HomeMy WebLinkAboutContract 43405crosrcWntrry�pS
INVESTMENT ADVISORY AND PORTFOLIO MANAGEMENT AGREEMENT
BETWEEN
PATTERSON CAPITAL MANAGEMENT and
CITY OF FORT WORTH, TEXAS
This Investment Advisory and Portfolio Management Agreement dated as of the 6 bay of
u �l eJ 2012 (the "Agreement ") is made and entered into by and between Patterson Capital
Management, L.P. ("Patterson"), a Texas limited partnership and a registered investment advisor and
funds manager, and the City of Fart Worth [the "Client'}, a Texas home -rule municipal corporation.
PREAMBLE
WHEREAS, the Client has determined to select and appoint Patterson to act as its investment
advisor and portfolio manager for funds and securities to manage and invest monies and securities, to
maintain records, and to perform the advisory and consulting services described herein,
NOW THEREFORE, for and in consideration of the mutual promises, covenants, and
agreements herein contained and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree with each other as follows:
ARTICLE I. Defr i i n5
"Authorized Investments" shall mean those investments authorized and defined in the Client's
Investment Policy, which is made a part of this Agreement and attached hereto as Exhibit A.
"Authorized Representative(s) of the Client" shall mean those duly authorized officers and
employees empowered to execute instructions and take other necessary actions under this Agreement on
behalf of the Client as designated in writing and attached hereto as Exhibit D.
"Authorized Representative(s) of Patterson" shall mean any employee of Patterson who is
designated in writing by Patterson as an authorized representative for purposes of this Agreement,
attached hereto as Exhibit D.
ARTICLE II. Creation of Portrolio an_ Account (s)
Section 2.01.Creation of a Separate and Distinct Pa oli (g). Patterson, on behalf of the
Client, hereby creates and establishes for management and reporting purposes one or more separate and
distinct portfolios {the "Portfolio'} with all assets held in the Client's name at Client's safekeeping
institution. Patterson shall invest and manage all monies deposited by the Client into the Portfolio. Client
will determine the number of Portfolios to be established and maintained in accordance with Client needs.
All Portfolios shall be segregated and held distinct from all other funds held or invested by Patterson.
OFFICIAL RECORD
CITY SECRETARY
j , - u -12 r r _7 1 FT. WORTH, TX
ARTICLE III. Operation of Portfolioi's]
Section 3.0l.Depositoot Services. The Portfolio and securities owned by the Portfolio will be
maintained in the Client's name and in the safekeeping institution of the Client, and the Client may
authorize Patterson to conduct security transactions in that account for Client. All fees and expenses for
safekeeping account maintenance and transactions will be paid directly by Client to the safekeeping
institution.
Section 3.02.Delivery versug Payment, All securities managed by Patterson will be settled
on a delivery versus payment (DVP) basis into the Client designated depository account at the
safekeeping institution. DVP will assure that no Client funds are released until the security is received
and verified by the safekeeping institution of the Client.
Section 3.03.Seuaration of Portfolios. The Portfolio(s) shall be segregated and distinctly
invested from all other funds managed by Patterson.
ARTICLE IV. Investment Duties and Services
Section 4.01.5tandard of Care. Patterson hereby agrees to manage Client Portfolios in
accordance with the "Prudent Person Standard," which is defined as that level of judgment and care,
under circumstances then prevailing, which persons of prudence, discretion and intelligence would
exercise in the management of their own financial affairs, not for speculation, but for investment,
considering the probable safety of their capital as well as probable income to be derived, This Prudent
Person Standard shall be applied to the investment of all Portfolios and Accounts with the same degree of
care and assuming the same duty as the Client.
Section 4.02.Investment Services. Patterson shall provide full advisory and management
services for Client's Portfolios to include market advice, portfolio structure advice, trade execution and
settlement on an ongoing basis. All investments shall be in accord with applicable state laws and with
Client's Investment Policy, which is attached hereto as Exhibit A and made a part hereof. Patterson
certifies that all funds shall be invested only in Client- authorized investments.
