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Reso 2020-929RESOLUTION NO. 2020-929 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE COSTA MESA SANITARY DISTRICT ADOPTING A STATEMENT OF INVESTMENT POLICY FOR FISCAL YEAR 2020- 219 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 transactions. NOW, THEREFORE, the Board of Directors does hereby resolve: 1. That the Statement of Investment Policy for fiscal year 2020-21 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 invest 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 oversight. PASSED and ADOPTED on this 22" d day of June 2020. -0 1 Ai6lUlfAi-11 cretary, Costa TA6sa S itary District Board of Direc rs President, Costa Mesa Sanitary District Board of Directors STATE OF CALIFORNIA) COUNTY OF ORANGE SS CITY OF COSTA MESA 1, Noelani Middenway, District Clerk of the Costa Mesa Sanitary District, hereby certify that the above and foregoing Resolution No. 2020-929, was duly and regularly passed and adopted by said Board of Directors at a regular meeting thereof held on the 22 day of June, 2020, by the following vote: AYES: Ferryman, Ooten, Schafer, Scheafer, Perry NOES: None ABSENT: None ABSTAIN: None IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Costa Mesa Sanitary District, this 22 day of June 2020. COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2020-21 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 the District while safeguarding its assets. II. INVESTMENT SELECTION OBJECTIVE The District strives to maintain the level of investment of all idle funds as near 100% as possible. All temporarily pooled idle cash is invested under the "Prudent Investor Standard," 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 the State of California Government Code §53600 et seq. and the Costa Mesa Sanitary District Statement of Investment Policy. The District Treasurer, after meeting the legality, safety, liquidity and diversification criteria, will attempt to obtain the highest yield possible. The criteria for selecting investments, in order of priority are: 1. Legality — The District's investments must conform to federal laws, state statutes, District ordinances and internal policies and procedures. The District has established internal controls to ensure that investment activities comply with all applicable statutes, ordinances and policies. 2. Safe — The safety and risk associated with an investment refers to the potential loss of principal, interest or a combination of these amounts. The District only operates in those investments that are considered very safe. 3. 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. 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 earnings an investment can provide, and sometimes is described as the rate of return. - 1 - COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2020-21 The basic premise underlying the District's investment philosophy is to ensure that funds are always safe and available when needed. The District does not buy stocks, speculate or deal in futures or options. Any investment extending beyond a five-year period requires prior District Board approval. III. AUTHORIZED INVESTMENTS The District limits its investments to the following vehicles: • US Treasury Bills • US Treasury Notes • Federal Agency Issues — examples include: 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 • Shares of Beneficial Interest • Passbook Savings Account • Local Agency Investment Fund (LAI F) • CalTRUST • Supranational Securities IV. DELEGATION OF AUTHORITY The District's Board of Directors (Board) hereby delegates its authority to invest surplus District 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 include: 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 standards. Opm COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2020-21 VI. REPORTING Government Code §53646(a)(2) previously mandated that investment policies be approved by the legislative body. Additionally, Government Code §53646(b)(1) previously mandated that quarterly investment reports be submitted to the legislative body. In June 2004, the California Assembly adopted AB2853 which made these requirements optional. The District believes it prudent to continue with these practices. 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. These deposits cannot exceed the amount of the institution's paid -up capital and surplus. The bank or savings and loan must secure public funds deposits with eligible securities having a market value of 110% of the total amount of the deposits or first trust deeds having a value of 150% of the total amount of the deposits. A third class of collateral is a 105% letter of credit drawn on the Federal Home Loan Bank. The Treasurer may waive security for that portion of a deposit, which is insured pursuant to Federal law. Currently, the first $250,000 of a deposit is federally insured. Deposits over $250,000 are collateralized as indicated above. VIII. DERIVATIVES The term derivative is a commonly used name that describes a variety of securities whose values are "derived from" the value of another asset, a reference rate or an index. Investment in derivative instruments is limited to securities that have periodic increases, or step-up interest rate adjustments that provide an increased yield. Investment in callable securities is also allowed, but must comply with other restrictions as specified in this Investment Policy. Derivative securities known as inverse floaters, range notes, or 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 security, are not allowable per Government Code §53601.6(a). 