Proposal:

Approve AQMD Annual Investment Policy and Delegation of Authority to Los Angeles County Treasurer to Invest AQMD Funds

Synopsis:

State law requires local government entities annually to provide a statement of investment policy for consideration at a public meeting and to renew its delegation of authority to its treasurer to invest or to reinvest funds of the local agency.

Committee:

Investment Oversight, February 7, 1997, Recommended for Approval

Recommended Action:

Approve the attached Annual Investment Policy and resolution delegating authority to the Los Angeles County Treasurer to invest and reinvest AQMD funds.

James M. Lents, Ph.D.
Executive Officer

Changes to the Government Code which took effect in 1996 require that a statement of investment policy be transmitted annually to the oversight committee and legislative body of a local agency for consideration at a public meeting. In addition, recent changes to state law (Gov’t. Code Section 53607) now require that a local agency’s legislative body annually renew its delegation of authority to its Treasurer to invest or to reinvest funds of the local agency.

Board action on April 12, 1996 approved a recommendation to minimize AQMD investments in the Los Angeles County Pooled Surplus Investment Portfolio (PSIP), by directing staff to work with the Los Angeles County Treasurer (AQMD’s Treasurer) to make specific investments on behalf of the AQMD. This change in investment policy has required the development of a statement of investment policy specifically for the AQMD. Sperry Capital, AQMD’s investment consultant, working with staff of the AQMD and the Los Angeles County Treasurer’s office, has developed a statement of investment policy whicih sets forth the investment guidelines for the AQMD with the objective of ensuring that funds are prudently invested to preserve principal and provide necessary liquidity while earning a market average rate of return.

For the past 20 years the County of Los Angeles has provided treasury management services to the AQMD. These services are limited to the processing of payroll and accounts payable warrants and the investment of the AQMD’s cash balances. In April 1996 the Governing Board reviewed the treasury management options available to the AQMD and elected to continue with the services provided by Los Angeles County. Since that action, the Board has received quarterly reports regarding AQMD investments managed by the Los Angeles County Treasurer.

Resource Impacts

The cost associated with AQMD treasury management operations is included in the FY 1996-97 Budget.

Attachments

1. AQMD Annual Investment Policy

2. Resolution delegating authority to the Treasurer of the County of Los Angeles to invest and reinvest funds of the South Coast Air Quality Management District

/ / /

(Invpolcy)

RESOLUTION NO. 97-_________

A Resolution of the South Coast Air Quality Management District Board delegating authority to the Treasurer of the County of Los Angeles to invest and reinvest funds of the South Coast Air Quality Management District.

WHEREAS, the Governing Board of the South Coast Air Quality Management District desires to reaffirm the appointment of the Treasurer of the County of Los Angeles as Treasurer of the South Coast Air Quality Management District; and

WHEREAS, the Governing Board of the South Coast Air Quality Management District pursuant to Section 40527 of the Health and Safety Code has authority to appoint a Treasurer; and

WHEREAS, the Governing Board of the South Coast Air Quality Management District pursuant to Section 53607 of the Government Code is required to annually renew the delegation of authority to its Treasurer to invest or to reinvest funds or sell or exchange securities of the District;

THEREFORE, BE IT RESOLVED that the Governing Board of the South Coast Air Quality Management District hereby delegates to the Treasurer of the County of Los Angeles the authority to invest and to reinvest funds of the South Coast Air Quality Management District.

AYES:

NOES:

ABSENT:

Date: _______________ _______________________________

Clerk of the Board

South Coast Air Quality Management District

Annual Investment Policy

I. PURPOSE

This Annual Investment Policy (the "Policy") sets forth the investment guidelines for all general, special revenue, trust, agency and enterprise funds of the South Coast Air Quality Management District (AQMD). The objective of this Policy is to ensure temporarily idle funds are prudently invested to preserve principal and provide necessary liquidity, while earning a market average rate of return.

