Chapter 4.05 INVESTMENT POLICY AND PROCEDURE

It is the policy of the Cross Valley Water District to invest public funds in a manner which will provide the highest investment return with the maximum security while meeting its daily cash flow demands. All investments shall conform to all Washington statutes governing the investment of public funds. [Res. 2010-10-3 (Att. § 1).]

4.05.020 Scope.

It is intended that these policies apply to investment activities of all reserves and inactive cash under the direct authority of the Cross Valley Water District. [Res. 2010-10-3 (Att. § 2).]

4.05.030 Prudence.

Investments shall be made with judgment and care – under circumstances then prevailing – which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.

(1) The standard of prudence to be used by investment officials should be the “prudent person” standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures, the 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 and appropriate action is taken to control adverse developments. [Res. 2010-10-3 (Att. § 3).]

4.05.040 Objective.

The primary objectives in priority order of the district’s investment activity shall be safety, liquidity, and return on investment.

(1) Safety. Safety of principal is the foremost objective of the Cross Valley Water District. Investments of the district shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To obtain this objective, diversification is required so that potential losses on an individual security do not exceed the income generated from the remainder of the portfolio.

(2) Liquidity. The district’s investment portfolio will remain sufficiently liquid to enable the district to meet all operating requirements, which may be reasonably anticipated.

(3) Return on Investment. The district’s investment portfolio shall be designed with the objective of obtaining a market rate of return throughout budgetary and economic cycles, taking into account the district’s investment risk constraints, the district’s investment objectives, and the cash flow characteristics of the portfolio. [Res. 2010-10-3 (Att. § 4).]

4.05.050 Delegation of authority.

By the adoption of this policy, the management of inactive cash and the investment of funds identified in CVWDC 4.05.020 are the responsibility of the general manager or his/her designee as identified within the Cross Valley Water District policy. Management responsibility for the investment program is hereby delegated to the financial accounting manager, who shall establish written procedures for the operation of the investment program consistent with this investment policy.

In the execution of this delegated authority, the financial accounting manager in concert with the general manager may establish accounts with qualified financial institutions and broker/dealers for the purpose of effecting investment transactions in accordance with this policy. The criteria used to select qualified financial institutions and broker/dealers are identified in CVWDC 4.05.070.

(1) Investment Procedures. The procedures should include reference to safekeeping, master repurchase agreements, wire transfer agreements, custody agreements and banking services contracts. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the financial accounting manager. [Res. 2010-10-3 (Att. § 5).]

4.05.060 Ethics and conflicts of interest.

Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution of the investment program or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the financial accounting manager any material financial interest in financial institutions that conduct business within this jurisdiction and they shall further disclose any personal financial/investment positions that could be related to the performance of the district’s portfolio. The financial accounting manager shall disclose any material financial interest in financial institutions that conduct business within this jurisdiction and shall further disclose any personal financial/investment positions that could be related to the performance of the district’s portfolio. Employees and officers shall subordinate their personal investment transactions to those of the Cross Valley Water District, particularly with regard to the timing of purchases and sales. [Res. 2010-10-3 (Att. § 6).]

4.05.070 Authorized financial dealers and institutions.

The financial accounting manager will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved security brokers/dealers selected by credit worthiness and who are authorized to conduct business in the state of Washington. No public deposit may be made except in a qualified depository in the state of Washington as provided in Chapter 39.58 RCW. All brokers/dealers and financial institutions who desire to do business with the district must supply the financial accounting manager with annual audited financial statements, proof of National Association of Securities Dealers certification, and certification of having read the district’s investment policy. The financial accounting manager will periodically conduct an annual review of the financial condition of all financial institutions and broker/dealers with whom the district invests ensuring that a current audited financial statement and other supplementary information required by the district is current. [Res. 2010-10-3 (Att. § 7).]

4.05.080 Authorized and suitable investments.

The Cross Valley Water District is empowered to invest in any of the securities as defined by RCW 35A.40.050, Fiscal – Investment of Funds. In general, these include:

(1) Investment deposits, including certificates of deposit, with qualified depositories defined in Chapter 39.58 RCW.

(2) Certificate notes or bonds of the United States, or other obligations of the United States, or its agencies, or any corporation owned by the government of the United States, such as the Government National Mortgage Association.

