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Agenda Packets - Board - 2002-10-02Board of Directors Arlene Schafer Greg Woodside Art Perry James Ferryman Dan Worthington Phone (714) 754 -5043 Fax (714) 432 -1436 Mailing Address P. O. Box 1200 Costa Mesa, CA 92628 -1200 Street Address 77 Fair Drive Costa Mesa, CA 92626 -6520 OPrintedon Recycled Paper s Costa Mesa ... an Inbepenaent Special District NOTICE OF SPECIAL MEETING COSTA MESA SANITARY DISTRICT BOARD OF DIRECTORS OCTOBER 2, 2002 The Board of Directors of the Costa Mesa Sanitary District will meet on Wednesday, October 2, 2002 at 12:00 p.m., in Conference Room 1-A at the Costa Mesa Civic Center, 77 hair Drive, Costa Mesa, California to consider" the following: I. GASB 34 — New Governmental Financial Reporting Model II. Public Comments Dated: September 25, 2002 Qj�' 4"k�' Verk of the District Serving our communitN s sobb waste anb sewer collection needs. costamesasanitarr bistrict.org. 'rhe New Retiortint.z Model IntrodUCtion and Overview What Is GA.S.B Statement No. 34? What Does the New Model .Replace? Does GASB apply to CMSD? s off-ocal Governinents How New is the New Model? -low Manv Models Are There? Key Components of'the New Model t Are the Kev New Features`? New Governmental Model What Can Be Found in MD &A? What are the Entity-Wide Statements? Why Entity -Wide Statements? How are Net Assets What is the Statement of Activities? Structure of Statement of Activities What is the Implementation Schedule? COSTA MESA SANITARY DISTRICT Financial Statements Year ended June 30, 2001 GASB 34 SAMPLE DRAFT s COSTA MESA SANITARY DISTRICT Financial Statements Year ended June 30, 2001 (with comparative totals for the year ended June 30, 2000) TABLE OF CONTENTS Notes to Financial Statements 2 12 Page Independent Auditors' Report 1 Maia ernents Discussion andAiialyss 2 Basic Financial Statements: Governrnentwide Financial Statements C�[u �w�"� Statement of Net Assets 7 ,R Statement,of Activities 8 Fund Financial Statements, StatementTof Activities �.(� 9 Statement of Revenues, Expenses and Changes in Net Assets 10 t Statement of Cash Flows 11 Notes to Financial Statements 2 12 r COSTA MESA SANITARY DISTRICT Lateen# a.1 et assets :. ; ; :?:: >::::.; . June 30, 2001 Assets Current assets: Cash and investments Accounts receivable Interest receivable Taxes receivable Due from other governments Total current assets Construction in progress Total capital assets Less accumulated depreciation Net capital assets Total assets Liabilities Current Liabilities: Accounts payable Deposits payable Sales and use tax payable Due to other governments Total current liabilities SAMPLE DRAFT 2001 $ 10,080,554 7,899 110,442 105,167 58,763 10,362,825 4,025 19,782,467 346,520 458,725 192,905 20,784,642 (9,969,446) 10,815,196 21,178,021 570,705 400 571,105 10,815,196 3,650,922 6,140,798 $ 20,606,916 See accompanying notes to basic financial statements. 7 2000 9,849,400 3,443 134,057 84,776 16,489 10,088,165 4,025 19,305,508 346,520 450,355 365,264 20,471,672 (9,520,697) 10,950,975 21,039,140 438,436 72,298 225,481 736,215 10,950,975 3,231,303 6,120,647 20,302,925 COSTA MESA SANITARY DISTRICT Stiafem�nt of Activies ........................... :.:. ...................... . Year ended June 30, 2001 SAMPLE DRAFT Bsss ;etttes .................... 35,950 (484,565) (68,001) - (57,264) 298,004 35,950 (541,829) 230,003 ............................................... ............................... . ............................................... ............................... Taxes Annexation fees Investment income Other revenues 0 : >u:<>: .::::::.... . See accompanying notes to basic financial statements. 151,426 625,973 - 86 670,091 426,803 821,517 1,052,862 279,688 1,282,865 20,327,228 19,020,060 $ 20,606,916 20,302,925 COSTA MESA SANITARY DISTRICT Financial Statements Year ended June 30, 2001 (With Independent Auditors' Report Thereon) COSTA MESA SANITARY DISTRICT Financial Statements Year ended June 30, 2001 (with comparative totals for the year ended June 30, 2000) TABLE OF CONTENTS Independent Auditors' Report Financial Statements: Page Balance Sheet 2 Statement of Revenues, Expenses and Changes in Retained Earnings 3 Statement of Cash Flows 4 Notes to Financial Statements 6 Board of Directors Costa Mesa Sanitary District Costa Mesa, California Independent Auditors' Report We have audited the balance sheet of the Costa Mesa Sanitary District as of June 30, 2001 and the related statement of revenues, expenses and changes in retained earnings, and the related statement of cash flows, for the year then ended. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller of the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Costa Mesa Sanitary District as of June 30, 2001 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. September 13, 2001 COSTA MESA SANITARY DISTRICT June 30, 2001 (with comparative totals as of June 30, 2000) A ccPtc Current assets: Cash and investments (note 2) Accounts receivable Interest receivable Taxes receivable Due from other governments Total current assets Property, plant and equipment: Property rights Subsurface sewer lines Buildings and improvements Equipment Construction in progress Total property, plant and equipment Less accumulated depreciation Net property, plant and equipment Total assets Liabilities and District Equity Current liabilities: Accounts payable Deposits payable Sales and use tax payable Due to other governments Total current liabilities 2001 $ 10,080,554 7,899 110,442 105,167 58,763 2000 9,849,400 3,443 134,057 84,776 16,489 10,362,825 10,088,165 4,025 19,782,467 346,520 458,725 192,905 20,784,642 4,025 19,305,508 346,520 450,355 365,264 20,471,672 (9,969,446) (9,520,697) 10,815,196 21,178,021 $ 570,705 400 10,950,975 21.039.140 438,436 72,298 225,481 571,105 736,215 . .. . ti a a _v. 606 916 , 20,3.02.9 5 '�� , ; � �Totalhablhhes sand district �egiuty,� � ; � A� �" 21.178 021 . `w.21'039.14`0 See accompanying notes to financial statements. 2 COSTA MESA SANITARY DISTRICT Staternent of Revenues, Expenses and Changes i °Retained Earnings Year ended June 30, 2001 (with comparative totals for the year ended June 30, 2000) Operating re�eriues Trash assessments Sewer assessments Permits and inspection fees Connection fees Other services Investment recovery Excessive effluent discharge Total operating revenues Operatam expenses: Solid waste disposal Liquid waste disposal Dump charges General and administration Depreciation Total operating expenses Operating income (loss) Non:= peratmg revenues (expenses) Investment income Taxes Annexation fees Other revenues (expenses) Total non - operating revenues (expenses) Net income Retained earnings at beginning of year, as restated (note 3) Retained eam at end of year 2001 $ 3,676,200 1,508,150 21,445 67,763 91,017 140,949 2,016 2000 3,242,526 1,382,405 26,089 108,121 39,771 423,128 8,726 5,507,540 5,230,766 2,758,872 2,071,705 508,388 500,839 1,666,619 1,638,937 547,557 375,408 448,748 413,113 5,930,184 5,000,002 (422,644) 230,764 670,091 426,803 151,426 625,973 - 86 (155,135) (761) 666,382 1,052,101 243,738 1,282,865 15,656,349 14,349,181 15,900.087 15,632,046 See accompanying notes to financial statements. 