HomeMy WebLinkAbout1988-11-28 89-15 ORDERpate 11-28-88 coo Item No. 69-15
Item/SubjM: detecting investment Policy
Responsible Memrtment Finance
Commentary:
At its final meeting on October 19. 1988, the investment advisory
Committee voted to recommend to the City Council a policy of not requiring
Investments to be collateralized. Me Committee felt the loss of investment
Income to be greater than the risk of not collateralizing.
�Q
Manager's Commands: yi N6p��n an ,n'�'�-F,
Ciry Mewger
Auo [ed Information: CAAA ,
Budget APPmval:vA,
Forever Director
Legal Approval:
City solicitor
Introduced For
ED Passage of 1
El First Reading page
❑Referral
89-15
Amigned to CnoteiRr Tilley, November 28, 1988
CITY OF BANGOR
(TITLE.) (Orkre .__.- amending investment Policy- ._
BY the aty CaaaCA of the aW OfBaadem.
osoeasn,
THAT paragraph 4 of the InvestmenVIDbjectivee'be amended by addingthe
follovtng sentence: It is not a requirement, however, that investment instruments
be collateralized.
Statement of Fact: The Investment Advisory Committee voted on October 19, 1988
to recommend a policy of not collateralizing the City's
Investments. Me loss of interest income is greater then
the risk of not collateralizing.
In City Ca it November 28,1*
Pawed
Vote 6 yea 1 Po;2 Absent
Voting Yen Hlanchette,abglena-,`
Shubert,Stone, Sullivan,Tilley
Voting NO Soeuaua
Abse t Se Sawyer
�1tY rk
8 -15
ORDER
Titles
Amending Investment Policy
......................................
Amigneml to
r.T. unci.....
Councilman
Bangor, the canter of Maine — the Gateway to Maine's Nortb Woods gad Saas¢ore Reiorty
89-15 b^•
JUL
Te Comes r JOLL
Otg of Panggor,'tlfaina 1
July 26, 1988
FO$: Edward garret[
FROM: Ted Jellison
50&JBCT: Investment Collateral Issue
The enclosed an= from John Field indicates a loss of from $46,000
to $50,000 for fiscal 1908 if we had been requiring collateral for our
Investments. The bankers have Indicated to us our return would be about
1/2Y lower if we require collateral.
Further, in talking to out ewly engaged financial advisor, he
indicates we
may limit our investment possibilities, should we require
collateral,because not all institutions are willing to tie up their
securities. He has suggested we include languagein ur policy which
would retain sense degree of flexibility depending upon the institution
we re dealing with. Mr. Cuetara also, Indicates the State of Maine
does not collaterilixe its investments.
I had John Field call some of his fellow treasurers to find out
what other cities in Maine are doing. While Augusta does not require
Collateral, both Lewiston and Portland do require security for their
investments.
Please let me know if you wish to discuss this issue further.
TCS/111
Attachment
'Bangor, demand" of Maine—de cawe:my ro Moine} Nerd Wmd' and Smaban Remm
JOHN 9. FIELD
.......s ceu.men I�
QIilq of Pansur, Abnna
M6tfODaNUDN
T0: Interfere Je111eon, Finance Director
Me: John Field, City Treasurer
SO&I: Loss of Income
DATE: July 25. 1908
as per your request of July 22, please find enclosed an analysis of the
possible loss of intoes due to collaterillized Certificates of Deposits.
This is at best an approximate loss of income of $66.000.00 to $50.000.00.
If you need any further information I would be more than happy to provide
it for you.
