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HomeMy WebLinkAboutMINUTES - 05042004 - HA.1 H-4. HOUSING,AUTHORITY OF THE COUNTY OF CONTRA COSTA TO: BOARD OF COMMISSIONERS FROM: Robert McEwan, Executive director DATE: June 22, 2004 SUBJECT: ANNUAL REVIEW AND APPROVAL OF INVESTMENT POLICY SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION I. RECOMMENDED ACTION: APPROVE the Investment Policy as presented for annual review in accordance with Government code and prudent fiscal practices to be in compliance with the U.S. Department of Housing and Urban Development (HUD) and California governmental Code (CCC) 53600.6. 11, FINANCIAL IMPACT: NIA. Ill. REASONS FOR RECOMMENDATION/BACKGROUND The U. S. Department of Housing & Urban Development has established requirements governing cash management and investments for certain funds under the control of Public Housing Authorities. Under these'I requirements the Investment Policy for the Housing Authority of the County of Contra Costa is required to be reviewed by the Board of Commissioners annually. It is staffs recommendation that the existing policy is satisfactory and recommends no revisions. Attached for your annual review and approval is the Investment Policy for the Housing Authority of the County of Contra Costa. IV. CONSEQUENCES OF NEGATIVE ACTION: Should the Board of Commissioners elect not to approve the Investment Policy for the Housing Authority of the County of Contra Costa as presented, the agency would not be in compliance with HUD regulations and California Governmental Code (CGC) 53600.6. CONTINUED ON ATTACHMENT: . .._...YES SIGNA'T'URE RECOMMENDATION OF EXECUTIVE DIRECTOR RECOMMENDATION OF BOARD COMMITTEE APPROVE OTHER SIGNATURE(S): i�II�I�iiilPl/ - _ 1����1��� IYF�.PIi/II�WIA�111 II�1M 11 ACTION OF BOARD ON m 2. ?, APPROVED AS RECOMMENDED__X._-OTHER VOTE OF COMMISSIONERS I HEREBY CERTIFY THAT THIS IS A UNANIMOUS (ABSENT I, V TRUE AND CORRECT COPY OF AN AYES: NOES: ACTION TAKEN AND ENTERED ON THE ABSENT: ABSTAIN: MINUTES OF THE BOARD OF COMMISSIONERS ON THE DATE SHOWN. ATTESTED ime 22, 2004 JOHN SWEETEN,CLERK OF THE BOARD OF COMMISSIONERS AND COUNTY ADMINISTRATOR BN r ?,4 r "_,DEPUTY H:\JudyHayes\MSOFFICE\VVNWORD\BOARD\BO-Investment Policy Annual Review.d�c± Housing Authority of the County of Contra Costa Investment Policy Policy WHEREAS; The U. S. Department of Housing and Urban Development (HUD) has established requirements governing cash management and approved investment instruments for certain funds under the control of Public Housing Authorities; and WHEREAS; the Legislature of the State of California has declared that the deposit and investment of public funds by local officials and local agencies is an issue of statewide concern, California Government Code (CGC) Section 53600.6; and WHEREAS; the legislative body of a local agency may invest surplus monies not required for the immediate necessities of the local agency in accordance with the provisions of HUD and the California Government Code (CGC) Sections 5922 and 53601; and WHEREAS; the Executive Director of the Housing Authority of the County of Contra Costa (HACCC) shall annually prepare and submit a statement of investment policy and such policy, and any changes thereto, shall be considered by the Board of Commissioners of the Housing Authority at a public meeting [CGC 53646(a)]; now; THEREFORE; it shall be the policy of the Housing Authority to invest funds in a manner which will provide the maximum safety, liquidity and reasonable investment return whip meeting the daily cash flow demands of the Housing Authority and conforming to all statutes governing the investment of Housing Authority funds. Scope This investment policy applies to all financial assets of the HACCC. These funds are listed .and accounted in the HACCC's Annual Financial Report and include the: Section 8 Earned Administrative Fee and Housing Assistance Payment Fund; HUD Affordable Conventional Housing Fund; State of California grant funds and reserve; and the Housing Authority General Fund. Prudence 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. The standard of prudence to be used by investment officials shall be the "prudent person" standard (CGC 53640.3) and shall be applied in the context of managing an overall portfolio. The Executive Director and his designees acting in accordance Adopted Res,No. 3770 Revised March 13,2001 March 19, 1996 Investment Policy Page 2 with written procedures and this investment policy and exercising due diligence small be relieved of personal responsibility for an individual security's credit risk or market price changes. Any information received which identifies potential security risks or market price changes of significance shall be reported in a timely fashion and efforts to control adverse developments shall be pursued. Objective When investing, reinvesting, purchasing, acquiring, exchanging, selling and managing public funds the primary objectives, in priority order, of the investment activities shall be: 1. Safety: Safety of principal is the foremost objective of this investment policy. Investments of the Housing Authority shall be undertaken in a manner that seeps to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification is required in harder that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio. 2. Liquidity: The investment portfolio will remain sufficiently liquid to enable the Housing Authority to meet all operating requirements, which might be reasonably anticipated. All investments will be capable of being liquidated on one days notice. ! No investments will be made which impose a longer notice period for redemption or which are not readily marketable. 3. Return on Investments: The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles consistent with the HA investment policy, taking into consideration investment risk constraints and cash flow characteristics of the portfolio. {CGC 53600.5} Delegation of Authority Authority to manage the investment program is derived from Section 401(E) of the Annual Contribution Contract between HUD and the Housing Authority and the CGC Sections 53601, et seq. Management responsibility for the investment program is hereby delegated to the Executive Director of the Housing Authority who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include references to safekeeping Adopted Res.No. 3770 Revised March 13. 2001 March 19, 1996 Investment Policy Page 3 and repurchase agreements, wire transfer agreements, collateral/depository agreements and banking services contracts, as appropriate. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and procedures established by the Executive Director. The Executive Director, as authorized by the Housing Authority Board of Commissioners, shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. The Executive Director is a trustee and a fiduciary subject to the prudent investor standard. (CGC 53600.3) Ethics and Conflicts of Interest Officers and employees of the Housing Authority and such investment underwriters, bond counsel and other financial advisors or consultants involved in the investment process shall refrain from personal business activity which could conflict with the proper execution of the investment program, or which could impair their ability to make impartial investment decisions, Authorized Financial Institutions and Dealers A) The Executive Director will maintain a list of financial institutions that are authorized to provide investment services. Selection for placement on this list will be on the basis of credit worthiness, financial strength, experience and minimal capitalization. In addition, a list will also be maintained of approved security broker/dealers or investment bank underwriters who are authorized to provide investment and financial advisory services in the State of California. No public deposit shall be made except in a qualified public depository as established by state laws. B) Selection: For brokers/dealers or investment bank underwriters of government securities and other investments, the Executive Director shall select only brokers/dealers or investment bank underwriters who are licensed and in good standing with the California Department of Securities, the Securities and Exchange Commission, the National Association of Securities Dealers or other applicable self-regulatory organizations; and, cannot have made any campaign contributions to any member of the Housing Authority's Board of Commissioners. C) Certification: Before engaging in investment transactions with a broker/dealer or investment bank underwriter, the Executive Director shall have received from said firm a signed Certification Form (See Exhibit 1). This form shall attest that the individual responsible for the Housing Authority's account with that firm has reviewed the Housing Authority's Investment Policy and that the firm understands Adopted Res.No. 3770 Revised March 13,2001 March 19, 1996 Investment Palmy Page 4 the policy and intends to present investment recommendations and transactions to the Housing Authority that are appropriate under the terms and conditions of the Investment Policy. Authorized and Suitable Investments The Housing Authority is empowered by the HUD Notice 96-33 (See Attachment A)to invest HUD funds in the fallowing: A. United States Treasury Sills, Notes & Bonds. B. Obligations issued by Agencies or Instrumentalities of the U.S. Government. C. State or Municipal Depository Funds, such as The Local Agency Investment Fund(LAIF), D. Insured Demand and Savings Deposits, provided that deposits in excess of the insured amounts must be 100 percent collateralized by securities listed in A & B above. E. Insured Money Market Deposit Accounts, provided that deposits in excess of the insured amount must be 100 percent collateralized by securities listed in A & B above. F. Insured Super NOW Accounts, provided that deposits in excess of the insured amount must be 100 percent collateralized by securities listed in A & B above. G. Repurchase Agreements of any securities authorized by this Section. Securities purchased under repurchase agreements shall be no less than 102 percent of market value. (See special limits in HUD Notice 96-33 (Attachment A) and CGC 63601.0 (Attachment B).) H. Reverse Repurchase Agreements of any U. S. Treasury and Federal Agency Securities in portfolio. Securities purchased under reverse repurchase agreements shall be for temporary and unanticipated cash flow needs only. (See also special limits in HUD Notice 06-33 (Attachment A) and CGC 63601.0 (Attachment B).) €. Sweep Accounts that are 100 percent collateralized by securities listed in A & B above. Adopted Res.No. 3770 Revised March 13,2001 March 19, 1996 Investment Policy Page 5 J. Shares of beneficial interest issued by diversified management companies investing in the securities and obligations authorized by this Section (Money Market Mutual Funds). Such Funds must carry the highest rating of at least two national rating agencies. Not more than 15 percent or 20 percent of surplus funds can be invested in Money Market Mutual Funds. K. Funds held under the terms of a Trust Indenture or other contract or agreement, including the HUD/Public Housing Agency Annual Contributions Contract, may be invested according to the provisions of those indentures or contracts. L. Any other investment security authorized under the provisions of HUD Notice PIH 97-41. The Housing Authority is empowered by California Government Code (CGC) Sections 5922 and 53601 et seq. to invest non-HUD funds in the following: A. Bonds issued by local government agencies with a maximum maturity of five years (See Attachment 2). B. United States Treasury Bills, Notes & Bonds. C. Registered warrants, treasury notes or bonds issued by the State of California. D. Bonds, notes, warrants or other evidence of debt issued by a local agency within the State of California, including pooled investment accounts sponsored by the State of California, County Treasurer, other local agencies or Joint Powers Agencies. E. Obligations issued by Agencies or Instrumentality of the U.S. Government, F. Bankers Acceptances with a term not to exceed 270 days. Not more than 40 percent of surplus funds can be invested in Bankers Acceptances and no more than 30 percent of surplus funds can be invested in the bankers acceptances of any single commercial bank. G. Prime Commercial Paper with a term not to exceed 180 days and the highest ranking issued by Moody's Investors Service or Standard & Poor's Corp. Commercial paper cannot exceed 15 percent of total surplus funds, provided, that if the average maturity of all Commercial paper does not exceed 31 days, up to 30 percent of surplus funds can be invested in Commercial paper. H. Repurchase Agreements of any securities authorized by this Section. Securities purchased under repurchase agreements shall be no less than 102 percent of market value. (See special limits in CGC 53601( Attachment B).) Adopted Res.No. 3770 Revised March 13,2001 March 19, 1996 Investment Policy Page 6 1. Reverse Repurchase Agreements of any U. S. Treasury and Federal Agency Securities in portfolio. Securities purchased udder reverse repurchase agreements shall be for temporary and unanticipated cash flaw needs only. (See also special limits in CCC 53601.0 (Attachment B).) J. Medium term notes (not to exceed 2 Years) of U.S. corporations rated "A" or better by Moody's or S&P. Not more than 30 percent of surplus funds can be invested in medium term notes. K. Shares of beneficial interest issued by diversified management companies investing in the securities and obligations authorized by this Section. (Money Market Mutual Funds) Such; Funds must carry the highest rating of at least two national rating agencies. Not more than 15% of surplus funds can be invested in Money Market Mutual Funds. L. Funds held under the terms of a Trust Indenture or other contract or agreement may be invested according to the provisions of those indentures or agreements. M. Collateralized bank deposits with a perfected security interest in accordance with the Uniform Commercial Code (UCC) or applicable federal security regulations. N. Any mortgage pass-through security, collateralized mortgage obligation, mortgaged backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate or consumer receivable backed bond of a maximum maturity of five years. Securities in this category must be rated AA or better by a national rating service. No more than 30% of surplus funds can be invested in this category of securities. 