AQMD funds deposited with the Los Angeles County Treasurer may only be invested in the Los Angeles County Pooled Surplus Investment Portfolio or in Special Purpose Investments as authorized by this Policy. The AQMD Annual Investment Policy conforms to the California Government Code (the Code) as well as customary standards of prudent investment management. Irrespective of these Policy provisions, should the provisions of the Code be or become more restrictive than those contained herein, such provisions will be considered immediately incorporated in this Policy and adhered to.

The investment of bond proceeds will be governed by state law and the permitted investment provisions of relevant bond documents.

II. SCOPE

It is intended that this Policy cover all funds (except those funds invested in the two retirement systems covering AQMD employees and 457 deferred compensation plan funds) and investment activities under the direction of the AQMD and deposited with the Los Angeles County Treasurer.

III. OBJECTIVES

The objectives of this Annual Investment Policy, in priority order, are SAFETY OF PRINCIPAL, LIQUIDITY, AND MARKET RATE OF RETURN.

1. Safety of Principal. The primary objective of AQMD is to reduce credit risk and interest rate risk to a level that is consistent with safe and prudent investment management. Credit risk is the risk of default or the inability of a debt issuer to make interest or principal payments when due. Credit risk is minimized by investing in only permitted investments and diversifying the portfolio according to this Annual Investment Policy so that no one type of issuer or issue will have a disproportionate impact on the portfolio. Interest rate risk is associated with price volatility introduced by extending the maturity of instruments purchased. Interest rate risk is controlled by limiting the maturity exposure to acceptable levels.

2. Liquidity. AQMD funds will be invested to ensure that normal cash needs and scheduled extraordinary cash needs can be met. Cash flow forecasting will be used to determine the current and projected future needs of AQMD and the ability of AQMD to make Special Purpose Investments. AQMD shall invest funds in instruments for which there is a secondary market and which offer the flexibility to be easily sold at any time with minimal risk of loss of either the principal or interest based upon then prevailing interest rates.

3. Market Rate of Return. AQMD’s funds shall be invested to attain a market average rate of return through economic cycles consistent with maintaining risk at a prudent level.

These objectives are to be achieved in part through the diversification of AQMD investments among the Los Angeles County Pooled Surplus Investment Portfolio and Special Purpose Investments. The combination of the Pooled Surplus Investment Portfolio and the Special Purpose Investment of AQMD funds in the State of California Local Agency Investment Fund will provide significant diversification, safety of principal and liquidity for the programs of the AQMD. Other Special Purpose Investments in an AQMD separate account will experience market price changes due to interest rate risk consistent with longer maturity investments that are permitted by this policy.

IV. RESPONSIBILITIES

The Governing Board. The AQMD Governing Board is responsible for establishing the Annual Investment Policy and ensuring investments are made in compliance with this Policy. This Policy shall be reviewed annually by the Governing Board at a public meeting pursuant to Section 53646(a) of the California Government Code. The Los Angeles County Treasurer has been appointed Treasurer of AQMD. The Treasurer shall be appointed at least annually by the AQMD Governing Board.

The Treasurer. The Treasurer is responsible for making investments and for compliance with this Policy pursuant to the delegation of authority to invest funds or to sell or exchange securities made in accordance with Code Section 53607. If the AQMD Governing Board appoints as Treasurer someone other than the Los Angeles County Treasurer, the new Treasurer shall be responsible for making investments and for compliance with this Policy or such other Policy which may be adopted by the Governing Board at that time.

The Director of Finance. The Director of Finance, based on information provided by the Treasurer, shall submit a quarterly report to the Governing Board in accordance with Code Section 53646(b). The Director of Finance is responsible for preparation of cash flow forecasts for AQMD funds as described below. The Director of Finance will recommend specific individual investments for the Special Purpose Investments to be made by the Treasurer.

The Investment Oversight Committee. The AQMD Governing Board shall appoint an Investment Oversight Committee. The duties and responsibilities of the Investment Oversight Committee shall consist of the following:

1. Annual review of AQMD’s Investment Policy before it is considered by the Governing Board, and recommend revisions, as necessary, to the Director of Finance.

2. Quarterly review of AQMD’s investment portfolio for conformance with AQMD’s Annual Investment Policy diversification and maturity guidelines, and make recommendations to the Director of Finance as appropriate.