Stager, the onto of Mane--l6e Gaeevml to Molar's North Waal and 5vabore Room
OE �2N19O[, �wm
NO. OF DAYS
S
S - .50
M. INCOME
N8N INCOM
)ASS INCO
16
6.82
6.32
3.031.11
2,989.50
41.53
34
7.06
6.56
6,845.62
6,576.43
269.19
51
7.13
6.63
10,100.83
9,263.83
837.00
92
7.13
6.63
35.943.01
33.422.46
2,520,55
113
7.24
6.74
45.250.00
41,732.60
3,517.40
91
6.87
6.37
17,365.83
15,881.36
1,484.47
90
6.91
6.41
17,038.36
15.805.47
1,232.89
112
6.97
6.47
21.387.40
19,853.15
1,534.25
96
7.01
6.51
18.437.26
17,122.19
1,315.07
60
7.02
6.52
5,850.00
5,358.90
491.10
119
7.32-
6.72
22,550.14
21,909.04
641.10
114
7.22
6.72
22,352.33
20.980.49
1,363.84
135
7.36
6.06
27,221.92
25,372,60
1,849.32
120
8.00
7.50
29.049.86
24,657.54
4.392.32
104
7.41
6.91
21.113.42
19,688.77
1.424.65
18
6.50
6.00
3.250.00
2,958.90
291.10
16
6.50
6.00
2.088.09
2,630.13
258.76
113
7.62
7.12
23,918.33
22,042,74
1,875.59
100
7.71
.7.21
42,405.00
39,506.85
2,898.15
80
7.25
675
16.111.11
14,794.52
1.316.59
84
-7.05
6.55
16,293.70
15,073.97
1,219.73
98
7.08
6.58
10,928.77
17,666.85
1,261.92
112
7.13
6.63
21.878.36
20.344.10
1,534.26
113
7.12
6.62
22,058.22
20.494.79
1,563.43
120
7.15
6.65
23,983.51
21,863.01
2,120.50
113
7.00
6.50
43,944.44
40,246.57
3.697.07
105
6.65
6.15
19,395.83
17.691.78
1.704.05
91
6.81
6.31
34,428.33
31,463.55
2,964.78
1
7
Bangor, the onto of ino-abe Gatnoay to Mainei Nonh Wo and Smsb R ora
1
�Ilm "I "�.
0
dau OE Pmwr, AlN@
MIONNT
M. OF GAYS
% S - .50 &EC. INC
N6N INCOME
LOSS INCOME
1,000.000
38
6.81' 6.31 7.188.33
6,569.31
619.02
1.000,000
35
7.10 6.60 6.789.62
6.328.76 ,
460.86
1,000.000
20
7.40 6.90 3.905.56
3,780.82 -
124.74
MY s 610,905.09
564,079.06
46.826.03
89-15
Qty haemger's Office
InF r -Office �m
MTH: Common: 22, 1988
TO: Honorable Chairman and Members of the City Council
Q1: Edward A. Barrett, City Manager
CI: Proposed Amendment to City Investment Policy
At the present time, the City has a fairly ®pwhereive investment policy
which is need to guide cur efforts in investing City funds. As part of nis
policy, ne City has set a marine of investment objectives. The two primary
d,jectives of our Invest t Policy are (1) the preservation of capital and
the protection of investment principles; and (2) maximization of return on
the pxtfolio while avoiding assuming unreasonable investment risk. The
remainder of the objectives ant policies can be found on the attached
Investment Policy. In actual practice, the City currently invests all of
its funds in the Certificates of Dsyceit win hanks having offices in the
Bangor area.
it should as noted that our existing policy does not specifically address
the issue of collateralizing investments in Certificates of Deposit. As I'm
sure all of you are aware, deposits in a bank insured by the Federal Deposit
Insurance Corporation are insured only up to $100,000. Normally, all of our
Certificates of Deposit will be in excess of this amount. The City, at its
motion, cold require that its Certificates of Deposit he further
collateralized. In effect, this would require the banks in which we place
we Certificates to pledge tc the City offer invssments mored by the bank
which world have a market value acmal to or greater than the face amount of
the Certificate of Deposit. In the unlikely event that a bank would default
open our Certificate of Deposit, the City would then have recourse to no
collateralizing securities to remover its foods.
