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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.