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RES 23-837 - Modifying & Adopting Investment Policy for Public Funds.pdf11,14 RUN IN & ; iirrr i !I; 1111r� 1 1 1 NBC I to govern the investment of public funds. 1711 1 1 11 1 1 WHEREAS, the assets of the City include a portion of the City's total cash held in reserve, 101111 �� II wkqnff� =6wGM==- �IT= WHEREAS, amendments to the investment policy are necessary to reflect best practices, ININTOUNFAWMAN-111910• M�MIIIIIIFI 911113 IFIN ]INITE111 9= WITIV held to be invalid or unconstitutional by a court of competent jurisdiction, such invalidity or Resolution No. 23-83 7 Page 1 of28 make necessary corrections to this resolution including, but not limited to, the correction of F-M "Olum 1 1161 1 1 110 1 1101 1 references thereto. Section.5. Ratification. Any act consistent with the authority and prior to the effective date of mn��i Resolution No. 23-83 7 Page 2 of JM WFERRELL, MAYOR ATTEST: azmm�� y RYAN CALL, Cl CIT "ATTORNEY FILED WITH THE CITY CLERK: 03/01/2023 PASSED BY THE CITY COUNCIL - RESOLUTION NO.: 23-837 Resolution No. 23-83 7 Page 3 of28 Investment Policy Effective Date: March 7, 2023 Authorized by: Resolution 23-837 Supersedes: Policy Dated: April 5, 2022 Authorized by: Resolution No. 22-827 City of Federal Way, Finance Department 33325 8th Ave South, Federal Way, WA 98003 Resolution No. 23-837, Exhibit A Page 4 of 28 City ofFederal Way Investment Policy Table of Contents i Purpose .......................................... 3 |X Diversification ................................ 7 U. Policy 3 X Maximum Maturities ........................ 7 Ui Scope and Applicability .................. 3 }(i Safekeepingand Custody -----8 |V. Governing Authority XU. CO|k][8r8|iz8tiOO.............................. 8 a Enabling � --" ------ 3 >(U| Performance 8 b O�|g�@UOnUf � '~~'~''�----� 4 � ------ a. Downgraded Securities ............. 8 V. Objectives >(|V � Repo�ingondDiaoosune ' 8 Safety --�------------- 4 8 K8On�h|y ------------� 9 b LiqUidt« �------------ 4 b {�u@�er� � —`-----------' g C. `/k�d-------------'5 V| �rUd�nC� �V� 5 |nvea�m�r� ---'-gy � -------------� o Ethics � ' — 5 a Buy � ---------� b. Segmented Portfolio ................. 9 9 \4| � Authorized XV| |D�8[DG| �OD�0|S 10 Institutions ------------'8 � --------- VUi Authorized Investments XV|| � ��v�� Approval Review, , '- —� 10 a. Washington State Treasurer Local Government Investment Pool ......... 8 b � Ao�no�e Federal Agencies, Addenda: sponsored enterprise obligations .... 0 o. Treasuries, Obligations ofthe U.G, XVUi Glossary ....................................... 11 8QenCheS. vvhOUy-OvvDed )(|X Text UfWashington Statutes corporations, and SUp[8O8UOO8|S.... 8 (��VVSL-------------15 d. Corporate notes ----------O ` ' 8. Washington State/local government )(X Text OfCitV'sMunicipal Code ....... 2O bonds --------------- 7 XXi Broker/Dealer Questionnaire ........ 21 f. Other-State/local government bonds __________________�7 XXU. Approved Br0k8�DeG|8rList --'24 g. 88DlH-COUn[vk]C8|gOV8OlDl�OL )(XUi Confirmation OfPolicy ReQeiDt--25 registered vv@rn3ntG--------. 7 � h. Bankers' acceptances .................... 7 i Commercial paper .......................... 7 i Non-negotiable CDs -------.7 p.2of25 City ofFederal Way Investment Policy Investment Policy A.Pmrpose The purpose of this Policy is: * To establish investment objectives and parameters necessary to safeguard public funds entrusted to the City of Federal VVuy. * To articulate City Counoi|'a intent for the governance over city investments * To communicate clear policy and strategy guidelines for city investment administration * To demonstrate to cibzana, taxpayers and voters o transparent and accountable stewardship plan. The [ity'Smanageable cash ranges from $60 to $90million, of which 8portion may be invested in a laddered portfolio after assuring sufficient liquidity and safety; cyclical liquidity is kept in the Washington State Treasurer's Local Government |nmaetrnert Pool and the safety ufoperating cash is maintained in depository bank accounts. U1Policy It is the policy of the City of Federal Way to invest public funds in8manner that, giving first regard to safety, suitability and liquidity, will maximize kuno-hernl yield in conformance with State Statutes and Federal Regulations, and City Charter. Ill. Scope and Applicability The investment policy ounkea to all financial assets of the City of Federal Way. These one accounted for in the City of Federal Way's Comprehensive Annual Financial Report and include: �^ General Fund �+ Special Revenue Funds )� Capital Project FUOdS )� Enterprise Funds )� |nt8nnG| Service Funds Trust and Agency Funds Any new fund created by Council, unless specifically exempted by Council. Investments of City Funds may be made On 8 pooled basis GCrOGS all fundS, with principal and interest apportioned for the benefit of the V8hOUS participating funds Orfor the benefit of the general fund. (RCVV35.39.034) IV. Govemmim Enabling Legislation All investments shall be managed in a manner responsive to the public trust, consistent with state S1GtUteS (Revised Code of Washington /R[X8/\. Authority LO OO8D8ge the Citv'S iDv8StDl8Dt program iSderived from RCVVsections 35A.40.O50and 35.39.O32and from the Federal Way Revised Code sections 3.45.010and 345.O2O. p.3of25 City of Federal Way Investment Policy Delegation of Authority This policy provides for accountability and transparency to city council. The City Council authorizes the Finance Director or their designee, to engage in investment -related transactions within this policy without prior approval. The Finance/Economic Development/Regional Advisory Committee (FEDRAC), comprised of three city council members, may review and conduct oversight of transactions and monthly reporting prior to council review and approval. Management responsibility for the investment program is delegated by the Mayor to the Finance Director, who shall establish procedures for the operation of the investment program consistent with this investment policy. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions to provide adequate redundancy by properly trained and informed staff. