Investment Policy

SECTION 1: PURPOSE

FIRST 5 Santa Clara County has recently adopted a 5-Year Community Investment Plan, identifying a Sustainability Fund. This Fund will not be required for daily operations or program allocations. The Fund is established to preserve sufficient funds for future operations and program expenses. The Fund is to be invested in accordance with all applicable legal requirements; this policy provides additional guidance for prudent investments and financial management activities.

SECTION 2: POLICY

This policy applies to the FIRST 5 Sustainability Fund. It is the policy to safeguard the principal and maintain the public’s trust while seeking a competitive rate of return on the investment of this fund. FIRST 5 recognizes that no investment policy is totally without risk and that all investment activities shall be guided by the prudent investment standard, this policy guidance and all applicable legal requirements, including but not limited to Articles 1 and 2 of Chapter 4 of Part 1 of Division 2 of Title 5 of the Government Code, commencing with section 53600. FIRST 5 also recognizes that occasional measured losses are inevitable in a diversified portfolio and shall be considered within the context of the overall portfolio’s return.

SECTION 3: TREASURER

Pursuant to Government Code section 53607, FIRST 5 may delegate to its Treasurer, for a one-year period, the responsibility for the full time management and investment of this fund. If the Commission makes this delegation, the Treasurer will provide the Commission or the Personnel and Finance Committee with monthly and quarterly reports for the investment activities undertaken.

SECTION 4: PRUDENT INVESTMENT STANDARD

FIRST 5 and/or all persons authorized to make investment decisions on behalf of FIRST 5, are trustees and therefore fiduciaries subject to the prudent investment standard in accordance with Government Code section 53600.3. All investments must be made in accordance with the prudent investment standard which requires care, skill, prudence, and diligence under the prevailing circumstances, including but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard principal and maintain the liquidity needs of the agency. Individual investments must be considered as part of the overall investment strategy.

Ethics and Conflicts if Interest: Each member of the Commission, including the Treasurer, and all other persons authorized to make investment decisions on behalf of FIRST 5, shall refrain from any personal business activity that could compromise the security and integrity of FIRST 5’s investment program, or that could impair their ability to make impartial and prudent decisions. In addition, all Commissioners involved in the investment process shall refrain from accepting gifts that would be reportable under the Fair Political Practices Commission (FPPC) regulations.

SECTION 5: INVESTMENT OBJECTIVES

When investing, reinvesting, purchasing, acquiring, reacquiring, exchanging, selling, or managing public funds, the primary objective shall be to safeguard the principal of the Sustainability Fund under its control. The secondary objective shall be to meet the liquidity needs of the Commission. The third objective shall be to achieve a competitive return on the investment of the funds.

  • Safety: Safety of principal is the foremost objective of FIRST 5’s investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio.
  • Credit Risk: Credit risk is the risk of loss due to the failure of the security issuer. Credit risk maybe mitigated by:
    • Determining on-going credit worthiness of the financial institutions, broker/dealers, intermediaries and advisors with which FIRST 5 does business; and,
    • Diversifying the investment portfolio so that potential losses on individual securities will be minimized.
    • Interest Rate Risk: Interest rate risk is the risk that the market value of securities in the portfolio will decrease due to changes in general interest rates. Interest rate risk maybe mitigated by:
    • Structuring the portfolio so that securities mature to meet cash requirements, thereby avoiding the need to sell securities prior to maturity.
  • Liquidity: No investment shall be made that could not appropriately be held to maturity without compromising liquidity requirements. The investment portfolio shall remain sufficiently liquid to meet future requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity).
  • Yield: The investment portfolio shall be designed with the objective of attaining a maximum rate of return throughout budgetary and economic cycles, taking into account FIRST 5’s investment risk constraints and cash flow characteristics.
  • Maturity: To the extent possible, investment shall be matched with anticipated cash flow requirements. Additionally, FIRST 5 will not invest in securities maturing more than five years from the date of purchase.

SECTION 6: ELIGIBLE, AUTHORIZED AND SUITABLE INVESTMENT

All investments made on behalf of FIRST 5 must be in accordance with federal and state law unless additional restrictions are required by this investment policy.

The chart below and footnotes that follow outline the permissible investment and the requirements associated with each type of investment. In addition to the investments listed, funds may also be invested in accordance with Government Code section 53635.2 in the following:

  • State or national banks,
  • Savings associations,
  • Federal associations,
  • Credit unions, or
  • Federally insured industrial loan companies in California

TABLE OF NOTES
a. Sources: Government Code Sections 16429.1, 53601, 53635, and 53638.

b. Municipal Utilities Districts have the authority under the Public Utilities Code Section 12871 to invest in certain securities not addressed here.

c. Government Code Section 53601 provides that the maximum term of any investment authorized under this section, unless otherwise stated, is five years. However, the legislative body may granted express authority to make investments either specifically or as a part of an investment program approved by the legislative body that exceed this five year maturity limit. Such approval must be issued no less than three months prior to the purchase of any security exceeding the five-year maturity limit.

d. No more than 30 percent of the agency's money may be in Bankers' Acceptances of any one commercial bank.

e. "Select Agencies" are defined as a "city, a district, or other local agency that do[es] not pool money in deposits or investment with other local agencies, other than local agencies that have the same governing body".