3. Provide comments to the AQMD Director of Finance regarding potential investments and potential investment strategies.

4. Perform such additional duties and responsibilities as may be required from time to time by specific action and direction of the Governing Board.

It shall not be the purpose of the Investment Oversight Committee to advise on particular investment decisions of AQMD.

V. IMPLEMENTATION

This Policy establishes and defines investable funds, authorized instruments, credit quality requirements, maximum maturities and concentrations, collateral requirements, and qualifications of brokers, dealers, and financial institutions doing business with or on behalf of the AQMD.

A. Standard of Care.

All investments shall be made in the context of the "Prudent Investment" rule which states that:

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.

B. Investable Funds.

Investable Funds for purposes of this Policy are the AQMD general, special revenue, trust, agency and enterprise funds that are available for investment at any one time including any estimated bank account float. Investable Funds are idle or surplus funds of the AQMD including all segregated funds. All bond proceeds are excluded from Investable Funds. The Cash Flow Horizon is the time period in which the AQMD cash flow can be reasonably forecast. This Policy establishes the Cash Flow Horizon for AQMD idle or surplus funds to be three (3) years. The AQMD cash flow forecast must be updated at least every six months.

When the AQMD Director of Finance determines that the cash flow forecast can be met, the Treasurer, at the request of the Director of Finance, may invest a maximum of up to 75% of the minimum amount of funds available for investment during the Cash Flow Horizon in Special Purpose Investments ("SPI"), exclusive of investments in the State of California Local Agency Investment Fund ("LAIF"), in a separate account outside of the Pooled Surplus Investment ("PSI") Portfolio, in accordance with this Policy.

C. Authorized Investments.

Authorized investments shall match the general categories established by the California Government Code Sections 53601 et. seq. and 53635 et. seq. Authorization for specific instruments within these general categories as well as portfolio concentration and maturity limits are established below as part of this Policy. No investments shall be authorized that have the possibility of returning a zero or negative yield when held to maturity; for example: inverse floaters, range notes or interest only strips. As the California Government Code is amended, this Policy shall likewise become amended.

AQMD investments or deposits in the County of Los Angeles PSI Portfolio are governed by the County of Los Angeles Treasurers Investment Policy for Pooled Surplus Funds. AQMD investments or deposits in the LAIF are governed by the investment policy and guidelines for LAIF as established by the Office of the Treasurer for the State of California. Investments in LAIF are a SPI investment and are limited in amount to the investment limits established for LAIF by the California State Treasurer.

AQMD funds and segregated funds that are invested by the Treasurer in a SPI separate account outside of the County of Los Angeles PSI Portfolio or LAIF are subject to this Policy. AQMD funds invested in a SPI separate account will be governed by various approved lists that may be established and maintained by the Los Angeles County Treasurer.

D. Maximum Maturities.

The maximum maturity of any SPI investment shall be five (5) years. The weighted average maturity of the SPI separate account portfolio may not exceed three (3) years. Maturity shall mean the nominal maturity of the security, or the unconditional put option date, if the security contains such provision. Term or tenure shall mean the remaining time to maturity when purchased.

E. Diversification Guidelines

Diversification limits ensure that the AQMD SPI separate account portfolio is not unduly concentrated in the securities of one type, industry, or issuer, thereby assuring adequate portfolio liquidity should one sector or issuer experience difficulties. The diversification limits outlined below for an individual investment instrument and issuer/counterparty are expressed as the maximum percentage of the total AQMD SPI separate account portfolio invested by the Los Angeles County Treasurer.