Client Designation of Funds. Client has full discretion to designate the amount of funds to be
placed in Portfolios or in separate investments in accordance with Client's cash flow needs. In addition,
Client has full discretion to designate the amount of funds to be placed in Portfolios or in a local
government investment pool or money fund for liquidity and as authorized by the Client's governing
body.
Client Directives. Monies held in the Portfolios shall be invested and reinvested in Authorized
Investments selected by Patterson and approved by Client before settlement in accordance with the
Client Investment Policy. Client reserves the right to notify the safekeeping institution of pending trades
and approve settlement of those trades. Client reserves the right to approve any and all trades.
Patterson will utilize only Client- approved broker/dealers.
Trade Aggregation. For the purpose of purchase transactional efficiency or market price
advantage involving funds of the Portfolios, Patterson may aggregate these funds with other clients'
funds for investment. However, Client funds and securities shall never be commingled with other clients'
funds, and Client transactions will be specifically segregated on all brokerage transactions and settled
separately into Client depository at the safekeeping institution.
Section 4.03. Confirmations. Patterson will establish all necessary procedures for Client to
receive independent trade confirmations from all broker/dealers for each transaction involving the
Portfolios. Independent confirmations will be sent directly to both the Client and Patterson for audit -trail
purposes.
Section 4.04.Re�. Patterson shall provide monthly and quarterly reports that, at a
minimum, detail and summarize all investments and Portfolio transactions during the reporting period. In
addition, Client shall define information that is needed on a daily, monthly or quarterly basis, and
Patterson shall provide and report information in accordance with those definitions. Patterson shall
submit to the Client all reports of its transactions promptly after the end of each month; For purposes of
this provision, reports shall generally be considered to be "promptly" submitted if provided to Client by
the tenth business day (i) after the end of the month or (ii) after Client has supplied all needed
information. Such reports shall indicate, at a minimum, the following information For each Portfolio and
each Account: balance remaining, interest earned, all deposits and withdrawals, and a detailed inventory
of all securities and positions for the period. All reports shall comply with applicable statutory
requirements. In addition, on an annual basis Patterson will prepare and submit reports for GASB 31 and
40 reporting.
Section 4.05.113r entati s. An Authorized Representative of Patterson will be available, at no
additional cost to Client, to present reports or attend presentations to the Client or the Client's governing
body on a semi - annual basis, or as required by the Client.
Section 4.06.Earrinings and Losses from Investments. All earnings and profits from the
investment of funds in any Portfolio shall be credited to and deposited in that Portfolio unless otherwise
designated by Client. All losses resulting from the investment of funds in any Portfolios shall be charged
to such Portfolio or Account.
Section 4.07.11-iabili . Except as otherwise provided below, Patterson and its employees shall
only be held liable for acts or omissions to act on behalf of the company, its agents, employees or other
persons that involve negligence, malfeasance, or violation of applicable law. Common law and the
federal securities laws impose liabilities under certain circumstances on persons who act in good faith,
and nothing herein shall in any way constitute a waiver or limitation of any rights which the
Client may have under common law or any federal securities laws.
Section 4.015. Mediation. Prior to instigating any litigation with respect to any controversy or
claim arising out of or relating to this Agreement, or the breach thereof, the parties agree to first attempt
to settle the matter through consultation and negotiation in good faith and a spirit of mutual cooperation.
If those attempts fail, the parties agree that the matter most be submitted to mediation. In order to
institute a mediation proceeding, the party who has a claim shall notify the other party in writing,
describing the nature of the claim and the material facts surrounding it. Thereafter, the parties will
attempt to agree on a mediator. However, if the parties are unable to agree on a mediator, the parties
shall request that the senior -most judge (as determined by length of tenure) of state civil district courts
of Tarrant County, Texas, acting in his individual and not his judicial capacity, designate a mediator (the
"Designated Mediator "). The parties shall submit to mediation by the Designated Mediator within thirty
(30) days of the Designated Mediator's designation at such time and place as the parties may agree. At
such mediation, the Alternative Dispute Resolution provisions of the Texas Civil Practice and Remedies
Code shall apply.