0. Any other investment security authorized under the provisions of CGC 5922 and 53501. Attachment A, HUD Approved Investment Instruments, and Attachment B, CGC Section 53601, also provide a detailed summary of the limitations and special conditions that apply to each of the above listed investment securities, These attachments are included by reference in this investment policy. Prohibited Investments Under the provisions of CGC Section 53631.5, the Housing Authority shall not invest any funds covered by this Investment Policy in inverse floaters, range notes, interest-only STRIPS derived from mortgage pools or any investment that may result in a zero interest accrual if held to maturity. Adopted Res,No.3770 Revised March 13,2001 March 19, 1996 Investment Policy Page 7 Collateralization All certificate of deposits must be collateralized by U.S. Treasury Obligations. Collateral must be held by a third party and valued on a monthly basis. The percentage of collateralization on repurchase agreements will conform to the amount required under CGC 53601(l)(2). Safekeeping and custody All security transactions entered into by the Dousing Authority shall be conducted during the normal business fours of the Dousing Authority, on Housing Authority premises and on a delivery-versus-payment (DVP) basis. Only during an extreme emergency shall security transactions be conducted during non-business !-lousing Authority fours, not on Housing Authority premises. All securities purchased or acquired shall be delivered to the Dousing Authority by book entry, physical delivery or by third party custodial agreement. (CGC 63661) Diversification It is the policy of the Housing Authority to diversify its investment portfolio. The Housing Authority will diversify its investments by security type and, within each type, by institution. Assets shall be diversified to eliminate the risk of loss resulting from over concentration of assets in a specific maturity, a specific issuer or a specific class of securities. Diversification strategies shall be determined and revised periodically. In establishing specific diversification strategies, the following guidelines shall apply: A) Portfolio maturities shall be matched against projected liabilities to avoid an over concentration in a specific series of maturities. B) Maturities selected shall provide for stability and liquidity. C) Disbursement and payroll dates shall be covered by the scheduled maturity of specific investments, marketable U.S. Treasury Bills or notes or other cash equivalent instruments, such as money market mutual funds. Reporting? The Executive Director shall submit to each member of the Housing Authority Board of Commissioners a quarterly investment report. The report shall include a complete description of the portfolio, the type of investments, the issuers, maturity dates, par values and the current market values of each component of the portfolio, including funds managed by third party contractors. The report will also include the source of Adopted Res.No.3770 Revised March 13,20011 March 19, 1996 Investment Policy Page 8 the portfolio valuation. In the case of funds invested in The vocal Agency Investment Fund (LAIF), Federal Deposit Insurance Corporation (FDIC) accounts or county investment pools, current statements from these institutions will satisfy the above reporting requirement. The report will also include a certification that (1) all investment actions executed since the last report have been made in full compliance with the Investment Policy and; (2) the Mousing Authority will meet its expenditure obligations for the next six months. (CCC 53646(b)). The Executive Director and/or his designee shall maintain a complete and timely record of all investment transactions. Investment Policy Adoption The Investment Policy shall be adopted by resolution by the Housing Authority Board of Commissioners. Moreover, the Policy shall be reviewed on an annual basis, and modifications must be approved by the Housing Authority Board of Commissioners. Adopted Res. No. 3770 Revised March 13,2001 March 19, 1996 Exhibit 1 Housing Authority Investment Policy Certification I hereby certify that: 1) 1 have personally read the Housing Authority of the County of Contra Costa (HACCC) Investment Policy, U. S. Department of Housing and Urban Development Notice PIH 96-33 and the California Government Code pertaining to the investments of the HACCC ; and 2) have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the HACCC investment objectives, strategies and risk constraints. As a duty authorized representative of this firm, we pledge to exercise due diligence in informing the HACCC staff of all foreseeable risks associated with financial transactions conducted with our firm. We further pledge not to offer the HACCC any types of securities not authorized by the HACCC Investment Policy and California Law. All sales personnel will be routinely informed or your investment objectives, strategies and risk constraints whenever we are so advised. We will notify the HACCC immediately by telephone and in writing of any material adverse change in our financial condition. The supervising officer agrees to exercise due diligence in monitoring the activities of other officers and subordinate staff members engaged in transactions with the HACCC. Print Name: Date: Investment VP, Analyst, Officer Signed: Investment Firm: Countersignature: Signature of Investment Firm's President or Manager (Countersigned by Company President or person in charge of government securities operations.) Exhibit 2 Investments for non-HUD Funds Investments authorized Under California Government Code 53601 CGC Investment Type Maximum Authorized Required Rating Section Maturity Limit(%) 53601(a) Local Agency Bonds 5 Years None None 53601(b) U.S.Treasury Bills,Notes or Bonds 5 Years None None 53601(c) State Warrants,Notes, Bonds 5 Years None None 53601(d) Notes&Bonds of other Local Agencies 5 Years None None 53601(e) U. S. Agencies 5 Years None None 53601(f) Bankers Acceptances 270 Days 40% None 53601(g) Prime Commercial Paper 180 Days 15%or 30%* AI/PI 53601(h) Negotiable Certificates of Deposit 5 Years 30% None 53601(i) Repurchase Agreements 5 Years None None 536010) Medium Term Corporate Notes 5 Years 30% A 53601(k) Money Market Mutual Funds& Mutual 5 Years** 15% AAA Funds 53601(m) Collaterized Bank Deposits 5 Years None None 53601(n) Mortgage Pass-Through Securities 5 Years 20% AA Local Agency Investment Fund(LAIF) N/A None None County Pooled Investment Funds N/A None None 30% if dollar weighted average maturity of all CP does not exceed 31 days. ** Mutual Funds maturity may be defined as the weighted average maturity. U.S.Department of Housing and Urban Development PUBLIC AND INDIAN HOUSING Se 1 J entiQn of- PIH 96-33 (HA) 'u , c�ousmg Agencies; Indian Notice Housing Authorities; Secretary's. Issued. June 4, 1996 Representatives; State/Area June 30, 199T Coordinators; Directors, Public Expires: Housing Divisions; strators, Crosi References: Offices of Native Ame. 