matched with adequate investment liquidity. The secondary objective is to create a portfolio structure, which will experience minimal volatility during changing economic cycles. These objectives may be accomplished by purchasing money market government investment pools, money market mutual funds or high quality, short to medium term securities in a laddered (maturities coming due regularly and staggered to match cash outflows) or barbell (maturities that are placed very short term and maturities that are longer term, such that the average achieves cash flows and income similar to buying in the middle of those maturity spectrums) maturity structure and by diversification among market sectors. The dollar-weighted average maturity of operating funds, based on the stated final maturity date of each security, will be calculated and limited to one year or less. However, each of the city's operating funds has a component classified as fund balance or reserve monies. These reserve monies may have a dollar-weighted average maturity of two years or less. C. CAPITAL PROJECT FUNDS AND SPECIAL PURPOSE FUNDS: Capital Project Funds and Special Purpose Funds shall have as their primary objective to assure that anticipated cash outflows are matched with adequate investment liquidity. These portfolios should have liquid securities to allow for unanticipated project expenditures or accelerated project outlays due to a better than expected or changed construction schedule. The portfolios shall be invested based on cash flow estimates to be supplied by the City Engineer and a capital project report completed by the accounting division. The dollar-weighted average life of the portfolio should be matched or below the duration of the liabilities. Funds invested for capital projects may be from bond proceeds that are subject to arbitrage rebate regulations. The City will manage these funds as previously described, but will conduct an arbitrage rebate calculation annually to determine the 3.3 income, if any, that has exceeded the arbitrage yield of the bond. This positive arbitrage income will be averaged over a five-year period and rebated to the federal government according to federal arbitrage regulations. A secondary objective of these funds is to achieve a yield equal to or greater than the arbitrage yield of the applicable bond. D. DEBT SERVICE FUNDS: Debt Service Funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligation on the required payment date. Securities purchased shall not have a stated final maturity date which exceeds the debt service payment date. E. DEBT SERVICE RESERVE FUNDS: Debt Service Reserve Funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate debt service fund within the limits set forth by the bond ordinance or debt covenants specific to each individual bond issue. Individual securities may be invested to a stated final maturity of five years or less and no more than a three year dollar-weighted average life. 3.4