f. 10 percent of the outstanding commercial paper of any single corporate issuer.

g. Issuing corporation must be organized and operating with the U.S. and have assets in excess of $500,000,000.

h. "Other Agencies" are counties, a city and county, or other local agency "that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body". Local agencies that pool exclusively with other local agencies that have the same governing body must adhere to the limits set for "Select Agencies", above.

i. No more than 10 percent of the agency's money may be invested in the Commercial Paper of any one corporate issuer; no more than 10 percent of the outstanding Commercial Paper of any one corporate issuer may be purchased by the local agency.

j. Reverse repurchase agreements or securities lending agreements may exceed the 92-day term if the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity dates of the same security.

k. Reverse repurchase agreements must be made with primary dealers of the Federal Reserve Bank of New York or with a nationally or state chartered bank that has a significant relationship with the local agency. The issuer must have held the securities used for the agreements for at least 30 days.

l. "Medium-term notes" are defined in Government Code Section 53601 as "all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating with the United States or by depository institutions licensed by the United States or any state and operating within the United States".

m. Must receive the highest ranking by not less than two nationally recognized statistical rating organizations or retain an investment advisor registered with the SEC or exempt from registration and who has not less than 5 years experience investing in money market instruments with assets under management in excess of $500 million.

n. Issuer must have an "A" rating or better for the issuer's debt as provided by a nationally recognized rating agency.

SECTION 7: SAFEKEEPING AND CUSTODY

All security transactions, including collateral from repurchase agreements, shall be conducted by book entry, physical delivery or by third party custodial agreement basis. Securities must be held in the name of FIRST 5 in the trust department or a separate safekeeping department of the investment entity. All securities purchased by FIRST 5 under this section shall be properly designated as an asset of FIRST 5’s and held in safekeeping. If these conditions cannot be satisfied, securities must be held in the name of FIRST 5 by a third party custodian.

SECTION 8: INTERNAL CONTROLS

The Treasurer shall establish a system of internal controls to provide reasonable assurance that funds are physically protected from loss, theft, or misuse. The Treasurer shall submit a copy of those internal control procedures, including any modifications, to the Personnel and Finance Committee for its review.

  1. Control and Authority: The Commission shall, at all times, exercise control and authority over FIRST 5’s investments unless delegated to a Treasurer. Investment and management tasks and duties may be delegated to an investment manager on the following conditions:

    • The Commission, upon recommendation of the Personnel and Finance Committee, evaluates and hires the investment manager under a written contract with FIRST 5. The contract imposes safeguards on the investment manager to prevent abuse in the exercise of discretion by the investment manager, including but not limited to the following: a) the contract shall be subject to and incorporate the terms and conditions of this policy, b) if the investment manager has any discretion in making any investment decisions with FIRST 5 funds, the investment manager agrees to be a fiduciary of FIRST 5 in the provision of its services under the contract, and c) the investment manager shall at least quarterly provide written reports to the Treasurer or the Personnel and Finance Committee.
    • The Treasurer shall continually monitor the investment manager’s performance to keep informed of the status of the investments. Any significant adverse credit changes or market changes to FIRST 5 securities must be reported to the Personnel and Finance Committee and the Commission in a timely fashion.
  2. Annual Review and Approval: The Personnel and Finance Committee and Treasurer shall annually evaluate the performance of the investment manager. Subject to this review, FIRST 5 may renew its contract with the investment manager for another year, or may determine to conduct a competitive process to identify another financial institution to provide investment management services for FIRST 5.

SECTION 9: REPORTING REQUIREMENTS

Any investment manager providing services to FIRST 5 must meet with both the Personnel and Finance Committee and the Commission at least annually. The investment manager must also provide the Commission with written reports at least quarterly, within 30 days after the end of each quarter to include a detailed account of FIRST 5’s current investment portfolio invested by the investment manager, and to ensure that the services provided comply with the requirements of the law and this policy. The report must include the following:

  • A listing of individual securities by type of investment and maturity held at the end of the reporting period.
  • A composite of transactions purchased during the reporting period by type of security.
  • Unrealized gains or losses resulting from appreciation or depreciation of securities held in the portfolio, by listing the cost of market value of securities.
  • Average weighted yield to maturity of the portfolio and benchmark comparisons.
  • Weighted average maturity of the portfolio.
  • The percentage that each permitted investment category represented in the portfolio.
  • A summary of purchases during the reporting period showing the purchase date, issuing agency, amount purchased and cost. A summary of sales during the reporting period showing the date of sale and gain or loss resulting from the sale.
  • An appropriate benchmark to compare return on investments.
  • Income and Expense and changes to the value of the portfolio.
  • Recommendations, if any, on changing the fund or portfolio structure and investment strategy, subject to this policy.
  • A statement of compliance with the Commission’s investment policy.An investment summary presented by the investment manager to the Personnel & Finance Committee and Commission at least on an annual basis.

SECTION 10: CONTROLLING DOCUMENT

This investment policy must be incorporated and attached to any contract entered into between FIRST 5 and an investment manager. In the event of any conflict or ambiguity between the investment policy and any other document, including the contract with the investment manager, the provisions of the investment policy shall control.