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Item N1N.1 G BOARD OF COUNTY COMMISSIONERS County of Monroe Mayor Sylvia Murphy, District 5 The Florida Keys l'U � Mayor Pro Tern Danny Kolhage, District 1 �pw° Michelle Coldiron, District 2 Heather Carruthers, District 3 David Rice, District 5 County Commission Meeting January 23, 2019 Agenda Item Number: N.1 Agenda Item Summary #5113 BULK ITEM: No DEPARTMENT: County Clerk of Court TIME APPROXIMATE: STAFF CONTACT: Aneta Jodkowska (305) 292-3411 11:00 A.M. AGENDA ITEM WORDING: Approval of a resolution to adopt the Monroe County Investment Policy. ITEM BACKGROUND: Chapter 218, Part IV, Florida Statutes requires a local governmental unit to file with the State Board of Administration either a resolution to deposit surplus funds in the Local Government Surplus Funds State Trust Fund or a formally adopted policy for alternative investment activity. We are requesting approval to adopt a resolution to update Monroe County's investment policy. PREVIOUS RELEVANT BOCC ACTION: Monroe County has managed its investments under the alternative investment guidelines of Section 218.415(15), Florida Statutes as approved in Resolution 114-2003. CONTRACT/AGREEMENT CHANGES: N/A STAFF RECOMMENDATION: Approval as submitted DOCUMENTATION: AIS - Resolution to Adopt Monroe County Investment Policy FINANCIAL IMPACT: Effective Date: Expiration Date: Total Dollar Value of Contract: Total Cost to County: Packet Pg. 1092 N.1 Current Year Portion: Budgeted: Source of Funds: CPI: Indirect Costs: Estimated Ongoing Costs Not Included in above dollar amounts: Revenue Producing: Grant: County Match: Insurance Required: Additional Details: h]XLTA1of11-."V If yes, amount: Kevin Madok Skipped Cynthia Hall Completed Kathy Peters Completed Board of County Commissioners Pending O1/08/2019 10:11 AM O1/08/2019 10:17 AM O1/08/2019 12:11 PM O1/23/2019 9:00 AM Packet Pg. 1093 N.1.a RESOLUTION NO. - 2019 A RESOLUTION OF THE BOARD OF COUNTY COMMISSIONERS OF MONROE COUNTY, FLORIDA ADOPTING THE MONROE COUNTY INVESTMENT POLICY. WHEREAS, Chapter 218, Part IV, Florida Statutes, requires a unit of local government to file with the State Board of Administration either a resolution to deposit surplus funds in the Local Government Surplus Funds State Trust Fund or a formally adopted policy for alternative investment activity; and WHEREAS, Monroe County has heretofore operated under the alternative investment guidelines of Section 218.415(15), Florida Statutes; and WHEREAS, it is desired to establish a written investment plan in accordance with investment policies developed pursuant to subsections (1) through (14) of Section 218.415; NOW THEREFORE, BE IT RESOLVED BY THE BOARD OF COUNTY COMMISSIONERS OF MONROE COUNTY, FLORIDA that: Section 1. The Monroe County Investment Policy attached hereto as Exhibit A and incorporated herein by reference is adopted as the County's investment policy. PASSED AND ADOPTED by the Board of County Commissioners of Monroe County, Florida, at a regular meeting of said Board held on the 23rd day of January 2019. Mayor Sylvia Murphy Mayor Pro Tem Danny Kolhage Commissioner Heather Carruthers Commissioner David Rice Commissioner Michelle Coldiron (SEAL) ATTEST: BOARD OF COUNTY COMMISSIONERS KEVIN MADOK, Clerk OF MONROE COUNTY, FLORIDA La Deputy Clerk LE Page 1 of 1 Mayor Packet Pg. 1094 N.1.a Monroe County, Florida Board of County Commissioners Investment Policy Prepared By: Kevin Madok, CPA Monroe County Clerk of Circuit Court & Comptroller Approved: Month 2019 Packet Pg. 1095 N.1.a TABLE OF CONTENTS I. PURPOSE IL SCOPE III. DEFINITIONS IV. INVESTMENT OBJECTIVES V. MANAGEMENT OF INVESTMENTS VI. STANDARDS OF PRUDENCE VII. ETHICS AND CONFLICTS OF INTEREST VIII. INTERNAL CONTROLS AND INVESTMENT PROCEDURES IX. CONTINUING EDUCATION X. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS XI. MATURITY AND LIQUIDITY REQUIREMENTS XIL RISK AND DIVERSIFICATION XIIL MASTER REPURCHASE AGREEMENT XIV. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS XV. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION XVI. PROHIBITED INVESTMENTS XVII. PERFORMANCE MEASUREMENTS XVIII. REPORTING XIX. THIRD -PARTY CUSTODIAL AGREEMENTS XX. INVESTMENT POLICY ADOPTION ATTACHMENT A: Glossary of Cash and Investment Management Terms ATTACHMENT B: Investment Pool/Fund Questionnaire Page 3 3 3 4 5 5 6 6 7 7 7 8 8 8 9 13 13 14 14 15 Monroe County Board of County Commissioners Investment Policy Page 2 Packet Pg. 1096 N.1.a Investment Policy Monroe County, Florida Board of County Commissioners PURPOSE Section 218.415, Florida Statutes, authorizes a unit of local government to invest its funds pursuant to a written investment plan adopted by the governing body, and pursuant to Article VIII, s. 1 of the Florida Constitution, the "clerk of the circuit court and comptroller shall be ex officio clerk of the board of county commissioners, auditor, recorder and custodian of all county funds." It furthers the public interest of the County to invest any monies not immediately required to be disbursed and to maximize the net earnings on such funds and it is the intent and desire of the Board to authorize investments that shall provide a high rate of return without compromising the safety of such funds. Therefore, the purpose of this Investment Policy ("Policy") is to set forth the investment objectives and parameters for the management of public funds of the Monroe County Board of County Commissioners (the "Board"). This Policy is designed to safeguard funds on behalf of the County, to assure the availability of operating and capital funds when needed, and provide an investment return competitive with comparable funds and financial market indices. II. SCOPE In accordance with Section 218.415, Florida Statutes, this Policy applies to all cash and investments held or controlled by the Clerk on behalf of the County. This Policy does not apply to pension funds or funds related to the issuance of debt where there are other existing policies or indentures in effect for such funds. Additionally, any future revenues, which have statutory investment requirements conflicting with this Policy and funds held or controlled by Federal or State agencies (e.g., Department of Revenue), are not subject to the provisions of this Policy. The Clerk will consolidate cash balances from appropriate funds into a pool to maximize investment earnings. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles. III. DEFINITIONS For purposes of this Policy, the following terms shall have the following meanings: "Board" means the Board of County Commissioners of Monroe County, Florida. "Clerk" or "Clerk of the Circuit Court and Comptroller" means the Clerk of the Circuit Court and Comptroller, and Ex Officio Clerk to the Board of County Commissioners of Monroe County or any duly authorized designee who has been so designated in writing by the Clerk of the Circuit Court and Comptroller. Monroe County Board of County Commissioners Investment Policy Page 3 Packet Pg. 1097 N.1.a IV "Core portfolio" means long term investments that are held primarily as reserves. "County" means Monroe County, a political subdivision of the State of Florida. "Investment Advisor" means an advisor or firm registered under the Investment Adviser's Act of 1940 and selected by the Clerk. "Investment Officials" means any authorized designee of the Clerk. "Moody's" means Moody's Investors Service, a global credit rating, research and risk analysis firm, publishing credit opinions, research and ratings on fixed income securities, issuers of securities and other credit obligations. "Short term portfolio" means investment of cash that is needed for operating purposes within a twelve-month period. "Standard and Poor's" means Standard and Poor's Corp., an independent bond rating service, which measures the probability of the timely payment of principal and interest. "Third Party Custodian" means any financial institution which shall lawfully act as a depository chartered by the Federal Government, the State of Florida, or any other state or territory of the United States which has a branch or principal place of business in the State of Florida as defined in Section 658.12, Florida Statutes, or by a national association organized and existing under the laws of the United States which is authorized to accept and execute trusts and which is doing business in the State of Florida. INVESTMENT OBJECTIVES The objectives of this Policy are as follows: A. Safety of Principal The foremost objective of this investment program is the safety of the principal of funds. Investment transactions shall seek to keep capital losses at a minimum, whether they are from securities defaults or erosion of market value. To attain this objective, investments will be diversified to the extent practicable to control the risk of loss resulting from over concentration of assets in a specific maturity, issuer (credit risk), instrument, dealer, or financial institution in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. Monroe County Board of County Commissioners Investment Policy Page 4 Packet Pg. 1098 N.1.a B. Maintenance of Liquidity To reduce interest rate risk on the market value of the portfolios, funds shall be managed such that they are available to meet reasonably anticipated cash flow requirements. Periodic cash flow analyses shall be completed to ensure that the funds are positioned to provide sufficient liquidity. C. Return on Investment Investment portfolios 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 least importance compared to the safety and liquidity objectives described above. However, return is attempted through active management where the Investment Adviser uses a total return strategy (which includes both realized and unrealized gains and losses in the portfolio). This total return strategy seeks to increase the value of the portfolio through reinvestment of income and capital gains. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Despite this, an Investment Adviser may trade to recognize a loss from time to time to achieve a perceived relative value based on its potential to enhance the total return of the portfolio. V. MANAGEMENT OF INVESTMENTS The Clerk shall oversee the day-to-day management of County investments. The Clerk shall be responsible for the transferring of appropriate funds to affect investment transactions consistent with this Policy. Should the Clerk elect to select an investment advisor, such advisor or firm must be registered under the Investment Adviser's Act of 1940. VI. STANDARDS OF PRUDENCE The standard of prudence to be used by Investment Officials shall be the "Prudent Person" standard and shall be applied in the context of managing the overall investment program. Investment officials, acting in accordance with written procedures and this investment policy and exercising due diligence, shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectation are reported to the Clerk in a timely fashion and the liquidity and the sales of securities are carried out in accordance with the terms of this policy. The Prudent Person standard states the following: Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived from the investment. While the standard of prudence to be used by Investment Officials who are officers or employees is the M Prudent Person standard, any person or firm hired or retained to invest, monitor, or advise concerning Monroe County Board of County Commissioners Investment Policy Page 5 Packet Pg. 1099 N.1.a these assets shall be held to the higher standard of "Prudent Expert." This is a revised version of the Prudent Person standard required by ERISA to guide managers of pension and profit sharing portfolios. The main addition is that the Investment Advisor must act as someone with familiarity with matters relating to the management of money, not just prudence. The standard is as follows: In investing and reinvesting moneys and in acquiring, retaining, managing, and disposing of investments of these funds, the person or firm shall exercise the judgment, care, skill, prudence, and diligence under the circumstances then prevailing, which persons of prudence, discretion, and intelligence, acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims by diversifying the