§ 6.50.030. Investment guidelines for Municipal Funds.
A.
Definitions. For the purposes of this section, the following definitions shall apply:
Asset Backed Commercial Paper (ABCP) means a short-term investment vehicle with a maturity that is typically between 30 and 270 days. The security itself is typically issued by a bank or other financial institution. Unlike commercial paper, the notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs.
Bank means a state or federally chartered commercial or mutual bank, savings and loan association or credit union located in the United States and having insurance of accounts through the appropriate federal insuring agency of the United States.
Broker/Dealer means a qualified institution including depository banks, any Federal Reserve Bank, government securities dealers, or broker dealer registered in compliance with the Securities Exchange Act of 1934.
Certificate of deposit means a nonnegotiable certificate of deposit or other depository agreement issued or to be issued to the Municipality by a Bank.
Collateralized Debt Obligation (CDO) means an investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or "slices." Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.
Commodities means bulk goods such as grains, metals, and foods traded on a commodities exchange or on the spot market.
Contingency Reserve Portfolio means that portion of the Portfolio used as a defensive fixed income portfolio, with an average duration within half a year of its benchmark. The Contingency Reserve Portfiolio is intended as a buffer between the Working Capital Portfolio and the Strategic Reserve Portfolio. The objective of this fixed income portfolio is to provide a high level of current income consistent with low volatility of principal. The Contingency Reserve Portfolio is not designed to provide daily liquidity yet seeks higher returns with some preservation of principal by employing a broader range of sectors and tactically managing duration.
Derivatives means a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes.
Equity Investments means investments in foreign or domestic stocks or mutual funds that have investments in foreign or domestic stocks.
FDIC means the Federal Deposit Insurance Corporation.
FHLMC or Freddie Mac means Federal Home Loan Mortgage Corporation.
FNMA or Fannie Mae means Federal National Mortgage Association.
Forward Contract means a cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date. (Most forward contracts don't have standards and aren't traded on exchanges. A farmer would use a forward contract to "lock-in" a price for his grain for the upcoming fall harvest.)
Futures Contract or Futures means a contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quality of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
GNMA or Ginnie Mae means Government National Mortgage Association.
IBRD means the International Bank for Reconstruction and Development.
Index Fund means a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
Interfund loan means a loan from a MCP to a Municipal Fund extending outside a fiscal year.
Municipal Cash Pool means that portion of the Portfolio that is invested by external managers and represents the Duration/Risk Portfolio investment objective of this part of the Code.
Mutual Fund means a diversified mutual fund, including index funds, registered under the Securities Act of 1933 and Investment Company Act of 1940.
Non-Dollar Denominated Securities means a financial instrument that has its face value denominated in a currency other than the U.S. dollar.
Operating Policy & Procedures means the Municipality's Policy & Procedures established and related to investments.
Options means a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. In return for granting the option, the seller collects a payment (the premium) from the buyer.
Portfolio means aggregate balance of all Municipal funds currently under investment. It excludes real estate owned by the Municipality, including real estate owned by the Heritage Land Bank and any component unit of the Municipality. Portfolio excludes debt proceeds in escrow for defeased debt. Portfolio excludes assets invested within the MOA Trust Fund, the Police and Fire Pension, the Municipal Prefunding Trust, and the Police and Fire Medical Trust.
Portfolio Benchmark means a blended benchmark consisting of the individual portfolios respective benchmarks, weighted at their beginning-of-period market values throughout budgetary and economic cycles, taking into account the Municipality's investment risk constraints and the cash flow characteristics of the Portfolio.
Rated Bank means:
1.
A bank whose short term debt issues are rated at least A-1 or P-1 or F-1, or whose long term debt issues are rated at least A by Standard and Poor's (S&P), Moody's Investors Service (Moody's), or Fitch Ratings (Fitch) or the equivalent by a nationally recognized rating service; or
2.
A bank whose letters of credit secure third-party debt issues rated at least A by S&P or its equivalent by a nationally recognized rating service; or
3.
A bank which is a subsidiary of a one-bank holding company, all of whose commercial paper is rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch or the equivalent by a nationally recognized rating service.
Real Estate Investments means land and all physical property associated with it. This includes all investments that have an interest in land ownership including real estate investment trusts.
Securities means any authorized investment listed in subsection D.
Securities Lending means an investment strategy in which investors make short-term loans of their securities to generate incremental revenues from their portfolios. Loans are typically collateralized by at least 102 percent with cash or government backed securities.
Short Sales or Selling Short means the sale of a security or contract related to a security not owned by the seller. Selling Short is a technique used to take advantage of an anticipated price decline in the security.