3 COSTA MESA SANITARY DISTRICT Statement of Cash Flows Year ended June 30, 2001 (with comparative totals for the year ended June 30, 2000) Cash flows from operating activities: Cash received from customers Cash payments to suppliers for goods and services Net cash provided by operating activities Cash flows from non - capital financing activities: Taxes received Annexation fees received Miscellaneous cash payments Miscellaneous cash revenue Net cash provided by (used for) non - capital financing activities Cash flows from capital and related financing activities: Cash paid to acquire fixed assets Cash flows from investing activities: Purchase of investments Proceeds from sale of investments Interest received Net cash provided by (used for) investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2001 2000 $ 5,460,810 5,383,671 (5,084,928) (4,055,604) 375,882 1,328,067 131,035 544,057 - 86 (155,235) (761) 100 - (24,100) 543,382 (814,334) (462,493) (2,000,000) (3,978,872) 3,978,872 1,000,000 693,706 385,734 2,672,578 (2,593,138) 2,210,026 (1,184,182) 5,870,528 7,054,710 8,080,554 5,870,528 Reconciliation of cash and cash equivalents to amounts reported on the balance sheet: Reported on the balance sheet: Cash and investments $ 10,080,554 9,849,400 Less investments not meeting the definition of cash equivalents: Federal Agency Securities (2,000,000 ) (3,978,872) Cash and cash equivalents at end of year S 8,080,554 5.870.528 (continued) 2 COSTA MESA SANITARY DISTRICT Statement of Cash Flows (Continued) Non -cash investing, capital, and financing activities During the years ended June 30, 2001 and June 30, 2000, assets of $35,950 and $6,675 were contributed to the District by developers, respectively. See accompanying notes to financial statements. 2001 2000 Reconciliation of operating income to net cash provided by operating activities: Operating income (loss) $ (422,644) 230,764 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 448,748 413,113 Disposal of fixed assets 537,315 173,705 Changes in assets and liabilities: (Increase) decrease in accounts receivable (4,456) 30,251 (Increase) decrease in trash assessments receivable - 60,843 (Increase) decrease in sewer assessments receivable - 29,064 (Increase) decrease in due from other governments (42,274) 32,747 (Increase) decrease in prepaid insurance - 35,738 Increase (decrease) in accounts payable 156,572 96,731 Increase (decrease) in due to City of Costa Mesa (225,481) 225,481 Increase (decrease) in deposits payable (72,298) - Increase (decrease) in sales and use tax payable 400 (370) Total adjustments 798,526 1,097,303 Net cash provided by operating activities 375 882 1.328.067 Non -cash investing, capital, and financing activities During the years ended June 30, 2001 and June 30, 2000, assets of $35,950 and $6,675 were contributed to the District by developers, respectively. See accompanying notes to financial statements. COSTA MESA SANITARY DISTRICT Notes to Financial Statements Year ended June 30, 2001 (1) Summary of Significant Accounting Policies The Costa Mesa Sanitary District ( "District ") was incorporated in February 1944 pursuant to Division VI, Part 1 of the Health and Safety Code of the State of California (sometimes referred to as the Sanitary District Act of 1923). At the present time, the boundaries of the District extend into the Cities of Costa Mesa and Newport Beach as well as unincorporated areas within the County of Orange. On December 19, 1955, the District entered into an agreement with the City of Costa Mesa, pursuant to the authority contained in the Joint Exercise of Powers Act (Sections 6500 -6513 of the Government Code). Currently, the City has been contracted by the District to provide maintenance services related to the sewer system. The following is a summary of the District's significant accounting policies: (a) Basis of Accounting The District uses the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recorded when the liability is incurred for receipt of the related goods and services. (b) Investments Investments are reported in the accompanying balance sheet at fair value. Changes in fair value that occur during a fiscal year are recognized as investment income reported for that fiscal year. Investment income includes interest earnings, changes in fair value, and any gains or losses realized upon the liquidation, maturity, or sale of investments. (c) Cash Equivalents For purposes of the statement of cash flows, cash equivalents are defined as short- term, highly liquid investments that are both readily convertible to known amounts of cash or so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and have an original maturity date of three months or less. Investments in federal agency securities are not considered to be cash equivalents as defined above and, therefore, are excluded from the statements of cash flows. (d) Fixed Assets Fixed assets purchased by the District are capitalized at historical cost. Data reflected in the District fixed asset records include estimates of original cost as determined by knowledgeable District personnel. Contributed fixed assets, consisting primarily of donated subsurface lines dedicated to the District by sub- COSTA MESA SANITARY DISTRICT Notes to Financial Statements (Continued) (1) Summary of Significant Accounting Policies, (Continued) (d) Fixed Assets, (Continued) dividers, are recorded as increases in the contributed capital of the District. Such contributed fixed assets are recorded at their fair market value at the time of donation. Depreciation is charged to operations using the straight -line method based on the estimated useful life of the asset. The estimated useful lives are as follows: Buildings 20 years Improvements 20 years Equipment 20 years Subsurface sewer lines 60 years (2) Cash and Investments Cash and investments held by the Sanitary District at June 30, 2001 consisted of the following: Deposits $ (136,620) Investments 10,217,174 Total cash and investments 10.080.554 The Costa Mesa Sanitary District is generally authorized under the state statute and local resolutions to invest in U.S. Treasury bills, U.S. Treasury notes, Federal agency securities, banker's acceptances, certificates of deposit, negotiable certificates of deposit, commercial paper, medium term notes, repurchase agreements, Local Agency Investment Fund of the State of California, Orange County Treasurer's Pool, asset - backed and mortgage- backed securities, money market mutual funds, and passbook savings account demand deposits. The District has also established guidelines for security purchases with investment limitations as follows: Bankers acceptances may not exceed 40% of the District's surplus money. Negotiable certificates of deposits may not exceed 30% of the District's surplus money. Commercial paper may not exceed 180 days maturity nor exceed 30% of the District's surplus funds. Medium term corporate notes may not exceed 30% of the District's surplus funds. The District may not invest more than 10% of its surplus funds in reverse repurchase agreements, and must always match its maturities to the reinvestment. The District may not invest more than 35% of its surplus money with the Orange County Treasurer's Pool. Asset - backed and mortgage- backed securities may not exceed 20% of the District's surplus money. COSTA MESA SANITARY DISTRICT Notes to Financial Statements (Continued) (2) Cash and Investments, (Continued) Under the California Government Code, a financial institution is required to secure deposits made by state or local governmental units by pledging securities held in the form of an undivided collateral pool. The market value of the pledged securities in the collateral pool must equal at least 110% of the total amount deposited by the public agencies. California law also allows financial institutions to secure District deposits by pledging first trust deed mortgage notes having a value of 150% of the secured public deposits. Deposits of cities and other state or local governments are classified in three categories to give an indication of the level of custodial