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HomeMy WebLinkAboutResolution No. 07-069 CITY OF THE COLONY RESOLUTION NO. 07- 0 &q A RESOLUTION APPROVING THE INVESTMENT POLICY AS AMENDED, FOR THE CITY OF THE COLONY; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City Council must annually review and approve an Investment Policy; and WHEREAS, the City Council has previously adopted the Investment Policy by Resolution 06-094 on the 6th day of November, 2006; and WHEREAS, the City Council desire to amend said Investment Policy; NOW, THEREFORE, BE IT HEREBY RESOLVED BY THE CITY COUNCIL OF THE CITY OF THE COLONY, TEXAS that: SECTION 1: The City Council of the City of The Colony hereby approves the Investment Policy of the City of The Colony as amended, which is attached hereto and incorporated by reference as if set forth in full as Exhibit A. SECTION 2: That the Investment Policy as adopted herein shall govern the investment decisions and strategies for the city of The Colony. SECTION 3: That this resolution shall become effective immediately from and after its passage and approval. PASSED AND APPROVED this 17th day of September. 2007. ATTEST: ~L~ tJ4 ChrIstie Wilson, City Secretary CITY OF THE COLONY THE COLONY ECONOMIC DEVELOPMENT CORPORATION THE COLONY COMMUNITY DEVELOPMENT CORPORATION INVESTMENT POLICY September 17, 2007 Prepared by the Finance Department Approved by the City Manager Confirmed by the City Council on September 17,2007 THE COLONY INVESTMENT POLICY TABLE OF CONTENTS PAGE I. SCOPE OF POLICY 1 A. Funds Included 1 B. Funds Excluded 1 C. Pooling of Funds 1 D. Additional Requirements 1 II. PRUDENCE 1 III. OBJECTIVES OF POLICY 2 A. Safety 2 B. Liquidity 2 C. Yield 2 D. Risk of Loss 2 IV. RESPONSIBILITY AND CONTROL 3 A. Delegation 3 B. Investment Officers 3 C. Conflicts of Interest 3 D. Disclosure 3 E. Investment Training 3 V. AUTHORIZED INVESTMENTS 4 VI. INVESTMENT REPORTS 5 VII. PORTFOLIO AND INVESTMENT ASSET PARAMETERS 5 A. Bidding Process for Investments 5 B. Maximum Maturities 5 C. Maximum Dollar-Weighted Maturity 5 D. Diversification 5 E. Performance Standards 6 VIII. SELECTION OF DEPOSITORY, FINANCIAL INSTITUTIONS AND BROKER/DEALERS 6 A. Bidding Process 6 B. Insurability 6 C. Authorized Depository, Financial Institutions, and Broker/Dealers 6 D. Investment Advisors 7 IX. COLLA TERALIZA TION 7 A. Insurance or Collateral Pledged 7 B. Collateral Defined 7 C. Collateral Custodian Agreement 8 D. Audit of Pledged Collateral 8 x. SAFEKEEPING AND CUSTODY OF INVESTMENT ASSETS XI. MANAGEMENT AND INTERNAL CONTROLS XII. INVESTMENT POLICY ADOPTION XIII. INVESTMENT STRATEGY A. Operating Funds B. Capital Project and Special Purpose Funds C. Debt Service Funds D. Debt Service Reserve Funds APPENDIX A Authorized Broker/Dealers and Government Pools PAGE 8 8 9 9 10 11 11 11 12 THE COLONY INVESTMENT POLICY I. SCOPE OF POLICY This Investment Policy shall govern the investment activities of all funds of the City of The Colony, The Colony Economic Development Corporation, and The Colony Community Development Corporation (collectively herein referred to as "THE COLONY"), excluding any specific funds cited hereafter. This policy serves to satisfy the state statutory requirement to define and adopt a formal investment policy. A. FUNDS INCLUDED: All financial assets of all current funds of THE COLONY and any new funds created in the future, unless specifically exempted, will be administered in accordance with this Policy. These funds are accounted for in the City's Annual Financial Report and may include: General Fund, Enterprise Funds, Capital Project Funds, Special Revenue Funds, Trust and Agency Funds. B. FUNDS EXCLUDED: This Policy excludes Employee Retirement and Pension Funds administered or sponsored by THE COLONY and excludes defeased bond funds held in trust escrow accounts. THE COLONY will maintain responsibility for these funds as required by Federal and State law and Charters and Codes. C. POOLING OF FUNDS: Except for cash in certain restricted and special funds, THE COLONY will consolidate cash balances from all funds to optimize potential investment earnings. Investment income will be allocated to the various funds based on their respective percentage participation and in accordance with the 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. II. 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 the capital as well as the probable income to be derived. The standard of prudence to be used by Investment Officers 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. Page 1 III. OBJECTIVES OF POLICY The primary objectives of THE COLONY'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 COLONY's investment program is the preservation and safety of capital. 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 advisors who serve as intermediaries, shall be pre-qualified by THE COLONY. 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 COLONY will structure the investment portfolio so that securities mature to meet cash requirements for ongoing operations and will regularly monitor marketable securities. Should an issuer experience a downgrade of its credit rating by a nationally recognized credit rating agency below the required minimum rating, all prudent measures will be taken to liquidate the investment. B. LIQUIDITY: THE COLONY's investment portfolio will remain sufficiently liquid to enable THE COLONY 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 diversifying maturities and call dates. Furthermore, since all possible cash demands cannot be anticipated, the portfolio, or portions thereof may be placed in bank accounts, money market mutual funds or local government investment pools, which offer same day liquidity. C. YIELD: THE COLONY'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. Yields on debt proceeds that are not exempt from federal arbitrage regulations must rebate earnings