CALIFORNIA PUBLIC FUND INVESTMENT PRIMER
CALIFORNIA PUBLIC FUNDINVESTMENT PRIMERCALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSIONUPDATED DECEMBER 2009 CDIAC No. 09-02
CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSIONThe Legislature created the California Debt and Investment AdvisoryCommission (CDIAC) in the wake of the financial changes wroughtby passage of Proposition 13. The commission maintains a databaseof public debt issued in California since 1985, conducts a continuingeducation program, publishes a monthly newsletter and publishes several reference materials, including this primer on investment practicesand guidelines for implementing statutory law governing investments.BILL LOCKYERCalifornia State Treasurer and ChairARNOLD SCHWARZENEGGERGovernorJOHN CHIANGState ControllerDAVE COXState SenatorCAROL LIUState SenatorANNA CABALLEROAssemblymemberTED LIEUAssemblymemberJOSE CISNEROSTreasurer and Tax CollectorCity and County of San FranciscoJAY GOLDSTONEChief Operating OfficerCity of San Diego 2009 All rights reserved.Permission is granted to use this document with written credit given to theCalifornia Debt and Investment Advisory Commission.Information in this document is current as of January 1, 2009.
CONTENTSINTRODUCTION1CHAPTER 1: PUBLIC FUND INVESTMENT ROLES AND RESPONSIBILITIES5Role of the Legislative Body6Role of the Investment Official9Role of the Oversight Committee/Advisory Committee11Role of the Investment Advisor13Role of the Financial Advisor21Role of the Broker/Dealer27Role of the Trustee31Role of the Custodial Bank34CHAPTER 2: INVESTMENT CONCEPTS, TERMINOLOGY, AND INSTRUMENTS39Components of a Debt Instrument39The Purchase or Sale of Investments44Investment Evaluation45Investment Evaluation Calculations49
Financial Products51Individual Instruments57CHAPTER 3: INVESTMENT PORTFOLIO DEVELOPMENT AND MANAGEMENTInvestment Policy9999Investment Reporting109Cashflow Forecasting110Evaluating Credit Risk124Structuring a Portfolio128Evaluating a Portfolio146Portfolio Operations Management160CHAPTER 4: OTHER (NON-SURPLUS) FUND INVESTMENT163Proceeds of Tax-Exempt Obligations163Typical Restrictions on the Investment of Certain Funds189Issuer Purchases of Their Own Tax-Exempt Bonds192Pension Fund Investment193CHAPTER 5: LIABILITY AND ETHICAL ISSUES211Liability for Public Fund Investment211Ethical Issues218APPENDIX A: RESOURCES225APPENDIX B: SAMPLE INVESTMENT DOCUMENTS229Sample Request for Proposals for Investment Advisory Services230Sample Investment Management Agreement (Discretionary)236Sample Investment Management Agreement (Non-Discretionary)239Sample Request for Proposals for Financial Advisory Services244
Sample Broker/Dealer Questionnaire255Sample Questionnaire for Custodial Services256Sample Request for Proposals for Trustee Services262Sample Request for Proposals for Arbitrage Rebate Services266Sample Quarterly Report by Treasurer to Governing Body274APPENDIX C: CREDIT RATING DESCRIPTIONS285INDEX301
INTRODUCTION
INTRODUCTIONThe California Public Fund Investment Primer(Investment Primer), intends to help public agencies understand and evaluate investments optionsby describing commonly used public investmentconcepts, terms, and instruments.In addition to the Investment Primer, the commission publishes a guide, Local Agency InvestmentGuidelines, on implementing California statutegoverning local agency investments.The commission published the Investment Primerin 2004 in response to legislative directives associated with the Orange County bankruptcy.Though the municipal investment market experienced rapid change since then, the considerations for public fund investing remain safety,liquidity and yield. Recent market events reinforce these considerations.PUBLIC FUND INVESTMENTCONSIDERATIONSThe Investment Primer is intended to guide thedevelopment and management of an investmentprogram while maintaining an appropriate balanceamong safety, liquidity and yield considerations.Preservation of principal (or safety) is the firstand most important consideration of public fundinvestment. Public agencies address the safetyconsideration through the implementation of aninvestment program that controls exposure tomany risks, including those related to principalloss through excess exposure to market or creditrisk.1 The public investment program must provide for third-party custody of the agency’s assetsto reduce the possibility of principal loss throughtheft or collusion. These strategies are intended todiscourage an investor from incurring risk inappropriate for the public agency, even if the investments provide higher yield.The second consideration of public fund investment is liquidity. Public agencies invest funds1See Chapter 2, Concepts and Terminology, Terms Relating to Investment Evaluation, Safety for a discussion of themeaning of “market” and “credit risk.”