risk assumed by the entity at year end. Category 1 includes deposits that are insured or collateralized with securities held by the District or its agent in the District's name. Category 2 includes deposits collateralized with securities held by the pledging financial institution's trust department or agent in the District's name. Category 2 also includes deposits collateralized by an interest in an undivided collateral pool held by an authorized agent of depository and subject to certain regulatory requirements under State law. Category 3 includes deposits collateralized with securities held by the pledging financial institution, or by its trust department or agent but not in the District's name. Category 3 also includes any uncollateralized deposits. Category Bank Carrying Form of Deposit 1 2 3 Balance Amount Demand deposits 73 763 - - 73.763 136 620 Investments of cities and other state or local governments are classified in three categories to give an indication of the level of custodial risk assumed by the entity at year end. Category 1 includes investments that are insured, registered or are held by. the District or its agent (other than the institution through which the District purchased the securities) in the District's name. Investments held "in the District's name" include securities held in a separate custodial or fiduciary account and identified as owned by the District in the custodian's internal accounting records. Category 2 includes uninsured and unregistered securities which are held in the District's name by the counterparty's trust department or agent. Category 3 includes uninsured and unregistered securities which are held by the counterparty, or the counterparty's trust department or agent, but not in the District's name. The counterparty is the party that acts as the broker - dealer agent of the District (the party that purchased the securities on behalf of the District). Category 3 includes all securities held by the broker - dealer of the District, regardless of whether or not the securities are being held in the District's name: COSTA MESA SANITARY DISTRICT Notes to Financial Statements (2) Cash and Investments, (Continued) (Continued) Category 1 2 3 Investments held by the District: Medium term corporate notes $2,472,114 - - Federal Agency Securities 2,000,000 - - 4 472 114 - - Investments held by District not subject to categorization: Investment in State Investment Pool - LAIF Total investments Carrying Amount 2,472,114 2,000,000 5,745,060 10.217.174 The District is a voluntary participant in the Local Agency Investment Fund (LAIF) that is regulated by California Government Code Section 16429 under the oversight of the Treasurer of the State of California. The fair value of the District's investment in this pool is reported in the accompanying financial statements at amounts based upon the District's pro -rata share of the fair value provided by LAIF for the entire LAIF portfolio (in relation to the amortized cost of that portfolio). The balance available for withdrawal is based on the accounting records maintained by LAIF, which are recorded on an amortized cost basis. Included in LAIF's investment portfolio are collateralized mortgage obligations, mortgage- backed securities, other asset - backed securities, loans to certain state funds, and floating rate securities issued by federal agencies, government- sponsored enterprises, and corporations. (3) Restatement of Beginning Retained Earnings The accompanying financial statements reflect adjustments which resulted in a restatement of beginning retained earnings. The following schedule summarizes the effects of the prior period adjustment on the beginning retained earnings as of June 30, 2000: Retained earnings at beginning of year, as previously reported $15,632,046 Adjustment of retained earnings: Adjustment of accounts payable 24,303 Retained earnings at beginning of year, as restated $15,656,349 COSTA MESA SANITARY DISTRICT Notes to Financial Statements (Continued) (4) Subsequent Events On July 12, 2001, the Costa Mesa Sanitary District entered into a 10 year lease agreement with the Municipal Finance Corporation to provide financing in the amount of $2,200,000 for the acquisition of refuse containers. The lease provides a purchase option. The obligation is due in semi - annual principal and interest payments of $140,591. Interest is computed at a stated rate of 4.92 %. 10 ! M P03 -030 COSTA MESA SANITARY DISTRICT DEPARTMENT OF FINANCE MARC R. PUCKET "r INTEROFFICE MEMORANDUM DIRECTOR OF FINANCE TO: SANITARY DISTRICT BOARD OF DIRECTORS FROM: MARC R. PUCKETT, DIRECTOR OF FINANCE DATE: OCTOBER 2, 2002 SUBJECT: REVISION OF 2002 -2003 STATEMENT OF INVESTMENT POLICY FOR BOARD MEETING OCTOBER 10, 2002 RECOMMENDED ACTION • Adopt Resolution approving the amendment to the adopted Investment Policy for the 2002 -03 fiscal year, and delegating the investment activities to the District Treasurer. BACKGROUND At the Sanitary District's Investment Oversight Committee meeting held on September 12, 2002, it was recommended that the Investment Policy be revised to change the policy limitation regarding the minimum amount of investments that must mature in any one year from no less than 25% to no less than 20 %. This change is recommended to allow the Treasurer to achieve a slightly higher rate of return and consequently, increase investment earnings, in such a manner that does not add any significant duration risks to the investment portfolio. It was determined that this change could be enacted with no negative impact on cash flows. The California Government Code Section 53646 requires the District Treasurer to submit a "Statement of Investment Policy" to the legislative body each fiscal year. Effective January 1, 1996, this Code Section was reinstated and requires annual adoption of the policy statement. This revised Investment Policy has been designed according to the specific needs of the Costa Mesa Sanitary District and complies with both the California Government Code and the guidelines recommended by the California Municipal Treasurer's Association. • The District Treasurer has the responsibility to submit a monthly Treasurer's Report to the Board regarding status of receipts, disbursements, cash balances by fund and investment of cash balances. The Finance Department updates revenue and investment activity on a daily basis. The Treasury Management Division of the Finance Department analyzes the cash requirements of the District each morning in conjunction with the Director of Finance. Idle funds are invested daily to effectively maximize the District's investment earnings. The single most important statutory duty of the District Treasurer is set forth in California Government Code Section 41001 which provides that the "District Treasurer shall receive and safely keep all money coming into the Treasury." In light of this responsibility, the California Municipal Treasurer's Association has established the following as a guideline to prudent investment strategy: • Legal Investment Authority: Temporary idle monies are to be invested in accordance with state and local statutes and in compliance with California Government Code Sections 53600 et. seq. • Safety: It is the primary duty and responsibility of the District Treasurer to protect, preserve, and maintain intact cash and investments places in trust with the District Treasurer on behalf of the Costa Mesa Sanitary District. • Liquidity: An adequate percentage of the portfolio should be maintained in liquid short-term securities, which can be converted to cash if necessary to meet disbursement requirements. • Yield: The District