Maximum %

Instrument of SPI Portfolio

1. U. S. Treasuries 100%
2. Federal Agencies & U. S. Government Sponsored Enterprises 100%
3. Los Angeles County Pooled Surplus Investment Portfolio 100%
4. State of California Local Agency Investment Fund 100%
5. State of California & Local Agency Obligations Not Allowed
6. Shares of Money Market Mutual Funds 15%
7. Bankers Acceptances 40%
8. Negotiable Certificates of Deposit 30%
9. Commercial Paper
If weighted average maturity of all CP is >31 days 15%
If weighted average maturity of all CP is <31 days 30%
10. Medium Term Maturity Corporate Securities 30%
11. Mortgage Securities or Asset-backed Securities 20%
12. Repurchase Agreements 50%
13. Reverse Repurchase Agreements Not Allowed
14. Variable and Floating Rate Securities 30%
15. Derivative Securities Not Allowed

Maximum %

Issuer/Counterparty of SPI Portfolio

Any one Federal Agency or U.S. Government Sponsored Enterprise 35%

Securities of a single issuer or its related entities 10%

Any one Repurchase Agreement or other collateralized counterparty name 50%

F. Permitted Investments

1. U.S. Treasuries.

Direct obligations of the United States of America and securities which are fully and unconditionally guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States of America.

U.S. Treasury coupon and principal STRIPS are not considered to be derivatives for the purpose of this Annual Investment Policy and are, therefore, permitted investments pursuant to the Annual Investment Policy.

2. Federal Agencies and U.S. Government Sponsored Enterprises.

Obligations, participations, or other instruments of, or issued by, a federal agency or a United States government sponsored enterprise.

3. Los Angeles County Pooled Surplus Investment Portfolio.

The County of Los Angeles Pooled Surplus Investment Portfolio is a pooled fund managed by the County Treasurer whose permitted investments are authorized in the Code and are governed by the Treasurers Investment Policy with credit requirements and maturity limits established by the County Treasurer and adopted by the County Board of Supervisors.

4. State of California Local Agency Investment Fund.

LAIF is a pooled fund managed by the Office of the State Treasurer whose permitted investments are identified in the Code and whose credit requirements and maturity limits are established by the State Treasurer.

5. State of California and Local Agency Obligations.

Not allowed as a Special Purpose Investments.

6. Shares of Money Market Mutual Funds.

Credit requirements for approved money market funds shall be limited to ratings of AAA by two of the three largest nationally recognized rating services or managed by an investment advisor registered with the Securities and Exchange Commission with not less than five years’ experience and with assets under management in excess of five hundred million dollars ($500,000,000), and such investment may not represent more than ten percent (10%) of the total assets in the money market fund.

7. Bankers Acceptances.

Bankers acceptances must be issued by national or state-chartered banks or a state-licensed branch of a foreign bank. Credit requirements for bankers acceptances shall be a minimum of 2-A/B for IBCA or P-1/Aaa for Moody’s Investors Service.

Maximum maturities for bankers acceptances are 270 days.

8. Negotiable Certificates of Deposit.

Negotiable certificates of deposit must be issued by national or state-chartered banks or a state-licensed branch of a foreign bank. Credit requirements for bank certificates of deposit shall be a minimum of 2-A/B for IBCA or P-1/Aaa for Moody’s Investors Service.

Maximum maturities for all negotiable certificates of deposit are three (3) years.

9. Commercial Paper

Credit requirements for approved commercial paper issuers include (1) a Standard and Poor’s (S&P) short term rating of A-1 or better AND a Moody’s Investors Service short term rating of P-1 or better, (2) a minimum of either Moody’s Investors Service or Standard & Poor’s outstanding long term debt rating of Aa/AA2 or better, (3) incorporation and operations in the United States and having total assets in excess of one billion dollars ($1,000,000,000), and (4) may not represent more than ten percent (10%) of the outstanding paper of the issuing corporation.

Maximum maturities for commercial paper are 180 days.

10. Medium Term Maturity Corporate Securities.

Credit requirements for medium term maturity corporate securities shall be limited to a minimum debt rating of AA- from Standard & Poor’s OR a debt rating of Aa3 from Moody’s Investors Service.

Floating rate medium term notes may be used if interest resets at least quarterly.

Maximum maturities for medium term maturity corporate securities are three years.

11. Mortgage Securities or Asset-backed Securities.

Credit requirements for any mortgage pass-through security, collateralized mortgage obligations, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate, or consumer receivable backed bond shall be rated "AA" or its equivalent or better by a nationally recognized rating service, and issued by an issuer having a "A" or better rating by a nationally recognized rating service for it’s long-term debt.