(3) Obligations of government sponsored corporations, which are eligible as collateral for advances to member banks, as determined by the Board of Governors of the Federal Reserve System. These include, but are not limited to, federal home loans, bank notes and bonds, Federal Farm Credit Bank consolidation notes and bonds, Federal National Mortgage Association notes, and guaranteed certificates of participation.

(4) Bankers acceptances purchased on the secondary market.

(5) Repurchase agreements for securities listed in subsections (2), (3) and (4) of this section; provided, that the transaction is structured so that the Cross Valley Water District obtains control over the underlying securities, and a master repurchase agreement has been signed with the bank or dealer.

(6) Washington State Local Government Investment Pool.

(7) CDARs. CDs can be invested in banks in Washington for more than $250,000 that participate in the CDARs program. The amounts over $250,000 are then distributed in $250,000 increments to other banks that participate in CDARs with the whole investment being shown at the original investing bank regardless of another institution actually holding the money. In this way all of the investment is insured by the FDIC. [Res. 2010-10-3 (Att. § 8).]

4.05.090 Investment strategy.

(1) Pooled Investments. A buy and hold strategy will generally be followed; that is, investments once made will usually be held until maturity. A buy and hold strategy will result in unrealized gains or losses as market interest rates fall or rise from the coupon date of the investment. Unrealized gains or losses, however, will diminish as the maturity dates of the investments are approached or as market interest rates move closer to the coupon rate of the investment. A buy and hold strategy requires that the portfolio be kept sufficiently liquid to preclude the undesired sale of investments prior to maturity. Occasionally, the financial accounting manager may find it advantageous to sell an investment prior to maturity, but this should only be on an exception basis and only when it is clearly favorable to do so.

(2) Investments Held Separately. Investments held separately for bond proceeds will follow the trust indenture for each issue. [Res. 2010-10-3 (Att. § 9).]

4.05.100 Collateralization.

Investments in time certificates of deposit shall be fully insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC) or the Federal Savings and Loan Insurance Corporation (FSLIC), as appropriate. Additionally the Public Deposit Protection Commission (PDPC) provides security by protecting public deposits which exceed the amount insured by the FDIC. The PDPC also minimizes participating depositaries’ liability for defaulting institutions.

In order to provide a level of security for all funds, collateralization will be required on certificates of deposit and repurchase agreements pursuant to RCW 39.58.050 and 39.59.020. Repurchase agreements shall be collateralized at 102 percent of par value plus accrued interest. Only securities authorized to be purchased by the district will be accepted as collateral and said instruments will always be held by an independent third party with which the district has a current custodial agreement. The independent third party shall provide a clearly marked evidence of ownership (safekeeping receipt) for the district’s records.

The right to make substitutions of an equal or greater amount of such collateral at any time is granted. [Res. 2010-10-3 (Att. § 10).]

4.05.110 Safekeeping and custody.

All security transactions, including collateral for repurchase agreements entered into by the Cross Valley Water District, shall be conducted on a delivery versus payment basis. Securities purchased by the district will be delivered against payment and held in a custodial safekeeping account. A third party custodian designated by the financial accounting manager will hold securities and safekeeping receipts will evidence all transactions. [Res. 2010-10-3 (Att. § 11).]

4.05.120 Diversification.

In order to reduce overall portfolio risk while attaining a benchmark average rate of return, the district will maintain a diversified portfolio. Keeping some investment in the state pool (shorter term) and the longer market will accomplish this. [Res. 2010-10-3 (Att. § 12).]

4.05.130 Maximum maturities.

To the extent possible, the district will attempt to match its investments with anticipated cash flow requirements. Unless matched with a specific cash flow, the district will not directly invest operating funds in securities maturing in more than three years from the date of purchase. However, the district may collateralize repurchase agreements using longer dated investments.

Reserve or construction in progress funds may be invested in securities maturing up to five years after the purchase date if such investments are made to coincide as nearly as practical with the expected use of the funds. [Res. 2010-10-3 (Att. § 13).]

4.05.140 Internal controls.

The development of internal controls is the responsibility of the district’s management. Authority to establish and maintain internal controls is by this policy assigned to the financial accounting manager. Either an independent auditor or an independent committee, as determined appropriate by the financial accounting manager, shall conduct periodic reviews of said internal controls in order to assure compliance with investment policy, procedure and state statute. Periodic reviews may result in recommendations to revise or change procedures in order to improve effectiveness and/or efficiency. [Res. 2010-10-3 (Att. § 14).]