Treasurer may obtain the highest possible within the parameters of the District's authorized investments, provided the criteria for safety and liquidity have been met. ANALYSIS The 2002 -2003 Investment Policy adopted on June 13, 2002, has been revised to reflect the following proposed enhancements. These enhancements are a result of recommendations of the Investment Oversight Committee and District Treasurer. Section IX, related to duration requirements under the heading, "District Constraints," it was recommended that the Investment Policy be revised to change the policy limitation regarding the minimum amount of investments that must mature in any one year from no less than 25% to no less than 20 %. It was determined that this change could be enacted with no negative impact on cash flows. This proposed revision to the Investment Policy was reviewed and discussed with the Investment Oversight Committee at their meeting of September 12, 2002. The Committee supports these proposed modifications. C 2 ' CONCLUSION • At the Sanitary District's Investment Oversight Committee meeting held on September 12, 2002, it was recommended that the Investment Policy be revised to change the policy limitation regarding the minimum amount of investments that must mature in any one year from no less than 25% to no less than 20 %. This change is recommended to allow the Treasurer to achieve a slightly higher rate of return and consequently, increase investment earnings, in such a manner that does not add any significant duration risks to the investment portfolio. It was determined that this change could be enacted with no negative impact on cash flows. For the reasons mentioned above, it is recommended that the Board adopt the attached resolution approving the amendment to the adopted Investment Policy for the 2002 -03 fiscal year, and delegating the investment activities to the District Treasurer. If you have additional questions do not hesitate to contact me directly at your convenience. MA C R. PUCKETT District Treasurer L� Attachments: (1) Resolution (2) 2001 -2002 Red Lined Statement of Investment Policy (3) Investment Guidelines and Strategy (4) Investment Procedures, Internal Controls and Guidelines (5) Cash Controls: Independent Auditor's Procedure (6) Segregation of Treasury Responsibilities (7) Glossary 0 3 Attachment 2 COSTA MESA SANITARY DISTRICT STATEMENT OF INVESTMENT POLICY 2002 -03 I. GENERAL INTRODUCTION Under the laws of the State of California, it is the responsibility of the District Treasurer, at the direction of the Board, to secure and protect the public funds of the District, and to establish proper safeguards, controls, and procedures to maintain these funds in a lawful, rational and auspicious manner. Said maintenance shall include the prudent and secure investment of those funds that are deemed temporarily excess, in a manner anticipated to provide additional benefit to the people of the Costa Mesa Sanitary District. This Statement of Investment Policy will be provided annually for the review of the Oversight Committee and the approval of the Board in an open public meeting. It will also be provided to securities dealers, banks, and brokers currently approved for conducting investment transactions with the District Treasurer's office in the ongoing effort to manage the excess cash portfolio; to other affected persons or entities; and to any member of the electorate wishing to review this document upon request. The Treasurer reserves the right to provide these documents on a cost basis. 0 II. SCOPE This Statement of Investment Policy pertains to those temporarily surplus funds under the control of the Treasurer, designated for the daily ongoing operations of the District; and concerns the deposit, maintenance, safekeeping, and preservation of all such funds, and the investments made with these funds. This Policy does not apply to pension trust funds, deferred compensation funds, and certain other trust or non - operating funds. IJI. PURPOSE The purpose of this Statement of Investment Policy is to provide the District, the Investment Oversight Committee, those involved in servicing the investment requirements of the District, and any other interested party, a clear understanding of the regulations and internal guidelines that will be observed in maintaining and investing those pooled funds deemed temporarily excess. This statement is intended to provide guidelines for the prudent investment of the Costa Mesa Sanitary District's (District's) temporary idle cash, and outline the procedures for maximizing the efficiency of the District's cash management system. The ultimate goal is to enhance the economic status of the District while safeguarding its assets. IV. OBJECTIVE The District's cash management system is designed to accurately monitor and forecast revenues and expenditures, thus enabling the District to invest funds to the fullest extent possible. The District attempts to obtain the highest yield possible only after the criteria established for safety and liquidity have been met. The Costa Mesa Sanitary District operates its pooled idle cash investments 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. 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 general laws of the Costa Mesa Sanitary District. The Costa Mesa Sanitary District strives to maintain the level of investment of all idle funds as near 100% as possible, through daily and projected cash flow determinations. Idle cash management and investment transactions are the responsibility of the Treasurer. Criteria for selecting investments and the order of priority are: 1. Safety: 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. 2. Li uidi : 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. 0 3. Yield: Yield is the potential dollar earnings an investment can provide, and sometimes is referred to as the rate of return. 4. Safekeeping: Securities purchased shall be held in third party safekeeping in the Trust Department of a financial institution, in the District's name and control. The account established shall be protected from seizure by creditors should the financial institution holding the District's securities file for bankruptcy protection. The basic premise underlying the District's investment philosophy is and continues to be, to insure that surplus funds are always safe and available when needed. V. DELEGATION OF INVESTMENT AUTHORITY Authority to manage the Costa Mesa Sanitary District's investment program is derived from Costa Mesa Sanitary District Board Resolution No. 2002 -650. Management responsibility for the investment program is hereby delegated for fiscal year 2002 -03 to the Treasurer who shall establish written procedures for the operation of the investment program consistent with this Investment Policy. Procedures should include references to: safekeeping, repurchase agreements, wire transfer agreements, banking service contracts, and collateral /depository agreements. 