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. All staff engaging in investment transactions shall attend public investment training, which may include staff training by a qualified Finance Director. Staff shall not engage in any policy -allowed investment transaction for which they cannot articulate a rationale for having done so. Contracted Management Any external investment manager engaged to assist in the management of the city's investment portfolio will be held to the prudent investor standard of care (RCW 11.100.020). V. Objective The prime objectives of this City's investment activities shall be the suitability of every investment to the financial requirements of the city, considering, in priority order: ➢ Safety: Safety of principal is the foremost objective of the investment program. Investments of the City of Federal Way shall be undertaken in a manner that seeks to ensure the preservation of principal in the overall portfolio. Each investment transaction shall be conducted in a manner to avoid principal loss arising from security default, institution default, broker -dealer default, safekeeping fraud, or the avoidable loss on the premature sale of an investment ➢ Liquidity: The City's investment portfolio will be structured to meet all expected obligations in a timely manner, to avoid premature sale of an investment at a loss of principal. This is to be achieved by comparing investment maturities with forecasted cash flows and maintaining sufficient liquidity for contingencies across all funds. A 3- to 5-year historical liquidity trend history, combining the city's main checking accounts, LGIP, and the investment portfolio, will clearly indicate annual seasonal low cashflows. ➢ Yield, or Return on investment: The City's investment portfolio shall be designed with the objective of attaining as high a rate of return as prudently possible having first satisfied the objectives of Safety and Liquidity. p. 4 of 25 Resolution No. 23-837, Exhibit A Page 7 of 28 City of Federal Way Investment Policy VI. Prudence The standard of prudence to be used by investment officials shall be the "prudent investor standard," which, as enacted by State Statute (RCW 11.100.020), says: 1) A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. 2) A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust." Investment officers acting in accordance with the written procedures and exercising due diligence shall be relieved of personal responsibility for individual security's credit risk or marketplace changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments. Ethics and Conflicts of Interest Officers and employees involved in the investment process shall refrain from, or disclose, personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Employees and investment officials shall disclose to the City Manager any material financial interests in the financial institutions to conduct business with in this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City's portfolio. Employees and officers shall subordinate their personal investment transaction to those of the City of Federal Way, particularly with regard to the time of purchases and sales. The intent of "disclosure:" an employee is unlikely to personally own a controlling interest in a security that becomes the best investment for the city such as a highly rated Microsoft or Coca- Cola medium -term note and should not have to sell their personal position in order to serve the city). Employees and officers shall refrain from, or disclose, any personal investment transactions with the same agents with whom business is conducted on behalf of the city and shall avoid, or disclose, transactions that might impair public confidence. Consistent with general City Policy, officers and employees involved in the investment process may not accept any valuable gift, favor or gratuity which is made on the basis of his or her position in the City's service. VII. Authorized Financial Dealers and Institutions The Finance Director or his/her designee will maintain a list of broker/dealers, which are authorized to provide investment services. To be eligible to do business with Federal Way, a broker/dealer must provide a Broker/Dealer Questionnaire that includes the following: audited financial statements, current securities -related licensing; proof of registration and licenses held with the Financial Industry Regulatory Authority (FINRA); proof of registration with the State of Washington Securities Division; provide current active municipal client references; and p. 5 of 25 Resolution No. 23-837, Exhibit A Page 8 of 28 City of Federal Way Investment Policy certification of having read the City's current investment policy. An annual review of the financial condition of qualified bidders will be conducted by the Finance Director, or his/her designee. VIII. Authorized Investments State statutes permit local governments in the state of Washington only the specific investments permitted by state law, limited to the following: A. The primary investment instruments expected to be utilized in the City of Federal Way's Investment Portfolio are: ➢ State of Washington Local Government Investment Pool (LGIP), the public funds investment account for investment and reinvestment by the state treasurer. RCW 43.250.040 Agencies. Federal home loan bank notes and bonds, federal land bank bonds and federal national mortgage association notes, debentures and guaranteed certificates of participation, or the obligations of any other government sponsored corporation whose obligations are or may become eligible as collateral for advances to member banks as determined by the board of governors of the federal reserve system; RCW 39.59.040 (5) Treasuries. Certificates, notes, or bonds of the United States, or other obligations of the United States or its agencies, or of any corporation wholly owned by the government of the United States; or United States dollar denominated bonds, notes, or other obligations that are issued or guaranteed by supranational institutions, provided that, at the time of investment, the institution has the United States government as its largest shareholder; RCW 39.59.040 (4). Corporate notes purchased on the secondary market; with a minimum credit quality rating of upper medium investment grade - at least A by Standard and Poor's, A2 by Moody's, or A by Fitch - on the date of purchase. RCW 39.59.040 (8) and Washington State Investment Board Policy No. 2.05.500. B. The following secondary investment instruments are not expected to be routinely utilized in the City of Federal Way's Investment Portfolio but are also authorized by State Statute and should be disclosed and explained on council monthly reporting: 4- Bonds of the state of Washington and any local government in the state of Washington;" RCW 39.59.040 (1) ➢ General obligation bonds of a state other than the state of Washington and general obligation bonds of a local government of a state other than the state of Washington, which bonds have at the time of investment one of the three highest credit