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2008-33RESOLUTION NO. 2008- 33 • A RESOLUTION AMENDING THE VILLAGE OF BUFFALO GROVE IINVESTMENT POLICY WHEREAS, this resolution amends the language in the current policy, dated November 25, 1998, to reflect recommended practices set forth by the Government Accounting Standards Board (GASB), and; WHEREAS, a responsibility exists to maintain stewardship over the financial resources that are used to deliver government services, and; WHEREAS, the Village needs to ensure addition levels of collateralization and establish performance benchmarks. NOW, THEREFORE, BE IT RESOLVED BY THE PRESIDENT AND BOARD OF TRUSTEES OF THE VILLAGE OF BUFFALO GROVE, COOK AND LAKE COUNTIES, ILLINOIS as follows: 1. The Village of Buffalo Grove does hereby amend the Deposit and Investment Policy, dated October 6, 2008, and attached hereto as Exhibit "A" to reflect guidance provided by GASB to ensure all Village deposits are protected given the current economic environment. 2. Performance benchmark data will be included in monthly management reports as proscribed by new policy language. 3. This Resolution repeals Resolution 1998 -46. AYES: 4 — Braiman, Berman, Trilling, Rubin NAYES: 0 — None ABSENT: 2 — Glover, Kahn PASSED: October 6, 2008 APPROVED: October 6, 2008 ATTEST: APPROVED: oe Village erk Village President EXHIBIT (A) VILLAGE OF BUFFALO GROVE INVESTMENT POLICY I. Policy: The Villa of Buffalo Grove, as a public agency, has an inherent fiduciary responsibility to properly account or and manage public funds. Public funds are to be considered current operating funds, special funds, debt service and other funds of any kind or character belonging to or in the custody of any public agency (Chapter 30, paragraph 235 /1 through 235/7, Public Funds Investment Act, Illinois Complied Statutes II. Scope: This investment policy applies to all financial assets of the Village of Buffalo Grove except for the Police and Firefighter s Pension Funds which are subject to those individual fund boards. 1. Pooling of Funds Except for cash in certain restricted and special funds, the Village of Buffalo Grove will consolidate and reserve balances from all -funds to maximize investment earnin s and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. III. General Objectives: The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield: 1. Safety Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk (a). Credit Risk The Village of Buffalo Grove will minimize credit risk, which is the risk of loss due to the failure of the security issuer or backer, by: • Limiting investment to the types of securities listed in Section VII of this Investment Policy • Pre qualifying the financial institutions, broker /dealers, intermediaries, and adviser with which the Village of Buffalo Grove will do business in accordance with Section V • Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized. (b). Interest Rate Risk The Village of Buffalo Grove will minimize interest rate risk, which is the risk that the marker values of securities in the portfolio will fall due to changes in market interest rates, by: • Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity • Investor* operating funds primarily in shorter -term securities, money market mutual Ends, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy (see section VIII). 2. Liquidity The investment portfolio shall remain sufficiend li quid to meet all operating equirements that may be reasonably anticipated. This is accomplishedby structurin the portfolio so that securities mature concurrent with cash needs to meet anticipated demands �staticZiquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets )dynanuc liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same day liquidity for short -term funds. 3. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be held until maturity with the followin exceptions: • A security with declining credit may be sod early to minimize loss of principal. • A security swap would improve the quality, yield, or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold. IV. Standards of Care: 1. Prudence The standard of prudence to be used by investment officials standard and shall be applied in the context of managing the officers acting in accordance with written procedures and thi due diligence shall be relieved of personal responsibility for market price changes, provided deviations from expectations the liquidity and the sale of securities are carried out in accor 2. Ethics and Conflicts of Interest shall be the "prudent person" overall portfolio. Investment s investment policy and exercising an individual security's credit risk or are reported in a timely fashion and dance with the terms of this policy. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial /investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the Village of Buffalo Grove. 3. Delegation ofAuthority Authority to mange the Village of Buffalo Grove's investment program is derived from the following: The establishment of investment policies is the responsibility of the Village Board. Management and administrative responsibility for the investment program is hereby delegated to the Finance Director who, under the direction of the Village Manager, shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include references to: safekeeping, delivery vs. payment, investment accountin , repurchase agreements wire transfer agreements, collateral /depository agreements an� banking service contracts. Such procedures shall. include xplicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance Director. The Finance Director shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. The Finance Director may from time to time amend the written procedures in a manner not inconsistent with this policy or state statutes. The responsibility