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Reso 2005-710d RESOLUTION NO. 2005 -710 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE COSTA MESA SANITARY DISTRICT, ADOPTING THE 2005 -2006 STATEMENT OF INVESTMENT POLICY, AND AUTHORIZING THE TREASURER TO INVEST AND REINVEST IDLE MONIES OF THE COSTA MESA SANITARY DISTRICT IN ACCORDANCE WITH THE 2005 -2006 STATEMENT OF INVESTMENT POLICY, AND AUTHORIZING THE SAID TREASURER TO DELEGATE TO A DEPUTY THE CARRYING OUT OF ANY SUCH TASKS. THE BOARD OF DIRECTORS OF THE COSTA MESA SANITARY DISTRICT DOES HEREBY RESOLVE AS FOLLOWS: WHEREAS, Government Code Section 53601 sets forth the investments that the District may lawfully make; and WHEREAS, Government Code Section 53646 sets forth that the District's Treasurer shall annually render to the Board of Directors a Statement of Investment Policy at a public meeting for the Board to consider; and WHEREAS, The Board has reviewed the Statement of Investment Policy; and WHEREAS, Government Code Section 53607 authorizes the Board to delegate the authority to make investments and to sell or exchange securities for a one year period to the Treasurer provided that monthly reports are thereafter made of the status of said transactions; NOW, THEREFORE, the Board of Directors of the Costa Mesa Sanitary District does hereby resolve as follows: 1. That the Statement of Investment Policy is approved. 2. That the Treasurer is authorized to make investments consistent with said Policy and is required to report to the Investment Oversight Committee and Board on a monthly basis on the status of those transactions. The Treasurer is hereby given all of the authority provided by Government Code Section 53607, including the power to invest and reinvest and the power to sell or exchange securities, consistent with the District's policy. 1 3. That the Treasurer may delegate some part of these duties to a deputy provided that the Treasurer remains responsible for such decisions and provides oversight. The Clerk of the District shall certify to the passage and adoption of this resolution, and it shall thereupon be in full force and effect. PASSED AND ADOPTED this 11th day of July 2005. ATTEST: Secretary,,bosta Mesa'-' esa : arAtary Boatd-,of Director � l STATE OF CALIFORNIA ) COUNTY OF ORANGE ) ss COSTA MESA SANITARY DISTRICT ) r sident, Co to M a Sanitary District Board of Directors I, JOAN REVAK, Clerk of the Costa Mesa Sanitary District, hereby certify that the above and foregoing Resolution No. 2005 -710 was duly and regularly passed and adopted by said Board of Directors at a regular meeting thereof held on the 11th day of July 2005. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Costa Mesa Sanitary District this 11th day of July 2005. r Clerk o t e-,Ccsta Mess :S`anitary District ,, 2 COSTA MESA SANITARY DISTRICT STATEMENT OF INVESTMENT POLICY I. PURPOSE This statement is intended to formalize the various policies and procedures for the prudent investment of temporarily idle cash for the Costa Mesa Sanitary District. It outlines the investment - related activities, which comprise good cash management. In concert with these activities there are many facets of an appropriate secure short -term investment program, which will enhance the economic condition of the District while safeguarding its assets. II. INVESTMENT SELECTION OBJECTIVE The District strives to maintain the level of investment of all idle funds as near 100% as possible. All temporarily pooled idle cash is invested under the "Prudent Man Rule" (Civil Code Sect. 2261, et seq.) which states, in essence: "in investing... property for the benefit of another, a trustee shall exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs..." This affords the District a broad spectrum of investment opportunities as long as the investment is deemed prudent and is allowable under current legislation of the State of California Government Code Section 53600 et seq. and the Costa Mesa Sanitary District Statement of Investment Policy. The District Treasurer, after meeting the legality, safety, liquidity and diversification criteria, will attempt to obtain the highest yield possible. The criteria for selecting investments, in order of priority are: 1. Legality - The District's investments must conform to federal laws, state statutes, District ordinances and internal policies and procedures. The District has established internal controls to ensure that investment activities comply with all applicable statutes, ordinances and policies. 2. Safe - The safety and risk associated with an investment refers to the potential loss of principal, interest or a combination of these amounts. The District only operates in those investments that are considered very safe. 3. Liquidity - This refers to the ability to "cash in" at any moment in time with a minimal chance of losing some portion of principal or interest. The District's investment portfolio will remain sufficiently liquid to enable the District to meet all operating requirements as well as unanticipated needs for funds. 