in excess of the arbitrage yield of the debt obligation. Investment Officers will seek to preserve principal and optimize the yield of these funds. However, it is understood that if the yield achieved by THE COLONY is higher than the arbitrage yield, positive arbitrage income will be rebated to the federal government as required by current federal regulations. D. RISK OF LOSS: The governing bodies recognize 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. Page 2 IV. RESPONSIBILITY AND CONTROL A. DELEGATION: The Director of Finance has oversight management responsibility to establish written procedures and controls for the operation of the investment program, consistent with this Investment Policy. Such procedures shall include explicit delegation of authority to persons responsible for the daily cash management operation, execution of investment transactions, overall portfolio management, and investment reporting. The Director of Finance shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of the Investment Officers. B. INVESTMENT OFFICERS: The Director of Finance and Accounting Manager are the "Investment Officers" of THE COLONY. No person shall engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Director of Finance. C. CONFLICTS OF INTEREST: Investment Officers 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 Officers and employees shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of THE COLONY. D. DISCLOSURE: Employees and Investment Officers shall disclose to the City Manager, City Council, Board of Directors, and the Texas Ethics Commission any financial interests in financial institutions or any relationship within the second degree by affinity or consanguinity to an individual that conducts business with THE COLONY. All Investment Officers shall further disclose any large personal financial investment positions that could be related to the performance of THE COLONY's portfolio. Employees and Investment Officers shall subordinate their personal investment transactions to those of this jurisdiction, particularly with regard to the timing of purchases and sales. E. INVESTMENT TRAINING: In order to ensure qualified and capable investment management, the Director of Finance, the Accounting Manager, and any other Investment Officers shall have a finance, accounting, or related degree and knowledge of treasury functions. Additionally, Investment Officers 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, AI CPA, UNT, NCTCOG, and TML. All Investment Officers of THE COLONY shall attend at least one training session relating to their cash management and investment responsibilities within 12 months after assuming these duties for THE COLONY. Training must include education in investment controls, security risks, strategy risks, market risks, and compliance with state investment statutes. Page 3 v. AUTHORIZED INVESTMENTS Funds of THE COLONY 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 ofthe 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 that has its main office or branch office in the State of Texas and that are guaranteed or insured by the Federal Deposit Insurance Corporation or are secured in compliance with Section IX Collateralization; F. Fully Collateralized Repurchase Agreements as allowed by the Public Funds Investment Act, and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas. Repurchase agreements include "flexible repurchase agreements" designed to invest bond proceeds. G. Commercial paper is only an authorized investment when purchased by THE COLONY through a Money Market Mutual Fund or Local Government Joint Pool. H. 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, fully invest dollar-for-dollar all funds without sales commissions or loads, are categorized as a "Treasury" or "Government" money market fund, are continuously rated no lower than AAAm or an equivalent rating by at least one nationally recognized rating service, and include in their investment objectives the maintenance of a stable net asset value of $1 for each share. THE COLONY shall not invest funds in excess of 10% of the total assets of anyone money market mutual fund. I. Local Government Joint Investment Pools established and operating in compliance with the Public Funds Investment Act, and that are continuously rated no lower than AAA-m or an equivalent rating by at least one nationally recognized rating service have a dollar-weighted average maturity of90 days or less, and invest only in obligations listed in the Public Funds Investment Act. Only those investments listed are authorized. Investments authorized at the time of purchase do not need to be liquidated. Page 4 VI. INVESTMENT REPORTS The Director of Finance shall submit quarterly an investment report in compliance with the Public Funds Investment Act. This report will be prepared in a manner, which will allow THE COLONY to ascertain whether investment activities during the reporting period have conformed to the Investment Policy. The report should be provided to the City Council, Boards of Directors, and the City Manager. The reports shall be formally reviewed at least annually by an independent auditor in conjunction with the annual audit. The result of the review shall be reported to the City Council and Boards of Directors by that auditor. The quarterly investment report must be presented within 90 days of the end of the quarter reporting period. 