for investment activities of the Police and Firefighter Pension Funds rest with the trustees of the respective fund boards. V. Authorized Financial Institutions, Depositories and Broker /Dealers: The Finance Director will maintain a list of financial institutions authorized to provide investment services. In addition, a list will be maintained of approved security broker /dealers selected by credit worthiness. These may include "primary" dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3 -1 (uniform net capital rule). No public deposit shall be made except on qualified public depository as established by state statutes. All financial institutions and broker /dealers who desire to become qualified become qualified bidders for investment transactions must supply the Finance Director with the following: • Audited financial statements demonstrating compliance with state and federal capacity adequacy �udefines • Proof of National Association of Security Dealers (NASD) certification (not applicable to Certificate of Deposit counterparties) • Proof of state registration • Completed broker /dealer questionnaire • Certification of having read the Village's Investment Policy V1. Safekeeping and Custody: All trades of marketable securities will be executed by delivery vs. payment (DVP) to ensure that securities are deposited in an eligible financial institution prior to the release of funds. Securities will be held by an independent third -party custodian selected by the Village as evidenced by safekeeping receipts in the Village's name. The safekeeping institution shall annually provide a copy of their most recent report on internal controls (Statement of Auditing Standard No. 70, or SAS 70). 1. Internal Controls The Finance Director is responsible for establishin and maintaining an internal control structure designed to ensure that the assets of the Village of Ofalo Grove are protected from loss, theft or misuse. Details of the internal controls system shall be documented in an investment procedures manual and shall be reviewed and updated annually. The internal control structure shall be designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived and (2) the valuation of costs and benefits requires estimates and judgments by management. The internal controls structure shall address the following points: • Control of collusion • Separation of transaction authority from accounting and recordkeeping • Custodial safekeeping • Avoidance of physical delivery securities • Clear delegation of authority to subordinate staff members • Written confirmation of transactions for investments and wire transfers • Dual authorizations of wire transfers • Development of a wire transfer agreement with the lead bank and third -party custodian Accordingly, the Finance Director shall establish a process for annual independent review by an • external auditor to assure compliance with policies and procedures. VII. Suitable and Authorized Investments: The Village may invest in any type of the security allowed for in Illinois Compile Statutes (30 ILCS 235/2) regarding the investment of public funds. Approved investments include: • Bonds, notes, certificates of indebtedness, treasury bill, or any other securities now or hereafter issued, which are guaranteed by the full faith and credit of the United States of American as to principal and interest; • Bonds, notes, debentures or other similar obligations of the United States of America or its agencies; • Interest - bearing savings accounts, interest- bearing certificates of deposit or interest- bearing time deposits or any other investments constituting direct obligations of any bank as defined by the Illinois Banking Act; and is insured by the Federal Deposit Insurance Corporation; • Short -term obli ations of corporations organized in the United States with assets exceeding $500,000,000 if (i) such obli gations are rated at the time of purchase at one of the three highest classifications established by at least two standard rating services and which mature not later than 180 days for the date of purchase, (ii) such purchases do not exceed 10% of the corporation's outstanding obligations and (iii) no more than 25% of the Village's funds may be investing in short -term obligations of corporations; • Illinois Public 'I Treasurer's Investment Pool (Illinois Funds); • Consistent with the GFOA Recommended practice on Use of Derivatives by State and Local Governments (attachment #1), extreme caution should be exercise in the use of derivative instruments. 1. Collaterali�Zation: It is the policy of the Village of Buffalo Grove and in accordance with the GFOA's Recommended Practices on the Collateralization of Public Deposits (attachment #2), the Village requires that funds on deposit in excess of FDIC limits be secured with some form of collateral. The Village will accept any of the following assists as collateral: • Government Securities • Obligations of Federal Agencies • Obligations of Federal Instrumentalities • Obligations of the State of Illinois (The Village reserves the right to accept /reject any form of the above named securities.) The amount of collateral provided will not be less than 110% of the fair market value of the net amount of public funds secured. The ratio of fair market value of collateral to the amount of funds secured will be reviewed monthly, and additional collateral will be required when the ratio declines below the level required and collateral will be released if the fair market value exceeds the required level. Pledged collateral will be held in safekeeping by an independent third party depository designated by the Village of Buffalo Grove and evidenced by a safekeeping agreement. Collateral agreements will preclude the release of the pledged assets without an authorized signature from the Village of Buffalo Grove. The Village