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 this Policy, then the trust agreement supersedes this 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. -3- COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2020-21 X. GRANDFATHER PROVISIONS 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 §53601.6(b) 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 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. XI. BANKS AND SECURITIES DEALERS The District shall transact business only with banks, savings and loans, and 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. XII. SAFEKEEPING AND CUSTODY Securities should be held in a third party custodian/safekeeping account. Said securities shall be held in a manner that establishes the District's right of ownership pursuant to Government Code Sections 53601 and 53608 et seq. All securities owned by the District should be held by a third party except the collateral for time deposits in banks and savings and loans, which is held by the Federal Home Loan Bank or an approved Agent of Depository. The collateral for time deposits in banks should be held in the District's name by the bank's Trust Department, or alternately, by the Federal Reserve Bank pursuant to Government Code Sections 53656 and 53657 et seq. XII1. 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. -4- COSTA MESA SANITARY DISTRICT Statement of Investment Policy Fiscal Year 2020-21 XIV. CONFLICT OF INTEREST Any firm proposing to provide any type of investment service to the District shall acknowledge their familiarity with and agree to abide by any Federal and State laws or regulations pertaining to contractual conflicts of interest or contributions by such firms, their employees, spouses or agents. Any persons, firms, dealers, brokers and advisors providing investment services or bond issue assistance shall disclose to the Treasurer all fee sharing and commission arrangements with other entities or persons prior to the District agreeing to buy an investment or issuing bonds. XV. POLICY REVIEW The 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 always safe and available when needed. Attachments: Investment Guidelines and Strategy Investment Procedures — Internal Control Guidelines Cash Controls Segregation of Treasury Functions Glossary of Investments -5- COSTA MESA SANITARY DISTRICT Investment Guidelines and Strategy Fiscal Year 2020-21 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 for the District is projected with the receipt of revenues and maturity of investments scheduled so that adequate cash will be available to meet disbursement requirements. 5. Investment Limitations: Security purchases and holdings are maintained within statutory limits imposed by the California Government Code. The District's current limits are: Permitted Investments/Deposits US Treasury Bills and Notes US Government Securities Passbook Savings Accounts Certificates of Deposit Bankers' Acceptances (1) Commercial Paper (2) Negotiable CDs Medium Term Notes LAI F Shares of Beneficial Interest (3), (4) Supranational Securities District Policy Percent Maturity Unlimited 5 years Unlimited 5 years Unlimited n/a 25% 5 years 25% 180 days 25% 270 days 30% 5 years 20% 5 years 50% n/a 20% 5 years 15% 5 years Government Code Percent Maturity Unlimited 5 years Unlimited 5 years Unlimited n/a Unlimited 5 years 40% 180 days 25% 270 days 30% 5 years 30% 5 years $65 million n/a 20% 5 years 30% 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% of outstanding commercial paper of any single issuer (3) Includes CalTRUST, money market funds and money market mutual funds (4) Further limited to 10% in any single mutual fund 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 various types of securities, issuers, and maturities. sm COSTA MESA SANITARY DISTRICT Investment Guidelines and Strategy Fiscal Year 2020-21 8. Evaluate Certificates of Deposit: a) Certificates of Deposit shall be evaluated in terms of FDIC coverage. The District does not purchase Certificates of Deposit in excess of $250,000. b) Negotiable Certificates of Deposit shall be evaluated in terms of the credit worthiness of the issuer as detailed by the VERIBANC rating and Texas ratio. 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 through bankers and brokers to assist with the formulation of an investment strategy for the local agency. 2. Implementing Investment Strategy: Investment transactions are executed which conform 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 maintain earnings near the market and to preserve the value of the portfolio. III. AUDIT Annually as part of the District's financial audit, the District's external auditors may review the District's portfolio and perform limited procedures related to compliance. Additionally, they may review the purchase price, market value and maturity date for financial statement purposes. Era COSTA MESA SANITARY DISTRICT Investment Procedures — Internal Control Guidelines Fiscal Year 2020-21 1. 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 policies; • The safeguarding of assets; • The prevention or detection of errors and irregularities; • The accuracy and completeness of the accounting records; and • The timely preparation of reliable financial information. 11. LIMITATIONS OF INTERNAL CONTROL No internal control system, however elaborate, can by itself guarantee the achievement of management's objectives. Internal control can provide only reasonable assurance that the objectives are met, because of its inherent limitations, including: • Management's usual requirement that a control be cost-effective; • The direction of most controls at recurring, rather than unusual, types of transactions; • Human error due to misunderstanding, carelessness, fatigue or distraction of functions; 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: Specific responsibility for the performance of duties should be assigned and lines of authority and reporting clearly identified and understood. 