investments of the funds, so as to minimize the risk, considering the probable income as well as the probable safety of their capital. VII. ETHICS AND CONFLICTS OF INTEREST Investment Officials shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Also, Investment Officials shall disclose to the Clerk any material financial interests in Qualified Institutions that conduct business with the Clerk or the County, and they shall further disclose any material personal financial/investment positions that could be related to the performance of the County's investment program. VIIL INTERNAL CONTROLS AND INVESTMENT PROCEDURES The Clerk of the Circuit Court and Comptroller, as Chief Financial Officer, shall establish a system of investment internal control and operational procedures that are in writing and made a part of the operational procedures. The investment internal controls shall be designed to prevent losses of funds, which might arise from fraud, employee error, and misrepresentation by third parties, or imprudent actions by employees. The written procedures shall include reference to safekeeping, separation of transaction authority from accounting and record keeping, wire transfer agreements, banking service contracts, collateral/depository agreements, and delivery -vs -payment procedures. No person shall engage in an investment transaction except as authorized under the terms of this policy. Independent auditors, as a normal part of the annual financial audit to the County, shall conduct a review of the system of investment internal controls to ensure compliance with policies and procedures. Monroe County Board of County Commissioners Investment Policy Page 6 Packet Pg. 1100 N.1.a IX. X. XI. CONTINUING EDUCATION Investment Official(s) and/or designee shall annually complete eight (8) hours of continuing education in subjects or course of study related to investment practices and products. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS Authorized Staff shall only purchase securities from financial institutions, which are qualified as public depositories by the Treasurer, or Chief Financial Officer of the State of Florida, "Primary Dealers" as designated by the Federal Reserve Bank of New York, or from direct issuers of commercial paper and bankers' acceptances. The Clerk's Investment Advisor shall use and maintain its own list of approved primary and non -primary dealers. Authorized Staff shall only enter into Repurchase agreements with "Primary Dealers" as designated by the Federal Reserve Bank of New York and financial institutions that are state qualified public depositories. MATURITY AND LIQUIDITY REQUIREMENTS To the extent possible, an attempt shall be made to match investment maturities with known cash needs and anticipated cash flow requirements. A. Maturity Guidelines To the extent possible, an attempt will be made to match investment maturities with known cash needs and anticipated cash flow requirements. Investments of current operating funds ("short term funds") shall have maturities of no longer than twenty-four (24) months. Investments of bond reserves, construction funds, and other non -operating funds ("core funds" or "Surplus Fund") shall have a term appropriate to the need for funds and in accordance with debt covenants. The purchase of investments for core funds shall not have maturities longer than five and one- half (5.50) years. The maturities of the underlying securities of a repurchase agreement will follow the requirements of the Master Repurchase Agreements. B. Liquidity Requirements The Clerk shall determine the approximate amount of funds required to meet the day-to-day expenditure needs of the County. All balances in the depository bank shall be maintained in an interest -bearing account. To have an available source of funds to meet unexpected cash requirements, a minimum of three-month's operating expenses shall be invested in bank deposits, an authorized money market fund or other short-term alternatives. The balance of the County's funds shall be available for investment according to the guidelines incorporated within this Policy. Monroe County Board of County Commissioners Investment Policy Page 7 Packet Pg. 1101 N.1.a XII. RISK AND DIVERSIFICATION Assets held shall be diversified to control risks resulting from over concentration of assets in a specific maturity, issuer, instruments, dealer, or bank through which these instruments are bought and sold. The Clerk shall determine diversification strategies within the established guidelines. XIII. MASTER REPURCHASE AGREEMENT The Clerk will require all approved institutions and dealers transacting repurchase agreements to execute and perform as stated in the Master Repurchase Agreement. All repurchase agreement transactions will adhere to requirements of the Master Repurchase Agreement. XIV. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS After the Clerk has determined the approximate maturity date based on cash flow needs and market conditions and has analyzed and selected one or more optimal types of investments, a minimum of three (3) Qualified Institutions must be contacted and asked to provide bids/offers on the securities in question. Pursuant to Section 119.07(3)(m), Florida Statutes, bids shall be held in confidence until the bid deemed to best meet the investment objectives is determined and selected. The Clerk shall utilize the competitive bid process to select the securities to be purchased or sold. However, if obtaining bids/offers are not feasible and appropriate, securities may be purchased/sold using the comparison to current market price method on an exception basis. Selection by comparison to a current market price shall only be used when, in the judgment of the Clerk, competitive bidding would inhibit the selection process. The Investment Adviser will provide the Clerk with a written explanation of the purpose of using the comparison to a current market price method. A. Examples of when this method may be used include: i. When time constraints due to unusual circumstances preclude the use of the competitive bidding process, ii. When no active market exists for the issue being traded due to the age or depth of the issue, iii. When a security is unique to a single dealer, for example, a private placement, or iv. When the transaction involves new issues or issues in the "when issued" market. B. Acceptable current market price providers include, but are not limited to the following: i. TradeWeb, ii. Bloomberg Information Systems, iii. Wall Street Journal or a comparable nationally recognized financial publication providing daily market pricing, and a� iv. Daily market pricing provided by the County's custodian or its correspondent c� institution. Monroe County Board of County Commissioners Investment Policy Page 8 Packet Pg. 1102 N.1.a XV. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION Investments should be made subject to cash flow needs and subject to revisions as market conditions and County needs change. However, when the invested funds are needed in whole or in part for the purpose originally intended or for more optimal investments, the Clerk may sell the investment at the then -prevailing market price and place the proceeds into the proper account at the County's financial institution. The following are the investment requirements and allocation limits on security types, issuers, and maturities as established by the County. Diversification strategies within the established guidelines shall be reviewed and revised periodically as necessary by the Clerk. The Clerk shall have the option to further restrict investment percentages from time to time based on market conditions, risk and diversification investment strategies. The percentage allocation requirements for investment types and issuers are calculated based on the original cost, at the time of purchase, of each investment. Permitted Investments Sector Sector Maximum Perlssuer Maximum Minimum Ratings Requirement' Maximum Maturity U.S. Treasury 1000/0 100% N/A 5.50 Years (5.50 Years GNMA 40% avg. life' for GNMA) Other U.S. Government 10% Guaranteed (e.g. AID, GTC Federal Agency/GSE: FNMA, FHLMC, FHLB, 40%2 FFCB* 75% N/A 5.50 Years Federal Agency/GSE 10% other than those above Supranationals Highest ST or Two Highest LT Rating Categories where U.S. is a shareholder o 25% o 10fo (A-1/P-1, AAA/Aaa, or equivalent) 5.50 Years and voting member Corporates 50%2 5% Highest ST or Three Highest LT Rating Categories 5.50 Years (A-1/P-1, A-/A3 or equivalent) Municipals 25% 5% Highest ST or Three Highest LT Rating Categories 5.50 Years (SP-1/MIG 1, A-/A3, or equivalent) Agency Mortgage -Backed o 25% o z 40% N/A 5.50 Years Securities (MBS) Avg. Life3 Asset -Backed Securities 25% 5% Highest ST or LT Rating 5.50 Years (ABS) (A-1+/P-1, AAA/Aaa, or equivalent) Avg. Life Non -Negotiable Collateralized None, if fully Bank Deposits or Savings o 50 /o collateralized None, if fully collateralized. 2 Years Accounts Commercial Paper (CP) 50%2 5% Highest ST Rating Category 270 Days (A-1/P-1, or equivalent) Bankers' Acceptances (BA) 100/02 5% Highest ST Rating Category 180 Days (A-1/P-1, or equivalent) Monroe County Board of County Commissioners Investment Policy Page 9 Packet Pg. 1103 N.1.a Sector Sector Maximum Perlssuer Maximum Minimum Ratings Requirement' Maximum Maturity Counterparty (or if the counterparty is not rated by an NRSRO, then the counterparty's parent) must be rated in Repurchase Agreements (Repo 0 40% o 20% the Highest ST Rating Category 1 Year or RP) (A-1/P-1, or equivalent) If the counterparty is a Federal Reserve Bank, no rating is required Money Market Funds (MMFs) 50% 25% Highest Fund Rating by all NRSROs who rate the fund N/A AAAm/Aaa-mf, orequivalent) Intergovernmental Pools Highest Fund Quality and Volatility Rating Categories (LGIPs) o 50% o 25 /o by all NRSROs who rate the LGIP, N/A AAAm/AAAf, S1, orequivalent) Florida Local Government Highest Fund Rating by all NRSROs who rate the fund Surplus Funds Trust Funds "Florida 25 /o N/A (AAAm Aaa-mf, or equivalent) N/A Prime" Notes: Rating by at least one SEC -registered Nationally Recognized Statistical Rating Organization (" NRSRO"), unless otherwise noted. ST=Short- term; LT=Long-term. 2 Maximum allocation to all corporate and bank credit instruments is 50% combined. s Maximum exposure to any one Federal agency, including the combined holdings of Agency debt and Agency MBS, is 40%. ' The maturity limit for MBS and ABS is based on the expected average life at time of settlement, measured using Bloomberg or other industry standard methods. * Federal National Mortgage Association (FNMA); Federal Home Loan Mortgage Corporation (FHLMC); Federal Home Loan Bank or its District banks (FHLB); Federal Farm Credit Bank (FFCB). 1) U.S. Treasury & Government Guaranteed - U.S. Treasury obligations, and obligations the principal and interest of which are backed or guaranteed by the full faith and credit of the U.S. Government. 2) Federal Agency/GSE - Debt obligations, participations or other instruments issued or fully guaranteed by any U.S. Federal agency, instrumentality or government -sponsored enterprise (GSE). 3) Supranationals — U.S. dollar denominated debt obligations of a multilateral organization of governments where U.S. is a shareholder and voting member. 4) Corporates — U.S. dollar denominated corporate notes, bonds or other debt obligations issued or guaranteed by a domestic corporation, financial institution, non-profit, or other entity. 5) Municipals — Obligations, including both taxable and tax-exempt, issued or guaranteed by any State, territory or possession of the United States, political subdivision, public corporation, authority, agency board, instrumentality or other unit of local government of any State or territory. 6) Agency Mortgage Backed Securities - Mortgage -backed securities (MBS), backed by E residential, multi -family or commercial mortgages, that are issued or fully guaranteed as to 0 Monroe County Board of County Commissioners Investment Policy Page 10 Packet Pg. 1104 N.1.a principal and interest by a U.S. Federal agency or government sponsored enterprise, including but not limited to pass-throughs, collateralized mortgage obligations (CMOs) and REMICs. 