Split Rated or Split Rating means when a debt security or a debt issuer has ratings from two or more nationally recognized rating agencies that are different. In this situation, the lowest rating applies for the purposes of this section of the Anchorage Municipal Code when determining if an investment is an Authorized Investment.
Strategic Reserve Portfolio means that portion of the Portfolio that is analogous to an intermediate fixed income portfolio, managed with a maximum duration no greater than one-year in excess of its benchmark. The Strategic Reserve Portfolio is intended for residual cash balances for which the Municipality does not foresee utilizing over a rolling three-year forecast period. The objective of the Strategic Reserve Portfolio is to generate excess return through effective sector selection, issue selection, and duration management.
Structured Investment Vehicles (SIVs) means a special kind of conduit or a special purpose vehicle or entity that is bankruptcy remote, which means that it is a separate business entity and is not rolled up into the sponsoring company's balance sheet. It is a type of structured vehicle that issues ABCP. Many SIVs are administered by large commercial banks or other asset managers such as investment banks or hedge funds. They issue ABCP as a way to fund purchases of investment grade securities and also to earn the spread based on the term to maturity differential. They usually invest the majority of their portfolios in "AAA" and "AA" assets, which include an allocation to residential mortgage backed securities. In contrast to a multi-seller or securities arbitrage conduit, a SIV does not employ credit enhancement, and the underlying SIV assets are marked to market at least weekly.
Swap means a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.
TBA means a term used to describe a forward mortgage-backed securities trade. Pass-through securities issued by Freddie Mac, Fannie Mae and Ginnie Mae trade in the TBA market. The term TBA is derived from the fact that the actual mortgage-backed security that will be delivered to fulfill a TBA trade is not designated at the time the trade is made. The securities are "to be announced" 48 hours prior to the established trade settlement date. The settlement procedures of mortgage-backed securities TBA trades are established by the Bond Market Association.
Variable Rate Demand Obligation (VRDO) means a debt security which bears interest at a floating (variable) rate adjusted at specified intervals (such as daily, weekly, or monthly) and can be redeemed at its holder's option when the rate changes. Also known as a low floater, variable rate demand note, or variable rate demand bond.
Working Capital Portfolio means that portion of the Portfolio managed for very short-term liquidity, typically with a duration band of zero to 270 days. The Working Capital Portfolio is intended to provide for same-day liquidity for working capital management. In addition to providing liquidity, the objective of the Working Capital Portfolio is to preserve principal and generate current income by investing in a portfolio of high-quality, short-term instruments.
B.
Management of Municipal Funds.
1.
It is the policy of the Municipality to invest public funds in a manner that provides the highest investment return consistent with preservation of capital while meeting the daily cash flow demands of the Municipality.
2.
Investment decisions shall be guided by this section, and the Operating Policy & Procedures for investment of Municipal funds, as modified from time to time by the Chief Fiscal Officer.
3.
The Chief Fiscal Officer shall obtain the services of such investment managers, advisors, custodians and other professionals as are reasonably prudent and necessary to manage and invest all Municipal Funds.
4.
The Chief Fiscal Officer shall solicit input from the Investment Advisory Commission members prior to the final selection of any service providers.
a.
For an investment manager, advisor, custodian or other professionals contracted under the provisions of this section, assembly approval is not required;
b.
The Chief Fiscal Officer shall report within 90 days to the Assembly, by Assembly Informational Memorandum, on contracts entered into pursuant to the provisions of this section including, but not limited to, the duties of be performed by the contractor and the compensation paid.
5.
Restricted funds, whether subject to unrealized gains or losses or realized gains or losses, shall be deposited into separate and restricted alternative investments, bank accounts or other accounts which may be interest bearing and held by financial institutions for the benefit of the municipality, with all revenues and expenses associated with such funds allocated to such investments or accounts. Restricted funds may be co-mingled with other similarly restricted funds within the discretion of the chief fiscal officer.
C.
Investment Objective. The primary objectives, in priority order, of the Municipality's investment activities shall be:
1.
Safety. Safety of principal is the foremost objective of the investment program. Investments of the Municipality shall be undertaken in a manner seeking to ensure the preservation of capital in the overall Portfolio. To attain this objective, diversification is required to reduce overall Portfolio risk while attaining market rates of return.
2.
Liquidity. The Municipality's investment Portfolio shall remain sufficiently liquid to enable the Municipality to meet all reasonably anticipated operating requirements.
3.
Return on Investment. The Municipality's investment Portfolio shall be designed with the objective of outperforming the total Portfolio Benchmark.
4.
Duration/Risk Portfolio. The Municipality's investment Portfolio shall be structured into three duration portfolios, each designed to fulfill a specific liquidity requirement. Allocations into each portfolio shall consist of an absolute value derived from a rolling three-year forecast, re-evaluated on an annual basis.
D.