ratings of a nationally recognized rating agency RCW 39.59.040 (2) ➢ Registered warrants of a local government in the same county as the government making the investment;" RCW 39.59.040 (3) p. 6 of 25 Resolution No. 23-837, Exhibit A Page 9 of 28 City of Federal Way Investment Policy Commercial paper purchased in the secondary market with maturities not exceeding 270 days, and with a short-term credit rating at time of investment not less than A-1 by Standard & Poor's Rating Services and/or P-1 by Moody's Investors Service and/or F-1 by Fitch Rating Agency. Furthermore, the long-term credit ratings of the issuer at the time of investment shall not be less than one of the three highest ratings as rated by a nationally recognized rating agency. RCW 39.59.040 (7) and Washington State Investment Board Policy No. 2.05.500 ➢ Non -Negotiable Certificates of Deposit with financial institutions qualified by the Washington Public Deposit Protection Commission. (RCW 39.58.130) Prohibited Investments Equities (stocks), Collateralized mortgage obligations, Money market mutual funds, Inverse Floaters, Negotiable Certificates of Deposit, Repurchase and Reverse Repurchase Agreements, Cryptocurrency and any investment type not expressly permitted by City Council in this policy are not eligible investments for the City. IX. Diversification Investments in securities shall not exceed the following percentages of the portfolio at time of purchase: State Local Government Investment Pool 100% Treasury Securities Government Sponsored Agency Securities 100%, (40% per issuer) Corporate notes 15%, lesser of 2% or $1 million per issuer Commercial Paper Same-State/Local Securities Certificates of deposit 10%, lesser of 2% or $1 million per issuer Other-State/Local Securities 5%, lesser of 2% or $1 million per issuer Same -county local government issuer only by city council resolution X. Maximum Maturities ➢ Staggered maturities are to be a component of the diversified investment strategy, employed to minimize reinvestment risk due to rate fluctuations building a reasonably laddered maturity schedule. ➢ The average maturity of the portfolio will not exceed 2.5 years, including cash in depository accounts and the state investment pool. (For the purposes of this calculation, the maturity date of callable securities will be the final maturity date). p. 7 of 25 Resolution No. 23-837, Exhibit A Page 10 of 28 City ofFederal Way Investment Policy � The expected and final maturity ofany security will not exceed 5-years at time of purchase. X11. Safekeeping and Custody Security transactions entered into by the City of Federal Way shall be conducted on o delivery - versus -payment Securities will be held by third pohx custodian designated by the Finance Oirector, or his/her designee, and evidenced by safekeeping reports which will be reconciled monthly to the portfolio. Third -party CUStOdi@| [8pOdS Sh8|| be required [DODLh|y' LO list, at @ [DiOiDlUD1' each individual security, CU8|P, purchase dote, cost, market value, par value, and maturity dote. X11U'Collateral izatiom State SL8LUte (RCW 39.58) requires that all deposits Ofpublic funds be made with qualified public depositaries, protected through the actions of the Public Deposit Protection Commission (PDPC), comprised ofthe State Treasurer, Governor and Lieutenant Governor. State law requires that all deposits Of public funds over and above federally insured 8nOOUntS (including Certificates Of Deposit) be collateralized in accordance with regulations of the PDPC. All collateral is held by the POPC. The POPC ensures public funds deposited in banks are protected should a financial institution become insolvent. The names of authorized public depositaries may be found at: X1188.Performance Standards Benchmark. The City's cash management portfolio shall be managed using as comparison for yield0f2-Year Constant Maturity []STreasury Index |tcan hHexpected that the city pOrtfo|iO'S 8V8[8Q8 yield will be trail the bHOCh08[k'S yield in UOOSS of rising iDt0[HSt [8L8S and |H8d the b8nChno8rh'S yield in UnoeS of falling interest rates. Downgraded Securities. The city may, from time t0time, be invested in 8 security whose n8UnA is downgraded. In the event G rating drops below the nninirnunn G||0vv8d by this policy, the Finance Director will review and recommend @nappropriate plan Ofaction tOthe Mayor and City Council via the FEDRAC. If the City utilizes an |OVeStDleOt /\dViSO[' that |DV8StOO8Ot Advisor Sh8|| notify the City and recommend o plan of action within one month. The oib/ may continue to hold @ downgraded investment tOmaturity if3probable outcome iSthe eventual realization Offull value, rather than @ realized |OSS if divested prior to maturity. XIV. Reporting hNmmthUy Reports The Finance Director shall make omonthly report ofall investment transactions tothe city council vi@FEORAC. (RCVV35.3S.032) p.8of25 City of Federal Way Investment Policy The Finance Director shall prepare an investment report to FEDRAC, Mayor and City Council that provides a summary of the current investment portfolio and the individual transactions executed to show holdings and activities during the reporting period conform to the investment policy. The report should include the following: ➢ An asset listing showing par value, cost and market value, type of investment, issuer, days to maturity and interest rate of each security; ➢ Average days to maturity of the portfolio; ➢ Maturity distribution of the portfolio and distribution by type of investment. ➢ Credit quality of portfolio holdings; and, ➢ Average weighted yield to maturity of portfolio on investments ➢ Performance comparison to benchmark XV. INVESTMENT STRATEGY Buy and Hold. As a strategy, the City of Federal Way's investments will not be actively traded, meaning that no attempt to "buy low and sell high" or "time the market" will be made. Investments purchased with the intent of providing investment income shall be intended to be held to maturity, relying on following a prudent course of action for income rather than predicting market direction. Securities may be sold before they mature if market conditions present an opportunity for the City to capture a benefit or to avoid a risk but the strategy will be primarily buy -and -hold. Portfolio Segmenting. In keeping with the priorities of Safety, Liquidity then Yield, the first considerations of investing will be the immediate operational needs and scheduled disbursements of capital expenditures and debt service payments. ➢ The Safety Segment of the Portfolio is held primarily in the State LGIP. This will allow for seasonal fluctuations, primarily