7) Asset -Backed Securities - Asset -backed securities (ABS) whose underlying collateral consists of loans, leases or receivables, including but not limited to auto loans/leases, credit card receivables, student loans, equipment loans/leases, or home -equity loans. 8) Non -Negotiable Certificate of Deposit and Savings Accounts - Non-negotiable interest - bearing time certificates of deposit, or savings accounts in banks organized under the laws of this state or in national banks organized under the laws of the United States and doing business in this state, provided that any such deposits are secured by the Florida Security for Public Deposits Act, Chapter 280, Florida Statutes. 9) Commercial Paper — U.S. dollar denominated commercial paper issued or guaranteed by a domestic corporation, company, financial institution, trust or other entity, only unsecured debt permitted. 10) Bankers' Acceptances - Bankers' acceptances issued, drawn on, or guaranteed by a U.S. bank or U.S. branch of a foreign bank. 11)Repurchase Agreements - Repurchase agreements (Repo or RP) that meet the following requirements: a. Must be governed by a written SIFMA Master Repurchase Agreement which specifies securities eligible for purchase and resale, and which provides the unconditional right to liquidate the underlying securities should the Counterparty default or fail to provide full timely repayment. b. Counterparty must be a Federal Reserve Bank, a Primary Dealer as designated by the Federal Reserve Bank of New York, or a nationally chartered commercial bank. c. Securities underlying repurchase agreements must be delivered to a third -party custodian under a written custodial agreement and may be of deliverable or tri-party form. Securities must be held in the County's custodial account or in a separate account in the name of the County's. d. Acceptable underlying securities include only securities that are direct obligations of, or that are fully guaranteed by, the United States or any agency of the United States, or U.S. Agency -backed mortgage related securities. e. Underlying securities must have an aggregate current market value of at least 102% (or 100% if the counterparty is a Federal Reserve Bank) of the purchase price plus current accrued price differential at the close of each business day. f. Final term of the agreement must be 1 year or less. Monroe County Board of County Commissioners Investment Policy Page 11 Packet Pg. 1105 N.1.a 12) Money Market Funds - Shares in open-end and no-load money market mutual funds, provided such funds are registered under the Investment Company Act of 1940 and operate in accordance with Rule 2a-7. A thorough investigation of any money market fund is required prior to investing, and on an annual basis. Attachment B is a questionnaire that contains a list of questions, to be answered prior to investing, that cover the major aspects of any investment pool/fund. A current prospectus must be obtained. 13) Local Government Investment Pools — State, local government or privately -sponsored investment pools that are authorized pursuant to state law. A thorough investigation of any intergovernmental investment pool is required prior to investing, and on an annual basis. Attachment B is a questionnaire that contains a list of questions, to be answered prior to investing, that cover the major aspects of any investment pool/fund. A current prospectus must be obtained. 14) The Florida Local Government Surplus Funds Trust Funds ("Florida Prime") A thorough investigation of the Florida Prime is required prior to investing, and on an annual basis. Attachment B is a questionnaire that contains a list of questions, to be answered prior to investing, that cover the major aspects of any investment pool/fund. A current prospectus or portfolios report must be obtained. General Investment and Limits 1. General investment limitations: a. Investments must be denominated in U.S. dollars and issued for legal sale in U.S. markets. b. Minimum ratings are based on the highest rating by any one Nationally Recognized Statistical Ratings Organization ("NRSRO"), unless otherwise specified. c. All limits and rating requirements apply at time of purchase. d. Should a security fall below the minimum credit rating requirement for purchase, the Investment Advisor(s) will notify the Clerk. e. The maximum maturity (or average life for MBS/ABS) of any investment is 5.50 years. Maturity and average life are measured from settlement date. The final maturity date can be based on any mandatory call, put, pre -refunding date, or other mandatory redemption date. 2. General portfolios limitations: a. The maximum effective duration of the aggregate portfolios is 3 years. 3. Investment in the following are permitted, provided they meet all other Policy requirements: c� a. Callable, step-up callable, called, pre -refunded, putable and extendable securities, as long as the effective final maturity meets the maturity limits for the sector Monroe County Board of County Commissioners Investment Policy Page 12 Packet Pg. 1106 N.1.a b. Variable -rate and floating-rate securities c. Subordinated, secured and covered debt, if it meets the ratings requirements for the sector d. Zero coupon issues and strips, excluding agency mortgage -backed Interest -only structures (I/Os) e. Treasury TIPS 4. The following are NOT PERMITTED investments, unless specifically authorized by statute and with prior approval of the governing body: a. Trading for speculation b. Derivatives (other than callables and traditional floating or variable -rate instruments) c. Mortgage -backed interest -only structures (I/Os) d. Inverse or leveraged floating-rate and variable -rate instruments e. Currency, equity, index and event -linked notes (e.g. range notes), or other structures that could return less than par at maturity f. Private placements and direct loans, except as may be legally permitted by Rule 144A or commercial paper issued under a 4(2) exemption from registration g. Convertible, high yield, and non-U.S. dollar denominated debt h. Short sales i. Use of leverage j . Futures and options k. Mutual funds, other than fixed -income mutual funds and ETFs, and money market funds 1. Equities, commodities, currencies and hard assets XVI. PROHIBITED INVESTMENTS Investment Officials or Investment Advisor may not invest in investment products that include the use of derivatives or reverse repurchase agreements, unless permitted in section XV of this Policy. Additionally, securities lending transactions are not permitted by this Policy. A "derivative" is defined as a financial instrument the value of which depends on, or is derived from, the value of one or more underlying assets or index or asset values. Investments not listed in this Policy are prohibited. XVIL PERFORMANCE MEASUREMENTS In order to assist in the evaluation of the portfolios performance, the Clerk shall use performance benchmarks for short-term and core portfolios. The use of benchmarks shall allow the County to measure its returns against other investors in the same markets. A. Investment performance of funds designated as short-term funds and other funds that must maintain a high degree of liquidity will be compared to the return of the S&P Rated GIP Index Government 30-Day Gross of Fees Yield. Investments of current operating funds shall have maturities of no longer than twenty-four (24) months. Monroe County Board of County Commissioners Investment Policy Page 13 Packet Pg. 1107 N.1.a B. Investment performance of funds designated as core funds and other non -operating funds that have a longer -term investment horizon will be compared to the Bank of America Merrill Lynch 1-3 Year U.S. Treasury Note Index. The portfolio's total rate of return will be compared to this benchmark. The appropriate index will have a duration and asset mix that approximates the portfolio and will be utilized as a benchmark to be compared to the portfolio's total rate of return. Investments of bond reserves, construction funds, and other non -operating funds ("core funds") shall have a term appropriate to the need for funds and in accordance with debt covenants, but in no event shall exceed five and one-half (5.50) years. XVIIL REPORTING The Clerk and the Investment Advisor shall prepare periodic reports at least annually for the Board that shall include securities in the portfolio by class or type, income earned, market value and a comparison of the portfolios' asset allocation positions to the policy's asset allocation requirements as of the reporting date. The annual report shall provide all, but not limited to, the following: a complete list of all invested funds, name or type of security in which the funds are invested, the amount invested, the maturity date, earned income, the book value, the market value and the yield on each investment. The annual report shall show performance on both a book value and total rate of return basis and shall compare the results to the above -stated performance benchmarks. All investments shall be reported pursuant to Statements issued by the Governmental Accounting Standards Board. XIX. THIRD -PARTY CUSTODIAL AGREEMENTS Securities shall be held with a third party custodian and should be properly designated as an asset of the County. The securities must be held in an account separate and apart from the assets of the financial institution. The custodian shall accept transaction instructions only from those persons who have been duly authorized by Clerk and which authorization has been provided, in writing, to the custodian. No withdrawal of securities, in whole or in part, shall be made from safekeeping or permitted unless by a duly authorized person. Monthly, the custodian shall provide the Clerk with detailed information on the securities held by the custodian. Security transactions between a broker/dealer and the custodian involving the purchase or sale of securities by transfer of money or securities must be made on a delivery vs. payment basis, if applicable, to ensure that the custodian shall have the security or money, as appropriate, in hand at the conclusion of the transaction. Only after receiving written authorization from an Investment Official shall authorized securities be delivered. Securities held as collateral shall be held free and clear of any liens. Monroe County Board of County Commissioners Investment Policy Page 14 Packet Pg. 1108 N.1.a XX. INVESTMENT POLICY ADOPTION The Clerk shall review the Policy annually and make recommendations to the Board for modification thereto. The Mayor of the Board of County Commissioners, Monroe County, Florida By: Date: The Clerk of the Circuit Court and Comptroller of Monroe County, Florida By: Date: Monroe County Board of County Commissioners Investment Policy Page 15 Packet Pg. 1109 N.1.a Attachment A Glossary of Cash and Investment Management Terms The following is a glossary of key investing terms, many of which appear in the Monroe County Board of County Commissioners' investment policy. This glossary clarifies the meaning of investment terms E generally used in cash and investment management. This glossary has been adapted from the GFOA U) Sample Investment Policy and the Association of Public Treasurers of the United States and Canada's > Model Investment Policy. Accrued Interest. Interest earned but which has not yet been paid or received. Agency. See "Federal Agency Securities." 0 cu Ask Price. Price at which a broker/dealer offers to sell a security to an investor. Also known as "offered price." Asset Backed Securities (ABS). A fixed -income security backed by notes or receivables against assets 0 other than real estate. Generally issued by special purpose companies that "own" the assets and issue the ABS. Examples include securities backed by auto loans, credit card receivables, home equity loans, manufactured housing loans, farm equipment loans, and aircraft leases. 