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 Treasurer. The Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to . regulate the activities of subordinate officials. \� VI. STANDARD OF PRUDENCE The Treasurer shall perform the investment function in conjunction with the "Prudent Man Rule ". This rule states, in principle that whenever investing property for the benefit of others, a trustee shall exercise the judgment and care, under circumstances then prevailing that persons of prudence, discretion, and intelligence, would exercise in the management of their own affairs not in regards to speculation, but in regard to the permanent disposition of their funds, considering the probability of safety of, as well as the probable income from their capital. The Treasurer and his designees are considered to have a fiduciary, trustee, relationship with the public for the public funds and all investment decisions will be made in a manner sustaining this responsibility." VII. AUTHORIZED INVESTMENTS The California Government Code allows the District to invest in the following media: • Securities of the U.S. Government, or its government sponsored agencies • Small Business Administration loans • Certificates of deposit, placed with commercial banks and savings and loan companies • Negotiable certificates of deposit • Bankers acceptances • Commercial paper • Corporate notes and bonds, including medium term notes • Local Agency Investment Fund • Repurchase agreements • Reverse repurchase agreements • Passbook savings account demand deposits • County Treasurer demand deposits • Asset - backed and mortgage- backed securities • Money market mutual funds As a matter of practice, however, the District generally limits its investments to the following vehicles: U.S. Treasury Bills - Issued weekly with maturity dates up to one year. They are issued and traded on a discount basis with interest figured on a 360 -day basis, actual number of days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. U.S. Treasury Notes - Initially issued with two- to ten -year maturities. They are actively traded in a large secondary market and are very liquid. The Treasury may issue Note issues with a minimum of $1,000, however, the average minimum is $5,000. Federal Government Sponsored Agency Issues - Guaranteed directly or indirectly by the United States Government. All agency obligations qualify as legal investments and are acceptable as security for public deposits. They usually provide higher yields than regular Treasury issues with all of the same advantages. Examples include: J� • FICBs (Federal Intermediate Credit Bank Debentures) - 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. • FFCBs (Federal Farm Credit Bank) - 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 year) on a periodic basis. These issues are highly liquid. • FLBs (Federal Land Bank Bonds) - 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. • FHLBs (Federal Home Loan Bank Notes and Bonds) - 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. • FNMAs (Federal National Mortgage Association) - 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 about four times a year for maturities ranging from a few months to eight years. They are issued in minimum denominations of $10,000. They carry semi - annual coupons. Interest is computed on a 360 -day, 30 -day month basis. • FHLMCs (Federal Home Loan Mortgage Corporation) - A government- sponsored corporation established to develop the secondary market for conventional home mortgages. Mortgages are purchased solely from the Federal Home Loan Bank System member lending institutions whose deposits are insured by agencies of the United States Govermment. 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. • Other federal agency issues are Small Business Administration notes (SBAs), Government National Mortgage Association notes (GNMAs), Tennessee Valley Authority notes (TVAs), and Student Loan Marketing Association notes (SALLIE- MAEs). As a matter of practice, the District does not invest in these i-ssuosissues, as they do not suit our purposes as well as other investment opportunities available. The District limits its investments to no more than 25% of its surplus funds in any one Federal Agency. Bankers Acceptances - Short-terns 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. Bankers Acceptances can be 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. Local agencies may not invest more than 40% of their surplus funds in bankers acceptances or more than 10% of the agency's surplus funds in bankers acceptances of any one commercial bank. Certificates of Deposit - Time deposits of a bank or savings and loan. They are purchased in various denominations with maturities ranging from 30 to 360 days. The interest is calculated on a 360 -day; actual -day month basis and is payable monthly. N Ne. otiable Certificates of Deposit - 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, although smaller lots are occasionally available. As a matter of practice, only the ten largest U.S. banks where there is a secondary market established for continued liquidity are considered for investment. The District's total investment in negotiable certificates of deposit may not exceed 30% of surplus funds. Commercial Pape - 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. Local agencies are permitted by State law to invest in commercial paper of "prime" quality of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc., and/or Standard and Poor's Corporation. Eligible paper is further limited to issuing corporations that are organized and operating within the United States and having total assets in excess of five hundred million dollars ($500,000,000) and having an "A" or higher rating for the issuer's debt other than commercial paper. Commercial Paper issued by an Issuer that has a rating of "A" on their debt other than commercial paper but are on credit watch for a possible downgrade by a nationally recognized rating agency shall not be considered for investment purposes. Purchases of eligible commercial paper may not exceed -270 days maturity nor exceed represent more than 10% of the outstanding paper of an issuing corporation. Purchases of commercial paper may not exceed 15 percent of the portfolio. An additional 15 %, for a total of 30 percent of the portfolio, may be invested only if the dollar - weighted average of the entire investment in commercial paper does not exceed 31 days. "Dollar- weighted average maturity" is defined as the sum of the amount of each outstanding commercial paper investment multiplied by the number of days to maturity, divided by the total amount of outstanding commercial paper. Medium Term Corporate Notes - 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. m Medium ter corporate notes can be defined as extended maturity commercial paper. l" MLocal agencies are restricted by the Government Code to investments in corporations rated in the top three note categories by Moody's Investors Service, Inc., and/or Standard and Poor's Corporation. For medium - term notes, eligible purchases consist of instruments that have a rating of "A" or better by both Moody's Investors Service, Inc., and Standard and Poor's Corporation. Corporate Notes issued by an Issuer that has a rating of "A" but are on credit watch for a possible downgrade by a nationally recognized rating agency shall not be considered for investment purposes. If the security's credit rating falls below "A" by one of these agencies, then awareness is heightened and the security monitored closely to determine if credit risk has been significantly increased. If a security falls below "A" by both rating agencies, then the Treasurer will evaluate the need to sell the security prior to maturity. Further restrictions are a maximum term of five years to maturity and total investments in medium term corporate notes may not exceed 30% of the local agency's surplus funds. Repurchase Agreements - A repurchase agreement is a short-term investment transaction. Banks buy temporarily idle funds from a customer by selling U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date. Repurchase agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal funds and the maturity of the repurchase agreement. Some banks will execute repurchase agreements for a minimum of $100,000 to $500,000, but most banks have a minimum of $1,000,000. The term of a repurchase agreement may not exceed one year. The market value of securities that underlay a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Repurchase Agreements can only be executed with financial institutions or broker /dealers that have signed a Master Repurchase Agreement with the District. Reverse Repurchase Agreements - A reverse repurchase agreement is the opposite of a repurchase agreement. The District loans a security to a bank in exchange for cash. The District agrees to pay off the loan with interest on a future date. As this type of investment actually involves a loan arrangement, the District may not invest more than 10% of its surplus funds in reverse repurchase agreements, and must always match its maturities to the reinvestment. Reverse repurchase agreements may be utilized only when either of the following conditions are met: 1. The security was owned or specifically committed to purchase, by the local agency, prior to December 31, 1994, and was sold using a reverse repurchase agreement on December 31, 1994. 