realizes that there is a cost factor involved with collateralization and the Village will pay any reasonable and customary fees related to collateralization. VIII. Investment Parameters: 1. Diversification In order to reduce the risk of default, the investment portfolio of the Village of Buffalo Grove shall be diversified by: Limiting investments to avoid over - concentration in securities from a specific issuer or business sector (U.S. Treasury and Agency securities), - No financial institution shall hold more than 40% of the Village's investment portfolio - Monies deposited at a financial institution shall not exceed 75% of the capital stock and surplus of that institution. - Commercial paper shall not exceed 10% of the Village's investment portfolio. - Brokered certificates of deposit shall not exceed 25°` of the Village's investment portfolio. Investing in securities with varying maturities, and Continuously investing a portion of the portfolio in readily available funds such as local government investment pools (LGIPs), money market funds or overnight repurchase agreements to ensure that appropriate liquidity is maintained in order to meet ongoing obligations. 2. Maximum Maturities To the extent possible, the Village of Buffalo Grove will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the Village will not directly invest in securities maturing more than three years from the date of purchase. Reserve funds and other funds with longer. term investment horizons may be invested in securities exceeding three year if the maturities of such investments are made to coincide as nearly as practicable with the expected use of funds. Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the pportfolio should be continuously invested in readily available funds such as LGIPs, money market funds, or overnight repurchase agreements to ensure that appropriate liquidity is maintained to meet ongoing obligations. IX. Reporting: The Finance Director shall prepare as investment report at least monthly, including a management summary that provides an analysis of the status of the current investment portfolio and the individual transactions executed over the month. This management summary will be prepared in a manner which will allow the Village to ascertain whether investment activities during the reporting period have conformed to the investment policy. This report should be provided to the Village Manager and Village Board. The report win include the following: • Listing of individual securities held • Average weighted yield to maturity • Listing of investments by maturity • Percentage of total portfolio whic 1. Per Standards hby fund, at the end of the reporting period. of portfolio. date. each type of investment represents. The investment ortfolio will be managed in accordance with the parameters specified within this policy. The portfolio should obtain a market average rate of return during a market /economic environment of stable interest rates. Portfolio performance should be compared to appropriate benchmarks on a regular basis. The benchmarks shall be reflective of the actual securities being purchased and risks undertaken, and the benchmark shall have similar weighted average as the portfolio. 2. Market Yield The Village's investment strategy is passive. Given this strategy, the basis used by the Finance Director to determine whether market yield are being achieved shall be the six -month U.S. Treasury Bill. 0 3. Marking to Market • The market value of the portfolio shall be calculated at least quarterly and a statement of the market value of the portfolio shall be issued at least quarterly. This will ensure that review of the investment portfolio, in terms of value and price volatility, has been performed consistent with the GFOA recommended Practices on "Mark -to- Market Practices for State and Local Government Investment Portfolios and Investment Pools" (attachment #3). In defining market value, considerations should be given to the GASB Statement 31 pronouncement. X. Investment Policy Adoption: The Village of Buffalo Grove's investment policy shall be adopted by resolution of the Village Board of Trustees. This policy shall be reviewed on an annual-basis by the Finance Director and any modifications thereto must be approved by the Village Board of Trustees. Dated November 25, 1998 Amended October 6, 2008 • 0 Attachment #1 GFOA Recommended Practice Use of Derivatives by State and Local Governments for Cash Operating and Reserve Portfolios (1994 and 2002) Background. Derivative products are financial instruments created from or whose value depends on (is derived from) the value of one or more underlying assets or indexes of asset values. Derivatives include instruments or features such as collateralized mortgage obligations (CMOs), interest -only (IOs) and principal -only (POs) securities, forwards, futures, currency and interest rate swaps, options, floaters /inverse floaters, and caps /floors /collars. It still remains the responsibility of each government to determine what constitutes a derivative product and what is allowable by policy and statute. Recommendation. The Government Finance Officers Association (GFOA) urges state and local government finance officers to exercise extreme caution in the use of derivatives and to consider their use only when they have developed a sufficient understanding of the products and the expertise to manage them. Because new derivative products are increasingly complex, state and local governments should use these instruments only if they can evaluate the following factors, among others, to determine their appropriateness: 1. Governmental entities must observe the objectives of sound asset and liability management policies that ensure safety, liquidity, and yield within legally allowable investments. Because of the risks involved, the use of derivatives by governmental entities should receive particular scrutiny. Certain derivative products may not be appropriate for all governmental investors. Characteristics of such products can include high price volatility, illiquid markets, products that are not market - tested, highly leveraged products, products requiring a high degree of sophistication to manage, and products that are difficult to value. 