the April/October inflows of Property Tax and outflows of capital projects. ➢ The Liquidity Segment of the portfolio is held primarily in the City's depository bank, and will be maintained at adequate levels to ensure availability. ➢ This Yield Segment of the portfolio is the portion of the city's cash reserves which, based on historical analysis, long-term budgetary planning or council -approved reserve policy, will not be subject to seasonal spending and can be invested comfortably long-term. This segment is invested in a laddered portfolio comprised of Agencies, Treasuries and other authorized investments. XVI. Internal Controls The Office of the State Auditor requires that in accordance with Revised Code of Washington 43.09.260, the City of Federal Way must undergo annual financial examinations performed by State Examiners. Investment management is to be included as part of the annual independent audit to assure compliance with this investment policy. The City's internal controls shall be designed to prevent losses of public funds arising from fraud, employee error, misrepresentation by third parties, or unanticipated changes in financial markets. Controls which the City deems important include, but are not limited to: • Control of collusion p. 9 of 25 Resolution No. 23-837, Exhibit A Page 12 of 28 City of Federal Way Investment Policy • Separation of functions • Separation of transaction authority from accounting and recordkeeping • Custodial safekeeping • Avoidance of bearer -form securities • Specific limitations regarding securities losses and remedial action • Clear delegation of authority to subordinate staff members • Written confirmation of telephone transactions • Supervisory authority of employee actions • Minimize the number of authorized investment officials • Documentation of transactions and strategies XVI1. Investment Policy Review, Approval and Adoption The City of Federal Way's investment policy shall be adopted by resolution of the City Council. The policy shall be reviewed annually by the Finance Director and any significant modifications must be approved by the City Council, with prior review by the FEDRAC. p. 10 of 25 Resolution No. 23-837, Exhibit Page 13 of28 City of Federal Way Investment Policy Addendum: Glossary Accrued Interest— Interest earned but not yet received. Active Investment Management — the active trading of securities, selling prior to maturity and purchasing secondary issues, in an effort to earn higher portfolio yield by the continual monitoring of financial markets, spreads and pricing opportunities of individual securities. Requires substantially more staff time than passive investing. (see also Passive Investment Management) Agencies — (See Government Sponsored Entities) Entities chartered by Congress, such as: Fannie Mae (FNMA) Freddie Mac (FHLMC), Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB). These entities carry an implicit guaranty of the federal government. Amortization — a mathematical calculation that pays off a balance evenly while at the same time adding interest for every period. Asked — The price at which securities are offered. Bid — The price offered for securities. Broker— A broker brings buyers and Sellers together for a commission paid by the initiator of the transaction or by both sides; he does not hold a position. In the money market, brokers are active in markets in which banks and institutional investors buy and sell bills, notes or bonds and in interdealer markets. Bullet (Non -callable Bond) — a bond issue in which all of its outstanding principal amount may not be redeemed before maturity by the issuer, therefore assuring interest earnings through to the end maturity date. Callable Bond — a bond issue in which all or part of its outstanding principal amount may be redeemed before maturity by the issuer Certificate of Deposit (CD) — a deposit of funds for a specified period of time that earns interest at a specific interest rate. Collateral — Securities, evidenced by a deposit or other property which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public moneys. Comprehensive Annual Financial Report (CAFR) — The independently -audited annual report for the City of Federal Way. It includes entity -wide financial statements as well as financial statements for major funds and fund types, notes to the financial statements and required schedules. Certificates of Deposit (CD) — A time deposit with specific maturity and interest rate evidenced by a certificate. p. 11 of 25 Resolution No. 23-837, Exhibit A Page 14 of 28 City ofFederal Way Investment Policy ComnvancialPaoar— Unsecured short-term corporate obligations with rnetuhUea less than 270 Coupon —(a) The annual rate ufinterest that abond's issuer promises to pay the bondholder ua a percentage of the bond's face value. Cryptocurrency — @ digital or virtual currency that is Secured by cryptography, typically decentralized networks booed on b|oohohain technology, o daoen[na|bs»d ledger enforced by a network ufcomputers. Currently prohibited because itcan lose principal, and iatherefore unsafe. It is not legal tender, essentially a risky, anonymous, volatile foreign currency. Custody — Aservice to customers rendered by banks for ofee whereby securities are held by an independent third party for p[Ot8CtiOD from fraud or theft. DesAar— A dealer, as opposed to a broher, acts as a principal in all traneaoUone, buying and selling for their own account. Delivery venSUO Payment (DyP)—Delivery Ofsecurities with 8simultaneous exchange Ofmoney for the aeouhUea used in conjunction with o third -party custodian to oaaunu integrity of the exchange and to prevent fraud Or DniSdineC[iOn. SirDi|2r to an eSCrOvv process in ne8| estate. (Delivery versus receipt is 8 delivery of securities with an eXCh8D0e of Signed receipt for the securities.) Discount — The difference between the COSt price of 8 security and its value at nn8tUhtv when quoted at lower than its face value. Asecurity selling below original offering price shortly after sale iaalso considered tobeotadiscount. This can be the normal mathematically equalizing uf the stated rate of an investment with prevailing market rates. Discount Securities — Non -interest bearing rnOn8y market instruments that are issued at @ discount and redeemed at maturity for full face value. Diversification — Dividing investment funds among G variety Ofsecurities offering independent returns and credit quality. Federal Credit Agencies — Agencies of the Federal government and guaranteed by the full faith and credit of the US GOV8[DDl8OL set Up to SUpD|y credit to V8hOUS C|8SSHS Of iOSUtUUOOS and individuals, e.g., Ginnie Mae, Sallie Mae, Tennessee Valley Authority. Fannie Mae — The trade name for the Federal National Mortgage Association ,8�S. GSE (government -sponsored entity). Farmer Mac —The trade name for the Federal Agricultural Mortgage Corporation (FAMC).