4.05.150 Performance standards.

The Cross Valley Water District investment portfolio will be designed to obtain a market average rate of return in budgetary and economic cycles, taking into account the district’s investment risk constraints, investment objectives and cash flow needs.

(1) Market Yield. The district’s investment strategy is passive and yield objectives are just as important as internal controls. Given this strategy, the basis used to determine whether the market yields are being achieved shall be to identify a comparable benchmark to our portfolio investment duration. This benchmark shall be periodically reviewed for effectiveness and applicability. The present benchmark has been identified as the annual average of the Washington State Local Government Investment Pool (LGIP). Average rate data will be derived from the Office of the State Treasurer, custodian and administrator of the LGIP.

(2) Credit Risk. The district is subject to credit risk and discloses in the financial statements the credit ratings for investment in debt securities, whether held directly or indirectly, including for position in external investment pools. If a rating is not available Cross Valley Water District will disclose that fact. (This requirement does not apply to debt securities of the U.S. government or obligations of the U.S. government agencies that are explicitly guaranteed by the U.S. government.) The district uses the various rating categories (e.g., AAA, Aaa, etc.) set by nationally recognized statistical rating organizations (e.g., Fitch Ratings, Moody’s Investor Services, Standard & Poor’s, etc.). If Cross Valley Water District has deposits at the end of a fiscal period that are exposed to custodial credit risk, then a disclosure on the financial statements will disclose the amount of those bank balances, the fact that the balances are uninsured, and whether the balances are exposed on the basis of being either (a) uncollateralized, (b) collateralized with securities held by the pledging financial institution, or (c) collateralized with securities held by the pledging financial institution’s trust department or agent but not in the Cross Valley Water District’s name.

(3) Concentration Risk. The district is subject to concentration risk and discloses in the financial statements the amount and issuer of investments that represent five percent or more of total investments. (This requirement does not apply to investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments.)

(4) Interest Rate Risk. The district is subject to interest rate risk and should organize the information by investment type and amount using one of the following methods: segmented time distribution, specific identification, weighted average maturity, duration or simulation module. Any assumption made in process of applying these methods needs to be disclosed. If Cross Valley Water District participates in a pooled arrangement (other than a 2a-7-like external pools investment pool) they should disclose the interest rate risk for the pooling arrangement. Cross Valley Water District should also disclose (if not disclosed already) any contractual terms for debt investments that expose those investments to risk of significant change in fair value resulting from interest rate fluctuation (e.g., coupon multipliers, benchmark indices, embedded option, etc.).

(5) Foreign Currency Risk. Cross Valley Water District does not purchase foreign currencies. But if they did then the financial statements would disclose in U.S. dollars value of investment held in foreign currency. A separate disclosure would be necessary for each different foreign currency denomination and each different type of investment within a given currency. [Res. 2010-10-3 (Att. § 15).]

4.05.160 Reporting.

Periodic investment reports to policymakers and elected officials provide necessary written communication regarding investment performance, risk analysis and adherence to policy provisions. Given this theory, investment reports shall be incorporated within routinely scheduled quarterly financial reports submitted to management and commission that provide a clear picture of the status of the current investment portfolio. The investment report should include, at a minimum: (1) a listing of individual securities held at the end of the reporting period by authorized investment category, (2) life and final maturity date of all investments listed, (3) earnings rate, (4) par value, and (5) percentage of the portfolio represented by each investment category. [Res. 2010-10-3 (Att. § 16).]

4.05.170 Adoption of policy.

The Cross Valley Water District investment policy shall be adopted by resolution of the district board of commissioners. The policy is subject to continuous review and evaluation primarily by the financial accounting manager and his/her designee in order to assure a degree of accountability and professionalism that is worthy of the public trust. All recommended modifications must be approved and adopted by resolution of the district board of commissioners. [Res. 2010-10-3 (Att. § 17).]

4.05.180 Glossary.

“Agencies” means federal agency securities, the price at which the securities are offered.

“Bankers acceptance” (“BA”) means a draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill as well as the issuer bid.

“Bid” means the price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See “Offer.”