4. Diversification - The District's investment portfolio will be sufficiently diversified to avoid incurring unreasonable risks resulting from saturation of assets in specific security types, maturities or individual financial institutions. 5. Yield - Yield is the potential dollar earnings an investment can provide, and sometimes is described as the rate of return. The basic premise underlying the District's investment philosophy is to ensure that funds are always safe and available when needed. The District does not buy stocks, speculate or deal in futures or options. Any investment extending beyond a five -year period requires prior District Board approval. III. AUTHORIZED INVESTMENTS The District limits its investments to the following vehicles: US Treasury Bills US Treasury Notes Federal Agency Issues - Examples include:. • Federal Intermediate Credit Bank Debentures (FICB) • Federal Farm Credit Bank (FFCB) • Federal Land Bank Bonds (FLB) • Federal Home Loan Bank Notes and Bonds (FHLB) • Federal National Mortgage Association (FNMA) • Federal Home Loan Mortgage Corporation (FHLMC) Banker's Acceptances Certificates of Deposit (CD) Negotiable Certificates of Deposit Commercial Paper Medium Term Corporate Notes Money Market Mutual Funds Passbook Savings Account Local Agency Investment Fund (LAIF) IV. DELEGATION OF AUTHORITY The District Board hereby delegates its authority to invest surplus District funds to the District Treasurer. Delegation of the investment function by the District Board is limited to a one -year period. Failure to delegate deems the District Board to be trustee and fiduciary, therefore subject to the prudent investor standard. V. INTERNAL CONTROLS A system of internal control shall be established and documented in writing. The controls shall be designed to prevent loss of public funds arising from. irregularities, employee error, misrepresentation of third parties, unanticipated changes in financial markets, or imprudent actions by employees and officers of the District. Controls deemed most important include: control of collusion, separatign of duties, custodial safekeeping, clear delegation of authority, confirmation of transactions, minimizing the number of authorized investment officials, documentation of transactions and strategies, and code of ethics standards. VI. REPORTING Under provisions of Section 53607 of the California Government Code, the District Treasurer shall submit a monthly investment report to the District Board. This report will list the type of investment, institution, date of maturity, amount of deposit, rate of interest, current market value of securities with maturities in excess of 12 months, source of market valuations, and statement of compliance. Also provided shall be a schedule of market values maturing by date and type, and such other data as required by the District Board. VII. LEGAL CONSTRAINTS Surplus funds must be deposited in state or national banks, state or federal savings associations or federal credit unions within the State of California. These deposits cannot exceed the amount of the institution's paid -up capital and surplus. The bank or savings and loan must secure public funds deposits with eligible securities having a market value of 110% of the total amount of the deposits or first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is a 105% letter of credit drawn on the Federal Home Loan Bank. The Treasurer may waive security for that portion of a deposit, which is insured pursuant to Federal law. Currently, the first $100,000 of a deposit is federally insured. Deposits over $100,000 are collateralized as indicated above. VIII.DERIVATIVES The term derivative is a commonly used name that describes a variety of securities whose values are "derived from" the value of another asset, a reference rate or an index. Investment in derivative instruments is limited to securities that have periodic increases, or step -up interest rate adjustments that provide a increased yield. Investment in callable securities are also allowed, but must comply with other restrictions as specified in this Investment Policy. Derivative securities known as "inverse floaters" and other such securities that produce higher yields when purchased but have the possibility of producing low or no return through the life of the security, are not allowable. IX. BOND PROCEEDS When investing bond proceeds, the Costa Mesa Sanitary District will adhere to this Investment Policy when determining appropriate instruments for placing monies. If the bond's trust agreement is more restrictive than