that are intended to meet their ongoing cashdemands for operations and capital spending.One of the agency’s objectives must be to structure a portfolio that ensures adequate cashflowto meet both anticipated and unanticipated expenditures. Beyond projected cashflow needs,the agency must be prepared for the unexpected, such as when actual revenues fall short ofprojections due to a weakening economy. Theagency can meet unexpected cashflow needswith additional short-term investments or securities that can readily be sold without the risk ofa significant loss of principal.The third consideration of public fund investment (after safety and liquidity needs are met)is yield. Investment income and portfolio growthare important to public agencies to provide necessary funds for budgetary purposes. With preservation of principal and liquidity accounted for,public agencies must seek reasonable rates of return on their investments.This edition of the Investment Primer reflects lawas of January 1, 2009.2 The material presented isnot intended, however, to provide advice for specific investments. Commission staff encouragesinvestment officials to rely upon their counsel forlegal advice.ORGANIZATION OF THE CALIFORNIAPUBLIC FUND INVESTMENT PRIMERChapters of the Investment Primer are writtento promote quick access to information regarding public fund investment, by particular topic.They address the roles and responsibilities ofparticipants involved in public fund management, the types of investments available, investment-portfolio development, administration,operation, and applicable legal and ethical issues. Specifically:22 CHAPTER 1: PUBLIC FUND INVESTMENTROLES AND RESPONSIBILITIES describes theroles and responsibilities of participants typically involved in public fund management,including investment officials, legislativebodies, oversight committees, investment/financial advisors, brokers/dealers, and trustees/custodial banks. CHAPTER 2: INVESTMENT CONCEPTS, TERMINOLOGY, AND INSTRUMENTS defines and describes typical investment concepts and terms,and types of individual instruments availablefor public fund investment (including theircharacteristics, safety, liquidity and yield). CHAPTER 3: INVESTMENT PORTFOLIO DEVELOPMENT AND MANAGEMENT discussesinvestment policies, investment portfolioreporting, cashflow forecasting for both operating and capital funds, credit risk evaluation, structuring a portfolio, and evaluating aportfolio. CHAPTER 4: OTHER (NON-SURPLUS) FUNDINVESTMENT describes various issues relatingto the investment of tax-exempt bond proceeds and pension funds. CHAPTER 5: LIABILITY AND ETHICAL ISSUESdescribes certain liability issues for those responsible for public fund investment and ethical issues impacting public fund investment.To assist in prudent investment decision-makingand management, the Investment Primer also provides practical examples, such as sample contractsand checklists.Completing the Investment Primer are two appendices that identify public investment resources available to local officials and samples of documents; including, RFPs, rating agency tables,checklists, and other matters. For quick access toCDIAC cannot ensure the accuracy of this report beyond this date as a consequence of changes in law, authorities, or financial markets that occur subsequent to the publication of this Investment Primer .California Public Fund Investment Primer
specific investment-related topics and terminology, an Index has been included in the back ofthe Investment Primer.PAULINE MARXACKNOWLEDGEMENTSLAURA PARISIIn November 2008, CDIAC convened a workinggroup of public- and private-sector public financeindustry professionals to review and update theInvestment Primer. CDIAC thanks the followingmembers of the working group for contributingtheir professional expertise and time to updatethe Investment Primer for the benefit of the publicinvestment community:LYDIA ABREUInvestment and Operations ManagerCity of SacramentoWILLIAM BLACKWILLSenior Vice PresidentCitigroup Global Markets, Inc.ROD DOLETreasurer-Tax CollectorSonoma CountyTONY GARCIAVice PresidentWells Fargo IBSSCOTT HALLABRINGeneral CounselFair Political Practices CommissionDEBORAH HIGGINSPresidentHiggins Capital ManagementNANCY JONESManaging DirectorPFM Asset Management LLCCAROL LEWShareholderStradling Yocca Carlson & RauthChief Assistant TreasurerCity and County of San FranciscoTreasurerCity of Laguna BeachMs. Angelica Hernandez, principal researcherat CDIAC, coordinated the development ofthe Investment Primer. Ms. Barbara Tanaka,Deputy, assisted.The original edition of the Investment Primer wasprepared under contract with Chandler Asset Management, Inc., Fieldman Rolapp & Associates, andStradling Yocca Carlson & Rauth, a joint venture,with Carol L. Lew serving as project manager. KayChandler, President, Chandler Asset Management,Inc.; Conny