@E)SE (govern ment-spOnGnn9denUty\. Federal Funds RGte—ThOtarget rate Ofinterest atwhich Fed funds are traded. This rate iS currently pegged by the Federal Open Market Committee. Federal Open Market Committee —CoDSists of seven members ofthe Federal Reserve Board and five 0fthe twelve Federal Reserve Bank Presidents. The President ofthe New York Federal Reserve Bonk is a permanent member while the other presidents Serve on o rotating p.12of25 City of Federal Way Investment Policy basis. The Committee periodically meets to set Federal Reserve funds target rate and guidelines regarding purchases and sales of Governments Securities in an open market as a means of the influencing the volume of bank credit and money supply in the economy. Federal Reserve System — The central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, DC. There are 12 Region Banks and about 5700 commercial banks that are members of the system. Federal Deposit Insurance Corporation (FDIC) — A Federal Agency that insures bank deposits, currently capped at $250,000 dollars per deposit. FEDRAC — Finance / Economic Development / Regional Advisory Committee, an advisory committee comprised of three city council members. Financial Industry Regulatory Authority, Inc. (FINRA) - a private corporation that acts as a self - regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange. Freddie Mac — The trade name for the Federal Home Loan Mortgage Corporation (FHLMC), a GSE (government -sponsored entity). Ginnie Mae — the trade name for the Government National Mortgage Association (GNMA), a GSE (government -sponsored entity). Government Sponsored Entities (GSEs) — ("Agencies") Entities chartered by Congress, such as: Fannie Mae (FNMA) Freddie Mac (FHLMC), Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB). These entities carry an implicit guaranty of the federal government. Interest Rate Risk — the risk associated with declines or rises in interest rate that cause an investment in a fixed -income security to increase or decrease in market value. Investment Committee — Comprised of the City Manager and Finance Director or their designees. The committee is authorized to make investments of city funds, as authorized by law, and, at any time, to liquidate investments, and to engage in all such transactions without prior consent of city council, but subject to investment policy reporting requirements. Leverage - Increasing the output compared to the input. In investments, a negative application would be multiplying the yield on investable funds by investing using borrowed funds in addition to cash on hand; the risk is that when a loss is experienced, the borrowed funds must be repaid in full, multiplying the loss to the investor. Liquidity — A liquid asset is one that can be converted easily and rapidly into cash Liquidity Risk — the risk that an entity (i.e. the city) may be unable to meet short term financial demands due to the inability to convert investments to cash without a loss of principal and/or interest income. Market Risk — the risk that the value of a security will rise or decline as a result of changes in market conditions, typically interest rates. p. 13 of 25 Resolution No. 23-837, Exhibit A Page 16 of 28 City of Federal Way Investment Policy Market Value — The price at which a security is trading and could presumably be purchased or sold. Maturity— the date upon which the principal of an investment is due and paid. New Issue — An investment available at the time of issuance, and therefore not subject to the secondary market that would involve competitive bidding or price uncertainty. Non -callable Bond (Bullet) — a bond issue in which all of its outstanding principal amount may not be redeemed before maturity by the issuer, therefore assuring interest earnings through to the end maturity date. Par Value — (face value) the amount of principal that must be paid at maturity. Passive Investment Management- investing methodically, managing primarily diversification and maturities, with the intention of holding to maturity rather than seeking to make gains through market price fluctuations. Principal - the original sum of money put into an investment at time of purchase. Reinvestment Risk - the risk that the proceeds from the payment of principal and interest would have to be reinvested at a lower rate than the original investment. This is a risk of all investments regardless of maturity date or call feature because of the uncertainty of future interest rates. Call features increase reinvestment risk because of the added uncertainty; issuers typically call their bonds in a declining interest rate environment. Safekeeping — A service to customers rendered by banks for a fee whereby securities and valuables of any types and descriptions are held in the bank's vaults for protection. Secondary Market — A market made for the purchase and sale of outstanding issues following the initial distribution. Securities and Exchange Commission — Agency created by Congress to protect investors in securities transactions by administering securities legislation. Treasury Bills — A non -interest bearing discount security issued by the U.S. Treasury to finance the National Debt. The above most bills are issued to mature in three months, six months, or one year. Treasury Bond — Long-term U.S. Treasury securities having initial maturities of more than 10 years. Treasury Notes — Intermediate term coupon bearing U.S. Treasury securities having initial maturities of from one to ten years. Yield — The rate of annual interest income return on investment, expressed as a percentage. p. 14 of 25 Resolution No. 23-837, Exhibit A Page 17 of 28 City of Federal Way Investment Policy Addendum - Text of Washington Statutes (RCW) Governing Investments of Public Funds by Local Governments (Intended only for easy reference for the reader - current statutes should be confirmed) RCW 11.100.020 Management of trust assets by fiduciary. 1) A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. 