2. The security: a) to be sold has been owned and fully paid for a minimum of 30 days prior to sale; and b) total of all reverse repurchase agreements owned does not exceed 10 percent of the base value of the portfolio; and c) agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement and the final maturity date of the same security. LAIF (Local Agency Investment Fund) - 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 a maximum of fifteen transactions per month. It offers high liquidity because deposits can be converted to cash in 24 hours and no interest is lost. All interest is distributed to those agencies participating on a proportionate share basis determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly. The State retains an amount for reasonable costs of making the investments, not to exceed one - quarter of one percent of the earnings. California Government Code § 16429.3 states, in part: "money placed with the State Treasurer for deposit in the Local Agency Investment Fund by cities, counties, or special districts shall not be subject to impoundment or seizure by any state official or state agency." Orange County Treasurer's Pool - A special fund in the County Treasury which local agencies may use to deposit funds for investment. The District may not invest more than 35% of its surplus money with the Orange County Treasurer's Pool. However, any investment held by the Orange County Treasurer's Pool will be apportioned and overlaid with the District's portfolio to determine compliance with other self - imposed restrictions as specified in this Investment Policy. The County Treasurer charges 12.5 basis points (.125 %) to all pool participants for its direct costs. Direct Costs include proper staffing, bank and custodial fees, software maintenance fees, and other indirect costs relating to the investment. Investment earnings are distributed to the pool participants on a monthly basis, net of the above charges. The earnings are credited to the participants accounts on either the last day of each month or the first day of the subsequent month. Money Market Mutual Funds - Shares of beneficial interest issued by diversified management companies. To be eligible for investment, shares must: attain the highest rating provided by Moody's Investors Service, Inc., which is currently "Aaa," and/or Standard and Poor's Corporation, which is currently "AAA;" and 2. the investment adviser managing the shares must be registered with the Securities and Exchange Commission with not less than five year's experience investing in instruments authorized under California Government Code §53601 subdivisions (a) to (m) inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000); and 3. the purchase price of shares shall not include any commission that these companies may charge; and 4. investment in shares shall not exceed 20 percent of surplus funds. However, no more than 10 percent of the District's surplus funds may be invested in shares of beneficial interest of any one mutual fund. Furthermore, any investment in a money market mutual fund must comply with other self - imposed restrictions as specified in this Investment Policy. Asset - Backed and Mortgage- Backed Security - Bonds backed by payments from receivables /mortgages having a maximum of five years maturity. These securities must have an "AA" or better rating by Moody's Investors Service, Inc., and/or Standard and Poor's Corporation. No more than 20% of the District's surplus money may be invested in these securities. i f� VIII. INVESTMENT OF BOND PROCEEDS When investing proceeds from the issuance of bonds, the Costa Mesa Sanitary District will follow this Investment Policy when determining allowable investments. Should the trust agreement of a particular bond issue be more restrictive than the District's policy on permitted investments, then the trust agreement will take precedence. IX. DISTRICT CONSTRAINTS The Treasurer will evaluate local banks and savings institutions and may invest idle cash funds with such institutions when the criteria for prudent investment previously stated are met. The District operates its investment pool according to State and self - imposed constraints. It does not buy stocks; it does not speculate; it does not deal in futures or options. Any investment extending beyond a five -year period requires prior District Board approval. Additionally, a minimum of 25% of the outstanding investments must mature within a one -year time period. X. SAFEKEEPING AND COLLATERALIZATION All security transactions, including collateral for repurchase agreements, entered into by the District shall be conducted on a delivery- versus - payment (DVP) basis. Securities will be held by a third party custodian designated by the Treasurer. Collateralization will be required on two types of investments: certificates of deposit and repurchase (and reverse repurchase) agreements. In order to anticipate market changes and provide a level of security for all funds, a minimum collateral ization level is required. Surplus funds must be deposited in State or national banks, State or Federal savings associations, or State or Federal credit unions within the State of California. The deposits cannot exceed the amount of the bank's or savings and loan'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. State law also allows as an eligible security, first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is 105% in the form of a 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 in excess of $100,000 are collateralized as previously indicated. XI. DERIVATIVE INVESTMENTS A derivative is a generic term often used to categorize a wide variety of financial instruments whose value "depends on" or is "derived from" the value of an underlying asset, reference rate, or index. Investments in derivative instruments are limited to debt securities that have periodic increases, or step -up interest rate adjustments that provide upward mobility in yield return. Investments in debt securities, which contain a callable feature are also allowable, but must comply with other restrictions as specified in this Investment Policy. Investments in derivative instruments known as "inverse floaters," "dual index," or "stepped inverse" securities that produce higher than market yields at purchase date (when interest rates are low), but have the possibility of producing low or no coupon rates as market interest rates rise through the life of the instrument are not allowable. Furthermore, investments in range notes or interest -only