0 Average Life. The average length of time that an issue of serial bonds and/or term bonds with a mandatory sinking fund feature is expected to be outstanding. Bankers' Acceptance (BA's). A draft or bill of exchange drawn upon and accepted by a bank. 2 Frequently used to finance shipping of international goods. Used as a short-term credit instrument, a. bankers' acceptances are traded at a discount from face value as a money market instrument in the secondary market on the basis of the credit quality of the guaranteeing bank. E Basis Point. One hundredth of one percent, or 0.01 %. Thus 1 % equals 100 basis points. U) 0 > Bearer Security. A security whose ownership is determined by the holder of the physical security. Typically, there is no registration on the issuer's books. Title to bearer securities is transferred by 0 delivery of the physical security or certificate. Also known as "physical securities." 0 0 Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills program, a short-term c debt securities issuance program to supplement its existing discount note program. The program includes a schedule of larger, weekly issues in three- and six-month maturities and biweekly issues in 0 one-year for Benchmark Bills. Each issue is brought to market via a Dutch (single price) auction. FNMA conducts a weekly auction for each Benchmark Bill maturity and accepts both competitive and r_ non-competitive bids through a web based auction system. This program is in addition to the variety of 2 other discount note maturities, with rates posted on a daily basis, which FNMA offers. FNMA's Benchmark Bills are unsecured general obligations that are issued in book -entry form through the Federal Reserve Banks. There are no periodic payments of interest on Benchmark Bills, which are sold at a discount from the principal amount and payable at par at maturity. Issues under the Benchmark program constitute the same credit standing as other FNMA discount notes; they simply add organization and liquidity to the short-term Agency discount note market. Benchmark Notes/Bonds: Benchmark Notes and Bonds are a series of FNMA "bullet" maturities (non - callable) issued according to a pre -announced calendar. Under its Benchmark Notes/Bonds program, 2, Monroe County Board of County Commissioners Investment Policy Page 16 Packet Pg. 1110 N.1.a 3, 5, 10, and 30-year maturities are issued each quarter. Each Benchmark Notes new issue has a minimum size of $4 billion, 30-year new issues having a minimum size of $1 billion, with re -openings based on investor demand to further enhance liquidity. The amount of non -callable issuance has allowed FNMA to build a yield curve in Benchmark Notes and Bonds in maturities ranging from 2 to 30 years. The liquidity emanating from these large size issues has facilitated favorable financing opportunities through the development of a liquid overnight and term repo market. Issues under the Benchmark program constitute the same credit standing as other FNMA issues; they simply add organization and liquidity to the intermediate- and long-term Agency market. Benchmark. A market index used as a comparative basis for measuring the performance of an investment portfolio. A performance benchmark should represent a close correlation to investment guidelines, risk tolerance, and duration of the actual portfolio's investments. Bid Price. Price at which a broker/dealer offers to purchase a security from an investor. Bond. Financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a specified stream of future cash -flows, including periodic interest payments and a principal repayment. Book Entry Securities. Securities that are recorded in a customer's account electronically through one of the financial markets electronic delivery and custody systems, such as the Fed Securities wire, DTC, and PTC (as opposed to bearer or physical securities). The trend is toward a certificate -free society in order to cut down on paperwork and to diminish investors' concerns about the certificates themselves. The vast majority of securities are now book entry securities. Book Value. The value at which a debt security is reflected on the holder's records at any point in time. Book value is also called "amortized cost" as it represents the original cost of an investment adjusted for amortization of premium or accretion of discount. Also called "carrying value." Book value can vary over time as an investment approaches maturity and differs from "market value" in that it is not affected by changes in market interest rates. Broker/Dealer. A person or firm transacting securities business with customers. A "broker" acts as an agent between buyers and sellers, and receives a commission for these services. A "dealer" buys and sells financial assets from its own portfolio. A dealer takes risk by owning inventory of securities, whereas a broker merely matches up buyers and sellers. See also "Primary Dealer." Bullet Notes/Bonds. Notes or bonds that have a single maturity date and are non -callable. Call Date. Date at which a call option may be or is exercised. Call Option. The right, but not the obligation, of an issuer of a security to redeem a security at a specified value and at a specified date or dates prior to its stated maturity date. Most fixed -income calls are a par, but can be at any previously established price. Securities issued with a call provision typically carry a higher yield than similar securities issued without a call feature. There are three primary types of call options (1) European - one-time calls, (2) Bermudan - periodically on a predetermined schedule (quarterly, semi-annual, annual), and (3) American - continuously callable at any time on or after the call date. There is usually a notice period of at least 5 business days prior to a call date. Monroe County Board of County Commissioners Investment Policy Page 17 Packet Pg. 1111 N.1.a Callable Bonds/Notes. Securities which contain an imbedded call option giving the issuer the right to redeem the securities prior to maturity at a predetermined price and time. Certificate of Deposit (CD). Bank obligation issued by a financial institution generally offering a fixed rate of return (coupon) for a specified period of time (maturity). Can be as long as 10 years to maturity, but most CDs purchased by public agencies are one year and under. Collateral. Investment securities or other property that a borrower pledges to secure repayment of a loan, secure deposits of public monies, or provide security for a repurchase agreement. Collateralization. Process by which a borrower pledges securities, property, or other deposits for securing the repayment of a loan and/or security. Collateralized Mortgage Obligation (CMO). A security that pools together mortgages and separates them into short, medium, and long-term positions (called tranches). Tranches are set up to pay different rates of interest depending upon their maturity. Interest payments are usually paid monthly. In "plain vanilla" CMOs, principal is not paid on a tranche until all shorter tranches have been paid off. This system provides interest and principal in a more predictable manner. A single pool of mortgages can be carved up into numerous tranches each with its own payment and risk characteristics. Commercial Paper. Short term unsecured promissory note issued by a company or financial institution. Issued at a discount and matures for par or face value. Usually a maximum maturity of 270 days and given a short-term debt rating by one or more NRSROs. Convexity. A measure of a bond's price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond's price to interest rate changes. Corporate Note. A debt instrument issued by a corporation with a maturity of greater than one year and less than ten years. Counterparty. The other party in a two party financial transaction. "Counterparty risk" refers to the risk that the other party to a transaction will fail in its related obligations. For example, the bank or broker/dealer in a repurchase agreement. Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond's face value. Current Yield. Annual rate of return on a bond based on its price. Calculated as (coupon rate / price), but does not accurately reflect a bond's true yield level. Custody. Safekeeping services offered by a bank, financial institution, or trust company, referred to as the "custodian." Service normally includes the holding and reporting of the customer's securities, the collection and disbursement of income, securities settlement, and market values. Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his/her own account. Delivery Versus Payment (DVP). Settlement procedure in which securities are delivered versus payment of cash, but only after cash has been received. Most security transactions, including those through the Fed Securities Wire system and DTC, are done DVP as a protection for both the buyer and seller of securities. Monroe County Board of County Commissioners Investment Policy Page 18 Packet Pg. 1112 N.1.a Depository Trust Company (DTC). A firm through which members can use a computer to arrange for -;, securities to be delivered to other members without physical delivery of certificates. A member of the Federal Reserve System and owned mostly by the New York Stock Exchange, the Depository Trust a. Company uses computerized debit and credit entries. Most corporate securities, commercial paper, CDs, and BAs clear through DTC. Derivatives. (1) Financial instruments whose return profile is linked to, or derived from, the movement E U) > of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security 2 (interest rates, foreign exchange rates, equities, or commodities). For hedging purposes, common derivatives are options, futures, interest rate swaps, and swaptions. Derivative Security. Financial instrument created from, or whose value depends upon, one or more 0 M underlying assets or indexes of asset values. 0 c Designated Bond. FFCB's regularly issued, liquid, non -callable securities that generally have a 2 or 3 year original maturity. New issues of Designated Bonds are $1 billion or larger. Re -openings of existing U) Designated Bond issues are generally a minimum of $100 million. Designated Bonds are offered through a syndicate of two to six dealers. Twice each month the Funding Corporation announces its intention to 0 issue a new Designated Bond, reopen an existing issue, or to not issue or reopen a Designated Bond. Issues under the Designated Bond program constitute the same credit standing as other FFCB issues; 0- they simply add organization and liquidity to the intermediate- and long-term Agency market. 0. Discount Notes. Unsecured general obligations issued by Federal Agencies at a discount. Discount notes mature at par and can range in maturity from overnight to one year. Very large primary (new issue) .6 and secondary markets exist. Discount Rate. Rate charged by the system of Federal Reserve Banks on overnight loans to member banks. Changes to this rate are administered by the Federal Reserve and closely mirror changes to the "fed funds rate." Discount Securities. Non -interest bearing money market instruments that are issued at discount and redeemed at maturity for full face value. Examples include: U.S. Treasury Bills, Federal Agency Discount Notes, Bankers' Acceptances, and Commercial Paper. 0 Discount. The amount by which a bond or other financial instrument sells below its face value. See also r_ 0 "Premium." c Diversification. Dividing investment funds among a variety of security types, maturities, industries, c and issuers offering potentially independent returns. Dollar Price. A bond's cost expressed as a percentage of its face value. For example, a bond quoted at 2 a dollar price of 95 1/z, would have a principal cost of $955 per $1,000 of face value. Duff & Phelps. One of several NRSROs that provide credit ratings on corporate and bank debt issues. (s Duration. The weighted average maturity of a security's or portfolio's cash -flows, where the present values of the cash -flows serve as the weights. The greater the duration of a security/portfolio, the greater E its percentage price volatility with respect to changes in interest rates. Used as a measure of risk and a u Monroe County Board of County Commissioners Investment Policy Page 19 Packet Pg. 1113 N.1.a key tool for managing a portfolio versus a benchmark and for hedging risk. There are also different kinds of duration used for different purposes (e.g. MacAuley Duration, Modified Duration). 