2. Governmental entities should understand that state and local laws may not specifically address the use of derivatives and examine such considerations as • the constitutional and statutory authority of the governmental entity to execute derivative contracts, the potential for violating constitutional or statutory provisions limiting the entity's authority to incur debt resulting from the transaction, and the application of the governmental entity's procurement statutes to derivative transactions. 3. Governmental entities should be aware of all the risks associated with use of derivatives, including counterparty credit, custodial, market, settlement, and operating risk. 4. Governmental entities should establish internal controls for each type of derivative in use to ensure that these risks are adequately managed. For example, • the entity should provide a written statement of purpose and objectives for derivative use; • written procedures should be established that provide for periodic monitoring of derivative instruments; • managers should receive periodic training and have sufficient expertise and technical resources to oversee derivative programs; • recordkeeping systems should be sufficiently detailed to allow governing bodies, auditors, and examiners to determine if the program is functioning in accordance with established objectives; managers should report regularly on the use of derivatives to their governing body and appropriate disclosure should be made in official statements and other disclosure documents; and • reporting on derivative use should be in accordance with generally accepted accounting principles, and because use of these instruments is a complex matter, early discussion with public accountants is essential to determine if specialized reporting may be required. 5. Governmental entities should be aware if their broker /dealer is merely acting as an agent or intermediary in a derivatives transaction or is taking a proprietary position. Possible conflicts of interest should be taken into consideration before entering into a transaction. 6. Governmental entities should be aware that there may be little or no pricing information or standardization for some derivatives. Competitive price comparisons are recommended before entering into a transaction. 7. Governmental entities should exercise caution in the selection of broker /dealers or investment managers and ensure that these agents are knowledgeable about, understand and provide disclosure regarding the use of derivatives, including benefits and risks. The entity should secure written acknowledgment from broker /dealers that they have received, read, and understood the entity's debt and investment policies, including whether derivatives are currently authorized under the entity's investment policy and that the broker /dealer or investment manager has ascertained that the recommended product is suitable for the governmental entity. Governmental entities are responsible for ensuring this same level of safeguards when derivative transactions are conducted by a third party acting on behalf of the govern- mental entities. 9. Government Entities should analyze the materiality of a transaction closely to determine if it might affect a bond or other credit — related rating of such entity. Rating agencies should be notified at the appropriate time, before a transaction is completed. References • A Public Investor's Guide to Money Market Instruments, Second Edition, edited by M. Corinne Larson, GFOA, 1994. • An Elected Official's Guide to Investing, M. Corinne Larson, GFOA, 1995. Approved by the Committee on Cash Management, June 15, 2002 Approved by the Executive Committee, October 25, 2002. Attachment #2 Collateralization of Public Deposits (1984, 1987, 1993, and 2000) Background. The safety of public funds should be the foremost objective in public fund management. Collateral ization of public deposits through the pledging of appropriate securities or surety bonds by depositories is an important safeguard for such deposits. State programs pertaining to the collateralization of public deposits have generally proven to be beneficial for both the public sector and its depositories. However, federal law imposes certain limitations on collateral agreements between financial institutions and public entities in order to secure public entity deposits. Under certain circumstances, the Federal Deposit Insurance Corporation (FDIC) may be able to avoid a perfected security interest and leave the public depositor with only the right to share with other creditors in the pro rata distribution of the assets of a failed institution. Recommendation. The Government Finance Officers Association (GFOA) favors the use of pledging requirements as protection for state or local government's deposits. GFOA further favors and encourages state and local governments to establish adequate and efficient administrative systems to maintain such pledged collateral, including state or locally administered collateral pledging or collateral pools. To accomplish these goals, GFOA recommends the following: 1. Public entities should implement programs of prudent risk control. Such programs could include a formal depository risk policy, credit analysis, and use of fully secured investments. In the absence of an effective statewide collateralization program, local officials should establish and implement collateralization procedures. 