strips that are derived from a pool of mortgages are not allowable. However, debt securities that have a floor or a built - in feature that prevents the instrument from potentially returning no yield are allowable. XII. POLICY COMPLIANCE REGULATIONS Should the portfolio, for any reason, fall out of compliance with this Investment Policy, immediate liquidation of securities in order to bring the portfolio back into compliance is not required. However, the Treasurer must take action to bring the portfolio into compliance within 12 months from the date the portfolio was determined to be in non - compliance with the provisions of this Investment Policy. Additionally, adequate disclosure as to all instances of noncompliance, and the efforts undertaken to bring the portfolio into compliance, must be made on the monthly Treasurer's Report. XIII. REPORTING Under provisions of Section 53646 of the California Government Code, the Treasurer shall render a quarterly investment report to the District Board and Manager of the District within 30 days following the end of the quarter covered by the report. However, as a matter of practice a monthly report shall be submitted listing the type of investments, institution, date of maturity, amount of deposit, rate of interest, current market value for all securities, and such other data as may be required by the District Board on a monthly basis. Furthermore, an Investment Oversight Committee comprised of the following individuals will meet quarterly to review the District's portfolio and investment strategy. • Director of Finance /District Treasurer • Assistant Director of Finance • Revenue Supervisor • District Manager • Assistant Manager • Two Board Members Additionally, an annual audit of the District's investment portfolio will be conducted by an independent Certified Public Accounting firm and a report of the results will be made available. XIV. QUALIFIED DEALERS The Costa Mesa Sanitary District shall transact business only with banks, savings and loans, and • registered investment securities dealers. The District will utilize broker /dealers authorized to do business with the City of Costa Mesa. Each authorized broker /dealer shall be required to annually file a signed certification with the District Treasurer certifying that they have read and understand the District's most recently adopted investment policy. The Treasurer will maintain a list of financial institutions authorized to provide investment services. In addition, a list will also be maintained of approved broker /dealers who are authorized to provide investment services in the State of California. These may include "primary" and "regional" broker /dealers with offices located in the State of California. All financial institutions and broker /dealers who desire to become qualified bidders for investment transactions must be approved by and supply the Treasurer with a completed broker /dealer questionnaire. XV. POLICY REVIEW This Statement of Investment Policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity and return, and its relevance to current law, financial and economic trends. Should conditions change or legislation become effective that behooves subsequent changes or a liberalization of terms within the policy during the next fiscal year, the revised policy will be submitted to both the Investment Oversight Committee and Board for adoption of the recommended action." • Attachment 3 40 COSTA MESA SANITARY DISTRICT 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 Treasurer. 2. Pooled Cash. Whenever practical, local agency cash is consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated quarterly according to month -end cash and investment balances for each fund. 3. Competitive Bids. Purchase and sales of securities are made on the basis of competitive offers and bids when practical. 4. Cash Forecast. The cash flow for the District is analyzed with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet disbursement requirements. 0 5. Investment Limitations. Security purchases and holdings are maintained within statutory limits imposed by the California Government Code. Current limits are: Bankers Acceptances Commercial Paper Negotiable Certificates of Deposit Reverse Repurchase Agreements Medium Term Notes Money Market Mutual Funds Asset- Backed/Mortgage- Backed Securities Local Agency Investment Fund Orange County Treasurer's Pool 40% Section 53601(f) 30% Section 53601(g) 30% Section 53601(h) 20% Section 53601(1) 30% Section 536010) 15% Section 53601(k) 20% Section 53601(n) $40,000,000 Section VII of Policy 35% Section VII of Policy 6. Li uidi . The marketability 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 a mix 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. For deposits in excess of the insured maximum of $100,000, approved collateral at full market • value shall be required. (California Government Code Section 53652 and/or 53651(m) and 53651.2(a)(1). 0 COSTA MESA SANITARY DISTRICT INVESTMENT GUIDELINES AND STRATEGY (continued) (b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of the issuer, as these deposits are uninsured and uncol lateral ized promissory notes. II. STRATEGY - Strategy refers to the ability to manage financial resources in the most advantageous manner. Economic Forecasts. Economic Forecasts are obtained periodically from economists and financial experts through bankers and brokers to assist the Treasurer 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. Field standards are developed in order to maintain earnings near the market and to preserve the value of the portfolio. III. AUDIT - At least annually, the District's external auditors will analyze the District's portfolio and report to the Board regarding the legal, credit, and market risks associated with each investment. Additionally, the auditors will review the District's investment policy and make recommendations for modifications, if appropriate. • Attachment 4 is COSTA MESA SANITARY DISTRICT INVESTMENT PROCEDURES INTERNAL CONTROL - GUIDELINES OBJECTIVES OF INTERNAL CONTROL 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 fraud. • The accuracy and completeness of the accounting records. • The timely preparation of reliable financial information. • 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. • Potential for collusion that circumvents controls dependent on the segregation of functions. • Potential for a person responsible for exercising control abusing that responsibility; a responsible staff member could be in a position to override controls which management has set up. • COSTA MESA SANITARY DISTRICT INVESTMENT PROCEDURES INTERNAL CONTROL - GUIDELINES (continued) 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 fraud in the normal course of duty. If two parts of a transaction are handled by different people, collusion is necessary to conceal errors or fraud. 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 All transactions should be authorized by an appropriate responsible individual. The responsibilities and limits of authorization should be clearly delineated. The individual or group authorizing a specific transaction or granting general authority for transactions should be in a position commensurate with the nature and 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 the procedures, both manual and computerized, carried out independently to ascertain that transactions are complete, valid, authorized, and properly recorded. Attachment 5 is COSTA MESA SANITARY DISTRICT CASH CONTROLS PROCEDURES PERFORMED BY EXTERNAL AUDITORS WITH RESPECT TO CASH RECEIPTS A. District procedures and controls are reviewed. Some of the system strengths are: 1. Receipts are controlled upon receipt by proper registration devices. 