ADMINISTRATIVE COMMITTEE
4.	CONSIDER ADOPTION OF REVISIONS TO DISTRICT INVESTMENT POLICY
Meeting Date:		July 14, 2020	Budgeted:	N/A
From:		David J. Stoldt	Program/
		General Manager	Line Item No.:	N/A
Prepared By:		David J. Stoldt	Cost Estimate:	$126,000 w/contingency
General Counsel Approval: N/A
Committee Recommendation: The Administrative Committee reviewed this item on July 14, 2020 and recommended _______________________.
CEQA Compliance: Not a project under CEQA.

SUMMARY: The State of California Government Code requires the District Board to annually review and approve the Policy.  The District’s current Policy was adopted on September 20, 1997 and has been reviewed and approved annually by the Board since that time.  Additionally, State law, as well as District policy, requires that each quarter the Board receive and approve a report of investments held by the District.  This requirement has been met as the Board has received quarterly reports on the contents and performance of the investment portfolio since adoption of the investment policy. At the May 15, 2020 Special Board meeting to discuss the District’s preliminary budget, suggestions were made by staff to make minor revisions to the District Investment Policy (the Policy). At that time, the Board requested that the proposed revisions be brought back at a regular Board meeting with additional information about the relative risks and returns of the allowable investment vehicles.

RECOMMENDATION: Administrative Committee should consider a recommendation to the Board to eliminate (a) Repurchase Agreements, (b) Securities Lending Agreements, and (c) Mortgage Pass-Through Securities from the District’s permitted investments, as well as increase the allowable portion of the portfolio invested in Negotiable Certificates of Deposit to 75%.

BACKGROUND: The objectives of the District’s investment program in order of priority are:

1) Safety of invested funds – The Treasurer shall ensure the safety of the District’s invested

funds by limiting, as much as possible, credit and interest rate risk. Credit risk is the risk

of loss due to failure of the security issuer or backer. Interest rate risk is the risk that the

market value of investments will fall due to an increase in the general level of interest rates.

2) Maintenance of sufficient liquidity to meet cash flow requirements – Attainment of a

market average rate of return during budgetary and economic cycles, taking into account

the District's investment risk constraints and cash requirements. Liquidity risk includes the

inability to sell portfolio holdings at a competitive price, a penalty for early withdrawal, capital losses if interest rates have gone up, or fire sale prices.

District funds may be placed in any instrument or medium approved by the State of California as

enumerated in Government Code Section 53651 as shown in Exhibit 4-A. The allowable investments are summarized in the table below:

Source: CDIAC/CMTA Advanced Public Funds Investing Workshop, PFM Asset Management LLC, Sarah Meacham, Managing Director, January 15, 2020

The proposed revisions are to prohibit 3 investment vehicles as shown in red in the table on page 6 of the Policy, included in Exhibit 4-A, but to also increase the proportion of the portfolio that may be invested in Negotiable Certificates of Deposit. The District already is not be authorized to invest in any security that has the possibility of returning a zero or negative yield if held to maturity except that investment in U. S. Treasury Certificates of indebtedness ("SLUGS") issued by the U. S. Bureau of Public debt is authorized. Prohibited investments also include inverse floaters, range notes and interests only strips derived from a pool of mortgages.

Credit Risk – Credit risk is defined as an issuers ability and willingness to repay interest and principal. Credit risk shall be mitigated by diversifying the fund among issues and issuers so that the failure of any one issue or issuer would not result in a significant loss of income or principal to participants. Allowable investments can roughly be ranked as follows to show relative credit risk:

Source: CDIAC/CMTA Advanced Public Funds Investing Workshop, PFM Asset Management LLC, Sarah Meacham, Managing Director, January 15, 2020

Interest Rate Risk – Interest rate risk (also known as “market risk”) is the risk that the market value of a security or of the portfolio will change as the general level of interest rates changes over time. Because “fixed income securities” (i.e., securities that provide scheduled interest payments on a periodic basis and return principal invested upon maturity) comprise a significant component of local agency portfolios and the value of these securities is directly affected by interest rate changes, local agencies must develop strategies for identifying and managing interest rate risk for their portfolios.

To date, the District has attempted to manage interest rate risk by eliminating the need to ever sell a security by laddering out the maturity of investments to mature prior to the need for the revenues. The “ladder” has typically been in Negotiable Certificates of Deposit maturing in 3-, 6-, 12-, 24-, or 36 months, ensuring each CD is below the federally insured $250,000 amount. This approach can come at the expense of yield however, in that a large portion of the District portfolio is kept in the statewide pooled Local Agency Investment Fund or LAIF which has great liquidity, but low returns. Additional yield can be achieved by diversifying into higher-yielding securities, such as the addition of mortgage-backed securities as shown below, but to date the District has avoided such a strategy and is, in fact, recommending prohibiting such investments in this agenda item.

Trade-offs between diversification and yield can be demonstrated by the example below, where “MBS” indicates mortgage-backed securities and “ABS” indicates asset-backed securities:

Source: CDIAC/CMTA Advanced Public Funds Investing Workshop, PFM Asset Management LLC, Sarah Meacham, Managing Director, January 15, 2020

Liquidity Risk – Allowable investments can roughly be ranked as follows to show relative liquidity risk:

Source: CDIAC/CMTA Advanced Public Funds Investing Workshop, PFM Asset Management LLC, Sarah Meacham, Managing Director, January 15, 2020

EXHIBIT

4-A District Investment Policy with Suggested Edits

U:\staff\Board_Committees\Admin\2020\20200714\04\Item-4.docx