2. State and local government depositors should take all possible actions to comply with federal requirements in order to ensure that their security interests in collateral pledged to secure deposits are enforceable against the receiver of a failed financial institution. Federal law provides that a depositor's security agreement, which tends to diminish or defeat the interest of the FDIC in an asset acquired by it as receiver of an insured depository, shall not be valid against the FDIC unless the agreement. • is in writing; • was approved by the board of directors of the depository or its loan committee; and • has been, continuously, from the time of its execution, an official record of the depository institution. 3. Public entities should have all pledged collateral held at an independent third -party institution, and evidenced by a written agreement in an effort to satisfy The Uniform Commercial Code (UCC) requirement for control. The UCC states that the depositor does not have a perfected interest in a security unless the depositor controls it. Control 0 E means that swaps, sales, and transfers cannot occur without the depositor's written approval. • The value of the pledged collateral should be marked to market monthly, or more frequently depending on the volatility of the collateral pledged. If state statute does not dictate a minimum margin level for collateral based on deposit levels (e.g., Georgia statute requires 110 percent), the margin levels should be at least 102 percent, depending on the volatility of the collateral pledged. • Substitutions of collateral should meet the requirements of the collateral agreement, be approved in writing prior to release, and the collateral should not be released until the replacement collateral has been received. 4. The pledge of collateral should comply with the investment policy or state statute, whichever is more restrictive. The use of surety bonds and other appropriate types of insurance in lieu of collateral could be reviewed as an alternative to collateralization. If a public entity agrees to the us of surety bonds and other types of insurance in lieu of collateral, only insurers of the higher credit quality as determined by a nationally recognized insurance rating agency should be used. Note: As a result of the court case North Arkansas Medical Center v. Barrett, 963 F.2d 780 (8th Cir. 1992), the FDIC issued a policy statement in March 1993 indicating that it would not seek to void a security interest of a federal, state, or local government entity solely because the security agreement did not comply with the contemporaneous execution requirement set forth in Section 13(e) of the Federal Deposit Insurance Act 12 U.S.C. 1823(e). The policy statement was officially enacted by Section 317 of the Riegle Community Development and Regulatory Improvement Act of 1994 (Public Law 103- 325). Because of this change, the bullet item "was executed by the depository institution and any person claiming an adverse interest, contemporaneously with the acquisition of the asset by. the depository institution" that appeared in previous versions of this recommended practice has been removed from this version. References • GFOA Sample Security Agreement, 1995. • GFOA Sample Custodial Trust Agreement, 1995. • An Introduction to Collateralizing Public Deposits for State and Local Governments, M. Corinne Larson, GFOA, 1996. • Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson and W. Paul Zorn, GFOA, 1998. 0 • Attachment #3 GFOA Recommended Practice Mark -to- Market Practices for State and Local Government Investment Portfolios and Investment Pools (1995, 2000, and 2003) Background. As the investment portfolios of state and local governments are subjected to increased scrutiny, it is essential that reporting standards be enhanced so that investors, governing bodies, and the public remain informed of the current market value of the portfolio. Regular disclosure of the value of a governmental entity's investments is an important step to furthering taxpayer and market confidence in state and local government investment practices. The Governmental Accounting Standards Board (GASB) has also recognized in GASB Statement 31 the need to report investments at fair value at fiscal year end. Government officials should be aware of state, local, accounting, and rating agency requirements regarding mark to market practices. Recommendation. The Government Finance Officers Association (GFOA) recommends that state and local government officials responsible for investment portfolio reporting determine the market value of all securities in the portfolio on at least a quarterly basis. These values should be obtained from a reputable and independent source and disclosed to the governing body or other oversight body at least quarterly in a written report. It is recommended that the report include the market value, book value, and unrealized gain or loss of the securities in the portfolio. Many state and local government officials are allowed to invest in various state and local government investment pools available in their state or region. GFOA recommends that pool administrators, on a daily basis, determine the market value of all securities in the pool and report this information to all pool participants on at least a monthly basis. These values should be obtained from a reputable and independent source. This information should be included in the report to the governing body prepared on at least a quarterly basis. References • An Elected Official's Guide to Investing, M. Corinne Larson, GFOA, 1996. • GASB Statement 31 and Implementation Guide. • Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson and W. Paul Zorn, GFOA, 1998. Recommended for Approval by the Committee on Cash Management, January 23, 2003. Approved by the GFOA's Executive Committee, February 28, 2003.