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25 - Investment Policy Agenda FY13-14 Costa Mesa Sanitary District …an Independent Special District Protecting our community’s health and the environment by providing solid waste and sewer collection services. www.cmsdca.gov Memorandum To: Board of Directors Via: Scott Carroll, General Manager From: Marc Davis, Treasurer Date: June 27, 2013 Subject: Statement of Investment Policy for Fiscal Year 2013-14 Summary Attac he d is th e Statem en t of In ves tm en t Po licy for Fiscal Y ea r 201 3-14 (Po lic y). Th e Po licy do cum ent s th e Board ’s gui de li ne s under which th e Dis trict Tr ea s urer can invest th e Dis tr ic t ’s id le f und s. Staff Recommendation Adopt Res ol ut ion No. 201 3-8 36 app roving th e Po licy an d de leg at ing th e inves tm en t f un ction t o th e Dis trict Tr ea surer for th e 201 3-14 fiscal y ea r. Analysis Ca li forn ia Go vernm en t C od e §5364 6 a ll ows th e Dis trict Tr ea surer to s ub m it an annua l investm en t po licy t o th e Board for c on si de r at i on . It is no t a requirem en t t o do s o, bu t s ta ff be li eves it is pr uden t to c ont i nu e th is prac t ic e. The en closed Po licy do cum ent s th e Board ’s ob jectives su rr ound ing th e s election of inves tm ent s, as we ll as those i nves tm ent s in which th e Board ha s authoriz ed . I t also provi de s li mitati on s on s pe cific investm ent s. The res pon sib ili ty for placing investm ent s rests with th e Board. Ca li forn ia Go vernm en t C od e §5360 7 a ll ows th e Board t o de leg at e th e inves tm en t f un ction t o th e Dis trict ITEM NO. 25 Board of Directors June 27 , 2013 Page 2 of 5 T r ea s u r e r f o r a pe r i o d o f on e y ea r . T h e atta c he d R e s o l ut i o n app r o v e s th e P o licy an d de l e g ate s th e i n v e s t m en t f un c t i o n t o th e Dis t r ict T r ea s u r e r f o r th e 2012 -1 3 f isc a l y ea r . The attached Policy is a red -lined version so that the Board can review the proposed changes to the Policy. Once approved, the changes will be incorporated into the Policy, and it will be distributed to the brokers assisting the District with the investment of its idle funds. Strategic Plan Element & Goal This item supports achieving Strategic Element No. 7.0, Finances, by ensuring the short and long -term fiscal health of the District. Legal Review District Counsel has reviewed Resolution 201 3 -836 as to form. Financial Review The Statement of Investment Policy guides the Treasurer in how to invest the District’s idle funds. The amount of investment earnings to be generated as a result of the investing function is based upon the market conditions at the time of investment. Public Notice Proce ss Copies of this report are on file and will be included with the entire agenda packet for the June 27 , 2013 Board of Directors regular meeting at District Headquarters (6 31 W. 19 th Street) and on the District’s website at www.cmsdca.gov . Alternative Actions 1. Refer the matter back to staff Attachments Attachment 1 – Resolution Number 201 3 -836 Attachment 2 – Statement of Investment Policy for Fiscal Year 2013 -14 ATTACHMENT 1 RESOLUTION NO. 2013 -836 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE COSTA MESA SANITARY DISTRICT ADOPTING A STATEMENT OF INVESTMENT POLICY FOR FISCAL YEAR 201 3 -14 , AND AUTHORIZING THE TREASURER TO INVEST AND REINVEST IDLE MONIES OF THE COSTA MESA SANITARY DISTRICT IN ACCORDANCE WITH THE STATEMENT OF INVESTMENT POLICY, AND FURTHER AUTHORIZING THE SAID TREASURER TO DELEGATE TO A DEPUTY THE CARRYING OUT OF ANY SUCH TASKS. WHEREAS , Government Code Section 53601 et seq. sets forth the investments that the District may lawfully make; and WHEREAS , Government Code Section 53646(a)(2) sets forth that the District’s Treasurer may 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 allows 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 transa ctions. NOW, THEREFORE , the Board of Directors does hereby resolve: 1. That the Statement of Investment Policy for fiscal year 201 3 -14 is approved. 2. That the Treasurer is authorized to make investments consistent with said Policy and is required to provide a written report to the Board on a monthly basis and verbal report to the Board on a quarterly 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 i nvest and reinvest and the power to sell or exchange securities, consistent with the District’s policy. 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 o versight. ATTACHMENT 1 PASSED and ADOPTED on this 27th day of June 2013. ________________________________ ________________________________ Secretary, Costa Mesa Sanitary District President, Costa Mesa Sanitary District Board of Directors Board of Directors ATTACHMENT 1 STATE OF CALIFORNIA ) COUNTY OF ORANGE ) SS CITY OF COSTA MESA ) I, Scott Carroll, Clerk of the Costa Mesa Sanitary District, hereby certify that the above and foregoing Resolution No. 201 3 -836 duly and regularly passed and adopted by said Board of Directors at a regular meeting thereof held on the 27 th day of June 2013. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Costa Mesa Sanitary District, this 27 th day of June 2013. _________________________________ Scott Carroll Clerk of the Costa Mesa Sanitary District A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 1 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 (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 th e 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 Investor S tandard," Government Code §53600.3, which states, in part: ”…When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency…” 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 t he 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 th e 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 ha s established internal controls to ensure that investment activities comply with all applicable statutes, ordinances and policies. 