Broker. A broker brings buyers and sellers together for a commission.

“Certificate of deposit” (“CD”) means a time deposit with a specific maturity evidenced by a certificate. Large denomination CDs are typically negotiable.

“Collateral” means securities, evidence of deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies.

“Commission” means the price offered for securities broker. A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides. He does not have a position in the money market. Brokers are active in markets, in which banks buy and sell money and enter dealer markets.

“Coupon” means an annual rate of interest that a bond issuer promises to pay the bondholder on the balance of the face value.

Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.

“Debenture” means a bond secured only by the general credit of the issuer.

Delivery versus Payment. There are two methods of delivery of securities: delivery versus payment and delivery versus receipt (also called free). Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities.

“Discount” means the difference between the cost price of a security and its value at maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be a discount.

“Discount securities” means non-interest-bearing money market instruments that are issued at a discount and redeemed at maturity for full face value, e.g., U.S. treasury bills.

“Diversification” means dividing investment funds among a variety of securities offering independent returns.

“Duration” means the measurement of sensitivity of a security’s market value or price. It is the average time until receipt of the weighted present value of the cash flows, expressed in years.

“Factor” means the decimal number representing the proportion of the outstanding principal balance of a security to its original certificate amount currently remaining.

“Federal credit agencies” means agencies of the federal government set up to supply credit to various classes of institutions and individuals, e.g., S&Ls, small business firms, students, farmers, farm cooperatives and exporters.

“Federal Deposit Insurance Corporation” (“FDIC”) means a federal agency that insures bank deposits, currently up to $100,000 per deposit.

“Federal funds rate” means the rate of interest at which federal funds are traded. This rate is currently pegged by the Federal Reserve through open market operations.

“Federal home loan banks” (“FHLB”) means the institutions that regulate and lend to savings and loan associations. The federal home loan banks play a role analogous to that played by the Federal Reserve banks vis-a-vis member commercial banks.

Federal National Mortgage Association (FNMA). FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development, HUD. It is the largest single provider of residential mortgage funds in the states. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.

Federal Open Market Committee (FOMC). Consists of seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents. The president of the New York Federal Reserve Bank is a permanent member while the other presidents serve on a rotating basis. The committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market as a means of influencing the volume of bank credit and money.

“Federal Reserve System” means the central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system.

“Float” means the amount of money represented by checks outstanding and in the process of collection.

Freddie Mac. The Federal Home Loan Mortgage Corporation (FHLMC) was created in July 1970 to promote development of a nationwide secondary market in conventional residential mortgages. The FHLMC buys residential mortgages and then resells them via the sale of mortgage-related instruments. The FHLMC may purchase mortgages only from financial institutions that have their deposits or accounts insured by agencies of the federal government.

“Full faith and credit” means a pledge of the general taxing power of a government to repay debt obligations (typically used in reference to bonds).

Government National Mortgage Association (GNMA or Ginnie Mae). The 1968 partition of the Federal National Mortgage Association spawned the Government National Mortgage Association. Ginnie Mae is a wholly government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae’s mission is to make real estate investment more attractive to institutional investors which it has done by designing and issuing, partly in conjunction with private financial institutions, mortgage-backed securities for which an active secondary market has developed. These securities are referred to as pass-through securities because payment of interest and principal on mortgages is passed on to the certificate holders after deduction of fees for servicing and guarantee. These securities carry Ginnie Mae’s guarantee of timely payment of both principal and interest and are backed by the full faith and credit of the U.S. government.

“Internal control” means a plan of organization for purchasing, accounting, and other financial activities which, among other things, provides that:

(a) The duties of employees are subdivided so that no single employee handles a financial action from beginning to end;

(b) Proper authorization from specific responsible officials is obtained before key steps in the processing of a transaction are completed; and

“Investment” means securities and real estate purchased and held for the production of income in the form of interest, dividends, rentals or base payments.

“Investment instrument” means the specific type of security which a government purchases and holds.

Liquidity. A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked price is narrow and reasonable-sized investment can be sold at that bid.

“Local Government Investment Pool” (“LGIP”) means the aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.

“Market value” means the price at which a security is trading and could presumably be purchased or sold.

“Master repurchase agreement” means a written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establishes each party’s rights in the transactions. A master agreement will often specify, among other things, the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.