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 the Accounting Manager. Information to maintain the investment program and the reporting requirements is derived from various sources such as broker/dealer research reports, newspapers, financial on-line market quotes, communication with broker/dealers, government investment pools, and financial consulting servIces. VII. PORTFOLIO AND INVESTMENT ASSET PARAMETERS A. BIDDING PROCESS FOR INVESTMENTS: Investment Officers for THE COLONY may accept bids for certificates of deposit and for all marketable securities either orally, in writing, electronically, or in any combination of these methods. The Investment Officers will strive to create a competitive pricing environment for all portfolio transactions, including long-term investment pool selection B. MAXIMUM MATURITIES: THE COLONY will manage its investments to meet anticipated cash flow requirements. THE COLONY will not directly invest in securities maturing more than five years from the date of purchase. C. MAXIMUM DOLLAR-WEIGHTED AVERAGE MATURITY: Under most market conditions, the composite portfolio will be managed to achieve a nine month or less dollar-weighted average maturity. The maximum dollar-weighted average maturity based on the stated final maturity, authorized by this Investment Policy for the composite portfolio of THE COLONY shall be twelve months. D. DIVERSIFICATION: It is the policy of THE COLONY to diversify its investment portfolios. Assets held in each investment portfolio shall be diversified to eliminate the risk of loss resulting from concentration of assets in a specific maturity, a specific issuer, or a specific class of securities. In establishing specific diversification strategies, the following general policies and constraints shall apply: Page 5 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 call sector. Securities shall be selected which provide for stability of income and adequate 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 that portion of the portfolio. E. 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 market/economic environment of stable interest rates. A series of appropriate benchmarks shall be established against which portfolio performance shall be compared on a regular basis. "Weighted average yield to maturity" shall be the portfolio performance measurement standard. VIII. SELECTION OF DEPOSITORY. FINANCIAL INSTITUTIONS. BROKER/DEALERS. AND INVESTMENT ADVISORS A. BIDDING PROCESS: Depositories shall be selected through THE COLONY's banking services procurement process, which shall include a formal request for proposal (RFP) issued not less than every five years. In selecting depositories, the credit worthiness of institutions shall be considered. No public deposit shall be made except in a qualified public depository as established by state depository laws. B. INSURABILITY: Banks and Savings and Loan Associations seeking to establish eligibility for THE COLONY's deposits, shall submit financial statements, evidence of federal insurance, and other information as required by the Investment Officers of THE COLONY. C. AUTHORIZED DEPOSITORY, FINANCIAL INSTITUTIONS AND BROKER/DEALERS: The Director of Finance will maintain a list of financial institutions and broker/dealers, who are authorized to provide investment services to THE COLONY. These firms 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 criteria established by the Director of Finance. The Director of Finance will review each firm at least annually. 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; Page 6 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 COLONY; and 5) Texas Public Funds Investment Act Acknowledgements from a "Qualified Representative" of the financial institution or broker/dealer that they have received, read, understood, and agree to comply with THE COLONY's Investment Policy. The qualified representative shall execute a written instrument acceptable to THE COLONY 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 and Boards of Directors will include the broker/dealer-approved list as part of their annual review. D. INVESTMENT ADVISORS: Investment Advisors shall adhere to the spirit, philosophy and specific term of this Policy and shall advise within the same "Standard of Care". Selected Investment Advisors must be registered under the Investment Advisors Act of 1940 or with the State Securities Board. A contract with an Investment Advisor may not be for a term longer than two years and must be approved by the City Council, including any renewals or extensions. IX. COLLATERALIZATION A. INSURANCE OR COLLATERAL PLEDGED: Collateralization shall be required on depository bank deposits, certificates of deposit, and repurchase 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 any FDIC insurance. Collateral shall be monitored at least monthly to ensure that the market value of the securities pledged equals or exceeds the related deposit or investment balance. B. COLLATERAL DEFINED: THE COLONY shall only accept, as depository collateral, any security that is specifically allowed to be held as a direct investment by THE COLONY's portfolio and that the maximum maturity of the collateral securities may be no greater than ten years. THE COLONY 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. Page 7 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 and by the City Council and Boards of Directors. c. COLLATERAL CUSTODIAN AGREEMENT: Deposit and repurchase agreement collateral will always be held by an independent third party with whom THE COLONY has a current custodial agreement. A clearly marked evidence of ownership (safekeeping receipt) must be supplied to THE COLONY and retained. The custodial agreement must clearly define the responsibility of the custodian bank. The custodian 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 custodial agreement shall include the authorized signatories of THE COLONY 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 COLONY's independent auditors. x. SAFEKEEPING AND CUSTODY OF INVESTMENT ASSETS All security transactions, including collateral for repurchase agreements, entered into by THE COLONY 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 has been received by the safekeeping bank. The safekeeping bank is responsible for matching up instructions from THE COLONY's Investment Officers on an investment settlement with what is wired from the broker/dealer, prior to releasing THE COLONY's designated funds for a given purchase. The security shall be held in the name of THE COLONY or held on behalf of THE COLONY 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 COLONY's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to THE COLONY. 