2. Safety – The safety and risk associated with an investment refers to the potential loss of principal, interest or a comb ination of these amounts. The District only operates in those investments that are considered very safe. A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 2 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 s tocks, 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: o Federal Intermediate Credit Bank Debentures (FICB) o Federal Farm Credit Bank (FFCB) o Federal Land Bank Bonds (FLB) o Federal Home Loan Bank Notes and Bonds (FHLB) o Federal National Mortgage Association (FNMA) o 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 Investm ent Fund (LAIF) A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 3 IV. DELEGATION OF AUTHORITY The District ’s Board of Directors (Board) hereby delegates its authority to invest surplus Distr ict funds to the Treasurer. Delegation of the investment function by the Board is limited to a one -year period. Failure to delegate deems the 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 includ e: control of collusion, separation 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 s tandards. VI. REPORTING The Treasurer shall submit a monthly investment report to the Board. This report will communicate, at a minimum, 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, statement of compliance and such other data as required by the Board. Once each quarter, the Treasurer shall discuss the previous month’s investment report with the Board at a regular meeting. 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 ins titution'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 amou nt 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 $250 ,000 of a deposit is federally insured. Deposits over $250 ,000 are collateralized as indicated above. A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 4 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 in creases, or step -up interest rate adjustments that provide an increased yield. Inves tment in callable securities is also allowed, but must comply with other restrictions as specified in this Investment Policy. Derivative securities know n as inverse floaters, range notes, structured investment vehicles , mortgage -derived interest -only strips 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 sec urity, are not allowable. IX. BOND PROCEEDS When investing bond proceeds, if any, the District will adhere to this Investment Policy (Policy) when determining appropriate instruments for placing monies. If the bond's trust agreement is more restrictive than th is Policy, then the trust agreement supersedes th is Policy. The District may delegate it’s 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 PRO VISIONS The District ’s investment strategy is to buy and hold investments until maturity. As legislation and the District’s 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 and subsequently repurchasing 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 Treasurer’s awareness is heightened and the security will be closely monitored to determine if credit risk has been significantly increased. The Treasurer will evaluate the need to sell the security prior to maturity. A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 5 XI. BANKS AND SECURITIES DEALERS The District shall transact business only with banks, savings and loans, and "primary" or "regional" registered investment securities broker/dealers with offices located , or doing business, 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 Treasurer. The number of broker/dealers authorized to transact business with the District is one broker/dealer for every $5,000,000 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 deposi ts 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 Feder al 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 ’s 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 employe es, spouses or agents. Any persons, firms, dealers, brokers and advisors providing investment services or bond issue assistance shall disclose to the Treasurer all fee sharing and commission arrangements with other entities or persons prior to the Distric t agreeing to buy an investment or issuing bonds. A ttachment B COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2012 -13 2013 -14 6 XV. POLICY REVIEW The Treasurer shall be responsible for reviewing and modifying this Policy annually for 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 al ways safe and available when needed. Attachments: Investment Guidelines and Strategy Investment Procedures – In ternal Control Guidelines Cash Controls Segregation of Treasury Functions Glossary of Investments A ttachment B COSTA MESA SANITARY DISTRICT Investment Guidelines and Strategy Fiscal Year 2012 -13 2013 -14 7 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, cash is consolidated into one bank account and invested on a pooled concept basis. Interest earnings are allocated quarterly to each fund based upon the average monthly ending cash balance of the fund . 