'can Programs; Resident Management Corporations (RMCs). Subject: Required RA Cash Management and Investment Policies and Procedures k 1. PURPOSE The purpose of this Notice is to advise public housing agencies and Indian housing authorities (herein referred to as HAs) and Area Offices of the Department's HA requirements governing cash management and approved investment instruments. The Notice extends and reissues, with minor editorial changes, the policies and procedures, including the list of HUD approved investment instruments, previously - set forth in Notice PIH 95-27. 2. BACKGROUND The Annual Contributions Contract (ACC) requires the HA to deposit and invest all program funds for projects under an ACC in accordance with the terms of a General Depository Agreement. The General Depository Agreement must be in a form approved by HUD and is executed between the HA and the depositary. In addition, the ACC requires the HA to invest General Fund (program) monies only in HUD approved investments. The Federal Cade of Regulations, Part 85, Subpart C, (24 CFR. § 85.20) requires HAs to establish cash management procedures. gash management is the process of managing the cash flow of a FIA to optimize its use of funds. This process involves the timing of receipts and disbursements to assure the availability of funds to meet expenditures and to maximize the yield from the investment of temporarily surplus funds. Effective cash management calls for organized planning. Good relations between the HA and the financial institution can improve the effectiveness of a cash management program. PAHO : Diatribution: W-3-1, R-6, R-7 , R-9, R-3-1(PIH) , 138-2, 138-7 , RMC-2 Previous Hdlttom Are Obseieto HUD 2113(3-801 GPO 871 902 3. APP_LI_CABILM This Notice applies to the Low Ment Public Housing Program:, the HAA Owned/Leased Housing Homeownership Program (Turnkey III Program.), the Section 23 Leased Housing Program, and the Mutual Help Homeownership Program. 4. BANDING SERVICES I Banking services'shall be arranged by selecting a bank through competitive solicitation to assure the HA that it receives the banking services provided at the lowest cost. It should be noted, however, that HAs must designate a single bank account for the deposit of all payments that are received from HUD through Direct Deposit-Electronic Funds Transfer (DD-EFT). (A Standard Form 1199A, Direct Deposit Sign-Up Form, must be submitted to designate this account.) A-copy of the General Depository Agreement (see below) with the uncial institution shall be attached with the SF-1199A. Once the funds are received, they may be transferred to separate accounts according to the applicable program. a. General Doositozy Agreement The General Depository Agreement (Form HUD-51999) shall be executed by the HA and the depository. The depository must be a financial institution whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Share Insurance Fund (NC'USIF). An original HLTD-51999 should be maintained by the HA and the financial institution. A copy of the HUD-51999 should be sent to the HUD Area Office and the Field Accounting Office (along with the SF-1199A). b. Procurement Procedure and Period of Service Banking services should be periodically solicited through competitive negotiation. The solicitation in the form of a Request for Proposal (RFP) would permit the HA to evaluate the quality of the services received as well as the price. This periodic process should prevent the bank supplying the services from becoming complacent in its dealings with the HA. 5. COLLATERALIZATION OF DEPOSITS HAs shall require their depositories to continuously and fully (100%) secure all deposits regardless of type (i.e. regular, savings, etc.) that are in excess of the 2 $100,000 insured amount. This may be accomplished by the pledging or setting aside collateral of identifiable U.S. Government securities as prescribed by HUD. The HA has possession of the securities (or the HA will take possession of the securities) or an independent custodian (or an independent third party) holds the securities on behalf of the HA as a bailee (evidenced by safe keeping receipt and a written bailment for wire contract) and will be maintained for the full term of the deposit. Such securities shall be owned by the depository and the manner of collateralizationjshall provide the HA with a continuing perfected security interest for the full tern i of the deposit in the collateral in accordance with applicable laws and Federal regulations. Such collateral shall, at all times, have a market value at least equal to the amount of the deposits so secured. 6. 114NT5TMENT OF FUNDS k - a. Funds Available for Investment 1) Funds on deposit in the General.Fund are comprised of four components: (1) funds for current transaction purposes, (2) development and/or modernization funds (see #2 below), (3) funds exceeding those necessary for the daily operation of the HA which are considered available for investment and (4) any operating reserve funds. As a general rule, the average amount on deposit in the General Fund cash accounts (the targeted maximum cash balance) should be the amount needed on hand for transaction purposes or as a safeguard against cash shortages. In the interest of good cash management, non- interest bearing deposits should be reduced to the amount necessary to maintain a good banking relationship. 2) Under the Modernization and Development Programs, the term "cash management" also means minimizing the time elapsing between the drawdown and disbursement of funds by the HA. HUD has established the maximum time to be generally three working days. Therefore, reference to "excess funds" also means the amount of modernization or development funds drawn down, but not needed for immediate disbursement (see 24 CFR § 85.21 (b)). interest income earned on modernization funds is included as operating income in the calculation of operating subsidy eligibility under the Performance Funding System (PFS). Interest income earned on development funds is credited to the development program and reduces the development cost of the project. 3 b. Approved Investment Securities � In most cases, purchases of securities shall have maturities which coincide with expected disbursements by the HA. .For the purpose of investing operating reserves, issues shall be limited to maturities three years or less. Although some of the following securities have maturities longer than three years, they can be traded in the secondary market. A list of investments approved by HUD for the investment sof HA funds is attached. HAs aie' required to choose from these financial instruments. Within the HUD approved instrument;, HAs are permitted to modify their investment policy without prior HUD approvals. The choice of investments from the approved list should be made using the criteria developed in the.remainder of this paragraph. C. Determination of Investment Type The determination of the best or appropriate types and mixtures of investments is dependent on several factors. The primary objective is safety. Once that objective is attained, the optimum return on the investment should be consistent with the goals of the cash .management program of the HA. The factors that should be taken into account include the fallowing: (1) Safe - Safety is achieved