the District's Policy, then the trust agreement supersedes the District's Policy. The District may delegate its responsibly to the fiscal agent to ensure compliance with the bond covenants when managing bond proceeds on behalf of the District. Borrowing money solely for the purpose of investing and earning arbitrage is specifically prohibited. X. GRANDFATHER PROVISIONS The Costa Mesa Sanitary District investment strategy is to buy and hold until maturity. As legislation and the District's Statement of Investment Policy change, certain investments may become prohibited. Under Section 53601.6 of the California Government Code, the District may hold prohibited investments until their maturity to avoid incurring a loss. This allows the District to "grandfather" in securities purchased prior to the effective date of new legislation. When selling securities prior to maturity, losses are only acceptable if the proposed swap /trade can clearly enhance yield (value) over the life of the new security on a total return basis, or to prevent the further loss of principal. Sufficient written documentation to facilitate the audit of the transaction must be maintained. In the event that an issuer's rating is downgraded from when the security was purchased, the District Treasurer's awareness is heightened and the security will be closely monitored to determine if credit risk has been significantly increased. The District Treasurer will evaluate the need �o sell the security prior to maturity. XI. BANKS AND SECURITIES DEALERS The Costa Mesa Sanitary District shall transact business only with banks, savings and loans, and "primary" or "regional" registered investment securities broker /dealers with offices located in the State of California. Any broker /dealer or financial institution wishing to provide services must complete the District's questionnaire and be approved by the District Treasurer. The number of broker /dealers authorized to transact business with the District is one broker /dealer for every $3,000,000 of portfolio size. XII. SAFEKEEPING AND CUSTODY Securities should be held in a third party custodian /safekeeping account. Said securities shall be held in a manner that establishes the District's right of ownership pursuant to Government Code Sections 53601 and 53608 et seq. All securities owned by the District should be held by a third party except the collateral for time deposits in banks and savings and loans, which is held by the Federal Home Loan Bank or an approved Agent of Depository. The collateral for time deposits in banks should be held in the District's name by the bank's Trust Department, or alternately, by the Federal Reserve Bank pursuant to Government Code Sections 53656 and 53657 et seq. XIII. INDEMNIFICATION Any authorized investment personnel acting with prudence and in accordance with the District Statement of Investment Policy, will not be held personally liable for any investment losses. Through surety bonds the District is indemnified against any investment personnel acting with malfeasance, misfeasance or nonfeasance. XIV. CONFLICT OF INTEREST Any. firm proposing to provide any type of investment service to the District shall acknowledge their familiarity with and agree to abide -by any Federal and State laws or regulations pertaining to contractual conflicts of interest or contributions by such firms, their employees, spouses or agents. Any persons, firms, dealers, brokers. and advisors providing investment services or bond issue assistance shall disclose10 the District Treasurer all fee sharing and commission arrangements with other entities or persons prior to the District agreeing to buy an investment or issuing bonds. XV. POLICY REVIEW The District Treasurer shall be responsible for reviewing and modifying this Statement of Investment Policy annually for District Board approval to ensure its consistency with the overall objectives of safety, preservation of principal, and liquidity, and its relevance to current law and current financial and economic conditions. XVI. SUMMARY The basic premise underlying the District's investment philosophy is conservative, and will continue to be, to ensure that money is always safe and available when needed. District Tre s rer Date -S�, -, Accountarlb Date Attachments: Prudent Man Rule Investment Guidelines and Strategy Investment Procedures Internal Control- Guidelines Cash Controls Segregation of Responsibilities of the Treasury Functions INVESTMENT GUIDELINES AND STRATEGY i. GUIDELINES: Guidelines are established to direct and control activities in such a manner that previously established goals are achieved. 1. Investment Transaction: Every investment transaction must be authorized and reviewed by the District Treasurer. 