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 fo r 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 statut ory limits imposed by the California Government Code. The District's current limits are: District Policy Government Code Permitted Investments/Deposits Percent Maturity Percent Maturity US Treasury Bills and Notes Unlimited 5 years Unlimited 5 years US Government Securities Unlimited 5 years Unlimited 5 years Certificates of Deposit 25% 1 year Unlimited 5 years Bankers’ Acceptances (1) 25% 180 days 40% 180 days Commercial Paper (2 ) 25% 270 days 25 % 270 days Negotiable CDs (2 ) 25% 5 years 30% 5 years Medium Term Notes 20% 5 years 30 % 5 years LAIF $40 million 50% n/a $40 million n/a Shares of Beneficial Interest (3 ), (4) 20% 5 years 20% 5 years (1) Further limited to 30% in any single commercial bank per Government Code and 15% per District Policy (2) Further limited to 10% in any single issuer (3) Includes CalTRUST, money market funds and money market mutual funds (4) Further limited to 10% in any single mutual fund A ttachment B COSTA MESA SANITARY DISTRICT Investment Guidelines and Strategy Fiscal Year 2012 -13 2013 -14 8 6. Liquidity : 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 various types of securities, issuers, and maturities. 8. Evaluate Certificates of Deposit : a) Certific ates of Deposit shall be ev aluated 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. II. 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 throug h 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 to 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 m aintain earnings near the market and to preserve the value of the portfolio. III. AUDIT Annually, the District's external auditors review the District’s portfolio and perform limited procedures related to compliance. Additionally, they review that purc hase price, market value and maturity date for financial statement purposes. This review is included as part of the annual audit of the District. A ttachment B COSTA MESA SANITARY DISTRICT Investment Procedures – Internal Control Guidelines Fiscal Year 2012 -13 2013 -14 9 I. 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 practical :  The orderly and efficient conduct of its business, including adherence to management polici es;  The safeguarding of assets;  The prevention or detecti on of errors and irregularities;  The accuracy and complet eness of the accounting records; and  The timely preparation of reliable financial information. II. L IMITATIONS 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 t hat a control be cost -effective;  The direction of most controls at recurring, rather than unusual, types of transactions;  Human error due to misunderstanding, carelessness, fati gue or distraction of functions; and  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. 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 : Speci fic 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. A ttachment B COSTA MESA SANITARY DISTRICT Investment Procedures – Internal Control Guidelines Fiscal Year 2012 -13 2013 -14 10 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, c ollusion 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. Authoriz ation : 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 sh ould 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 c omputerized procedures carried out independently to ascertain that transactions are complete, valid, authorized and properly recorded. Attachment B COSTA MESA SANITARY DISTRICT Cash Controls Fiscal Year 2012 -13 2013 -14 11 I. PROCEDURES THAT MAY BE PERFORMED BY AUDITORS WITH RESPECT TO CASH RECEIPTS 1. 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 a uthorized by the Board; e. Cash counts are done by two or more individuals; f. Ba nk reconciliations are reviewed; g. The posting of cash rec eipt entries in books is prompt; h. Receipt forms are prenumbered, accounted for, and physically secured; i. Proper approval required for w rite -off's of customer accounts; j. Checks are rest rictively endorsed upon receipt; k. Adequ ate physical security over cash; l. In dividuals who handle cash do not post account records or process billing statements; and m. Adequate supervision of f inanc ial operations. 2. Significant revenues are confirmed directly with payor and compared with District books to make sure amounts are recorded properly , or reviewed on an analytical basis by year over year comparisons . 3. Cash balances are substantiated by confirming account balances. Bank reconciliations are reviewed for propriety and recalculated by the auditor. All significant reconci ling items on bank reconciliations are verified as valid reconciling items by proving to subsequent bank statements. A ttachment B COSTA MESA SANITARY DISTRICT Segregation of Treasury Functions Fiscal Year 2012 -13 2013 -14 12 The District’s treasury function is segregated as follows. Function Responsibility Authorization of investment transactions: A) Formal investment policy Prepared by Treasurer Reviewed by Board Adopted by Board B) Investment transactions approved by Treasurer C) Monthly Investment Report: Prepared by Treasurer Reviewed by Board Execution of investment transactions Treasurer Recording of investments in Treasurer’s records Treasurer Recording of investments in accounting records Account ing Finance Manager Accounting records approved by Accounting Finance Manager Verification of investment and confirmation of Treasurer’s records Account ing Finance Manager Bank reconciliation: Prepared by Accounting Specialist II Associate Accountant Approved by Accounting Finance