Jamison, Former City Treasurer, Cityof San Diego; Edgar Johnson, Jr., Attorney-at-Law;Carol Lew, Shareholder, Stradling Yocca Carlson &Rauth; and Timothy J. Schaefer, President, MagisAdvisors, Inc. (formerly of Fieldman, Rolapp &Associates) were contributing authors to the original Investment Primer (2004).ADDITIONAL NOTESThe Investment Primer is intended for use by abroad group of individuals and entities involvedin the investment of public funds, including(1) members of the applicable agency’s governingbody, management, finance, and treasury staff,(2) outside professionals, such as brokers/dealers and investment advisors who work with localagencies on their investment programs, and (3)members of the public seeking more informationabout public agency investments.The Investment Primer is designed to provide accurate and authoritative information in regard tothe subject matter covered; it has been providedwith the understanding that, through the Investment Primer, neither the authors nor CDIAC areengaged in rendering investment, accounting, legal, or other professional services. This InvestmentIntroduction3
Primer should not be construed as providing legaladvice or opinions on any specific facts. Readersshould consult appropriate professional advisors ifsuch services are sought. Readers should note thateach public agency is unique, and while the Investment Primer can be of use to various types of publicagencies not everything contained in the InvestmentPrimer is applicable to every public agency (e.g., notall investments described in the Investment Primershould be part of every local agency’s portfolio).4California Public Fund Investment Primer
Chapter 1PUBLIC FUND INVESTMENT ROLES AND RESPONSIBILITIES
Chapter 1PUBLIC FUND INVESTMENT ROLESAND RESPONSIBILITIESThis chapter outlines the roles and responsibilities of the principal participants involvedin public fund investment, including their respective oversight, legal, and fiduciary obligations. The information contained in this chapter addresses questions that a public agency’slegislative body and/or oversight or advisorycommittee should ask staff. For staff, this chapter includes questions and information thatshould be included in Requests for Proposals(RFPs) and Requests for Qualifications (RFQs)Figure 1PRINCIPAL PARTICIPANTS IN PUBLICFUND INVESTMENT PUBLIC AGENCY LEGISLATIVE BODY PUBLIC AGENCY INVESTMENT OFFICIAL OVERSIGHT/ADVISORY COMMITTEE INVESTMENT ADVISOR FINANCIAL ADVISOR BROKER/DEALER TRUSTEE CUSTODIAL BANKwhen seeking public investment professionaladvisory services.As described in this chapter, day-to-day responsibility for investments is delegated to theinvestment official with oversight responsibility provided by the legislative body. Consultants typically are hired to assist the investmentofficial in investing public funds; including,investment advisors, financial advisors, and/orbrokers/dealers and typically report to the investment official. Trustees and custodial banksfrequently are retained by the investment official for safekeeping purposes.Additional oversight (aside from the legislativebody) can come in the form of an oversight committee, which may report directly to the legislative body and/or the investment official or anadvisory committee, which may report directlyto the investment official and/or the chief administrative officer of the local agency.Figure 2 illustrates the participants involvedin public fund investment and notes the corresponding reporting relationships.
Figure 2PUBLIC FUND INVESTMENT PARTICIPANTS’ TYPICAL REPORTING egates to and provides oversight of the investment official.2Primarily responsible for day-to-day investment.3Oversight committee provides monitoring/feedback to investment official and legislative body; advisory committee canprovide opinions to investment official.4Provides services to investment official.ROLE OF THELEGISLATIVE BODYDESCRIPTIONThe legislative body of a public agency is theelected or appointed group that has the primarypolicy setting role. For cities, this is the electedCity Council. For counties, it is the elected Boardof Supervisors, and for districts it may be anelected or appointed body, such as a school boardor a water district board.6TRUSTEES4California Public Fund Investment PrimerThe authority of the legislative body to invest orreinvest funds of a local agency may be delegatedfor a one-year period by the legislative body to thetreasurer of the local agency who assumes full responsibility until the delegation is revoked or expires. The delegation of authority may be renewedannually. If delegated, the treasurer must make amonthly report of transactions to the legislativebody (see California Government Code Section53607). Other investment reports that the treasurer may provide to the legislative body are discussedat length in Chapter 3, Investment Reporting.