2 0 Fannie Mae. See "Federal National Mortgage Association." Fed Money Wire. A computerized communications system that connects the Federal Reserve System E with its member banks, certain U. S. Treasury offices, and the Washington D.C. office of the Commodity Credit Corporation. The Fed Money Wire is the book entry system used to transfer cash balances E between banks for themselves and for customer accounts. Fed Securities Wire. A computerized communications system that facilitates book entry transfer of securities between banks, brokers and customer accounts, used primarily for settlement of U.S. Treasury c and Federal Agency securities. 0 Fed. See "Federal Reserve System." Federal Agency Security. A debt instrument issued by one of the Federal Agencies. Federal Agencies 0 are considered second in credit quality and liquidity only to U.S. Treasuries. Federal Agency. Government sponsored/owned entity created by the U.S. Congress, generally for the 0 purpose of acting as a financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the economy considered to otherwise have restricted access to credit markets. The largest Federal Agencies are GNMA, FNMA, FHLMC, FHLB, FFCB, SLMA, and TVA. Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commercial banks, currently to a limit of $250,000 per depositor per bank. 0 a. Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A government sponsored a enterprise (GSE) system that is a network of cooperatively -owned lending institutions that provides U) credit services to farmers, agricultural cooperatives and rural utilities. The FFCBs act as financial intermediaries that borrow money in the capital markets and use the proceeds to make loans and provide other assistance to farmers and farm -affiliated businesses. Consists of the consolidated operations of the Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks. Frequent issuer 0 of discount notes, agency notes and callable agency securities. FFCB debt is not an obligation of, nor is 0 it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and agricultural industry. Also issues notes under its "designated note" program. 0 Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by depository institutions in excess of current reserve requirements, and frequently loaned or borrowed on an overnight basis c between depository institutions. g Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository institution lending U) Federal Funds to another depository institution. The Federal Reserve influences this rate by establishing a "target" Fed Funds rate associated with the Fed's management of monetary policy. �s Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A government sponsored enterprise (GSE) system, consisting of wholesale banks (currently twelve district banks) E owned by their member banks, which provides correspondent banking services and credit to various 0 financial institutions, financed by the issuance of securities. The principal purpose of the FHLB is to Monroe County Board of County Commissioners Investment Policy Page 20 Packet Pg. 1114 N.1.a add liquidity to the mortgage markets. Although FHLB does not directly fund mortgages, it provides a -;, stable supply of credit to thrift institutions that make new mortgage loans. FHLB debt is not an obligation 2 of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk a. due to its importance to the U.S. financial system and housing market. Frequent issuer of discount notes, agency notes and callable agency securities. Also issues notes under its "global note" and "TAP" E E programs. U) Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"). One of the large Federal Agencies. A government sponsored public corporation (GSE) that provides stability and assistance to 2 the secondary market for home mortgages by purchasing first mortgages and participation interests financed by the sale of debt and guaranteed mortgage backed securities. FHLMC debt is not an0. obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal 'a credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of mo discount notes, agency notes, callable agency securities, and MB S. Also issues notes under its "reference note" program. Federal National Mortgage Association (FNMA or "Fannie Mae"). One of the large Federal 0 U) Agencies. A government sponsored public corporation (GSE) that provides liquidity to the residential M mortgage market by purchasing mortgage loans from lenders, financed by the issuance of debt securities 0 and MBS (pools of mortgages packaged together as a security). FNMA debt is not an obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of discount notes, agency notes, callable agency securities and MBS. Also issues notes under its "benchmark note" program. 2 Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System. c Federal Reserve System (the Fed). The independent central bank system of the United States that establishes and conducts the nation's monetary policy. This is accomplished in three major ways. u) (1) raising or lowering bank reserve requirements, (2) raising or lowering the target Fed Funds Rate and Discount Rate, and (3) in open market operations by buying and selling government securities. The >% Federal Reserve System is made up of twelve Federal Reserve District Banks, their branches, and many national and state banks throughout the nation. It is headed by the seven member Board of Governors known as the "Federal Reserve Board" and headed by its Chairman. 0 Financial Industry Regulatory Authority, Inc. (FINRA). A private corporation that acts as a c self -regulatory organization (SRO). FINRA is the successor to the National Association of Securities0. Dealers, Inc. (NASD). Though sometimes mistaken for a government agency, it is a non -governmental organization that performs financial regulation of member brokerage firms and exchange markets. The government also has a regulatory arm for investments, the Securities and Exchange Commission (SEC). c Fiscal Agent/Paying Agent. A bank or trust company that acts, under a trust agreement with a 0 corporation or municipality, in the capacity of general treasurer. The agent performs such duties as U) making coupon payments, paying rents, redeeming bonds, and handling taxes relating to the issuance of bonds. W Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on corporate and ; municipal debt issues. E Floating Rate Security (FRN or "floater"). A bond with an interest rate that is adjusted according to changes in an interest rate or index. Differs from variable -rate debt in that the changes to the rate take Monroe County Board of County Commissioners Investment Policy Page 21 Packet Pg. 1115 N.1.a place immediately when the index changes, rather than on a predetermined schedule. See also "Variable Rate Security." Freddie Mac. See "Federal Home Loan Mortgage Corporation." Ginnie Mae. See "Government National Mortgage Association." Global Notes: Notes designed to qualify for immediate trading in both the domestic U.S. capital market and in foreign markets around the globe. Usually large issues that are sold to investors worldwide and therefore have excellent liquidity. Despite their global sales, global notes sold in the U.S. are typically denominated in U.S. dollars. Government National Mortgage Association (GNMA or "Ginnie Mae"). One of the large Federal Agencies. Government -owned Federal Agency that acquires, packages, and resells mortgages and mortgage purchase commitments in the form of mortgage -backed securities. Largest issuer of mortgage pass -through securities. GNMA debt is guaranteed by the full faith and credit of the U.S. government (one of the few agencies that are actually full faith and credit of the U.S. government). Government Securities. An obligation of the U.S. government, backed by the full faith and credit of the government. These securities are regarded as the highest quality of investment securities available in the U.S. securities market. See "Treasury Bills, Notes, Bonds, and SLGS." Government Sponsored Enterprise (GSE). Privately owned entity subject to federal regulation and supervision, created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy such as students, farmers, and homeowners. GSEs carry the implicit backing of the U.S. government, but they are not direct obligations of the U.S. government. For this reason, these securities will offer a yield premium over U.S. Treasuries. Examples of GSEs include: FHLB, FHLMC, FNMA, and SLMA. Government Sponsored Enterprise Security. A security issued by a Government Sponsored Enterprise. Considered Federal Agency Securities. Index. A compilation of statistical data that tracks changes in the economy or in financial markets. Interest -Only (IO) STRIP. A security based solely on the interest payments from the bond. After the principal has been repaid, interest payments stop and the value of the security falls to nothing. Therefore, IOs are considered risky investments. Usually associated with mortgage -backed securities. Internal Controls. An internal control structure ensures that the assets of the entity are protected from loss, theft, or misuse. The internal control structure is 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. Internal controls should address the following points: 1. Control of collusion - Collusion is a situation where two or more employees are working in conjunction to defraud their employer. 2. Separation of transaction authority from accounting and record keeping - A separation of duties is achieved by separating the person who authorizes or performs the transaction from the 8 Z people who record or otherwise account for the transaction. Monroe County Board of County Commissioners Investment Policy Page 22 Packet Pg. 1116 N.1.a Custodial safekeeping - Securities purchased from any bank or dealer including appropriate collateral (as defined by state law) shall be placed with an independent third party for custodial safekeeping. 4. Avoidance of physical delivery securities - Book -entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. 5. Clear delegation of authority to subordinate staff members - Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities. 6. Written confirmation of transactions for investments and wire transfers - Due to the potential for error and improprieties arising from telephone and electronic transactions, all transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and if the safekeeping institution has a list of authorized signatures. 7. Development of a wire transfer agreement with the lead bank and third -party custodian - The designated official should ensure that an agreement will be entered into and will address the following points: controls, security provisions, and responsibilities of each party making and receiving wire transfers. Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction U) of interest rates. Considered risky as their value moves in the opposite direction of normal fixed -income > investments and whose interest rate can fall to zero. Investment Advisor. A company that provides professional advice managing portfolios, investment 0 recommendations, and/or research in exchange for a management fee. 0 Investment Adviser Act of 1940. Federal legislation that sets the standards by which investment 0 companies, such as mutual funds, are regulated in the areas of advertising, promotion, performance 0. reporting requirements, and securities valuations. 