“Maturity” means the date upon which the principal or stated value of an investment becomes due and payable.

“Money market” means the market in which short-term debt instruments (bills, commercial paper, bankers acceptances, etc.) are issued and traded.

“Offer” means the price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See “Bid.”

“Open market operations” means purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool.

“Performance measures” means specific quantitative measures of work performed within an activity or program (e.g., total interest earned). Also, a specific quantitative measure of results obtained through a program or activity (e.g., comparison of portfolio yield to six-month Treasury bill).

“Portfolio” means a collection of securities held by an investor.

“Premium” means the amount by which a security is selling above par.

“Primary dealer” means a group of government securities dealers that submit daily reports of market activity and positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal insight. Primary dealers include Securities and Exchange Commission (SEC) registered securities broker-dealers, banks, and a few unregulated firms.

Prudent Person Rule. An investment standard. Washington law requires that a fiduciary or trustee may invest money only in a list of eligible investments pursuant to the text of RCW 39.59.020, 35.39.030, 43.84.080, and 43.250.040. In some other states the trustee may invest in a security if it is one which would be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.

“Qualified public depositories” means a financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability and which has been approved by the Public Deposit Protection Commission to hold public deposits.

“Rate of return” means the yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond or the current income return.

Repurchase Agreement (RP or REPO). A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: when the Fed is said to be doing RP, it is lending money, that is, increasing bank reserves.

“Safekeeping” means a service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection.

“Secondary market” means a market made for the purchase and sale of outstanding issues following the initial distribution.

“Securities” means evidence of deposit or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to security deposits of public monies.

“Securities and Exchange Commission” means agency created by Congress to protect investors in securities transactions by administering securities legislation.

“Structured notes” means notes issued by government sponsored enterprises (Federal Home Loan Bank, Federal National Mortgage Association, Student Loan Marketing Association, etc.) and corporations which have embedded options (e.g., call features, step-up coupons, floating rate coupons, derivative based returns) into their debt structure. Their market performance is impacted by the fluctuation of interest rates, the volatility of the embedded options and shifts in the shape of the yield curve.

“Tax anticipation notes” means notes issued in anticipation of taxes which are retired usually from taxes collected.

“Treasury bills” means a non-interest-bearing discount security issued by the U.S. Treasury to finance the national debt. Most bills are issued to mature in three months, six months or one year.

“Treasury bond” means long-term U.S. Treasury securities having initial maturities of more than 10 years.

“Treasury notes” means intermediate term coupon bearing U.S. Treasury securities having initial maturities of from one to 10 years.

“Uniform net capital rule” means Securities and Exchange Commission requirement that member firms as well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to one; also called “net capital rule” and “net capital ratio.” Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities; one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.

“Weighted average life” means the weighted average number of years from the security’s issuance until each principal dollar is returned to the investor.

“Yield” means the rate of annual income return on an investment, expressed as a percentage.

(a) “Income yield” is obtained by dividing the current dollar income by the current market price for the security.

(b) “Net yield” or “yield to maturity” is the current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. [Amended during 2015 codification; Res. 2010-10-3 (Att. § 18).]

4.05.190 Federally insured institutions.

The district is hereby authorized to invest funds in federally insured institutions up to the amount of $100,000. [Res. 1990-2-1 § 1.]

4.05.200 Qualified public depositories.

The district is further authorized to invest funds held by the district and not needed for immediate costs of operation and maintenance in qualified public depositories as determined by the Washington State Public Deposit Protection Commission up to $1,000,000. [Res. 1997-5-10; Res. 1990-2-1 § 2.]

Article II. Investment Procedure*

* Code reviser’s note: The current investment procedure was adopted along with an earlier version of the investment policy by Resolution 2004-9-1. When the board repealed that resolution by Resolution 2010-10-3, it was their intent to replace the investment policy while maintaining the existing investment procedure.

4.05.210 Purpose.

Written procedures are an essential element of the internal control system. Our goal is to produce complete, concise descriptions of the daily procedures and duties required to maintain proper documentation of cash and the investment function.

This procedure is subject to continuous review and evaluation primarily by the financial accounting manager in order to assure a degree of accountability and efficiency that is worthy of the public trust. [Res. 2004-9-1 (Att. § 1).]