2) A trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust. 3) Among the circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries: a) General economic conditions; b) The possible effect of inflation or deflation; c) The expected tax consequences of investment decisions or strategies; d) The role that each investment or course of action plays within the overall portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property; e) The expected total return from income and the appreciation of capital; f) Other resources of the beneficiaries; g) Needs for liquidity, regularity of income, and preservation or appreciation of capital; and h) An asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries. 4) A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets. 5) A trustee may invest in any kind of property or type of investment consistent with the standards of this section. 6) A trustee who has special skills or expertise, or is named trustee in reliance upon the trustee's representation that the trustee has special skills or expertise, has a duty to use those special skills or expertise. RCW 35.39.030 Excess or inactive funds —Investment. Every city and town may invest any portion of the moneys in its inactive funds or in other funds in excess of current needs in: (1) United States bonds; (2) United States certificates of indebtedness; (3) Bonds or warrants of this state; (4) General obligation or utility revenue bonds or warrants of its own or of any other city or town in the state; (5) Its own bonds or warrants of a local improvement district which are within the protection of the local improvement guaranty fund law; and (6) In any other investments authorized by law for any other taxing districts. RCW 35.39.032 Approval of legislative authority —Delegation of authority —Reports. No investment shall be made without the approval of the legislative authority of the city or town expressed by ordinance: PROVIDED, That except as otherwise provided by law, the legislative authority may by ordinance authorize a city official or a committee composed p. 15 of 25 Resolution No. 23-837, Exhibit A Page 18 of 28 City of Federal Way Investment Policy of several city officials to determine the amount of money available in each fund for investment purposes and make the investments authorized as indicated in RCW 35.39.030 as now or hereafter amended and the provisions of RCW 35.39.034, without the consent of the legislative authority for each investment. The responsible official or committee shall make a monthly report of all investment transactions to the city legislative authority. The legislative authority of a city or town or city official or committee authorized to invest city or town funds may at any time convert any of its investment securities, or any part thereof, into cash. RCW 35.39.034 Investment by individual fund or commingling of funds —Investment in United States securities — Validation. Moneys thus determined available for this purpose may be invested on an individual fund basis or may, unless otherwise restricted by law be commingled within one common investment portfolio for investment. All income derived from such investment shall be apportioned and used for the benefit of the various participating funds or for the benefit of the general or current expense fund as the governing body of the city of [or] town shall determine by ordinance or resolution: PROVIDED, That funds derived from the sale of general obligation bonds or revenue bonds or similar instruments of indebtedness shall be invested, or used in such manner as the initiating ordinances, resolutions, or bond covenants may lawfully prescribe. Any excess or inactive funds on hand in the city treasury not otherwise invested, or required to be invested by this section, as now or hereafter amended, may be invested by the city treasurer in United States government bonds, notes, bills, certificates of indebtedness, or interim financing warrants of a local improvement district which is within the protection of the local improvement guaranty fund law for the benefit of the general or current expense fund. All previous or outstanding investments of city or town funds for the benefit of the city's or town's general or current expense fund which have been or could be made in accordance with the provisions of this section, as now or hereafter amended, are declared valid. RCW 39.58.020 Public funds —Protection against loss. All public funds deposited in public depositaries, including investment deposits and accrued interest thereon, shall be protected against loss, as provided in this chapter. RCW 39.58.030 Public deposit protection commission —State finance committee constitutes —Proceedings. The Washington public deposit protection commission shall be the state finance committee. The record of the proceedings of the public deposit protection commission shall be kept in the office of the commission and a duly certified copy thereof, or any part thereof, shall be admissible in evidence in any action or proceedings in any court of this state. RCW 39.58.050 Collateral for deposits —Segregation —Eligible securities. (1) Every public depositary shall complete a depositary pledge agreement with the commission and a trustee, and shall at all times maintain, segregated from its other assets, eligible collateral having a value at least equal to its maximum liability and as otherwise p. 16 of 25 Resolution No. 23-837, Exhibit A Page 19 of 28 City of Federal Way Investment Policy prescribed in this chapter. Eligible securities used as collateral shall be segregated by deposit with the depositary's trustee and shall be clearly designated as security for the benefit of public depositors under this chapter. (2) Securities eligible as collateral shall be valued at market value, and the total market value of securities pledged in accordance with this chapter shall not be reduced by withdrawal or substitution of securities except by prior authorization, in writing, by the commission. (3) The public depositary shall have the right to make substitutions of an equal or greater amount of eligible securities at any time. (4) The income from the securities which have been segregated as collateral shall belong to the public depositary without restriction. (5) Each of the following enumerated classes of securities, providing there has been no default in the payment of principal or interest thereon, shall be eligible to qualify as collateral: (a) Certificates, notes or bonds of the United States, or other obligations of the United States or its agencies, or of any corporation wholly owned by the government of the United States; (b) State, county, municipal, or school district bonds or warrants of taxing districts of the state of Washington or any other state of the United States, provided that such bonds and warrants shall be only those found to be within the limit of indebtedness prescribed by law for the taxing district issuing them and to be