Authorized Investments. In order to provide maximum security for the investment of public funds and to provide the greatest interest revenue consistent with safety, only the following investments of the Municipality's funds are authorized (where the issue or issuer is Split Rated, the lower of the ratings shall apply):
1.
Obligations issued or guaranteed by the U.S. government, U.S. agencies or U.S. government-sponsored corporations and agencies.
2.
Corporate Debt Securities that are guaranteed by the U.S. government or the FDIC as to principal and interest.
3.
Taxable and tax-exempt municipal securities having a long term rating of at least A- by a nationally recognized rating agency or a taxable or tax-exempt municipal security having a short term rating of at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch.
4.
IBRD Debt Securities issued and guaranteed by the IBRD and rated AAA by a nationally recognized rating agency.
5.
Commercial paper rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch.
6.
Bank debt obligations, including unsecured certificates of deposit, notes, time deposits, and bankers' acceptances (with maturities of not more than 365 days), and deposits with any Bank, the short-term obligations of which are rated at least "A-1" by S&P or "P-1" by Moody's or "F-1" by Fitch and is either:
a.
Incorporated under the laws of the United States of America, or any state thereof, and subject to supervision and examination by federal or state banking authorities; or
b.
Issued through a foreign bank with a branch or agency licensed under the laws of the United States of America, or any state thereof, or under the laws of a country with a Moody's sovereign rating for bank deposits of "Aaa", or an S&P sovereign rating of "AAA", or a Fitch national rating of "AAA", and subject to supervision and examination by federal or state banking authorities.
7.
Repurchase agreements secured by obligations of the U.S. government, U.S. agencies, or U.S. government-sponsored corporations and agencies.
8.
Dollar denominated corporate debt instruments rated BBB- or better by S&P's Rating Service (investment grade) or the equivalent by another nationally recognized rating agency.
9.
Dollar denominated corporate debt instruments, rated below BBB- by S&P's Rating Service or the equivalent by another nationally recognized rating agency, including emerging markets.
10.
Dollar denominated debt instruments of foreign governments rated BBB- or better by S&P's Rating Service or the equivalent by another nationally recognized rating agency.
11.
Asset Backed Securities (ABS), other than commercial paper, collateralized by: credit cards, automobile loans, leases and other receivables which must have a credit rating of AA- or above by S&P's Rating Service or the equivalent by another nationally recognized rating agency.
12.
Mortgage Backed Securities, including generic mortgage-backed pass-through securities issued by GNMA, FHLMC, FNMA, Non-agency mortgage-backed securities, Collateralized Mortgage Obligations (CMOs), or Commercial mortgage-backed securities (CMBS), which must have a credit rating of AA- or better by S&P's Rating Service or the equivalent by another nationally recognized rating agency.
13.
Debt issued by the Tennessee Valley Authority.
14.
Money Market Mutual Funds rated "Am" or better by Standard & Poor's Rating Service, or the equivalent by another nationally recognized rating agency, and consisting of any or all of the securities authorized for investment in this section of the Code.
15.
Alaska Municipal League Investment Pool (AMLIP), consistent with all other provisions of this section of the Code.
16.
Mutual Fund Investments so long as the overall nature of the fund is generally consistent with this section of the Code.
17.
Interfund Loans from a Municipal Cash Pool to a Municipal Fund.
E.
Prohibited Investments. Prohibited Investments for the Portfolio are those not listed under Authorized Investments and specifically include Equity Investments. Prohibited Investments also include the sale or purchase of futures or option contracts for any security.
Other Prohibited Investments include:
1.
SIVs;
2.
ABCP;
3.
The selling short of any security;
4.
Non dollar denominated securities;
5.
Commodities; and
6.
Real estate investments.
F.
Use of Derivatives. Derivatives shall not be used as an investment in the Portfolio with the exception of:
1.
TBAs; and
2.
Derivative securities of which the ultimate payment of principal and or interest on the security is guaranteed by the U.S. government or an agency of the U.S. government.
G.
Securities Lending. This type of program is permissible only if recommended by the Chief Fiscal Officer and approved by the Municipal Assembly.
H.
Reporting. The Chief Fiscal Officer shall submit to the Assembly on an annual basis reports addressing Portfolio performance and compliance. The annual report shall address the use of investment consultants and external money managers, the use of derivatives, securities lending activities and bank lines of credit. The report shall also include compliance with the requirements regarding Portfolio diversification, maximum holdings by type of authorized investment, and Portfolio performance compared with Portfolio benchmarks.
(AO No. 82-200(S); AO No. 97-60, § 1, 7-22-97; AO No. 2006-145, § 1, 10-31-06; AO No. 2009-80, §§ 1, 2, 7-21-09; AO No. 2013-70, § 1, 6-4-13)