2. Receipts are reconciled on a daily basis. 3. Amounts are deposited intact. 4. All bank accounts are authorized by the District Board. 5. Cash counts are done by two or more individuals. 6. Bank reconciliations are reviewed. • 7. Prompt posting of cash receipt entries in books. 8. Receipt forms are prenumbered, accounted for, and physically secured. 9. Proper approval required for write -offs of customer accounts. 10. Checks are restrictively endorsed upon receipt. 11. Adequate physical security over cash. 12. Individuals that handle cash do not post to customer account records or process billing statements. 13. Adequate supervision of Finance Department operations. B. Significant revenues are confirmed directly with payor and compared with District books to make sure amounts are recorded properly. C. Cash balances are substantiated by confirming all account balances recorded in books. 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. • Attachment 6 COSTA MESA SANITARY DISTRICT SEGREGATION OF RESPONSIBILITIES OF THE TREASURY FUNCTIONS Function Responsibility 1. Authorization of Investment Transactions: Formal Investment Policy should be: Prepared By: Treasurer Submitted To: District Board Investment Transactions Treasurer should be approved by 2. Execution of investment Assistant Director of Finance transactions • 3. Timely recording of investment transactions: Recording of investment Revenue Supervisor transactions in the Treasurer's records Recording of investment Accountant transactions in the accounting records 4. Verification of investment, Assistant Director of Finance i.e., match broker confirma- tion to Treasurer's records 5. Safeguarding of Assets and Records: Reconciliation of Treasurer's Revenue Supervisor records to the accounting records Reconciliation of Treasurer's Accountant • records to bank statements and safekeeping records 0 COSTA MESA SANITARY DISTRICT • • SEGREGATION OF RESPONSIBILITIES OF THE TREASURY FUNCTIONS (Continued) Function Responsibility 5. Safeguarding of Assets and Records (continued): Annual review of (a) financial Assistant Director of Finance with institution's financial condition, Treasurer's approval (b) safety, liquidity, and potential yields of investment instruments. 6. Periodic review of investment Independent Auditors portfolio as prepared by Treasurer including: • Investment types • Purchase Price • Market values • Maturity dates • Par values • Investment yields • Conformance to stated investment policy • Safekeeping reports 7. Periodic review of investment Investment Oversight Committee portfolio and strategies. GLOSSARY n LJ (Note: Entities are encouraged to include a glossary as part of the investment policy. All words of a technical nature should be included. Following is an example of common treasury terminology.) AGENCIES: Federal agency securities and/or Government - sponsored enterprises. ASKED: The price at which securities are offered. BANKERS' ACCEPTANCE (BA): a draft or bill or exchange accepted by a bank or trust company. BID: 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): A time deposit with a specific maturity evidenced by a . certificate. Large - denomination CD's are typically negotiable. OLLATERAL: Securities, evidence of deposit or other operty which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secured deposits of public monies. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of Costa Mesa. It includes five combined statements for each individual fund and group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance- related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling DEBENTURE: 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. Delivery versus payment is delivery of securities * th an exchange of money for the securities. Delivery versus ceipt is delivery of securities with an exchange of a signed receipt for the securities. ATTACHMENT 7 DERIVATIVES: (1) Financial instrument whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchanges, equities or commodities). DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount. DISCOUNT SECURITIES: Non - interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills. DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S &L's, small business firms, students, farmers, farm cooperatives, and exporters. FEDERAL DEPOSIT INSURANCE CORPORATION (FIDC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open- market operations. FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district Bank. 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 United 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. EDERAL OPEN MARKET COMMITTEE (FOMC): onsists of seven members of the Federal Reserve Board and five of the twelve 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: 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. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term "pass - throughs" is often used to describe Ginnie Maes. ISQUIDITY: 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 prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase — reverse repurchase agreements that established 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: The date upon which the principal or stated value of an investment becomes due and payable. OONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, bankers' acceptances, etc.) are issued and traded. ATTACHMENT 7 OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. OPEN MARKET OPERATIONS: 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. PORTFOLIO: Collection of securities held by an investor. PRIMARY DEALER: A group of government securities dealers who 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 oversight. Primary dealers include Securities and Exchange Commission (SEC) - registered securities broker - dealers, banks, and a few unregulated firms. PRUDENT PERSON RULE: An investment standard. In some states the law requires that a fiduciary, such as a trustee, may invest money only in a list of securities selected by the custody state — the so- called legal list. In 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: 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: 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 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 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: A service to customers rendered by banks for a fee whereby securities and valuables of all types and ATTACHMENT 7 .LCONDARY MARKET: A market made for the purchase descriptions are held in the bank's vaults for protection. and sale of outstanding issues following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3 -1: See Uniform Net Capital Rule. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMA, SLMA, etc.) and Corporations which have imbedded options (e.g., call features, step -up coupons, floating rate coupons, derivative -based returns) into their debt structure. Their market perfonnance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the shape of the yield curve. TREASURY BILLS: 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 BONDS: Long -term coupon- bearing U.S. Treasury securities issued as direct obligations of the U.S. It vernment and having initial maturities of more than 10 years. TREASURY NOTES: Medium -term coupon- bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. UNIFORM NET CAPITAL RULE: 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 1; 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. YIELD: 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. •