The investment function of certain public entities, such as school districts, is overseen by otherpublic agencies, such as local offices of education(see Chapter 1213, Statutes of 1991 (AB 1200)and California Education Code Section 41015).For county funds deposited in the county treasury, the board of supervisors may delegate theirfiduciary responsibility to the county treasurer.If such a delegation occurs, the board of supervisors is no longer a fiduciary; nor is it subjectto the prudent investor standard (see CaliforniaGovernment Code Section 27000.3 and Section53607). Notwithstanding delegation, and exceptas described above, the legislative body’s responsibility typically includes an oversight function, asdescribed below.Counties may use an oversight committee toassist in satisfying their oversight function (asspecified in California Government Code Section 27131); cities and other public agenciesalso may elect to do so, though state law doesnot establish any guidelines for these agencies.If the agency uses such a committee, roles andresponsibilities of these committees should beclearly set forth (see Chapter 1, Role of the Oversight Committee).OVERSIGHT FUNCTIONThe oversight function of the legislative body involves reviewing the policies and reports of investment officials and oversight committees, ifprovided. A public agency treasurer may “render”an annual investment policy to his/her legislativebody at a public meeting (see California Government Code Section 53646). In addition, a treasurer may produce a quarterly investment reportto be given to his/her legislative body. This reportis separate and distinct from the required month-3ly transactions report described above. State lawgoverns the content of both the investment policyand the quarterly report (see California Government Code Section 53646; Chapter 3, InvestmentPolicy; and Chapter 3, Investment Reporting).Realistically, the oversight function probably isbest exercised through an oversight committee,assuming that the committee has the necessaryindependence and expertise to perform this role(see Chapter 1, Role of the Oversight Committee).QUESTIONS TO ASKINVESTMENT STAFFThe following are questions the members of thelegislative body might consider asking investment staff regarding the public investment function to assist in the fulfillment of their oversightfunction:3 What is the level of experience and expertiseof those individuals who are performing theinvestment function? Are the resources devoted to the investmentfunction adequate for the needs of the agency? If not, what enhancements are needed? Was the oversight committee’s opinionsought during the preparation of the annualinvestment policy (if such a committee existsand if the policy is completed)? In what areas, if any, does the local agency’sinvestment policy differ from standards described in the California Government Code? Are the investments of the agency in compliance with state law and with the investmentpolicy of the agency?Investment staff may not be able to answer some of the questions listed (such as questions regarding the averagematurity and effective duration of the portfolio) without the assistance of an investment advisor because of thetechnical information required. The inability to answer such questions should not necessarily be viewed as asignificant shortcoming or inability to effectively manage the public agency portfolio.Chapter 1: Public Fund Investment Roles and Responsibilities7
What is the general composition of the current portfolio by type of security, issuer,credit rating of investments, and liquidity(e.g., a breakout of securities in the portfolio into maturity increments such as overnight, one day to six months, six months toone year, etc.)? If the local agency invests in corporate securities, is there an approved list of corporationsin which the local agency may invest? Whatcorporations are on the current list, and howfrequently is this list reviewed? Does the local agency have an approved listof brokers/dealers? What brokers/dealers areon the current list, and how frequently isthis list reviewed? What are the percentagetransactions by broker/dealer (that is, doesthe local agency rely too heavily on one broker/dealer rather than “shopping” for thebest deal)? What is the average maturity and effectiveduration of the portfolio? What will be theimpact on the investment performance ifinterest rates should change rapidly, for example, by 1 percentage point in the next 30to 60 days?4 What is the market value of the investments as compared to the cost of thoseinvestments? Where there is a significantdifference, how did this difference arise? Ifmarket value is less than cost, how will thatdifference impact future earnings comparedto current earnings?in the portfolio and do they fairly representthe value of the securities? What (if any) deficiencies in the investmentfunction were identified by the agency’s annual audit of the financial statements, or anyother audit of investments, and how are theybeing addressed? If the investment report compares the agency’s monthly, quarterly or even annual yieldsor total returns with those of a widely recognized market i
CHAPTER 1: PUBLIC FUND INVESTMENT ROLES AND RESPONSIBILITIES . 5. Role of the Legislative Body . 6. Role of the Investment Official . 9. Role of the Oversight Committee/Advisory Committee . 11. Role of the Investment Advisor . 13. Role of the Financial Advisor . 21. Role of the Broker/Dealer
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TARGET DATE FUNDS - 9.1 billion UC Pathway Funds UC Pathway Income Fund UC Pathway Fund 2020 UC Pathway Fund 2025 UC Pathway Fund 2030 UC Pathway Fund 2035 UC Pathway Fund 2040 UC Pathway Fund 2045 UC Pathway Fund 2050 UC Pathway Fund 2055 UC Pathway Fund 2060 UC Pathway Fund 2065 CORE FUNDS - 12.9 billion Bond and Stock Investments Bond .
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HEDGE FUND INVESTMENT TERMS KEY DECISIONS WHEN SETTING UP A DOMESTIC OR OFFSHORE FUND Call 212.203.4300 for a free consultation OPEN OR CLOSED-SOURCE FUND? A closed-end fund is an investment fund intended to last for a fixed term, usually between five and ten years. Investors in a closed-end fund are generally not permitted to make
5 Fund Type The fund type indicates how the fund is organized and operates — as a mutual fund or as an institutional fund. Mutual funds are public funds that combine the money of many different investors to buy stocks, bonds, and other securities. These funds have broad objectives and investment guidelines, which means their investment