0 Investment Grade. Bonds considered suitable for preservation of invested capital, including bonds 0 rated a minimum of Baa3 by Moody's, BBB- by Standard & Poor's, or BBB- by Fitch. Although "BBB" rated bonds are considered investment grade, most public agencies cannot invest in securities rated below "A." U) a� Liquidity. Relative ease of converting an asset into cash without significant loss of value. Also, a relative measure of cash and near -cash items in a portfolio of assets. Additionally, it is a term describing the marketability of a money market security correlating to the narrowness of the spread between the bid and ask prices. E E Monroe County Board of County Commissioners Investment Policy Page 23 Packet Pg. 1117 N.1.a Local Government Investment Pool (LGIP). An investment by local governments in which their -;, money is pooled as a method for managing local funds, (e.g., Florida State Board of Administration's Florida Prime Fund). a. U) Long -Term Core Investment Program. Funds that are not needed within a one-year period. a Market Value. The fair market value of a security or commodity. The price at which a willing buyer E and seller would pay for a security. Mark -to -market. Adjusting the value of an asset to its market value, reflecting in the process unrealized �s gains or losses. Master Repurchase Agreement. A widely accepted standard agreement form published by the Securities Industry and Financial Markets Association (SIFMA) that is used to govern and document 0 Repurchase Agreements and protect the interest of parties in a repo transaction. r_ Maturity Date. Date on which principal payment of a financial obligation is to be paid. 0 u) 2 Medium Term Notes (MTN's). Used frequently to refer to corporate notes of medium maturity (5- M years and under). Technically, any debt security issued by a corporate or depository institution with a o maturity from 1 to 10 years and issued under an MTN shelf registration. Usually issued in smaller issues with varying coupons and maturities, and underwritten by a variety of broker/dealers (as opposed to large corporate deals issued and underwritten all at once in large size and with a fixed coupon and maturity). Money Market. The market in which short-term debt instruments (bills, commercial paper, bankers' 0 acceptance, etc.) are issued and traded. Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in money market U) instruments, such as: U.S. Treasury bills, commercial paper, bankers' acceptances, and repurchase agreements. Money market mutual funds are registered with the SEC under the Investment Company Act of 1940 and are subject to "rule 2a-7" which significantly limits average maturity and credit quality of holdings. MMF's are managed to maintain a stable net asset value (NAV) of $1.00. Many MMFs 0 carry ratings by a NRSRO. 0 Moody's Investors Service. One of several NRSROs that provide credit ratings on corporate and c municipal debt issues. Mortgage Backed Securities (MBS). Mortgage -backed securities represent an ownership interest in a 0 '0 pool of mortgage loans made by financial institutions, such as savings and loans, commercial banks, or mortgage companies, to finance the borrower's purchase of a home or other real estate. The majority of MBS are issued and/or guaranteed by GNMA, FNMA, and FHLMC. There are a variety of MBS structures with varying levels of risk and complexity. All MBS have reinvestment risk as actual principal U) and interest payments are dependent on the payment of the underlying mortgages which can be prepaid W by mortgage holders to refinance and lower rates or simply because the underlying property was sold. (s Mortgage Pass -Through Securities. A pool of residential mortgage loans with the monthly interest and principal distributed to investors on a pro-rata basis. The largest issuer is GNMA. E Monroe County Board of County Commissioners Investment Policy Page 24 Packet Pg. 1118 N.1.a Municipal Note/Bond. A debt instrument issued by a state or local government unit or public agency.The vast majority of municipals are exempt from state and federal income tax, although some non -qualified issues are taxable. Mutual Fund. Portfolio of securities professionally managed by a registered investment company that issues shares to investors. Many different types of mutual funds exist (e.g., bond, equity, and money market funds); all except money market funds operate on a variable net asset value (NAV). Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs ($100,000 and larger) that are issued in bearer form and can be traded in the secondary market. Net Asset Value. The market value of one share of an investment company, such as a mutual fund. This figure is calculated by totaling a fund's assets including securities, cash, and any accrued earnings, then subtracting the total assets from the fund's liabilities, and dividing this total by the number of shares outstanding. This is calculated once a day based on the closing price for each security in the fund's portfolio. (See below.) [(Total assets) - (Liabilities)]/(Number of shares outstanding) NRSRO. A "Nationally Recognized Statistical Rating Organization" (NRSRO) is a designated rating organization that the SEC has deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank debt issues. Only ratings of a NRSRO may be used for the regulatory purposes of rating. Includes Moody's, S&P, Fitch, and Duff & Phelps. Offered Price. See also "Ask Price." Open Market Operations. A Federal Reserve monetary policy tactic entailing the purchase or sale of government securities in the open market by the Federal Reserve System from and to primary dealers in order to influence the money supply, credit conditions, and interest rates. Par Value. The face value, stated value, or maturity value of a security. Physical Delivery. Delivery of readily available underlying assets at contract maturity. Portfolio. Collection of securities and investments held by an investor. Premium. The amount by which a bond or other financial instrument sells above its face value. See also "Discount." Primary Dealer. A designation given to certain government securities dealer by the Federal Reserve Bank of New York. Primary dealers can buy and sell government securities directly with the Fed. Primary dealers also submit daily reports of market activity and security positions held to the Fed and are subject to its informal oversight. Primary dealers are the largest buyers and sellers by volume in the U.S. Treasury securities market. Prime Paper. Commercial paper of high quality. Highest rated paper is A-1+/A-1 by S&P and P-1 by Moody's. Principal. Face value of a financial instrument on which interest accrues. May be less than par value if xz cz some principal has been repaid or retired. For a transaction, principal is par value times price and includes any premium or discount. Monroe County Board of County Commissioners Investment Policy Page 25 Packet Pg. 1119 N.1.a Prudent Expert Rule. Standard that requires that a fiduciary manage a portfolio with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. This statement differs from the "prudent person" rule in that familiarity with such matters suggests a higher standard than simple prudence. Prudent Investor Standard. Standard that requires that 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. More stringent than the "prudent person" standard as it implies a level of knowledge commensurate with the responsibility at hand. Qualified Public Depository - Per Subsection 280.02(26), F.S., "qualified public depository" means any bank, savings bank, or savings association that: 1. Is organized and exists under the laws of the United States, the laws of this state or any other state or territory of the United States. 2. Has its principal place of business in this state or has a branch office in this state which is authorized under the laws of this state or of the United States to receive deposits in this state. Has deposit insurance under the provision of the Federal Deposit Insurance Act, as amended, 12 U.S.C. ss.1811 et seq. 4. Has procedures and practices for accurate identification, classification, reporting, and collateralization of public deposits. 5. Meets all requirements of Chapter 280, F.S. 6. Has been designated by the Chief Financial Officer as a qualified public depository. Range Note. A type of structured note that accrues interest daily at a set coupon rate that is tied to an index. Most range notes have two coupon levels; a higher accrual rate for the period the index is within0. c a designated range, the lower accrual rate for the period that the index falls outside the designated range. This lower rate may be zero and may result in zero earnings. Rate of Return. Amount of income received from an investment, expressed as a percentage of the amount invested. 0 U) Realized Gains (Losses). The difference between the sale price of an investment and its book value. Gains/losses are "realized" when the security is actually sold, as compared to "unrealized" gains/losses which are based on current market value. See "Unrealized Gains (Losses)." a� Reference Bills: FHLMC's short-term debt program created to supplement its existing discount note program by offering issues from one month through one year, auctioned on a weekly or on an alternating four -week basis (depending upon maturity) offered in sizeable volumes ($1 billion and up) on a cycle Monroe County Board of County Commissioners Investment Policy Page 26 Packet Pg. 1120 N.1.a of regular, standardized issuance. Globally sponsored and distributed, Reference Bill issues are intended -;, to encourage active trading and market -making and facilitate the development of a term repo market. The program was designed to offer predictable supply, pricing transparency, and liquidity, thereby a. providing alternatives to U.S. Treasury bills. FHLMC's Reference Bills are unsecured general corporate obligations. This program supplements the corporation's existing discount note program. Issues under E the Reference program constitute the same credit standing as other FHLMC discount notes; they simply U) add organization and liquidity to the short-term Agency discount note market. > Reference Notes: FHLMC's intermediate -term debt program with issuances of 2, 3, 5, 10, and 30-year maturities. Initial issuances range from $2 - $6 billion with re -openings ranging $1 - $4 billion. The notes are high -quality bullet structures securities that pay interest semiannually. Issues under the 0 Reference program constitute the same credit standing as other FHLMC notes; they simply add M organization and liquidity to the intermediate- and long-term Agency market. 2 Repurchase Agreement (Repo). A short-term investment vehicle where an investor agrees to buy securities from a counterparty and simultaneously agrees to resell the securities back to the counterparty U) at an agreed upon time and for an agreed upon price. The difference between the purchase price and the M sale price represents interest earned on the agreement. In effect, it represents a collateralized loan to the 0 investor, where the securities are the collateral. Can be DVP, where securities are delivered to the investor's custodial bank, or "tri-party" where the securities are delivered to a third party intermediary. 0- Any type of security can be used as "collateral," but only some types provide the investor with special bankruptcy protection under the law. Repos should be undertaken only when an appropriate Securities Industry and Financial Markets Association (SIFMA) approved master repurchase agreement is in place. 2 Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view of the original seller 0 a. of securities. Used by dealers to finance their inventory of securities by essentially borrowing at short- E term rates. Can also be used to leverage a portfolio and in this sense, can be considered risky if used U) improperly. Safekeeping. Service offered for a fee, usually by financial institutions, for the holding of securities and other valuables. Safekeeping is a component of custody services. 0 Secondary Market. Markets for the purchase and sale of any previously issued financial instrument. 0 Securities Industry and Financial Markets Association (SIFMA). The bond market trade association r_ 0 representing the largest securities markets in the world. In addition to publishing a Master Repurchase Agreement, widely accepted as the industry standard document for Repurchase Agreements, the SIFMA also recommends bond market closures and early closes due to holidays. 