Section 4.09.Coordination and Advisory Consultina Services. Patterson agrees to provide
advisory consulting services for the Client in all areas of investment and cash management to include, at
a minimum, examination and evaluation of the following treasury areas and coordination of activities as
indicated:
Investment policy review. To analyze the existing investment policy in comparison to the
Client's needs and, if necessary, to formulate recommendations for revisions.
Investment strategy review. To continuously evaluate investment strategies (written and
operational) for feasibility and appropriateness.
Cash Flow Analysis. To provide cash flow analysis advice to develop a cash flow system
for the Client to include ongoing forecasts and projections for investment purposes.
Intemal procedures and processes. To evaluate internal treasury procedures in an
effort to maximize benefit and efficiency to the Client and its Portfolios, including, but not
limited to, evaluation of procedures related to broker/dealer transactions, wire transfers,
competitive bidding process, repurchase agreements documentation, and transaction audit
trails. To review for adequate management oversight and prepare written procedures.
Delivery and Settlement Oversight. To coordinate investment settlements and the
delivery and availability of funds with City staff to ensure safe transfer of funds and
securities.
Credit Rating Monitoring. To continuously monitor credit ratings related to investments
held by the City, as required by policy and statute.
- Financial counter -party evaluation. To provide ongoing credit review of Client's banking
institutions and financial counter - parties. To obtain and maintain all statutorily required
broker certifications.
- GASS 31 and 40 Compliance. To provide assistance in crafting and revising custodial
procedures to achieve GASB 40 compliance and to ensure accurate and timely reporting and
disclosures in accordance with GASB 31 and GASB 40,
Market Research. To provide technical and Fundamental market research on an ongoing
basis.
Banking arrangement and structure. To evaluate the Client's current banking structure
to determine its efficiency and effectiveness and to formulate recommendations for
improvements as needed. To prepare documents for the solicitation of proposals for banking
services for the Client and to evaluate bids received.
Coordination with external client agencies. To make recommendations on ways to
improve communications and efficiencies between the Client and any external service
agencies (including broker /dealers) to ensure policy compliance, maximum utility of funds,
and identification of investment alternatives. To maintain all broker/dealers tiles for
certification and ensuring compliance with Client and Patterson requirements.
Exposure review. To determine if the Client has any audit, operational or policy exposures
in the Treasury area.
Investment Reporting. To review all investment reporting for adequacy of information
and efficiency of presentation format in providing maximum benefit and understanding. To
provide monthly and quarterly Portfolio reporting,
Statutory Compliance. To monitor, evaluate, and inform Client of changes in applicable
law which might impact the management of Client's Portfolios, its reporting obligations, or
both.
ARTICLE V. Expenses and Reports
Section 5.01.Fee and Expenses. The Client agrees to pay to Patterson on a quarterly basis,
in arrears, in accordance with the Fee Schedule, attached hereto and made a part hereof as Exhibit B.
Patterson shall submit a written invoice to Client requesting payment for the previous quarter. Payment
on the charges shall be made within thirty (30) business days after receipt of invoice.
Section 5.03. Records. Patterson shall keep a book of records in which complete and correct
entries shall be made of all transactions relating to the holdings, balances and values in Client's Portfolios
in accordance with generally accepted accounting principles. Such records shall be available for
inspection by the Client at all reasonable hours of the business day and under reasonable conditions.
Section 5.04.Client Confidentiality. All records and information regarding the Client will be
held as confidential by Patterson.
ARTICLE VI. Miscellangous
Section 5.01.Notices. Any notices required or permitted to be given hereunder shall be made
in writing and sent to the other party via (i) hand delivery or (ii) registered or certified US mail, postage
pre-paid, return receipt requested, addressed as follows:
To Client: James Mauldin ToPatterson: Linda T. Patterson
City of Fort Worth Patterson Capital Management, L.P.
1000 Throckmorton 301 Congress Avenue
Fort Worth, Texas 76103 Suite 570
Austin, Texas 78701
Telephone: (817) 392 -2438 (512) 320 -5042 or 800 - 817 -2442
Telefax: (817) 342 -8181 (512) 320 -5041
E -mail: james.mauldin@fortworthtexas.gov linda@oatterson.net
If notice is sent via hand delivery, it shall be deemed received at the time of delivery. If notice is sent via
US mail, it shall be deemed received three days after the date on which it is deposited in the mail so long
as the notice is properly addressed and has sufficient postage.