through adherence to the list of permitted -; investments which are backed by the full faith and credit of; or a } guarantee of principal and interest by, the U.S. Government, a Government agency or issued by a Government-sponsored agency, coupled with an appropriate maturity date. (2) Yield - The HA, should strive to achieve the highest yield consistent with the other factors of the investment policy. Tax-exempt securities are not appropriate for investment by a HA because it would not benefit from the tax advantage. (3) Li uidi - All investments must be capable of being liquidated on one day's notice. Therefore, no investments may be made which impose a longer notice period for redemption or which are not readily marketable. (4) Maturi - Investments should be scheduled to mature when the funds are needed. Sale of securities prior to maturity should be avoided due to the inherent risk. {If the market interest rate increases above the 4 ................. yield on the investment, the market value of the securities will decline.) Investments shall be limited to securities maturing in periods of up to one year, or such lesser period that coincides with expected disbursements by the HA, but not beyond the current financing cycle. HAs may invest in securities up to three years for the investment of operating reserves. (S) Amount - The best or most appropriate type of investment depends, to some degree, on the amount available for investment because certain investments require a large initial amount. i (6) Administrative Cast a In choosing an investment, a HA must consider the administrative work involved, particularly with regard to investments of short duration. Substantial amounts can be invested for periods as short as one or two days. However, the administrative costs with small amounts may be greater than the return on the investment, thus would not be justified or cast effective. Administrative casts will be higher with a more frequent turnover of investments and must be taken into account together with the yield and term in determining the optimum investment strategy. d. INVESTMENT OF FUNDS H LD BY HA FISCAL ACTENIS Funds held by the Fiscal Agent in any trust funds shall be invested in strict accordance with the Resolution establishing such funds. Where the Resolution contains no provision concerning the investment of funds, the funds shall be invested in securities approved for General Fund Investment provided such investment will mature or may be redeemed at the option of the purchaser at not less than the purchase price on or prior to the date such funds are required to be disbursed by the Fiscal Agent. A description of funds established by HA resolutions authorizing the issues of bonds is attached. e. Investment Register An investment register or other record shall be maintained by the HA or its agent. The register/record shall be maintained in such a manner that a determination can be made as to the amount of investment securities purchased from each fund and at a minimum provide for recording a complete description of investment instrument, date of purchase, purchase 5 ................. .............................................. prig, interest rate, and applicable date of sale or maturity. The investment register/record may also be used to identify the source of funds invested (i.e., modernization or development funds,,tenant security deposit funds, operating funds). f. Internal Controls `HAs shall implement the following internal controls to assist in controlling investments and preventing loss or misuse. (1) Investment transactions shall be authorized by the HA governing board and documented in the board minutes. (2) Investment documents shall be kept in a safe firer-resistant locked file cabinet, safe deposit box, or ether similarly secured location. t . (3) Individuals responsible for custody of securities shall be someone other than an individual maintaining the accounting records. , (4) Investments shall be maintained in a custodian or trust account. (5) Investments shall be in the name of the HA. (6) Investments shall be recorded in detail in an investment ledger. (7) A system shall be in place to insure that all interest earned is collected and credited to the appropriate HA records. (8) Investments shall be reconciled periodically to the detailed record (investment ledger). 7. CASH MANAGEMENT A major tactor contributing to the success of an investment program is the delegation of responsibility and authority for developing and executing it. A SIA should compare the cost of establishing a cash management program in-house (if qualified professional staff' are available) to contracting out. If HAs contract for cash management and investment services, then the organization should have qualified personnel to achieve cost-effectiveness. Commercial banks and savings and loans association offer such services. i 6 Good cash management, which is an objective of management, creates responsibilities .for the use of funds. Such responsibilities are placed an both the HA and HUD for a successful program to benefit bath. The primary goals.of cash management are to assure the availability of cash for transaction needs, preserve the value of cash resources and earn the maximum return on funds until disbursed. a. Cash Management by the HA ~ The HA should compare the return from an in-house cash management program with a program managed by an agent. If the HA finds that administrative casts of an in-house program are such that the net yield on investments is less than that obtainable through an alternative, the general rule is that the HA should use that alternative. b. Cash_Management by an Agent As an alternative to an in-house cash management program., a HA may enter into a contract with an approved governmental unit such as a State agency established for this purpose (see attachment A, #6, Municipal Depository Fund), or a financial institution (excluding investment bankers and brokerage houses) to administer its cash management program. Such a program may include any of the functions of cash management, i.e., receipts, disbursements and investments. Such a contractual arrangement will give a small HA the expertise and administrative skills which it would not otherwise be expected to have and often can make a cash management program cost-effective. C. 