Manager Execute wire transfers Treasurer Callback verification of wire transfer Bank Annual review of investment portfolio External Auditors A ttachment B COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2012 -13 2013 -14 13 Bankers' Acceptances – S hort -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 pr imarily 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 and no more than 15 % of bankers’ acceptances may be placed with any one commercial bank . Certificates of Deposit (CD) – T ime 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 36 0 -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. Commercial Paper – S hort -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 inves t 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 ex ceed 25% of the District's surplus funds. The District may not purchase more than 10% of any single issuer. Federal Agency Issues – G uaranteed 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 t han five years. The Board must expressly authorize any investment with a maturity greater than five years. Examples include:  Federal Intermediate Credit Bank Debentures (FICB) – Loans to lending institutions used to finance the short -term and intermediat e 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. A ttachment B COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2012 -13 2013 -14 14  Federal Farm Credit Bank (FFCB) – 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 periodi c basis. These issues are highly liquid.  Federal Land Bank Bonds (FLB) – 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 m inimum 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) – Issued by the Federal Home Loan Bank System to help finance the housing industry. Th e 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.  F ederal National Mortgage Association (FNMA) – 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. Th ey 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) – A gov ernment -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 Unit ed 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. Investment Trust of California (CalTRUST) – A joint powers authority established by local agencies in the State of California for the purpose of pooling and investing local agency funds. A Board of Trustees supervises and administers the investment program. The Board is comprised of experienced investment officers and policy -makers of the public agency members. CalTRUST invests in fixed income securities eligible for investment pursuant to California Government Code §53601 et seq. The District is not limited as to the number of deposits and wit hdrawals in any given month for the short -term account within CalTRUST. The district is limited to one A ttachment B COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2012 -13 2013 -14 15 transaction per month in the medium -term account within CalTRUST. See also Shares of Beneficial Interest. Local Agency Investment Fund (LAIF) – A spe cial 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 age ncy. The District is restricted to 15 transactions per month for each LAIF account. LAIF 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 Sta te'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 ar e 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. Medium Term Corporate Notes – U nsecured 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 Co mmercial 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 3 0% 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 2 0 % of the District's surplus funds. The District may not purchase more than 10% of any single issuer. Negotiable Ce rtificates of Deposit – U nsecured 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 int erest 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 te n 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 Di strict may not buy more than 10% of any single issuer. A ttachment B COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2012 -13 2013 -14 16 Passbook Savings Account Demand Deposit – I nterest bearing active deposits placed at state or national banks, state or federal savings and loan associations, state or federal credit unions and federal ly insured industrial loan companies. Monies placed in a savings account earn short - term interest. Deposits are FDIC insured up to $250 ,000, and may be in any amount. Shares of Beneficial Interest – Also referred to as money market mutual funds. CalTRUST, which has previously been defined, is classified as shares of beneficial interest . Shares of beneficial interest must consist of highly -rated short -term debt instruments. The management compani es shall either (1) attain the highest ranking or the highest letters and numerical rating provided by not less than two of the three largest nationally recognized rating services, or (2) have an investment advisor registered with the Securities and Exchan ge Commission (SEC) with not less than five years experience investing in the securities and obligations as authorized above and with assets under management in excess of five hundred million dollars ($500,000,000) and (3) follow regulations specified by t he SEC under the Investment Company Act of 1940 (15 U.S.C. Section 80a -1, et seq.). The purchase price of shares for beneficial interest shall not exceed 2 0 % of the District 's portfolio. US Treasury Bills – D irect obligations of the United States Govern ment 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 – D irect 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 Board.