2. Pooled Cash: Whenever practical, cash is consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated quarterly to each fund according to fund actual month -end cash balances. 3. Competitive Bids: Purchases and sales of securities are made on the basis of competitive offers and bids when practical. 4. Cash Forecasting: The cash flow for the District is projected with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet disbursement requirements. 5. Investment Limitations: Security purchases and holdings are maintained within statutory limits imposed by the California Government Code. The District's current limits are: * Maximum term unless expressly authorized by Governing Body. ** Limit set by LAIF Governing Board (per individual entity account). (1) Individual issuer limit of 10 %. 6. Liquidity: The marketability (salability) of a security is considered at the time of purchase, as the security may have to be sold at a later date to meet unanticipated cash demands. 7. Diversification: The portfolio should consist of various types of securities, issuers, and maturities. 8. Evaluate Certificates of Deposit: a) Certificates of Deposit shall be evaluated in terms of FDIC coverage. The District does not purchase Certificates of Deposit in excess of $100,000. b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of the issuer, as these deposits are uninsured and uncollateralized promissory notes. DISTRICT POLICY GOVERNMENT CODE Permitted Investments/ Maximum Maximum Deposits Percent Maturi Percent Maturi US Government Securities Unlimited 5 years Unlimited 5 years* Certificates of Deposits 25% 1 year Unlimited 5 years* Bankers' Acceptances (1) 25% 180 days 40% 180 days Commercial Paper (1) 25% 270 days 30% 270 days Negotiable CD's (1) 25% 5 years 30% 5 years Medium Term Notes (1) 25% 5 years 30% 5 years LAIF 40mm** n/a 40mm ** n/a Time Deposits Unlimited 5 years Unlimited 5 years * Maximum term unless expressly authorized by Governing Body. ** Limit set by LAIF Governing Board (per individual entity account). (1) Individual issuer limit of 10 %. 6. Liquidity: The marketability (salability) of a security is considered at the time of purchase, as the security may have to be sold at a later date to meet unanticipated cash demands. 7. Diversification: The portfolio should consist of various types of securities, issuers, and maturities. 8. Evaluate Certificates of Deposit: a) Certificates of Deposit shall be evaluated in terms of FDIC coverage. The District does not purchase Certificates of Deposit in excess of $100,000. b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of the issuer, as these deposits are uninsured and uncollateralized promissory notes. INVESTMENT GUIDELINES AND STRATEGY (cont) 11. STRATEGY: Strategy refers to the ability to manage financial resources in the most advantageous manner. 1. Economic Forecasts: Economic forecasts are obtained periodically from economists and financial experts through bankers and brokers to assist with the formulation of an investment strategy for the local agency. 2. Implementing Investment Strategy: Investment transactions are executed which conform with anticipated interest rate trends and the current investment strategy plan. 3. Rapport: A close working relationship is maintained with large vendors of the District. The objective is to pinpoint when large disbursements will clear the District's bank account. It is essential for good cash control that such large expenditures be anticipated, estimated as to dollar amount, and communicated to the Treasurer for liquidity planning purposes. 4. Preserve Portfolio Value: Standards are developed in order to maintain earnings near the market and to preserve the value of the portfolio. III. AUDIT: Annually, the District's external auditors analyze the District's portfolio for purchase price, market value, maturity date and yield associated with each investment for financial statement purposes. INVESTMENT PROCEDURES INTERNAL CONTROL - GUIDELINES I. OBJECTIVES OF INTERNAL CONTROL: i. Internal control is the plan of organization and all the related systems established by management's objective of ensuring, as far as practicable: • The orderly and efficient conduct of its business, including adherence to management policies. • The safeguarding of assets. • The prevention or detection of errors and irregularities. • The accuracy and completeness of the accounting records. • The timely preparation of reliable financial information. II. LIMITATIONS OF INTERNAL CONTROL: No internal control system, however elaborate, can by itself guarantee the achievement of management's objectives. Internal control can provide only reasonable assurance that the objectives are met, because of its inherent limitations, including: • Management's usual requirement that a control be cost - effective. • The direction of most controls at recurring, rather than unusual, types of transactions. • Human error due to misunderstanding, carelessness, fatigue or distraction of functions. -The potential for a person responsible for exercising control abusing that responsibility. Frequently, a member of management is in a position to override controls which management has set up. INVESTMENT PROCEDURES INTERNAL CONTROL - GUIDELINES (cont) III. ELEMENTS OF INTERNAL CONTROL: Elements of a system of internal control are the means by which an organization can satisfy the objectives of internal control. These elements are: 1. ORGANIZATION: Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and understood. 