4.05.220 Cash review and forecast.

(1) Cash Review. Each day the “daily bank balance” report shall be obtained from the depository bank via electronic computer transmission and the following information reviewed, verified and/or recorded:

(a) Checking account bank balances are recorded on the aggregate cash balance worksheet and investment balances reviewed and verified with the investment worksheet.

(b) The previous day’s checking account disbursement transactions (A/P and payroll) are reviewed for completeness and also recorded on the cash balance worksheet. This step is to facilitate review and control of the check cancellation process.

(d) Revenues received via wire transfer are reviewed and recorded on the cash balance worksheet and documentation of each transaction is processed for cash receipting into the accounting software.

Once all inflows (earned interest, maturing investments, and all incoming funds) have been verified and recorded, the information will also be plotted on the cash flow projection/analysis worksheet (subsection (2) of this section).

The following uses of cash should be analyzed/reviewed and the information also plotted on the cash flow projection/analysis worksheet (subsection (2) of this section):

(a) Pending payroll and tax deposits;

(b) Pending accounts payable activity;

(2) Cash Forecast. The cash forecast provides the basis for the investment horizon by reviewing all inflows and outflows of cash. The cash flow projection begins with the use of a cash flow analysis worksheet that plots various sources of revenues and items of expenditure against time on a monthly basis. Cash receipts are predicted by using historical experience and knowledge of major revenue component timing (i.e., timing of tax receipts). If receipts exceed expenditures during the forecast period, investable balances will increase.

Additionally the cash forecast is the analysis of existing investments and their maturities. The forecast enables anticipation of forthcoming cash requirements and determines the maximum possible maturity that could be used. (Example: suppose the cash forecast shows that cash receipts will exceed disbursements during the next six months, and existing investments have maturities already within the six-month period to provide additional liquidity. We then know that funds can be invested safely for at least six months.)

By examining outstanding investments as well as subsequent months of the cash forecast, we can determine just how far into the future funds might be invested. [Res. 2004-9-1 (Att. § 2).]

4.05.230 Investment selection.

The financial accounting manager shall determine an appropriate amount of the aggregate cash balance that may be available for investment and selects the rate of annual income return on investment (yield) that most closely matches the required maturity date.

In determining the maturity date, consideration should be given to liquidity, cash flow and projected expenditures. A review of some of the following sources should be made to determine whether the investments should be placed to match projected expenditures or shorter, or to take advantage of current and expected interest rate environments:

(1) Wall Street Journal or similar daily business publication;

(2) Input from approved broker/dealer;

(3) Input from depository banks;

(4) Input on general trends of economic statistics;

(5) Input from data services (Bloomberg, Reuters, etc.). [Res. 2004-9-1 (Att. § 3).]

4.05.240 Purchasing an investment.

(1) The financial accounting manager shall establish with whom the district is going to transact business through careful consideration of CVWDC 4.05.070 through 4.05.130. A broker/dealer questionnaire should be established to assist in the following evaluation:

(a) Financial condition, strength and capability to fulfill commitments;

(b) Overall reputation with other dealers and investors;

(d) Background and expertise of the individual representative.

(2) Be as specific as possible in requesting the offering. If a particular type of investment or a particular issuing agency is to be excluded due to policy limitation, that information should be stated to the providers. If collateral is required (i.e. for repurchase agreements or certificates of deposit), the collateral limitation should be specified, pursuant to policy.

(3) The following must be determined prior to contacting the providers for quotes:

(a) Amount to be invested – either par value or total dollars to be invested;

(b) Type of security to be purchased, or type to be excluded;

(d) Time limit to show offering – five minutes, 15 minutes, etc.;

(e) Settlement – cash, regular (next day), corporate (three business days) or when issued if a new issue.

(4) If choosing an external pool or fund as the preferred investment vehicle, the following should be available for inspection prior to purchase and at any reasonable time thereafter:

(a) A written investment policy, if a government-run investment pool;

(b) A prospectus for money-market funds, mutual funds or bank managed funds;

(d) A clear description of how interest rates are calculated (30/360, actual/365, etc.);

(e) A schedule of when and how income is distributed;

(f) Are the pool or fund types of investments restricted to your own legal and policy limits?

(g) Is the pool or fund investments restricted to your own maturity limits?