general obligations; (c) The obligations of any United States government -sponsored corporation whose obligations are or may become eligible as collateral for advances to member banks as determined by the board of governors of the federal reserve system; (d) Bonds, notes, or other securities or evidence of indebtedness constituting the direct and general obligation of a federal home loan bank or federal reserve bank; (e) Revenue bonds of this state or any authority, board, commission, committee, or similar agency thereof, and any municipality or taxing district of this state; (f) Direct and general obligation bonds and warrants of any city, town, county, school district, port district, or other political subdivision of any state, having the power to levy general taxes, which are payable from general ad valorem taxes; (g) Bonds issued by public utility districts as authorized under the provisions of Title 54 RCW, as now or hereafter amended; (h) Bonds of any city of the state of Washington for the payment of which the entire revenues of the city's water system, power and light system, or both, less maintenance and operating costs, are irrevocably pledged, even though such bonds are not general obligations of such city. (6) In addition to the securities enumerated in this section, the commission may also accept as collateral a letter of credit from a federal home loan bank or a federal reserve bank on behalf of a public depositary, naming the commission as beneficiary. Such letters are not subject to a completed depositary pledge agreement. As such, the commission must act as the safekeeping agent for letters of credit. (7) A public depositary may also segregate such bonds, securities, and other obligations as are designated to be authorized security for public deposits under the laws of this state. (8) The commission may determine by rule or resolution whether any security, whether or not enumerated in this section, is or shall remain eligible as collateral when in the commission's judgment it is desirable or necessary to do so. RCW 39.58.135 Limitations on deposits. p. 17 of 25 Resolution No. 23-837, Exhibit A Page 20 of 28 City of Federal Way Investment Policy Notwithstanding RCW 39.58.130, (1) aggregate deposits received by a public depositary from all treasurers and the state treasurer shall not exceed at any time one hundred fifty percent of the value of the depositary's net worth, nor (2) shall the aggregate deposits received by any public depositary exceed thirty percent of the total aggregate deposits of all public treasurers in all depositaries as determined by the commission. However, a public depositary may receive deposits in excess of the limits provided in this section if eligible collateral, as prescribed in RCW 39.58.050, are pledged in an amount equal to one hundred percent of the value of deposits received in excess of the limitations prescribed in this section. RCW 39.59.010 Definitions. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter. (1) "Bond" means any agreement which may or may not be represented by a physical instrument, including but not limited to bonds, notes, warrants, or certificates of indebtedness, that evidences an obligation under which the issuer agrees to pay a specified amount of money, with or without interest, at a designated time or times either to registered owners or bearers. (2) "Local government" means any county, city, town, special purpose district, political subdivision, municipal corporation, or quasi -municipal corporation, including any public corporation, authority, or other instrumentality created by such an entity. (3) "State" includes any state in the United States, other than the state of Washington. RCW 39.59.020 Authorized investments —Local government authority. (1) Local governments in the state of Washington are authorized to invest their funds and money in their custody or possession, eligible for investment, in investments authorized by this chapter. (2) Nothing in this section is intended to limit or otherwise restrict a local government from investing in additional authorized investments if that local government has specific authority to do so. RCW 39.59.040 Authorized investments —Bonds, warrants, certificates, and other investments. Any local government in the state of Washington may invest in: (1) Bonds of the state of Washington and any local government in the state of Washington; (2) General obligation bonds of a state and general obligation bonds of a local government of a state, which bonds have at the time of investment one of the three highest credit ratings of a nationally recognized rating agency; (3) Subject to compliance with RCW 39.56.030, registered warrants of a local government in the same county as the government making the investment; (4) Certificates, notes, or bonds of the United States, or other obligations of the United States or its agencies, or of any corporation wholly owned by the government of the United States; or United States dollar denominated bonds, notes, or other obligations that are issued or guaranteed by supranational institutions, provided that, at the time of investment, the institution has the United States government as its largest shareholder; p. 18 of 25 Resolution No. 23-83 9, Exhibit A Page 21 of 28 City of Federal Way Investment Policy (5) Federal home loan bank notes and bonds, federal land bank bonds and federal national mortgage association notes, debentures and guaranteed certificates of participation, or the obligations of any other government sponsored corporation whose obligations are or may become eligible as collateral for advances to member banks as determined by the board of governors of the federal reserve system; (6) Bankers' acceptances purchased on the secondary market; (7) Commercial paper purchased in the secondary market, provided that any local government of the state of Washington that invests in such commercial paper must adhere to the investment policies and procedures adopted by the state investment board; and (8) Corporate notes purchased on the secondary market, provided that any local government of the state of Washington that invests in such notes must adhere to the investment policies and procedures adopted by the state investment board. RCW 43.250.040 Authority of official to place funds in the public funds investment account --Investment of funds by state treasurer --Degree of judgment and care required. If authorized by statute, local ordinance, resolution, or other appropriate official action, the state treasurer, a government finance official or financial officer or his or her designee, or