2. PERSONNEL: Personnel should have capabilities commensurate with their responsibilities. Personnel selection and training policies, together with the quality and quantity of supervision, are thus important. 3. SEGREGATION OF FUNCTIONS: Segregation of incompatible functions reduces the risk that a person is in a position both to perpetrate and conceal errors or irregularities in the normal course of duty. If different people handle two parts of a transaction, collusion is necessary to conceal errors or irregularities. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, custody of assets, and performing reconciliations. 4. AUTHORIZATION: An appropriate responsible individual should authorize all transactions. The responsibilities and limits of authorization should be clearly delineated. The authorization for a specific transaction or granting general authority for transactions should be to a position commensurate with the significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully. 5. CONTROLS OVER AN ACCOUNTING SYSTEM: Controls over an accounting system include manual and computerized procedures carried out independently to ascertain that transactions are complete, valid, authorized and properly recorded. CASH CONTROLS I. PROCEDURES PERFORMED BY AUDITORS WITH RESPECT TO CASH RECEIPTS: I. District procedures and controls are reviewed. Some of the system strengths are: a. Receipts are controlled upon receipt by proper registration devices. b. Receipts are reconciled on a daily basis. c. Amounts are deposited intact. d. All bank accounts are authorized by the District Board. e. Cash counts are done by two or more individuals. f. Bank reconciliations are reviewed. g. The posting of cash receipt entries in books is prompt. h. Receipt forms are prenumbered, accounted for, and physically secured. i. Proper approval required for write -offs of customer accounts. j. Checks are restrictively endorsed upon receipt. k. Adequate physical security over cash. I. Individuals who handle cash do not post account records or process billing statements. m. Adequate supervision of financial operations. 2. Significant revenues are confirmed directly with payor and compared with District books to make sure amounts are recorded properly. 3. Cash balances are substantiated by confirming all account balances. Bank reconciliations are reviewed for propriety and recalculated by the auditor. All significant reconciling items on bank reconciliations are verified as valid reconciling items by proving to subsequent bank statements. SEGREGATION OF RESPONSIBILITIES OF THE TREASURY FUNCTIONS Function Authorization of Investment Transactions: A) Formal Investment Policy should be: • Prepared by: • Approved by: • Adopted by: B) Investment Transactions should be approved by: C) Monthly Investment Report should be: • Prepared by: • Reviewed by: • Submitted to: 2. Execution of investment transactions: 3. Timely recording of investments in Treasurer's records: 4. Recording of investments in the accounting records: 5. Accounting records approved by: 6. Verification of investment, match broker confirmation of Treasurer's records: 7. Safeguarding of Assets and Records: A) Reconciliation of Treasurer's records to accounting records, bank statements and safekeeping records: B) Approved by: C) Review of financial institution's financial condition, safety, liquidity, and yield potentials of investments: 8. Wire Transfer Control Procedures: A) Written amount, account and authorization agreement: B) Call -back verification of District Treasurer phone transfers: 9. Annual review of investment portfolio prepared by Accountant/ District Treasurer including: Investment types, purchase price, market values, maturity dates, yields and Safekeeping reports. Resoonsibili District Treasurer District Board District Board District Treasurer District Treasurer Accountant District Board District Treasurer District Treasurer Accountant District Treasurer Accountant Accountant District Treasurer District Treasurer Bank District Treasurer Independent Auditors for Financial Statements GLOSSARY OF INVESTMENTS US Treasury Bills - are direct obligations of the United States Government issued