'Temporary Funds Available for Investment (1) Each HA with an average cash balance of $20,000 or more shall invest such funds in HUD-Approved Investment Securities in order to meet the PFS Target Investment requirements (24 CFR Section 990.109 (e), 24 CFR §950.725 (e)). HAs with average cash balances of less than $20,000 shall also invest such funds in HUD-Approved Investment Securities. For the purpose of calculating operating subsidy eligibility under the PFS (24 CFR Section 990.109 (e), 24 CFR §950.725 (e)) these TIAs shall make a reasonable estimate of investment income for the requested budget 7 year. Please note that investment income estimates for these HAs are not subject to the mandatory year-end adjustment. (2) See Handbook 7475.13, Performance Funding System (PFS), regarding reporting requirements for pr'oj*ecdng investment income for the purpose of calculating PFS operating subsidy eligibility. These requirements mandate a minimum investment income (Target Investment Income) for calculating operating subsidies and allow HAs to retain investment income in excess of the required amount. HAs should review these requirements carefully in developing their cash mahagenient programs. S. MONMRING The Office of Finance and Budget, PK will continue to oversee the overall cash management policy and programs for HAs. Actual monitoring of each HXs cash management will continue to be the responsibility of the respective Area, Office. Monitoring will be accomplished through review of documentation submitted to support the investment income shown in the calculation of operating subsidy and during on-site monitoring reviews. If there are questions regarding the contents of this Notice, please contact the Office of Finance and Budget at 202-708-1872. Assistant Secretary for Public and Indian Housing Attachments 8 ........................ ATTACHMENT A HUD APPROVED INVESTMENT INSTRUMENTS 1. Direct C3bU tions of the Federal Government Backed by the Full Fait and Credit of the United Mates a. U.S. Treasia Bilis These securities are short-term obligations which a HA or its went may purchase directly. Treasury Bills with 3- month and 6-month maturities are issued weekly and these with 9-month and 12-month maturities are issued monthly. The minimum denomination is $10,000. They are issued on a discount basis and are redeemed at par upon maturity. _ U.S. Treasury Bills are available for purchase at any time after issuance from investment departments of banks and from dealers in investment securities. Purchases-stay be made conveniently using the HA's depository bank. Treasury Bills may be acquired by subscription on the issue date from a Federal Reserve Bank or branch in amounts not in excess of $200,000. Retailed information is contained in the weekly or monthly announcements which may be received regularly upon application to a Federal Reserve Bank or branch. b. U.S. Treasury Notes and Bands These securities are issued periodically by the Treasury Department through Federal Reserve Banks and branches. They are medium to long-term obligations which a HA or its agent can only purchase in the secondary market to assure that they will mature at a date which coincides with scheduled disbursements by the HA. Outstanding issues may be purchased from banks or dealers in investment securities at the market price which on any given day may be more or less than-the face amount. (1) U.S. Treasury Notes These nates mature in not less than one and not more than 10 years from the issue date and bear interest at fixed rates payable semi- annually. t 1 (2) U.S. Treasu� Bonds These bands mature after ten years from the issue date and bear interest at fixed rates payable semi- annually. Many issues of bands are redeemable on call by the Treasury Department before maturity. The yield of such issues usually is computed to the first call date which may be as much as 5 years prior to maturity. tbliations o Federal Government Agencies a. pedeml.Financing Hank The Federal Financing Hank is authorized to purchase obligations held by Federal agencies and to issue obligations to the public. b. GovernmentNational Mort a Association GNMA Mort a e- Hacked Securities (GNMA I and GNMA II1 The securities, guaranteed by GNMA are issued by an issuer (a GNNIA- approved mortgage lender). The securities are backed by a pool of government-insured or guaranteed mortgages. The holders of the securities receive monthly payments of principal and interest. The minimum denomination issued is $25,000. The difference in GNMA I and GNMA II is that the GNMA II payment date is on the 20th of the month and the GNMA I payment date is on the 15th; GNMA II uses a central paying agency whereas GNMA I has individual issuers sending checks to investors; and GNMA II has interest rates that vary within a one percent range. The maximum maturity for GNMA I and GNMA II is 30 years, except that GNMA I project leans mature in 40 years. C. GNMA Participation Certificates These securities, guaranteed by GNMA, were sold by GNNIA as the trustee with various ether Federal agencieswas trusters. They represent beneficial interest in future payments of principal and interest on mortgage pools. Their maturities range between one and 20 years and the minimum denomination is $51000. 2 d. Maritime Administration Merchant Marine Bonds. Note;& and Qb These securities are issued by shipping companies and are backed by the full faith and credit of the U.S. Government. Each issue is further secured by a first preferred ship or fleet mortgage. Maturities and denominations vary. e. Small-Business AdminiagAtion (SD&A -Small Business IMLestment CgMoraggn (5BIQ Debentures When authorized by appropriation acts, the SBA may guarantee principal and interest payments on debentures of SBIC. The SBA may also pool - these debentures and sell SBA- guaranteed debentures. These issues have maturities of 10 years and are issued in $10,000 denominations. f. Tennessee Valle y Authoriq-(IYA ) Power Bonds and— Notes - These securities are secured by a first charge on net power proceeds. Payment of interest and principal on them is ranked ahead of annual payments to the U.S. Treasury. They have been issued in multiples of $1,000. 3. Securities of Government-Sponsored Aggricies U i R a. Farm Credit Consolidated System-Wide-Discount Notes These notes are the secured joint and several obligations of the Farm Credit System which consists of the Federal Land Banks, the Federal Intermediate Credit Banks, and the Banks for Cooperatives. They are issued in denominations of $5,000 and maturities are authorized from 5 to 365 days. b. Federal Farm Credit Banks Consolidated-System-wide..Bonds These bonds are the secured joint and several obligations of the Farm Credit Banks. Their issuance supersedes individual bond issues by the Federal Land Banks, the Federal Intermediate Credit Banks, and the Banks for Cooperatives. They are issued in multiples of $1,000 for maturities in excess of 13 months and in multiples of $5,000 for shorter maturities. 3 e. federal Home Loan Banks Consolidated Obligations These securities are the secured joint and several obligations of the Federal :Hume Loan Banks comprised of: (1) Bonds Bands which have maturities of one year or more. They are issued in mu�tiples of $10,000, $25,000, $100,000 and $1,000,000. 1 (2) Nates Notes which have maturities of less than one year. They are issued in multiples of $10,000, $25,000, $100,000 and $1,000,000. (3) Discount Dates Discount nates which have maturities ranging from 30 to 170 days. They are.issued in denominations of$100,000 and $1,000,000. d. FHLMC Mortgage Partipipation Certificates (PQ (QuarantegAd These certificates represent undivided interest in specific fixed rate, first lien conventional and residential. mortgages. FHLMC provides monthly interest and principal payments. The final payment is the first of the month and year in which the last monthly payment on the last maturing mortgage is scheduled to he paid. e. FHLMC Collateralized Mortgage Obligations (CMOs) CMGs are general obligations of FHLMC that are secured by a single pool of conventional mortgages owned by FHLMC. CMOs are issued in several classes with varying stated maturities. Semiannual principal payments are allocated to each class of the CMOs in the order of the stated maturity of each class so that no principal payrrents are made to holders of a class until classes with an earlier maturity are retired. f. Federal National Mortgage Association FiVhW Debentures These debentures are issued in denominations ranging from $10,000 and with maturities ranging from 20 to 25 years. 