authorized tribal official, may place funds into the public funds investment account for investment and reinvestment by the state treasurer in those securities and investments set forth in RCW 43.84.080 and chapter 39.58 RCW. The state treasurer shall invest the funds in such manner as to effectively maximize the yield to the investment pool. In investing and reinvesting moneys in the public funds investment account and in acquiring, retaining, managing, and disposing of investments of the investment pool, there shall be exercised the judgment and care under the circumstances then prevailing which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of the funds considering the probable income as well as the probable safety of the capital. p. 19 of 25 Resolution No. 23-837, Exhibit A Page 22 of 28 City of Federal Way Investment Policy Addendum — Text of Federal Way Revised Code Federal Way Revised Code contains no language pertaining to investments. This page is to confirm there are no city -level restrictions beyond state statutes. p. 20 of 25 Resolution No. 23-837, Exhibit A Page 23 of 28 City ofFederal Way Investment Policy Addendum —Broker/Dealer Questionnaire The Washington city of Federal \8kav incorporated in 1990. provides m range of rnunioioo| sgRvicgS, including general gOV8DlO08Dt. pO|iC8. StReetS. community development, p|8ODiDg and zoning, code enforcement, parks and recreation, and municipal services. Roughly 340 employees serve about 96,000 residents covering about 23 square miles with an annual operating budget of around $85million. The Cih/Smanageable cash ranges from $80tU$9Omillion Ofwhich about $40 is invested principally in TFg@SUh8S and G8E DlGdiuDl term notes with n8Dl@iDiOg liquidity maintained in the Washington State Treasurer's Local Governmental Investment Pool LGIP. The City has adopted ovvriUan Investment Policy that regulates the standards and procedures used in its C8Sh management activities. The most current policy is publicly available and ShOU|d be reviewed prior to completing this form. Firm Name: Year Founded: Corporate office address: Telephone #s: Principal, Managing Director urPartner: Name Title Direct phone E-mail address |Syour firm 8broker (does not own securities being offered |ayour firm adealer (does own securities being offered\?_ Local office address: Please attach 8bk}0rreGunr60fthe primary and secondary representatives covering this account, incertificates, complaints, disciplinary action, arbitration, litigation: Primary Representative: Name NUH Direct phone E-mail address Secondary Representative: Name Title Direct phone E-mail address p.21of25 City of Federal Way Investment Policy Provide proof of registration with State of Washington ❑ attached ❑ NA Provide proof of Financial Industry Regulatory Authority (FINRA) ❑ attached ❑ NA Provide documentation that your firm is qualified under SEC rule 15C3-1 (Uniform Net Capital Rule) ❑ attached ❑ NA Provide most recent audited financials ❑ attached ❑ NA Is your firm is examined by and subject to rules and regulations of: FDIC ❑ Yes ❑ No SEC ❑ Yes ❑ No NYSE ❑ Yes ❑ No Comptroller of Currency ❑ Yes ❑ No Federal Reserve System ❑ Yes ❑ No List three current, active, comparable, municipal client references: Entity Name Contact Address Phone / E-mail Entity Name Contact Address Phone / E-mail Entity Name Contact Address Phone / E-mail What market sectors are you and your firm currently involved? (Please feel free to provide additional information regarding specialization in any of the following market sectors). Firm Involvement US Treasuries US Agency Bonds Washington State Bonds Municipal Bonds Corporate Bonds CDARS Commercial Paper Other Broker Involvement Please provide your normal custody and delivery process, including specific banking relationships. What was your firm's total volume in US Government and agency securities trading last year? p. 22 of 25 Resolution No. 23-837, Exhibit A Page 25 of 28 City of Federal Way Investment Policy Has this firm, or the representatives assigned to this account, been subject to a regulatory agency, state or federal investigation for alleged improper, disreputable, unfair or fraudulent activities related to the sale of securities or money market instruments that resulted in a suspension or censure? ❑ Yes (attached) ❑ No Is there outstanding litigation which would materially affect your financial stability? ❑ Yes (attached) ❑ No Do you provide any fixed income research and economic commentary? ❑ Yes (attached) ❑ No Describe the precautions taken by your firm to protect the interests of the public when dealing with a local public entity. ❑ Attached ❑ NA Has any client sustained a loss on a securities transaction engendered from a misunderstanding or misrepresentation of the risk characteristic of a financial instrument by your firm? ❑ Yes (attached) ❑ No Please confirm that you are: (1) familiar with the Revised Code of Washington (RCW) Sections 39.59.010 et al. (2) have read, understand and agree to comply with the provisions of City of Federal Way's current investment policy by signing below. Name: Title: Name: Title: Name: Title: Signature: Date: Signature: Date: Signature: Date: p. 23 of 25 Resolution No. 23-83 9, Exhibit A Page 26 of 28 City of Federal Way Investment Policy Approved Broker/Dealer List The following brokers have completed BDQs and investment policy acknowledgements on file with the City: Mischler Financial Group, Seattle, WA Jason Klinghoffer, Corona Del Mar Office Vining Sparks, Memphis, TN Karl Meng, Seattle Office Wedbush Securities, Los Angeles, CA Don Collins, Irvine Office p. 24 of 25 Resolution No. 23-837, Exhibit A Page 27 of 28 City of Federal Way Investment Policy Addendum — Acknowledgement of Receipt/Adherence to Current Policy City of Federal Way requires an annual certification from authorized Financial Dealers and Institutions of having read the current investment policy. It is the intent of the City of Federal Way to pro -actively contact current existing financial institutions annually, or at any change in the city's investment policy, and to maintain the current investment policy on the city's public website. This is to acknowledge receipt of the City of Federal Way's current Investment Policy adopted by City Council on 04/05/2022. Entity name: 7171"M Signature: Please sign and submit via mail or email to: City of Federal Way 33325 8t" Ave South, Finance Department Federal Way, WA 98003 Title: Date: Current staff contact information is available on the City Website: https://www.cityoffederalway.com/content/Finance p. 25 of 25 Resolution No. 23-837, Exhibit A Page 28 of 28