Section 6.02.Serr rabili . In case any one or more of the provisions contained in this
Agreement are held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision hereof, and this Agreement shall be considered as if
such invalid, illegal, or unenforceable provisions were never contained herein.
Section 5.03. imitati n of i hts. With the exception of the rights herein expressly
conferred, nothing in or to be implied from this Agreement is intended or shall be construed to give any
person other than the parties hereto any legal or equitable right, remedy or claim under or in respect to
this Agreement or any of the covenants, conditions and provisions herein contained; this Agreement and
all of the covenants, conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and herein provided.
The Client further agrees that Patterson's responsibilities hereunder are limited to the
management of the Portfolios as herein described and the providing of advice, reports, and information
herein required; Patterson shall not be liable for any losses from investments made and transfers made in
accordance with the procedures set forth in this Agreement.
Section 5.04.Execution of Co nterparts. This Agreement may be simultaneously executed
in several separate counterparts, each of which shall be an original and all of which shall constitute but
one and the same instrument.
Section 5.05.A li le Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas and is performable in Tarrant County, Texas.
Section 6.05.Ca ion . The captions or headings in this Agreement are for convenience only
and in no way define, limit, or describe the scope or intent of any provisions, articles, or sections of this
Agreement.
Section 5.07.Amgndment. The Client and Patterson may supplement or amend this
Agreement only if evidenced in a writing signed by both parties.
Section S.DS.Termination, This Agreement may be terminated by either party hereto, with or
without cause, by tendering ninety (90) days' prior written notice in the manner set forth in Section 6.01
hereof. In addition, the Client may terminate this Agreement within five (5) business days of the date
hereof, with or without cause and without penalty, by notifying Patterson in the manner set forth in
Section 6.01 hereof of its decision to terminate the Agreement. If Patterson is subject to an Ownership
Change under Section 6.11, Client may terminate this Agreement with thirty (30) days' written notice.
Patterson acknowledges and agrees that Client is a governmental entity, and because of statutory,
constitutional, and City Charter provisions, the Client cannot commit to the funding of its obligations
described herein beyond each fiscal year. Therefore, the funding obligations of the Client described
herein are subject to and conditioned upon the City Council of the City of Fort Worth appropriating for
each fiscal year sufficient funds to satisfy such obligations. If for any reason, at any time during any
term of this Agreement, the City Council fails to appropriate funds sufficient for the Client to fulfil( all or
part of its obligations under this Agreement, the Client may terminate this Agreement to be effective on
the later of: (i) thirty (30) days following delivery by the Client to Patterson of written notice of the
Client's intention to terminate or (ii) the last date for which funding has been appropriated by the City
Council for the purposes set forth in this Agreement.
Section 6.09. Term, This Agreement shall be for an initial term of three years, beginning July 1,
2012, and ending June 30, 2015, unless terminated in accordance with Section 6.08 hereof. This
Agreement may be renewed for two additional one -year periods under the same terms and conditions if
agreed in writing and signed by both parties,
Section 6.10. AssignmentThis Agreement shall not be assignable by either party hereto, in
whole or in part, by operation of law or otherwise, without the prior written consent of the other pasty
hereto. Any assignment in violation of this Section 6.10 shall result in the automatic termination of this
Agreement.
Section 6.11. QwnerfihiQChange. Patterson shall notify the Client in writing of any change in
its partnership ownership at least sixty (60) days prior to such change becoming effective,
Section 6.12.5EC Duument Dislosure, The Client, by execution of this document,
acknowledges the receipt of Patterson's most current ADV Part II brochure disclosure document as
required by the SEC.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to he executed in
multiple counterparts as of the date first set forth above.
CITY OF FART WORTH, IN
Date: _
APPROVEp AS TO
FARM AND LEGAL
ASSISTANT 1 ATTORNEY
1�� C �� " I (,
Patterson Caoltal Manaaement, L.P.