weekly with maturity dates up to one year. They are issued and traded on a discount basis with interest calculated on a 360 -day basis and actual invested days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. An unlimited amount may be invested in US Treasury Bills. US Treasury Notes - are direct obligations of the United States Government with original maturities of 1 to 10 years. They are generally available in minimum denominations of $5,000 for two and three -year maturities, and $1,000 denominations for all other maturities. Notes are actively traded in a large secondary market and are very liquid. An unlimited amount of funds may be invested in US Treasury Notes with maximum terms of five years. The term may be extended if authorized by the District Board. Federal Agency Issues - are guaranteed directly or indirectly by the United States Government. All agency obligations qualify as legal investments and are acceptable as security for public deposits. Agencies usually provide higher yields than direct Treasury issues with all of the same advantages. An unlimited amount of funds may be invested in Federal Agency issues with maximum maturities of less than five years. The District Board must expressly authorize any investment with a maturity greater than five years. Examples include: Federal Intermediate Credit Bank Debentures (FICB) - are loans to lending institutions used to finance the short-term and intermediate needs of farmers, such as seasonal production. They are usually issued monthly in minimum denominations of $3,000 with a nine -month maturity. Interest is payable at maturity and is calculated on a 360 -day, 30 -day month basis. Federal Farm Credit Bank (FFCB) - are debt instruments used to finance the short and intermediate term needs of farmers and the national agricultural industry. They are issued monthly with three and six -month maturities. The FFCB issues larger issues (one to ten years) on a periodic basis. These issues are highly liquid. Federal Land Bank Bonds (FLB) are long -term mortgage credit provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. The minimum denomination is $1,000. They carry semi - annual coupons. Interest is calculated on a 360 -day, 30 -day month basis: Federal Home Loan Bank Notes and Bonds (FHLB) - are issued by the Federal Home Loan Bank System to help finance the'housing industry. The notes and bonds provide liquidity and home mortgage credit to savings and loan associations, mutual savings banks, cooperative banks, insurance companies and mortgage- lending institutions. They are issued irregularly for various maturities. The minimum denomination is $5,000. The notes are issued with maturities of less than one year and interest is paid at `maturity. The bonds are issued with various maturities and carry semi - annual coupons. Interest is calculated on a 360 -day, 30 -day month basis. Federal National Mortgage Association (FNMA) - are used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those guaranteed by the Veterans Administration. They are issued four times a year with maturities from a few months to eight years. The minimum amount is $10,000 and carry semi- annual coupons, with interest computed on a 360 -day, 30 -day month basis. Federal Home Loan Mortgage Corporation (FHLMC) - is a government- sponsored corporation established to develop the secondary market for conventional home mortgages. Mortgages are purchased solely from tfie Federal Home Loan Bank System member lending institutions whose deposits are insured by agencies of the United States Government. They are issued for various maturities and in minimum denominations of $10,000. Interest is paid semi - annually and is calculated on a 360 -day, 30 -day month basis. GLOSSARY OF INVESTMENTS (cont) rernment National Mortgage Association (GNMA) . - is established to monitor compliance with requirements for the structuring of securities backed by pools of mortgages guaranteed by the Federal Housing Administration, the Farmers' Home Loan Administration and the Veterans' Administration. All mortgages in the pool must carry the same interest rate and, when possible, the same maturity. Interest and principal on the mortgage pools is "passed through" to investors monthly after the deduction of service and guarantee fees. Student Loan Marketing Association (SLMA) - is established by the Education Amendments Act of 1972 by the US Congress to increase funds into student loans. SLMA is a for - profit, stockholder -owned corporation with the specific purpose of providing a.secondary market for the federally sponsored student loans. Discount notes are issued on a daily basis to mature in one year or less with a minimum denomination of $100,000. Six -month floating rate notes are issued monthly with a minimum denomination of $10,000. Longer