(5) Before concluding the transaction, the financial accounting manager should validate the following:

(a) The security selected for purchase meets all criteria, including portfolio diversification, collateralization (if appropriate) and maturity. If the security has any embedded options such as call provisions, or coupon adjustments, these should also be reviewed.

(b) Yield calculations should be verified.

(d) Advise the successful provider that their offering has been selected for purchase.

(e) After confirmation of the purchase, as a courtesy, notify the other broker/dealers that you have placed the investment. Best price may be disclosed, if you choose.

(6) After consummation of the transaction, and prior to settlement date, the financial accounting manager and the provider should collaboratively review the following information to ensure prompt and uninterrupted settlement:

(a) Name, ABA number, and account number of third party safekeeping agent;

(b) Reconfirm amount and settlement date of transaction;

4.05.250 Settlement and follow through.

The financial accounting manager shall forward to the safekeeping agent a report of the investment transaction. Written communication or electronic mail, when available, should be sent and acknowledged verifying the following:

(1) Provision of receipt or disbursement of funds;

(2) Internal transfer or wiring of funds;

(3) Validation of written “safekeeping receipt”;

(4) Notification of any discrepancy prior to acceptance or rejection of the transaction;

(5) Immediate notification if a fail has occurred: by provider if they are responsible, by safekeeping agent if they are responsible. [Res. 2004-9-1 (Att. § 5).]

4.05.260 Safekeeping.

All securities purchased for the district shall be controlled through the standard industry practice known as “delivery vs. payment.” This procedure demands physical delivery of the securities in exchange for the cash payment, which may alternately be accomplished through the use of a third party custodian as designated by the financial accounting manager. Safekeeping receipts shall evidence all transactions.

Certificates of deposit are permitted to be safekept at the issuing bank. All certificates of deposit confirmations, however, must be verified against the appropriate investment report on a daily, weekly, or other appropriate timeline as identified by the financial accounting manager in order to evidence and monitor the transaction.

A written master repurchase agreement shall be established and maintained for collateral securities, repurchase agreements (repos). This agreement will strengthen the position of the district (purchaser) by specifying the terms under which the investor may liquidate custodial collateral securities should a liquidation process be required. [Res. 2004-9-1 (Att. § 6).]

4.05.270 Banking services.

Consideration of financial institutions to provide daily banking services for the district should be accomplished through the use of a competitive bidding process, “Request for Proposal.” The use of a nationally recognized financial institution rating organization (Sheshunoff, Thompson Bankwatch, etc.) may also assist in this evaluation. The evaluation of a bank’s services should include (but not be limited to) the following:

(1) Control Objectives (Written Assurances).

(a) Data security.

(b) Confidentiality.

(d) Completeness.

(e) Timeliness.

(f) Technological changes.

(2) Contracting.

(a) Capital adequacy.

(b) Asset quality.

(d) Earnings.

(e) Liquidity.

(3) Services.

(a) Collection.

(b) Disbursement.

(d) Investment.

(4) General.

(a) Cost versus benefit.

(b) New banking technology. [Res. 2004-9-1 (Att. § 7).]

4.05.280 Wire transfers.

The financial accounting manager as stated on the funds transfer agreement shall be authorized to wire district funds for investment purposes to established bank accounts. The authorized representatives shall safeguard wire transaction instructions and personal identification numbers (PIN).

All bank transfer requests shall be in writing and authorized by the financial accounting manager. The purpose of the bank transfer must be stated as part of the transfer information on the bank transfer request and all requests shall be filed with the daily banking activity work file. [Res. 2004-9-1 (Att. § 8).]

4.05.290 Reporting.

(1) Reporting Requirements. Vigilant reporting requirements add to the internal control system by providing a management discipline. The district’s internal control system specifies monthly reconciliation of all asset cash accounts and bank statements against reported activity flows. Within 10 business days of the close of each month, bank statement reconciliations and cash asset reconciliations are to be submitted by the financial accounting manager for review.

(2) Periodic Reporting. Reporting of investment performance results also adds an element of accountability and discipline to an investment operation. The district’s internal control system specifies that investment activity be presented within routinely scheduled quarterly financial reports submitted to management and board of commissioners. Such reports will typically detail the cost of the investment, stated yield, date of purchase, maturity, accrued interest income and market value of the securities. [Res. 2004-9-1 (Att. § 9).]