By: Patterson & Associate Inc. General Partner
By: '
Li da T. Patterson, President
Date
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O FFICIAL RECORD
CITY SECRETARY
FT. WORTH, TX
EXHIBIT A
CLIENT'S INVESTMENT POLICY
Client Investment Policy is made part of this Investment Advisory Agreement in order to ensure that all
investment decisions conform to the policy and parameters established by the Client and its governing
body. As the Policy changes with Council action, the Client will provide the amended Policy to Patterson
and the most recent amended and adopted Policy will control the Client's investments.
EXHIBIT B
RESCHEDULE
The investment advisory services described under the terms of this Agreement are being provided in
accordance with the following fee schedule.
Services are provided for an annual fee of: $ 60,000.00
Payable quarterly.
Fees are due and payable within thirty (30) business days after receipt of invoice.
EXHIBIT C
Securities and Exchange Commission ADV FORM, PART II
This form is being provided the Client in accordance with SEC Regulations 204-3 for Registered
Investment Advisors. This disclosure document must be provided the Client not less than 48 hours prior
to entering any investment advisory contract. Failure to do so can result in a voidable contract.
Patterson shall provide to Client an updated ADV Form on an annual basis in accordance with SEC
Regulations.
f
EXHIBIT D
AUTHORIZED REPRESENTATIVES
Authflrized Representatives of the Client
Name/Title Phone
Jenny Kerzman 817- 392 -5030
Assistant City Treasurer
James Mauldin 817 -392 -2438
City Treasurer
Lena Ellis 817- 392 -8517
Financial Management Services Director / CFO
Authorized Representatives of Patberson
Name/Title Phone
Linda T. Patterson
President 512 - 320 -5042
Justin Gard
Adviser 512 -320 -5042
Howard Herring
Adviser 512- 320 -5042
Rikki Ramirez
Portfolio Assistant 512 - 320 -5042
Fax e-mail
817 - 392 -8181 lenn .kerzman fortworthtexas.aov
817 -392 -8181 james.mauldln @fortw�exas.gov
817 - 392 -8966 lena.ellisWortworthtexas aoy
Fax e-mail
512 -320 -5041 I inda @natterson. net
512- 320 -5041 iustinC�natterson.net
512- 320 -5041 howie @natterson.net
512- 320 -5041 rikki @natterson.net
10
VII,
To invest the City's cash in such a manner so as to ensure the safety of principal and interest, to meet the
liquidity needs of the City, and to achieve the highest reasonable market yield.
A, Cush hfurruyenrenl f lici- (AM— C G -95 V. Mnrrh 12, 199.1)
Subject to approval by the City Manager and the Director of Finance, the City Treasurer is both
authorized and required to promulgate a written Statement of Cash Management Rules and
Regulations governing the City's cash management and investment activities (exclusive of the
investment activities of the Employees' Retirement Fund), and to institute: and administer such
specific procedures and criteria as may be necessary to ensure compliance with the City's cash
management policy and the Public Funds investment Act (Texas Government Code Chapter
2255). Specifically, this policy mandates the pursuit of the following overall goals and
objectives:
All aspects of cash management operations shalt be designed to ensure the safety and
integrity of the City's financial assets.
2. Cash management activities shall be conducted in full compliance witb prevailing local,
state, and federal regulations. Furthemiore, such activities shall be designed to adhere to
guidelines, standards, and practices promulgated by such professional organizations as
the American Institute of Certified Public Accountants (AICPA), the Governmental
Accounting Standards Board tCASBI, and the Government Finance Officers Association
(GFOA).
3. Operating within appropriately established administrative and procedural parameters, the
City sball aggressively pursue optimum Financial rewards, while simultaneously
controlling its related expenditures. Therefore, cash management Functions that engender
interaction with outside financial intermcdiaries shall be conducted in the best financial
and administrative interests of the Cite. In pursuit of these 'interests, the City will utilize
competitive bidding practices wherever practicable, affording no special financial
advantage to an) individual or corporate member of the financial or investment
community.
4. The City shall design and enforce written standards and guidelines relating to a variety of
cash management issues, such as the eligibility or selection of various financial
intermediaries and counterparties. documentation and safekeeping requirements;
philosophical and operational aspects of the investment function; and such other
functional and administrative aspects of the cash management program which necessitate
standard setting in pursuit of appropriate prudence, enhanced protection of assets or
procedural improvements.