0 Securities Lending. An arrangement between and investor and a custody bank that allows the custody r_ 2 bank to "loan" the investors investment holdings, reinvest the proceeds in permitted investments, and 0 shares any profits with the investor. Should be governed by a securities lending agreement. Can increase the risk of a portfolio in that the investor takes on the default risk on the reinvestment at the discretion of the custodian. Sinking Fund. A separate accumulation of cash or investments (including earnings on investments) in a a fund in accordance with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other entity responsible for debt service), for the purpose of assuring timely availability of moneys for payment of debt service. Usually used in connection with term bonds. Monroe County Board of County Commissioners Investment Policy Page 27 Packet Pg. 1121 N.1.a Spread. The difference between the price of a security and similar maturity U.S. Treasury investments, expressed in percentage terms or basis points. A spread can also be the absolute difference in yield between two securities. The securities can be in different markets or within the same securities market between different credits, sectors, or other relevant factors. Standard & Poor's. One of several NRSROs that provide credit ratings on corporate and municipal debt issues. STRIPS (Separate Trading of Registered Interest and Principal of Securities). Acronym applied to U.S. Treasury securities that have had their coupons and principal repayments separated into individual zero -coupon Treasury securities. The same technique and "strips" description can be applied to non - Treasury securities (e.g., FNMA strips). Structured Notes. Notes that have imbedded into their structure options such as step-up coupons or derivative -based returns. Supranational. Supranational organizations are international financial institutions that are generally established by agreements among nations, with member nations contributing capital and participating in management. These agreements provide for limited immunity from the laws of member countries. Bonds issued by these institutions are part of the broader class of Supranational, Sovereign, and Non- U.S. Agency (SSA) sector bonds. Supranational bonds finance economic and infrastructure development and support environmental protection, poverty reduction, and renewable energy around the globe. For example, the World Bank, International Finance Corporation (IFC), and African Development Bank (AfDB) have "green bond" programs specifically designed for energy resource conservation and management_ Supranational bonds, which are issued by multi -national organizations that transcend national boundaries. Examples include the World Bank, African Development Bank, and European Investment Bank. Swap. Trading one asset for another. TAP Notes: Federal Agency notes issued under the FHLB TAP program. Launched in 6/99 as a refinement to the FHLB bullet bond auction process. In a break from the FHLB's traditional practice of bringing numerous small issues to market with similar maturities, the TAP Issue Program uses the four most common maturities and reopens them up regularly through a competitive auction. These maturities (2, 3, 5, and 10 year) will remain open for the calendar quarter, after which they will be closed and a new series of TAP issues will be opened to replace them. This reduces the number of separate bullet bonds issued, but generates enhanced awareness and liquidity in the marketplace through increased issue size and secondary market volume. Tennessee Valley Authority (TVA). One of the large Federal Agencies. A wholly owned corporation of the United States government that was established in 1933 to develop the resources of the Tennessee Valley region in order to strengthen the regional and national economy and the national defense. Power operations are separated from non -power operations. TVA securities represent obligations of TVA, payable solely from TVA's net power proceeds, and are neither obligations of nor guaranteed by the United States. TVA is currently authorized to issue debt up to $30 billion. Under this authorization, TVA may also obtain advances from the U.S. Treasury of up to $150 million. Frequent issuer of discount notes, agency notes, and callable agency securities. Monroe County Board of County Commissioners Investment Policy Page 28 Packet Pg. 1122 N.1.a Total Return. Investment performance measured over a period of time that includes coupon interest, interest on interest, and both realized and unrealized gains or losses. Total return includes, therefore any market value appreciation/depreciation on investments held at period end. a. U) Treasuries. Collective term used to describe debt instruments backed by the U.S. government and a issued through the U.S. Department of the Treasury. Includes Treasury bills, Treasury notes, and Treasury bonds. Also a benchmark term used as a basis by which the yields of non -Treasury securities > are compared (e.g., "trading at 50 basis points over Treasuries"). Treasury Bills (T-Bills). Short-term direct obligations of the United States government issued with an a� original term of one year or less. Treasury bills are sold at a discount from face value and do not pay interest before maturity. The difference between the purchase price of the bill and the maturity value is 0 the interest earned on the bill. Currently, the U.S. Treasury issues 4-week, 13-week, and 26-week cu T-Bills. 0 Treasury Bonds. Long-term interest -bearing debt securities backed by the U.S. government and issued with maturities of ten years and longer by the U.S. Department of the Treasury. U) 2 Treasury Notes. Intermediate interest -bearing debt securities backed by the U.S. government and issued with maturities ranging from one to ten years by the U.S. Department of the Treasury. The Treasury currently issues 2-year, 3-year, 5-year, and 10-year Treasury Notes. 0 Trustee. A bank designated by an issuer of securities as the custodian of funds and official representative of bondholders. Trustees are appointed to insure compliance with the bond documents and to represent bondholders in enforcing their contract with the issuer. .2 IL Uniform Net Capital Rule. SEC Rule 15c3-1 that outlines the minimum net capital ratio (ratio of indebtedness to net liquid capital) of member firms and non-member broker/dealers. E Unrealized Gains (Losses). The difference between the market value of an investment and its book U) 0 > value. Gains/losses are "realized" when the security is actually sold, as compared to "unrealized" gains/losses which are based on current market value. See also "Realized Gains (Losses)." Variable -Rate Security. A bond that bears interest at a rate that varies over time based on a specified 0 U 0 schedule of adjustment (e.g., daily, weekly, monthly, semi-annually, or annually). See also "Floating Rate Note." Weighted Average Maturity (or just "Average Maturity"). The average maturity of all securities 0 and investments of a portfolio, determined by multiplying the par or principal value of each security or investment by its maturity (days or years), summing the products, and dividing the sum by the total principal value of the portfolio. A simple measure of risk of a fixed -income portfolio. g Weighted Average Maturity to Call. The average maturity of all securities and investments of a U) portfolio, adjusted to substitute the first call date per security for maturity date for those securities with call provisions. �s Yield Curve. A graphic depiction of yields on like securities in relation to remaining maturities spread over a time line. The traditional yield curve depicts yields on U.S. Treasuries, although yield curves E exist for Federal Agencies and various credit quality corporates as well. Yield curves can be positively u Monroe County Board of County Commissioners Investment Policy Page 29 Packet Pg. 1123 N.1.a sloped (normal) where longer -term investments have higher yields, or "inverted" (uncommon) where longer -term investments have lower yields than shorter ones. Yield to Call (YTC). Same as "Yield to Maturity," except the return is measured to the first call date rather than the maturity date. Yield to call can be significantly higher or lower than a security's yield to maturity. Yield to Maturity (YTM). Calculated return on an investment, assuming all cash -flows from the security are reinvested at the same original yield. Can be higher or lower than the coupon rate depending on market rates and whether the security was purchased at a premium or discount. There are different conventions for calculating YTM for various types of securities. Yield. There are numerous methods of yield determination. In this glossary, see also "Current Yield," "Yield Curve," "Yield to Call," and "Yield to Maturity." Monroe County Board of County Commissioners Investment Policy Page 30 Packet Pg. 1124 N.1.a Attachment B Investment Pool/Fund Questionnaire 1. A description of eligible investment securities, and a written statement of investment policy and objectives. 2. Does the pool/fund have a stable or floating net asset value? 3. What are the liquidity gates? 4. A description of interest calculations and how it is distributed, and how gains and losses are treated. 5. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited. 6. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed. 7. A schedule for receiving statements and portfolio listings. 8. Are reserves, retained earnings, etc. utilized by the pool/fund? 9. A fee schedule, and when and how is it assessed. 10. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? Monroe County Board of County Commissioners Investment Policy Page 31 Packet Pg. 1125 pfm Monroe County, FL Investment Policy Review January 23, 2019 Steven Alexander, CTP, CGFO, CPPT Managing Director PFM Asset 300 S. Orange Avenue, (407) 648-2208 Management LLC Suite 1170 (407) 648-1323 fax Orlando, FL 32801 Investment Policy Review Framework Florida Association of Statutes Public Treasurers of US and Canada GFOA Best Practices © PFM 2 Section 218-415 Florida Statutes Requirements Scope Investment Objectives Performance Measurement Prudence and Ethical Standards Listing of Authorized Investments Maturity and Liquidity Requirements Portfolio Composition ❑ Risk and Diversification Authorized Investment Institutions and Dealers Third -Party Custodial Agreements ❑ Master Repurchase Agreement Bid Requirement Internal Controls Continuing Education Reporting The County's Investment Policy is missing two of the required sections per Section 218.415, Florida Statutes © PFM 3 APT US & C* Investment Policy Requirements Policy/Purpose Scope Prudence Objective (Safety, Liquidity, Yield) Delegation of Authority Ethics and Conflict of Interest Authorized Financial Dealers and Institutions Authorized & Suitable Investments Investment Pools/Mutual Fund Questionnaire Collateral ization Safekeeping and Custody Diversification Maximum Maturities Internal Control Performance Standards Reporting • Investment Policy Adoption ❑ Glossary The County's Investment Policy needs an update to two required sections necessary to be certified by the APT US & C © PFM *Association of Public Treasurers of the United States and Canada (APT US & C) 4 GFOA Investment Policy Best Practices Scope and investment objectives Roles, responsibilities, and standards of care Suitable and authorized investments Investment diversification Safekeeping, custody, and internal controls Authorized financial institutions, depositories, and broker/dealers Risk and performance standards Reporting and disclosure standards The County's Investment Policy contains all of the GFOA's best practice recommendations © PFM 5 Recommendations The County's existing policy is missing two of the necessary sections under Section 218.415 and needs to add one and update one of the recommended sections per the APT US & C. The policy contains all of the necessary sections per the GFOA investment policy best practices. Add the following sections required under Section 218.415, Florida Statutes: Risk and Diversification Master Repurchase Agreement Update the following sections required under the APT US & C: ❑Glossary of Terms — industry standard terms ❑ Investment Pool/Fund Questionnaire - to aid in the selection of Funds Update language around the maturity requirements for investment of core funds to clarify a max maturity of 5.5 year from the date of settlement. Increase the diversification of the investment program with expanded credit allocation limits and the addition of six new sectors (supranationals, corporate notes, commercial paper, agency mortgage - backed, municipal securities, and asset backed securities) to prudently increase expected earnings within the confines of the County's liquidity requirements. © PFM 6 Sector Allocation Changes Current 0% 09/6 4(r/c 60% 00% 100% Sector MJ.. 003 US Treasury ` F 100% 100% US Treasury � Federal Agency ' F 00% 75% Federal Agency' uprarational Corporate 0% 5% upranational 0% 0% Corporate Municipal ' , G% 5% Municipal Agency Mortgage -Backed , � � , G% 5% Agency MB Security (MBS) Asset -Backed Securities F G% 5% AB (ABS) Certificates of Deposit & 10% 0% CDs Sa+nngs Accounts Commercial Paper G% 50% CPS Repurchase Agreement ' F G% 40% Repo Money Market Furd ' F 0% 50% MMF L IPS ` F 10% 50% LGIPs Florida PRIME (SBA) ` F 1 Go% 5% SBA ■ PFM Marc Current 2003 • Draft Policy © PFM 7 0 County Investment Policy Comparison Monroe Monroe County County 3 Alachua Brevard Citrus Escambia Flagler HillsboroughJohns Current Proposed • (2003) (2018) FloridaSBA 100% 25% 50% 25% 50% 25% 25% 50% 75% 25% 75% 25% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 75% 80% 75% 100% 75% 80% 50% 75% 60% 75% 75% 80% 50% 0% 25% 0% 15% 0% 0% 0% 0% 25% 25% 25% 25% Certificates of Deposit 10% 50% 40% 50% 50% 50% 50% 20% 50% 50% 50% 40% Commercial0% 50% 0% 50% 25% 25% 25% 20% 50% 25% 25% 25% Corporate =• 0% 50% 0% 50% 25% 25% 15% 15% 50% 35% 25% 25% 0% 25% 0% 25% 0% 0% 0% 0% 25% 25% 0% 0% 0% 25% 15% 25% 25% 25% 20% 25% /10% 25% 25% 20% 0% 20% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 80% PoolsLocal Government Investment 10% 50% 25% 50% 25% 50% 25% 20% 50% 75% 25% 40% MortgageGovernment Agency 0% 25% 0% 25% 20% 0% 20% 20% 25% 25% 20% 0% Representative sample of investment policy permitted investments. Each County investment policy contains detailed © PFM requirements including additional permitted investments, maturity specifications and minimum ratings levels. 