4 _ _.. _ g. FNMA Motes The minimum investment in these nates is $50,000 with maturities ranging from 1 to 20 years. h. FNMA Short-Terra Discount Notes These note are similar to commercial paper and are tailored to the individual needs of investors. They are sold at published rates with maturities of 30 to 270 days and in denominations ranging from $5,000. i. FNMA Capital .Debentures These debentures are subordinated to the npn-capital debentures, notes, and short-term discount notes. They were last issued in 1975 in a $10,000 minimum denomination and-with maturities of 5 and 25 years. j. Student Loan Marketing Associations (SI!W Obligations SLMA issues obligations comprises of guaranteed student loans as follows: (1) Floating Rate and Master Nates. These notes bear interest at rates that vary with the 91-day Treasury Bill rate. Short-term borrowing have an original or remaining term maturity of one year or less. (2) The Series.E and F Floating; Rate Notes. These notes bear interest at rates which vary with the 91-day Treasury Bill, except that each issue has fixed minimum and maximum rates known as interest rate "collars" for any quarterly interest period. (3) Zero Coupon Dotes These notes are shown at net proceeds adjusted for accretion of discount. . ' 5 _... 4. Demand and Savings Deposits Demand and savings deposits at commercial banks, mutual savings banks, savings and loan associations and credit unions are permitted for HA funds provided that the entire deposit is insured by the Federal .Deposit Insurance Corporation. (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF). A deposit in excess of the insurance coverage may be made at a depository institution provided that'it is 100 percent collateralized by any of the securities listed under paragraphs 1, 2, and 3 of this Attachment Care should be taken that withdrawals may be made on demand without loss of interest and without penalty. S. Money Market Deposit Accounts Money-Market Deposit Accounts at depository institutions that may not be insured fully by the FDIC or NCUSIF are permitted provided that the certificates are fully backed by 100 percent collateral consisting of securities fisted under paragraphs 1, 2, or 3 of this Attachment. When accounts exceed the $100,000 insurance limitation, their safety also may depend on the HA's control of the underlying collateral which roust consist of clearly identified (not pooled) U.S. Government securities. .Possession of the collateral securities and a continuous perfected security interest may be the only sure protection against loss in case of financial institution failure.. 6. Municipal DepositoryFund A Municipal Depository Fund (Fund) or Local Government Investment Fool which is established by States, municipalities, units of local government or other political subdivisions to serve as an investment fund for I AAs is permitted. The securities purchased by a Fund shall be on the: HUD-approved list of investment securities. HA shall have either an undivided or divided interest in securities comprising the .Fund. The Fund shall be under the control of the Investment Company Act of 1940, and its objective shall be clearly stated. The investment objective of the Fund shall be to obtain as much income as possible consistent with the preservation and conservation of capital. The Fund shall disclose clearly the basis of earnings and how they ark distributed. RA shall obtain a statement of potential default and risk and a clear demonstration that withdrawals from the Funds will not be so restricted as to impair a HA's day-to-day cash management 6 meds. The management fee shall be fixed at a reasonable amount and management shall be passive. HA shall limit the amount of funds invested in the Fund to no more than 30 percent of a FWs available investment funds. The Fund shall disclose the relationships of the investment adviser, manager, trustees, custodian and transfer agent. Each financial advisory relationship shall be evidenced by a written document executed prior to, upon, or promptly after the inception of the financial advisory relationship, or promptly after the creation or selection of the issuer. If the issuer does exist or has not been determined at the time the relationship commences, that written document shall set forth the basis of compensation fob the financial advisory services to be rendered. 7. Super NOW Accounts Super NOW accounts have been available and approved for public funds since January 1983. They offer a relatively.high market rate and are: Hilly transactional (have no limitations on the number of checks or transfers). Insurance and collateral requirements are as above for subparagraph a Demand and Savings Deposits. 8. Certificates of D posit a. Certificates of Deposit are permitted at depository.institutions that are insured by an agency of the Federal Government. Caution must be exercised for certificates exceeding the $100,000 insurances limit or when the term is longer than 30-90 days. Although the certificates' rate of return may be attractive for larger amounts and longer terms, U.S. Treasury securities offer superior safety and liquidityf for the same amounts and terms. Certificates shall be in the HA.'s name. In addition a General Depository Agreement must be executed by each financial institution that issues a Certificate of Deposit. b. Certificate amounts above $100,000 are permitted provided that the excess is 100 percent collateralized by clearly identified (not pooled) U.S. Government securities. Possession of the collateral securities and a continuous perfected security interest may be the only sure protection against loss in case of bank failure. C. Brokered deposits should be avoided because it is impassible to get $100,000 federal insurance on a number of deposits placed by brokers. 7 ........................ 