B
Investments of the City, oroffunds held in its possession in a fiduciary capacity, shall be
made with the exercise of that judgment and care, under circumstances then prevailing,
which persons of prudence, discretion, and intelligence exercise in the management of
their own affairs, not for speculation, but for investment, considering the probable safety
of [heir capital, as well as the probable income to be derived.
lnveslncenf ,Srratep, r.1MC G- 11199, 4iogu.w 21. 1995 - Moelifiecl.tfarch 31, 19971
The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for
investment purposes. The City's cash management program seeks to achieve four objectives in
this order of priority: safety of principal, adequate liquidity to meet daily cash needs,
diversification, and finally a reasonable yield commensurate with the preservation of principal
and liquidity. The following investment strategy has been designed to accomplish these
objectives:
The City invests in "money market instruments," high credit quality, highly liquid
investments with maturities of one year or less, and in intermediate -term securities of
high credit quality with maturities no greater than five years. The City will only invest in
those securities specified in its "List of Eligible Investments ". These include U.S.
Treasury Bills and Notes, high quality obligations of certain U.S, agencies and
instrumentalities, and AAA -rated local government investment pools and no -load money
market mutual funds. Any securities not on this list will not be eligible investments,
?. At all times, the City shall maintain a cash position sufficient to meet daily liquidity
requirements. This will be accomplished by maintaining approximately 15 percent ofthe
total portfolio in money market funds, local government investment pools, bank accounts,
and/or overnight repurchase agreements. The City shall also position some investments
to provide liquidity for certain predictable obligations such as debt service payments.
3. The City shall not exceed a weighted average maturity of two years for the Consolidated
Portfolio. The City shall strive to maintain this weighted average maturity by investing
funds according to the following general maturity diversification guidelines:
Maturity Cash 1 Year 7 Fear 3 Year 4 Year 5 Fear
Day Range 0 1 -365 365 -730 730 -1095 1095 -1460 1460 -1875
% 15 78 14.75 14.25 14.25 14.25
Portfolio
There may be times when the City has more or less of its funds in any one maturity cell due to
cash flow needs, prevailing market conditions, and other factors. The maturity diversification
schedule serves as a general guideline for making investment decisions. In this way, the
portfolio will be able to take advantage of rising interest rates by re- investing maturing securities
at higher yields. In falling rate environments, it will profit from having investments that were
made al higher interest rates.
Following this discipline ensures that the City sill always have sufficient cash available for daily
needs, preserves its principal and encourage diversification in multiple maturity areas, short-term
or long -term. In this manner, the Consolidated Portfolio will endeavor to earn a competitive
market yield without assuming unacceptable risk.
C. Interest Earnings
Interest earned from investments shall be distributed to the operating, internal service. and ether
City funds from whieh the inoney was provided. xvith the exception that interest earnings
received on the investment of bond proceeds shall be attributed and allocated to those debt
service funds responsible for paying the principal and interest due on the particular bond issue,
D. Designated Investment Committee
Upon Council adoption of the Cash Management Policy and the promulgation of the Statement
of Cash Management Rules and Regulations, a Cash Management Task Force comprised of the
Assistant City Manager over Finance, the Finance Department Director, the City Treasurer, and
other City staff as deemed appropriate by the City Manager is established. This group serves as
the City's designated investment committee required under the State Public Funds Investment
Act. The Task Force will regularly examine and evaluate the City "s cash management and
investment activities and recommend revisions to operational rules and regulations, the Cash
Management Policy, and the Investment Strategy. Modifications to the administrative rules and
regulations will be submitted to the City Manager for approval. Amendments to the Cash
Management Poliey and/or Investment Strategy will be presented to the Council for adoption.
According to State statute, the Investment Policy and Strategy will be reviewed and adopted by
Council at least annually,
E. Investment Portfolio Ruling
The City will strive to maintain the highest possible portfolio rating. The City will manage its
cash according to procedures and strategies to maintain such a rating.