8 Risk/Return of Various Investment Strategies $135 $130 $125 $120 0 $115 $110 $105 $100 $95 Dec-08 Growth of a $100 Million Portfolio More Diversification Less Diversification Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Source: Bloomberg, Bank of America Merrill Lynch Indices, based on quarterly returns. Less diversified portfolio is composed of 45% 1-5 Yr. Treasury; 25% 1-5 Yr. Bullet Agency; 25% 1-5 Yr. Corp. AAA -A; and 5% 1-5 Yr. AAA -AA Muni. More diversified portfolio is composed of 20% 1-5 Yr. Treasury; 10% 1-5 Yr. Bullet Agency; 35% 1-5 Yr. Corp. AAA -A; 10% 1-5 Yr. Gov't & Supra; 13% 0-5 Yr. MBS; 10% 0-5 Yr. AAA -A Fixed Rate ABS; and 2% 1-5 Yr. AAA -AA Muni. Holdings Period from 12/31/2008 to 12/31/2018. © PFM 9 1-3 Year Index Returns NovemberMonth U.S. Treasury Duration 1.77 2.80% 0.79% 0.35% 0.38% 0.80% 0.67% 0.62% Agency 1.73 2.85% 1.01 % 0.36% 0.44% 1.04% 0.83% 0.78% Non -callable 1.75 2.84% 0.99% 0.36% 0.44% 1.00% 0.80% 0.76% Callable 1.67 2.87% 1.13% 0.36% 0.44% 1.18% 0.95% 0.88% U.S. Treasury/Agency 1.77 2.80% 0.80% 0.35% 0.38% 0.81 % 0.68% 0.64% Corp A -AAA 1.83 3.44% 0.90% 0.14% 0.21 % 1.00% 1.40% 1.31 % Corp AAA 1.87 3.04% 0.90% 0.34% 0.27% 0.99% 1.05% 1.00% Corp AA 1.83 3.32% 0.95% 0.23% 0.30% 1.03% 1.28% 1.18% Corp A 1.83 3.50% 0.88% 0.10% 0.18% 0.99% 1.46% 1.36% Corp BBB 1.82 3.88% 0.94% 0.00% 0.13% 1.07% 2.09% 1.77% Corp/Govt 1.79 3.03% 0.86% 0.28% 0.34% 0.90% 0.96% 0.87% MBS 0 - 3 4.57 3.52% (0.09%) 1.08% (0.42%) 0.05% 0.63% 0.98% ABS 0 - 3 1.16 3.14% 1.42% 0.27% 0.49% 1.47% 1.39% 1.15% Corp/Govt/Mtge 1.80 3.03% 0.86% 0.29% 0.34% 0.90% 0.95% 0.87% Supranationals 1.83 2.92% 1.05% 0.40% 0.47% 1.06% 0.93% 0.810/01 Source: ICE BofAML Indices. Returns greater than one year are annualized. © PFM 10 Appendix How Do ABS Work? Underlying Loans M AM s Typical Tranche Structure Sponsor -created Trust Securities Balance Coupon Type WAL A sponsor issues debt securities using principal and interest payments from loans, credit receivables, leases, etc. The underlying loan payments or credit receivables are used to make debt service payments on the securities. E� $236,757; 2.30% EX. $373,920:2.64% 11 EA-. $323,920:2.92% 11 EX• $75,000 ; 3.09% D $22,370 3.24% Principal of Securities are grouped based on expected securities in payment window and credit quality. These the tranche groups are called tranches. Quality is based on how likely it is that investors will get their money back. See our InvestEd, "Now ABS Can Benefit Your Portfolio," for more information. Interest rate paid on the principal SEQ ; 0.2 yrs SEQ ; 0.8 yrs SEQ ; 2.0 yrs SEQ SUB 3.1 yrs 3.5 yrs A 6/2018 6/2019 6/2020 6/2021 612022 Weighted Average Life (time until bond is repaid) Payment Window Investor priority for repayment in case of default. SEQ is sequential, SUB is subordinated. Principal & Interest Interest All data provided for illustrative purposes only. © PFM 12 Credit Spreads Wider YTD but Remain Low by Historical Standards Yield Spread (OAS) of 0-5 Year AAAAsset-Backed Securities Index 120 100 60 ' Average = 50.4 40 20 0 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Source: Bloomberg, ICE BofAML Indices. OAS is option adjusted spread. As of 12/31/18. © PFM 13 Supranationals # Multilateral organization of governments for which the United States is a participant, shareholder, and/or voting member # International financial institutions generally established by agreements among nations with member nations contributing capital and participating in management # Tend to have excellent credit quality due to multi -national ownership and commitment, long and successful operating histories, and significant ti hglD�lh[ �� capital from,, t Source: World Bank. .,. Sources: TlorldBank. Standard e-Poors. BafA Afkrr7llLynrh VyIORLU BAT 61 �Lj IDB lnternatio na I Imer-American Finance De Iopmmt Bank q Corporation }t+r`, L+• WORLD BANKGRDOP Jt( �rpV 9 PW -'G�y,►E of obey t W � O European Bank Asian Development Bank �\ lilirrnngr�urirnri nnrl Ilr�rinlinrirr 'c W ... lOP}?.. - ti /"Ir © PFM 14 What Are U.S. Instrumentalities? 0 Multinational financial institutions 0 Member nations contribute capital and participate in management 0 Loans used to finance economic and infrastructure development and support environmental protection, poverty reduction, and renewable energy around the globe. 0 Key Features • Triple -A rated • Issuers of only senior, unsecured debt • Financial strength based on- 0 Diversified, sovereign shareholders o Significant capital commitments from a diverse capital base o Strong operating history o Conservative lending and risk management practices r-7 Diverse loan portfolios © PFM 15 AAA Supranationals with U.S. as Largest Shareholder SUPRANATIONAL SHAREHOLDER LOCATION OF YEAR SHAREHOLDING POSITION 11L HEADQUARTERS International Bank for Reconstruction and 16% 1St Washington, DC, USA 1944 Development (World Bank) International Finance 24% 1St Washington, DC, USA 1956 Corporation (IFC) Inter -American Development Bank 30% 1St Washington, DC, USA 1959 (IDB) African Development 7% 2nd Abidjan, Ivory Coast 1963 Bank (AfDB) Asian Development 16% 1St Manila, Philippines 1966 Bank (ADB) (co -largest with Japan) European Bank of Reconstruction and 10% 1St London, UK 1991 Development (EBRD) S—r- Wodd uv © PFM 16 Instrumentalities Are Enacted by Congress 0 Instrumentalities are an Act of Congress and thus would be exempt from any payment concerns due to the debt ceiling. • Instrumentality issuers whose membership includes the U.S. are SEC exempt by the federal statutes that authorize U.S. membership and participation. 0 Instrumentalities' lending agreements give them "preferred creditor' status, meaning that if a borrowing nation gets into financial difficulty, they must be repaid before anyone else. MOW NSTRUMENTAILITY ACT OF • International Bank for Reconstruction and Bretton Woods Act 22 USC 286 et. Seq. Development (World Bank) International Finance Corporation (IFC) International Finance Corporation Act 22 USC 282 et. Seq. Inter -American Development Bank (IDB) Inter -American Development Act 22 USC 283 et. seq. African Development Bank (AfDB) African Development Bank Act 22 USC 290i et. Seq. Asian Development Bank (ADB) Asian Development Bank Act 22 USC 285 Under the provisions of Section 15(a) of the Bretton Woods Agreements Act, as amended, notes are exempted securities within the meaning of Section 3(a)(2) of the U.S. Securities Act of 1933, as amended, and Section 3(a)(12) of the U.S. Securities Exchange Act of 1934. Source: The World Bank: Demystifying Supranationals. © PFM 17 Potential Yield Benefit from Supranationals • Carry more yield spread and offer an attractive alternative in the high -quality government agency space • Seasonal issuers — tend to issue heavily in Q4 and Q1, which may create trading opportunities SUPRA G SPREAD Supra Avg. 07/09/18 Supra 12 Mos Max 0.30% 0.20% 0.10% 0.00% — 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 U.S. Treasury 1.80 2.51 % 0.09% 0.02% 0.22% 0.08% 0.42% 0.58% Agency 1.67 2.56% 0.21 % 0.02% 0.23% 0.30% 0.60% 0.73% Supranationals 1.82 2.67% 0.18% 0.06% 0.29% 0.30% 0.66% 0.79% Source: Bloomberg, MarketAxess, BofA Merrill Lynch Indices, PFMAM Trading Desk. As of July 9, 2018 unless otherwise noted. G Spread is the difference in yield compared to a Treasury note of comparable maturity. Please refer to the accompanying Important Disclosures. © PFM H Supranational and Federal Agency Yields Have Historically Tracked Closely 200 180 160 140 c 120 0 a 100 V) m 80 60 40 20 0 -20 OAS Comparison- Agencies vs. Supranationals 1-3 Yr AAA Supras 1-3 Yr Agency Source: Bloomberg, Merrill Lynch. Represents the historical Option Adjusted Spread of the 1-3 Year Agency Bullet Index (G1 PB), 1-3 Year AAA US Supranational Index (GS1 S), AAA This material is for general information purposes only, is not intended to provide specific recommendations, and is subject to changes in the market environment. © PFM 19 International Bank for Reconstruction and Development (IBRD) 0 Purpose • The IBRD, also known as the original World Bank institution, operates as a financial services firm and provides loans and other assistance to developing countries. The IBRD finances projects across all sectors and provides technical support and expertise at various stages of a project. 0 Largest Shareholders • U.S. — 16.6% • Japan — 7.2% • China — 4.6% • Germany — 4.2% • France — 3.9% • UK — 3.9% 0 Rating: AAA/Aaa Source: The World Bank. \ONNJ- BANK FOR =A�' WORLD BAN K m o AND =D FPJ E�oQ�` © PFM 20 International Finance Corporation (IFC) 0 Purpose • The IFC is the largest global development institution focused on the private sector in developing countries, including social sustainability, infrastructure, health, education, and developing local financial markets. 0 Largest Shareholders • U.S. — 22.2% • Japan — 6.3% • Germany — 5.0% • France — 4.7% • UK — 4.7% • India — 4.0% 0 Rating: AAA/Aaa Source: The World Bank. International Finance Corporation World Bank Group © PFM 21 Inter -American Development Bank (IDB) 0 Purpose • The IDB provides financing and expertise for sustainable economic, social, and institutional development in Latin America and the Caribbean, including efforts to reduce poverty and support for environmental sustainability. 0 Largest Shareholders • U.S. — 30.0% • Argentina — 10.8% • Brazil — 10.8% • Mexico — 6.9% • Venezuela — 5.8% • Japan — 5.0% 0 Rating: AAA/Aaa Source: iadb.org. 41-ID I ntoj,-. iner ica n D eue1 opine of Bdri k © PFM 22 African Development Bank (AfDB) 0 Purpose • The objective of the AfDB Group is to spur sustainable economic development and social progress in its regional member countries, thus contributing to poverty reduction. AfDB achieves this by mobilizing and allocating resources for investments in RCMs, and by providing policy advice and technical assistance to support development efforts. 0 Largest Shareholders • Nigeria — 9.3% • U.S. — 6.6% • Japan — 5.5% • Egypt — 5.4% • South Africa — 4.9% • Algeria — 4.2% t Rating: AAA/Aaa Source: afdb.org. kt&E DE ml � © PFM 23 Asian Development Bank (ADB) 0 Purpose • The ADB mission is to help developing member countries reduce poverty and improve the quality of life of their people. ADB maximizes the development impact of its assistance by facilitating policy dialogues, providing advisory services, and mobilizing financial resources through co -financing operations that tap official, commercial, and export credit sources. 0 Largest Shareholders • U.S. — 15.6% • Japan — 15.6% • Australia — 5.8% • Canada — 5.2% • Republic of Korea — 5.0% • Germany — 4.3% t Rating: AAA/Aaa Source: adb.org. © PFM 24 Disclosure This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. Pf M