At my request, the Finance Department has investigated the issue of
collateralizing our Certificates of Deposit and las referred this issue to
the Investment Advisory Committee. Attached you will find a memorandum from
Ted Jellison, Finance Director, addressing the collateral issue as well as
the minutes of the Investment Advisory Committee of October 19, 1988, in
bath instances, the recommendation has been made that collateralization not
be required. As a result, you have before you an Order which would
specifically insert a statement indicating that collateralization is not
required. I would like to go on record as opposing this change and
recommending that we adopt a policy which requires our Certificates of
Deposit to he collateralized.
-2- 89-15
Clearly, the issue before us is a question of the level of risk which the
City is willing to accept in order to malaise its return mvestments.
Based on estimates performd by John Field, the City Treasurer, a switch to
dellateralize Certificates of Deposit would most likely result in a loss of
income of at least $46,000 to $50,000 to the City of Bogor. This is based
upset an estimate that going to collateralization would result in a loss of
approximately are -half of one percent in the interest rates provided to the
City. It should also be noted that our Investment Policy roes call for the
City to diversify its investments in order to avoid incurring unreasonable
and avoidable risks regarding specific security types or individual
Institutions. This policy clearly mitigates the risk of loss by requiring
us to spread our investments amrg different institutions. It should also
he noted, however, that at times the City may have a comber of Certificates
of Deposit with any particular bank whin may total as mid as $4 to $6
million dollars. Should a particular financial institution default,
therefore, the City owld fare a potential loss in excess of $1 million.
Zeis further nearness, however, that the City has not beoms aware of any
pending financial problems with a particular institution and therefore made
the decision to keep its investments in a bank which subsequently failed.
The basic issue before us, than, is whether the City Coon it prefers to
reduce its income due to investments by approximately $50,000 per year in
order to be better guaranteed that its principle amount is protected should
a particular institution fail and default. More can clearly be a difference
of opinion as to whether the risk entailed by net collateralizing our
investments is justified by the higher rate of return we receive.
One area of our Investment policy may give us each the guidance we need to
determine car position on this issue. I refer you to the section headed
Investment Principles, 43. "Investments shall be made with judgement and
under circumstances than prevailing, which persws of prvdence,
discretion and intelligence exercise in the managarent of their own affairs,
not for speculation, but for investment considering the pentacle income In
be derived."
Clearly, my view of this situation may well be deleted by the financial
circumstances surroundieg the dMing and savings and loan industry in the
State of Teras. These pr Slams have not, as of yet, arisen in the State of
Baine. They may net arise in the near future, ars, if they do, the City may
hese aware of potential problems early enough to either adjust its
inveshneat policy or to redirect its investments toward institutions of
known strength. However, a somewhat greater risk of principle less does
remain should the City choose not to collateralize.
Based on W personal consideration of the issues involved, I would recommend
that the City Council revise the investrent policy in order to require
collateralization of Certificates of Oepos'[.
r-! Y
edward A. Barrett '
sae/jar
Enclosures
cc: Finance Director
Bangor, the center of Maine — the Gateway, to Maine's North Woods and Seashore Resorts
89-15
ODORS Q JELLMON 73 HARLOW STREET
(gitqof pmtgor, Mame
REAPER DEPARTMENT
Investment Advisory Committee
October 19, 1988 - 2:00 P.H.
The Committee met in the office Of the finance Director with 4 of 6
members present to discuss two issues:
l.) Ones the City's investment policy need to be changed to
require collateriliration Of investments?
The committee discussed the pro$ and cons of each situation
and based on today's worker conditions and the Heine bank -
fag environment voted unanimously not to recommend a change
in the policy which currently does not require the use of
collateral. -
2.) Is there an eed for the City to maintain an Investment Advisory
Co®Sttee?
The Committee freely discussed its role and considering the
infrequent need for meetings and the advise available to the
staff locally feels its input is no longer needed for the
City Co maintain a viable investment pasture. The concensus
of the comittee was to disband.