FORTWORTH
� THE CITY OF FORT WORTH, TEXAS I
SrATMETSiT OF CASH MANAGEMENT RULES & REGULATIONS
I. ]INTRODUCTION
A. Purpose
Prevailing Texas Revised Statutes provide the City of Forl Worth, Texas (hereinafter referred to as the "City ")
with the legal authority to promulgate and implement reasonable standards for its cash management and
investment operations. Speeifieally the Public Funds Investment Aet (Chapter 2256 of Title 10 of the Loeal
Government Code) requires the City to adopt a written investment poliey regarding the investment of its funds
and funds under its eontrol.
In order to comply with all statutes, rules and regulations governing the investment of public funds, and
subject to approval by the City Courted, the City Manager and the Finance Director, the City Treasurer is
authorized and required to promulgate reasonable rules, regulations and other appropriate procedures to ensure
the effective and judicious management of City funds. To this end, this �tafenoent of'Cash Management Rules
and Regulations has been prepared. On March 12, 1992, the City Council approved M &C G -9552 and
formally adopted the Statement of'Ca.sh Management Rules and Regulations.
B. Establishment of Cash Management Task Force as Designated Investment Committee
Both the City's formal policies and administrative rules and regulations have been designed to refleet a prudent,
conservative, orderly and exacting approach in the conductt of its cash management activities. In supporl of its
ongoing efforts, the City has established a permanent Cash Management Task Force comprised of an Assistant
City Manager, the Finance Director, the City Trcasurer and other City staff deemed appropriate by the City
Manager and approved by the City Council to serve as its designated investment committee as required under
the Public Funds Investment Act. This group regularly examines and evaluates the City's cash management
activities and considers any potential need for refinement or revision of its operational rules and regulations.
The Cash Management Task Force will also periodically review the Consolidated Portfolio and monitor
compliance with the City's Investment Strategy.
C. Ongoing Review
The Statement of'Cash Management Rides and Regulr7tion.s will be reviewed and evaluated on an annual basis
to ensure that the rules and regulations expressed herein are responsive to the prevailing cash management and
investment environment. The City Treasurer is directed to appropriately amend and/or revise the City's rules
and regulations as conditions warrant, subject to administrative approval by the City Manager and Finance
Director and legislative oversight by the City Council. If any changes are contemplated which substantially
alter or deviate from the intent and purpose of the policies adopted by the City Council (other than to effect
administrative or procedural efficiencies), the City Treasurer will discuss and submit such changes to the Cash
Management Task Force for recommendation to the City Manager and /or the City Council for appropriate
administrative and/or legislative action.
D. AAA Rating for Portfolio
The City has earned a AAA rating for its Investment Portfolio from Fitch Investor Services. This rating reflects
the high quality of the portfolio's composition and cash management process as well as the City's commitment
to ensure the absolute safety and integrit} of its financial assets. The Cit} will manage its cash according to
procedures and strategies appropriate to maintain sueh a rating. Once this goal has heen effectively achieved,
the City endorses appropriate operational and strategic activities designed to address its secondary concern -
optimization of the City's overall investment performance.
II. CITY COUNCIL POLICY (adopted by M &C G -9552, March 12, 1992)
INVESTMENT STRATEGY (adopted by M &C G- 11199, August 22, 1995)
The City Couneil has formally adopted the following cash management policy statement and investment
strategy statement which form the basis for the City's related rules and regulations:
A. STATEMENT OF CASH MANAGEMENT POLICY
Subject to approval by the City Manager and the Finance Director, the City Treasurer is both authorized and
required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's
cash management and investment activities (exclusive of the investment activities of the Employees'
Retirement Fund), and to institute and administer such specific procedures and criteria as may be necessary to
ensure eompliance with the City's cash management poliey. Speeifically, this policy mandates the pursuit of
the following overall goals and objectives:
f. All aspects of cash management operations shall be designed to ensure the absolute safety and integrity of
the City's linaneial assets.
2. Cash management activities shall be conducted in full compliance with prevailing local, state and federal
regulations. Furthermore, sueh activities shall be designed to adhere to guidelines and standards
promulgated by such professional organizations as the American Institute ofCertilied Public Aceountants
(AiCPA), the Governmental Accounting Standards Board (GASB) and the Government Finance Officers
Assoeiation (GFOA).