9. Repurchase A eements Repurchase (repos) agreements for a term not to exceed ail days may be entered into with Federally insured depository institutions to purchase and sale of securities identifier) under paragraphs 1., 2, and 3. A repurchase agreement is an: agreement negotiated with a bank usually for a short period (1 to 7 days) wherein securities approved for investment are purchased from that bank at a stated price with the bank agreeing to repurchase them on a specified date for a specified amount. The minimum may vary, although it is usually$100,000. There are three main types. (1) fixed ter , where both parties are bound to the negotiated time period, (2) decet mand, where the agreement stays in effect until terminated by either party, and (3) day-today, where daily renewal is by mutual consent and 24- hour notice is required for termination. The HA should review existing and future repos for compliance with the following certifications. Prior approval by HUD is not necessary, however, the repos seller depository or its agency must provide a written certification to HUD, Assistant Secretpry for Public.and Indian Housing (Office of Finance and Budget), the Area Office, and to the HA. a. that the depository's repo program complies with applicable Federal and State statutes and regulations and that the program does not involve sales or loans of Federal securities by securities dealers that are not regulated or that report to the Federal Reserve Board; b. that the depository owns the underlying Federal securities (approved for repurchase under HUD guidelines) when the repo interest is sold and that the value of the securities is equal to or greater than the amount the HA pays for the repo; C. that the FSA. has possession of the securities (or the HA will take possession of the securities) or an independent custodian (or an independent third party) holds the securities on behalf of the HA as a bailee (evidenced by a safe keeping receipt and a written bailment for hire contract), from the time the repo interest is sold to the HA and will be (or is expected to be) maintained for the full term of the repo; d. that the repo agreement and any related documents identify specific Federal securities related to the specific repo purchased by the 8 e. that the repo interest does not represent any interest in a pool or fund of Federal securities for which registration under the Investment Company Act of 1340 may be required; L that the HA will have a continuous perfected security interest in the underlying Federal securities under State or Federal law for the full term of the repo (disclosing the method by which perfection has or will be accomplishe4 i.e., by possession, filing, registration of book-entry securities and/or Federal preemption of State law by Federal regulation); g. that the depository or a reporting dealer selling the repo has not received any adverse financial report from a credit reporting agency, State or Federal regulatory agency; and h. that the depository will not substitute other securities as collateral, except to increase the value of the repo security to match the repds's purchase price. 10. Sweep Accounts Sweep Accounts is a contractual agreement between a bank and a HA. which provides that the bank will regularly "sweep" or transfer any available collected balances from the HA's account into repurchase agreements. The Sweep Accounts agreement shall include all the certification provided in the Repurchase Agreement and adherence to paragraph 4-3, Collateralization of Deposits. 11. Separate Trading Registered Interest and Principal of Securities Separate Trading of Registered Interest and Principal of Securities (STRIPS) are Treasury-based zero-coupon securities which consist of interest or principal on U. S. Treasury securities. STRIP'S were issued in minimum increments of $1,000. STRIPS pay no interest until maturity and the rate of return is "locked in" at the time of purchase. The delivery of STRIPS is accomplished by wire transfer through the Federal Reserve book entry system. STRIPS shall be in the name of the HA. 12. Mutual Funds A Mutual Fund (Fund) is an investment company that makes investments on behalf of.individuals and institutions. The Fund pools the money of the investors and buys various securities that are consistent with the Fund's objective. 9 ........................ a. Mutual Fund Criteria 'The Fund shall be organized as a no-lead, open-end, diversified management company and its shares shall be registered under the Securities Act of 1933. The Fund shall be under the control of the Securities Exchange Act of 1934, Investment Advisers Act of 1940 and the Investment Company Act of 1940. The investment objective of the Fund shall be to obtain as much income as possle'.consistent with the preservation, conservation and stability of capital. The%mutual fund objective cannot be changed without the prior approval of fund shareholders. b. The securities purchased by the Fund shall be on the HUD-approved list of investment securities. The Fund will not engage in options or financial futures. The HA shall limit the amount of funds invested in the Fund to no more than 20 percent of the HA's available investment funds. The Fund shall disclose clearly the basis of earnings and how they are distributed. The HA. shall obtain a statement of potential default and risk. The HXs invested funds shall be accessible to the 14A daffy. It shall be demonstrated that any limitations on withdrawals will not impair the HXs day-to-day cash management needs. C. The management fee shall be fixed at a reasonable amount. The Fund shall disclose the relationships of the investment advisor, manager, trustee, custodian and transfer agent. The Fund shall clearly state all services (such as wire transfers and check writing privileges) and charges. d. Investment in the Fund shall be authorized by a Board Resolution. A certified copy of the resolution shall accompany the initial application for the Fund. e. The Fund (or custodian) and the HA shall sign the General Depositary Agreement, H JD-51999 dated ,lune 1991, modified as follows: (1) In the title, "(Mutual Fund)„ shall be added after General Depository Agreement. Whenever "depositary" appears in the text it also refers to "mutual fund." (2) The HA's name and location (including county or city) will be filled in the first clause of the General Depository Agreement. The name, location and the HA's mutual fund account number also will be filled in the first clause. The second clause remains unchanged. 10 (3) The third clause is substituted as fellows: "Whereas, under the terms of the: Contract the HA shall invest in a mutual fund (herein called the depository) only on the terms set forth hereafter. Mutual fund is defined as an investment company that makes investments on behalf of individuals and institutions. The depository shall be oiganized as a no- load, open-end, diversified management company and its shares shall be registered under the Securities Exchange Act of 1933. The depository shall be under the control of the Securities Exchange Act of 1934, the investment Advisers Act of 1940 and the Investment Company Act of 1940. HA shall acquire shares in a mutual fund whose portfolio includes only securities on the HUD-approved list of investment securities." (4) Paragraphs 1, 3, 11 and 12 are deleted. (5) Paragraphs 4 through 6 are modified to read as follows: (a) Paragraph 4: Any shares purchased from HA funds shalt be held by the depository in safe-keeping for the HA until sold. Dividends and distributions on such shares and the proceeds from the sale thereof shall be used to purchase additional shares or remitted directly to the HA. (b) Paragraph 5: The language "from said Accounts" is deleted. (c) Paragraph 6: The language "in respect of the Accounts" is deleted. (d) Paragraphs 7 through 10 are not changed. (e) The additional language can be typed on a separate page, attached and duly executed. Xhe following language shall be added to the bottom of the page: Page number incorporated in and made a part of the General Depository Agreement between (HA) and (Depository). 11