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. MANAGEMENT AND INTERNAL CONTROLS 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 Officers of THE COLONY. Controls and managerial emphasis deemed most important that shall be employed where practical are: A. Control of collusion. Page 8 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. F. Clear delegation of authority G. Documentation of investment bidding events. H. Written confirmations from broker/dealers and financial institutions. I. Reconcilements and comparisons of security receipts with the investment 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 Officers. 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. Information about market conditions, changes, and trends that require adjustments in investment strategies. The above list of internal controls represents only a partial list of a system of internal controls. In conjunction with the annual audit, a process of independent review by an external auditor shall be established. XII. INVESTMENT POLICY ADOPTION THE COLONY's Investment Policy shall be adopted by resolution of the City Council and Boards of Directors. The Policy and general investment strategy statements shall be reviewed on an annual basis by the City Council and Boards of Directors, and any modifications made thereto must be approved by them. XIII. INVESTMENT STRATEGY Effective investment strategy development coordinates the primary objectives of THE COLONY's Investment Policy and cash management procedures. Cash management to increase the available "investment period" will be employed when necessary to enhance the ability of THE COLONY to earn interest income. Maturity selections shall be based on cash flow and market conditions to take advantage Page 9 of interest rate cycles. THE COLONY's portfolio shall be designed and managed in a manner responsive to the public trust and consistent with the Investment Policy. Each major fund type has varying cash flow requirements and liquidity needs. Therefore specific strategies shall be implemented considering the Fund's unique requirements. THE COLONY funds shall be analyzed and invested according to the following major fund types: A. Operating Fund B. Capital Project Funds and Special Purpose Funds C. Debt Service Funds D. Bond Reserve Funds OVERALL STRATEGY: THE COLONY's basic investment strategy is to utilize investment options that represent suitable risk/return alternatives. Therefore, all financial assets shall seek to preserve principal by restricting the authorized investment instruments to those securities with suitable and limited credit and market risk. Liquidity will be maintained by utilizing projected cash flow needs to limit investment maturities and targeting minimum cash balances. Security marketability will be maintained based on the fund-type strategies to sufficiently and reasonably assure that investments could be liquidated prior to the maturity, if cash needs dictate. THE COLONY shall also diversify its investment portfolio. Whenever practical, assets held in the investment portfolio shall minimize the risk of loss resulting from concentration of assets in a specific maturity, a specific issuer, or a specific class of security. THE COLONY will group investment instruments into "fund-type investment groups." These groups will reflect similar needs as to maturity limits, diversity, and liquidity. THE COLONY funds shall seek to achieve a competitive yield appropriate for each strategy. Yield objectives shall at all times be subordinate to the objectives of safety and liquidity. Tax-exempt debt proceeds shall be invested to maximize the interest earnings retained by the City, while at the same time fully complying with all applicable state laws and federal regulations, including the arbitrage rebate regulations. A. 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 investing in bank deposits, 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) 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. Stated final maximum maturity shall be two years. Page 10 B. 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. The portfolios shall be invested based on cash flow estimates Funds invested for capital projects may be from bond proceeds that are subject to arbitrage rebate regulations. THE COLONY will conduct an arbitrage rebate calculation annually to determine the income, if any, that has exceeded the arbitrage yield of the bond. This positive arbitrage income will be 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 issue. C. DEBT SERVICE FUNDS: Debt Service Funds shall have as the primary objective to assure 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 a debt service payment date cash requirement. D. 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. Page 11 APPENDIX A LIST OF BROKER/DEALERS AND GOVERNMENT POOLS AUTHORIZED TO SET UP INVESTMENT ACCOUNTS WITH THE COLONY IF THESE ENTITIES SUPPL Y THE COLONY WITH THE REQUIRED CERTIFICATIONS AND FINANCIAL DOCUMENTS. AUTHORIZED BROKER/DEALERS AG Edwards & Sons, Inc. Dean Witter/Morgan Stanley Duncan Williams FTN Financial Merrill Lynch SAMCO Capital Markets UBS Paine Webber Vining-Sparks In addition to the above named BrokerlDealers, THE COLONY is also authorized to set up investment accounts with THE COLONY's Depository Bank and may also obtain Collateralized Certificates of Deposits (CD) quotes from local Texas Banks. AUTHORIZED GOVERNMENT POOLS TEXPOOL (Texas Local Government Investment Pool) LOGIC (Local Government Investment Cooperative) Page 12