2. Personnel: Personnel should have capabilities commensurate with their responsibilities. Personnel selection and training policies, together with the quality and quantity of supervision, are thus important. 3. Segregation of Functions: Segregation of incompatible functions reduces the risk that a person is in a position both to perpetrate and conceal errors or irregularities in the normal course of duty. If different people handle two parts of a transaction, collusion is necessary to conceal errors or irregularities. In particular, the functions that should be considered when evaluating segregation of functions are authorization, execution, recording, custody of assets and performing reconciliations. sm COSTA MESA SANITARY DISTRICT Investment Procedures — Internal Control Guidelines Fiscal Year 2020-21 4. Authorization: An appropriate responsible individual should authorize all transactions. The responsibilities and limits of authorization should be clearly delineated. The authorization for a specific transaction or granting general authority for transactions should be to a position commensurate with the significance of the transactions. Delegation of authority to authorize transactions should be handled very carefully. 5. Controls Over an Accounting System: Controls over an accounting system include manual and computerized procedures carried out independently to ascertain that transactions are complete, valid, authorized and properly recorded. WE COSTA MESA SANITARY DISTRICT Cash Controls Fiscal Year 2020-21 I. PROCEDURES THAT MAY BE PERFORMED BY AUDITORS WITH RESPECT TO CASH RECEIPTS District procedures and controls are reviewed. Some of the system strengths are: a. Receipts are controlled upon receipt by proper registration devices; b. Receipts are reconciled on a daily basis; c. Amounts are deposited intact; d. All bank accounts are authorized by the Board; e. Cash counts are done by two or more individuals; f. Bank reconciliations are reviewed; g. The posting of cash receipt entries in books is prompt; h. Receipt forms are prenumbered, accounted for, and physically secured; i. Proper approval required for write-offs of customer accounts; j. Checks are restrictively endorsed upon receipt; k. Adequate physical security over cash; I. Individuals who handle cash do not post account records or process billing statements; and m. Adequate supervision of financial operations. 2. Significant revenues are confirmed directly with the payer and compared to 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 reconciling items on bank reconciliations are verified as valid reconciling items by proving to subsequent bank statements. EM COSTA MESA SANITARY DISTRICT Segregation of Treasury Functions Fiscal Year 2020-21 The District's treasury function is segregated as follows. Function Responsibilitv 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 Accountant Accounting records approved by Finance Manager Verification of investment and confirmation of Treasurer's records Accountant Bank reconciliation: Prepared by Senior Accountant Approved by Manager Execute wire transfers Treasurer Online verification of wire transfers General Manager Annual review of investment portfolio External Auditors s� COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2020-21 Bankers' Acceptances — Short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the draft at its maturity. An acceptance is a high-grade negotiable instrument. Acceptances are purchased in various denominations for 30, 60, or 90 days, but no longer than 180 days. The interest is calculated on a 360-day discount basis similar to Treasury Bills. The District may not invest more than 25% of its surplus money in Bankers' Acceptances and no more than 15% of bankers' acceptances may be placed with any one commercial bank. Certificates of Deposit (CD) — Time deposits of a bank or savings and loan. They are purchased in various denominations with maturities ranging from 30 days to 5 years. Certificates of Deposit are insured up to $250,000 per issuer by the FDIC. The interest is calculated on a 360-day, actual day month basis and is payable monthly. Commercial Paper — Short-term unsecured promissory notes issued by a corporation to raise working capital. These negotiable instruments are purchased at a discount to par value or at par value with interest bearing. Commercial Paper is issued by corporations such as General Motors, IBM, etc. Local agencies are permitted by State law to invest in Commercial Paper of the highest ranking or of the highest letter and numerical rating as provided by Moody's Investor's Service, Inc., or Standard and Poor's Corporation. Purchases of eligible Commercial Paper may not exceed 270 days maturity, nor exceed 25% of the District's surplus funds. The District may not purchase more than 10% of the commercial paper of any single issuer. Federal 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. Agencies usually provide higher yields than direct Treasury issues with all of the same advantages. An unlimited amount of funds may be invested in Federal Agency issues with maximum maturities of less than five years. The 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 intermediate needs of farmers, such as seasonal production. They are usually issued monthly in minimum denominations of $3,000 with a nine -month maturity. Interest is payable at maturity and is calculated on a 360-day, 30-day month basis. • Federal Farm Credit Bank (FFCB) — Debt instruments used to finance the short and intermediate term needs of farmers and the national agricultural industry. They are issued monthly with three and six-month