term fixed rate and floating rate securities are issued as needed. All loans are guaranteed by either the federal government or by a state or private agency. Bankers' Acceptances - are short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at its maturity. An acceptance is a high -grade negotiable instrument. Acceptances are purchased in various denominations for 30, 60, or 90 days, but no longer than 180 days. The interest is calculated on a 360 -day discount basis similar to Treasury Bills. The District may not invest more than 25% of its surplus money in Bankers' Acceptances with each issuer limited to 10 %. Certificates of Deposit (CD) - are time deposits of a bank or savings and loan. They are purchased in various denominations with maturities ranging from 30 to 360 days. The District does not purchase Certificates .of Deposit that are not FDIC insured. The interest is calculated on a 360 -day, actual day month basis and is payable monthly. The District may invest up to 25% of its surplus money in insured CD's with maturities of one year of less. Negotiable Certificates of Deposit - are unsecured obligations of the financial institution, bank or savings and loan, bought at par value with the promise to pay face value plus accrued interest at maturity. They are high - grade negotiable instruments, paying a higher interest rate than regular certificates of deposit. The primary market issuance is in multiples of $1,000,000, the secondary market usually trades in denominations of $500,000, and smaller lots are occasionally available. As a matter of practice, only the ten largest US banks, where there is a secondary market established for continued liquidity, are considered for investment. Purchases of Negotiable Certificate of Deposit may not exceed 25% of the District's surplus funds and five years to maturity. The District may not buy more than 10% of any single issuer. Commercial Paper - are short-term unsecured promissory notes issued by a corporation to raise working capital. These negotiable instruments are purchased at a discount to par value or at par value with interest bearing. Commercial Paper is issued by corporations such as General Motors, IBM, etc. Local agencies are permitted by State law to invest in Commercial Paper of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc., or Standard and Poor's Corporation. Purchases of eligible Commercial Paper may not exceed 270 days maturity, nor exceed 25% of the District's surplus funds. The District may not purchase more than 10% of any single issuer. Medium Term Corporate Notes - are unsecured promissory notes issued by a corporation organized and operating in the United States. These are negotiable instruments and are traded in the secondary market. Medium Term Corporate Notes can be defined as extended maturity Commercial Paper. Local agencies are restricted by the Government Code to investments in corporations rated in the top three note categories by a nationally- recognized rating service, five year maximum maturity and may not exceed 30% of surplus funds. The District's restrictions are a maximum term of five years to maturity and total investments in Medium Term Corporate Notes may not exceed 25% of the District's surplus funds. The District may not purchase more than 10% of any single issuer. 10 GLOSSARY OF INVESTMENTS (cont) ?assbook Savings Account Demand Deposit - are interest bearing active deposits placed at state or national banks, state or federal savings and loan associations, state or federal credit unions and federally insured industrial. loan companies. Monies placed in a savings account earn short-term interest. Deposits are FDIC insured up to $100,000, and may be in any amount. Local Agency Investment Fund (LAIF) a special fund in. the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum balance of $40,000,000 for any agency. The District is restricted to 15 transactions per month for each LAW account. LAW offers high liquidity because deposits can be converted to cash in 24 hours with no interest lost. Interest is distributed to those agencies participating on a per share basis determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly. The State retains a portion for administrative costs, not to exceed one- quarter of one percent of the earnings. The pooling of the State's surplus cash with the participant's surplus cash creates a multi - billion dollar money pool and allows diversified investments. In a high interest rate market, the District does better than LAIF however, in times of low interest rates, LAIF's yields are, higher. The District invests in the Local Agency Investment Fund whose Investment Policy allows investments in securities not specifically authorized by the District's Investment Policy, but allowable under the California Government Code. 11