The maximum maturity for Mortgage or Asset-backed Securities shall be five years.

12. Repurchase Agreements.

All repurchase transactions must be collateralized by U.S. Treasuries or Agencies with a market value of 102% for collateral marked to market daily, entered into with a commercial bank or broker-dealer which is a recognized primary dealer and evidenced by an executed Public Securities Association form of Master Repurchase Agreement signed by the Treasurer and on file with both the County Treasurer and the primary dealer.

The maximum maturity of a repurchase agreement shall be 30 days.

13. Reverse Repurchase Agreements.

Reverse repurchase agreements are not allowed except as part of investments in the County of Los Angeles Pooled Surplus Investment Portfolio and the State of California Local Agency Investment Fund.

14. Variable and Floating Rate Securities.

Variable and floating rate securities are instruments that have a coupon or interest rate that is adjusted periodically due to changes in a base or benchmark rate. Investments in floating rate securities must utilize commercially available U.S. denominated indices such as U. S. Treasury bills or Federal Funds. Investments in floating rate securities whose reset is calculated using more than one of the above indices are not permitted, i.e. dual index notes.

Variable and Floating Rate Securities that are priced based on a single common index are not considered derivative securities.

The maximum maturity is five years for U.S. Treasury and agency obligations and three years for corporate obligations.

15. Derivative Securities.

Not allowed as Special Purpose investments.

G. Investment Agreements (For Bond Funds Only).

Investment Agreements or Fully Flexible Repurchase Agreements, shall provide a fixed rate of return with liquidity, usually one-to-seven days withdrawal notice with no penalties, to meet cash flow needs of the AQMD. Investment Agreements may be with any bank, insurance company or broker/dealer, or any corporation whose principal business is to enter into such agreements, if:

1. at the time of such investment,

a. such bank has an unsecured, uninsured and unguaranteed obligation rated "Aa2" or better by Moody’s Investors Service and "AA" or better by Standard & Poor’s, or

b. such insurance company or corporation has an unsecured, uninsured and unguaranteed claims paying ability rated "Aaa" by Moody’s Investors Service and "AAA" by Standard & Poor’s, or

c. such bank or broker/dealer has an unsecured, uninsured and unguaranteed obligation rated "A2" or better by Moody’s Investors Service and "A" or better by Standard & Poor’s (and with respect to such broker/dealer rated "P-1" by Moody’s Investors Service and "A-1" by Standard & Poor’s); provided, that such broker/dealer or "A" rated bank also collateralize the obligation under the investment agreement with U.S. Treasuries or Agencies.

2. The agreement shall include a provision to the effect that if any rating of any such bank, insurance company, broker/dealer or corporation is downgraded below the rating existing at the time such agreement was entered into, the AQMD shall have the right to terminate such agreement.

3. Collateralization shall be at a minimum of 102%, marked to market, at a minimum, weekly.

The maximum term for an Investment Agreement for bond proceeds will be governed by the permitted investment language of the bond indenture.

H. Rating Downgrades.

The AQMD SPI separate account may from time to time be invested in a security whose rating is downgraded below the quality criteria permitted by the Annual Investment Policy. Any security held as an investment whose rating falls below the investment guidelines or whose rating is put on notice for possible downgrade shall be immediately reviewed for action by the Director of Finance. The decision to retain the security until maturity, sell (or put) the security, or other action shall be approved by the Treasurer.

I. Securities Safekeeping.

Securities shall be deposited for safekeeping with a third party custodian in compliance with Code Section 53608.

J. Review and Monitoring of Investments.

The Director of Finance will submit to the Governing Board the quarterly reports on investments prepared by the Office of the State Treasurer for LAIF and the Treasurer for the Pooled Surplus Investment Portfolio and AQMD funds invested in Special Purpose Investments. The Director of Finance will review at least monthly the transactions and positions of AQMD funds invested in Special Purpose Investments outside of LAIF or the Pooled Surplus Investment Portfolio.

Approved March 14, 1997