maturities. The FFCB issues larger issues (one to ten years) on a periodic basis. These issues are highly liquid. • Federal Land Bank Bonds (FLB) — Long-term mortgage credit provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. The minimum denomination is $1,000. They carry semi-annual coupons. Interest is calculated on a 360-day, 30-day month basis. • Federal Home Loan Bank Notes and Bonds (FHLB) — 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 -12- COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2020-21 maturities. The minimum denomination is $5,000. The notes are issued with maturities of less than one year and interest is paid at maturity. The bonds are issued with various maturities and carry semi-annual coupons. Interest is calculated on a 360-day, 30-day month basis. • Federal National Mortgage Association (FNMA) — Used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing Administration and the Farmers Home Administration, as well as those guaranteed by the Veterans Administration. They are issued four times a year with maturities from a few months to eight years. The minimum amount is $10,000 and carry semi-annual coupons, with interest computed on a 360-day, 30-day month basis. Federal Home Loan Mortgage Corporation (FHLMC) — 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 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 (CaITRUST) — 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. CaITRUST 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 withdrawals in any given month for the short-term account within CaITRUST. The district is limited to one transaction per month in the medium -term account within CaITRUST. See also Shares of Beneficial Interest. Local Agency Investment Fund (LAIF) — A special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $5,000, in multiples of $1,000 above that, with a maximum balance of $65,000,000 for any agency. 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 State's surplus cash with the participant's surplus cash creates a multi -billion dollar money pool and allows diversified investments. 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 — Unsecured promissory notes issued by a corporation organized and operating in the United States. These are negotiable instruments and are traded in the secondary market. Medium Term Corporate Notes can be defined as extended maturity Commercial Paper. Local agencies are restricted by the Government Code to investments in corporations rated in the top three note categories by a nationally -recognized rating service, five year maximum maturity and may not exceed 30% of surplus funds. The District's restrictions are a maximum term of five years to maturity and total investments in -13- COSTA MESA SANITARY DISTRICT Glossary of Investments Fiscal Year 2020-21 Medium Term Corporate Notes may not exceed 20% of the District's surplus funds. The District may not purchase more than 10% of any single issuer. Negotiable Certificates of Deposit — Obligations of the financial institution, bank or savings and loan, bought at par value with the promise to pay face value plus accrued interest at maturity. They are high- grade negotiable instruments, paying a higher interest rate than regular certificates of deposit. The primary market issuance is in multiples of $1,000,000, the secondary market usually trades in denominations of $500,000, and smaller lots are occasionally available. Negotiable Certificates of Deposit are insured up to $250,000 per issuer by the FDIC. Purchases of Negotiable Certificate of Deposit may not exceed 25% of the District's surplus funds and five years to maturity. The District may not purchase Negotiable Certificates of Deposit in excess of the FDIC insurance limit for any single financial institution. Passbook Savings Account Demand Deposit — Interest bearing active deposits placed at state or national banks, state or federal savings and loan associations, state or federal credit unions and federally insured industrial loan companies. Monies placed in a savings account earn short-term interest. Deposits are FDIC insured up to $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 companies 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 Exchange 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 the 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 20% of the District's portfolio. The District may not invest more than 10% in any single mutual fund. Supranational Securities — United States dollar denominated senior unsecured unsubordinated obligations issued or conditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter -American Development Bank. Investments are limited to five years or less and must be eligible for purchase or sale within the United States. Investments shall be rated "AK or better and shall not exceed 15% of the District's portfolio. US Treasury Bills — Direct obligations of the United States Government issued weekly with maturity dates up to one year. They are issued and traded on a discount basis with interest calculated on a 360-day basis and actual invested days. They are issued in amounts of $10,000 and up, in multiples of $5,000. They are a highly liquid security. An unlimited amount may be invested in US Treasury Bills. US Treasury Notes — Direct obligations of the United States Government with original maturities of 1 to 10 years. They are generally available in minimum denominations of $5,000 for two and three-year maturities, and $1,000 denominations for all other maturities. Notes are actively traded in a large secondary market and are very liquid. An unlimited amount of funds may be invested in US Treasury Notes with maximum terms of five years. The term may be extended if authorized by the Board. -14-