3. Operating within appropriately - established administrative and proeedural parameters, the City shall
aggressively pursue optimum linancial rewards, while simultaneously controlling its related expenditures.
Therefore, cash management functions which engender interaction with outside financial intermediaries
shall be conducted in the best finaneial and administrative interests of the City. In pursuit of these interests,
the City will utilize competitive bidding practices wherever practicable, affording no special financial
advantage to any individual or corporate member of the financial or investment eommunity.
4. The City shall design and enforce written standards and guidelines relating to a variety of cash management
issues, such as the eligibility or selection of various financial intermediaries; documentation and
safekeeping requirements; philosophical and operational aspects of the investment function; and such other
functional and administrative aspects of the eash management program which necessitate standard setting in
pursuit of appropriate prudence, enhaneed protection of assets or procedural improvements.
5, investments of the City, or of funds held in its possession in a fiduciary capacit}, shall be made with the
exercise of that _judgment and eare, under eircumstances then prevailing, which persons of prudence,
discretion, and intelligence exercise in the management of (heir own affairs, not for speculation, but for
investment. considering the probable safety of their capital, as well as the probable income to be derived.
B. STATEMENT OF INVESTMENT STRATEGY
F
The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment
purposes. The City's cash management program seeks to achieve three objectives in this order of priority:
safety of principal, adequate liquidity to meet daily cash needs, and finally a reasonable yield commensurate
with the preservation of principal and liquidity. The following investment strategy has been designed to
accomplish these objectives:
The City invests in "money market instruments," very creditworthy, highly liquid investments with
maturities of one year or less. and in intermediate -term securities of high credit quality with maturities no
greater than five years. The City will only invest in those securities specified in Section V. Investment
Criteria of the Cash Manalgemew Rides and Regulations. These include U.S. Treasury Hills and Notes,
high quality obligations of certain U.S. agencies and instrumentalities, and AAA rated local government
investment pools and no -load money market mutual funds. Any securities not on this list will not be
eligible investments.
2. At all times, the City shall maintain a eash position sufficient to meet daily liquidity requirements, This
will be accomplished by maintaining approximately 15 percent of the total portfolio in money market
funds, local government investment pools and/or overnight repurchase agreements. The City shall also
position some investments to provide liquidity for certain predictable obligations such as debt service
payments.
3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The
City shall strive to maintain this weighted average maturity by investing funds according to the following
general maturity diversification guidelines:
Maturity
Cash
1 year
2 year
3 year
4 year
5 year
Day Range
0
1 -365
365 -730
730 -1095
1095 -1460
1460 -1825
% Portfolio
15
28
14.25
14.25
14.25
14.25
There may be times when the City has more or less of its funds in any one maturity cell due to cash flow
needs, prevailing market conditions, and other factors. The maturity diversification schedule serves as a
general guideline for making investment decisions. In this way, the portfolio will be able to take
advantage of rising interest rates by re- investing maturing securities at higher yields. In falling rate
environments, it will profit From having investments that were made at higher interest rates.
Following this discipline ensures that the City will always have sufficient cash available for daily needs,
preserves its principal and never has too much money in any one maturity area, whether it be short-term
or long. in this manner, the Consolidated Portfolio will earn a competitive yield without assuming
unacceptable risk.
C. Annual Review by City Council
The City Council will annually adopt the Financial Management Policy Statements stating that it has reviewed
the Cash Managerricnt policy and Statement of Investment Strategy. The Financial Management Policy
Statements so adopted shall record any changes made to either the policy or strategy.
Ill{. OVERVIEW OF CASH MANAGEMENT
3
Inasmuch as both the legislative policies and administrative rules and regulations of the City are designed to be
completely congruent, all of the City's cash management activities shaft be conducted within the carefully -
defined framework Nvhicb is described throughout this Statement. Activities which represent any departure
from this procedural or conceptual framework are unacceptable.
A. Cash Management Capabilities and [qualifications:
Chapter 2, Section 2 -114 of the Code of the City of Fort Worth and City Cotlncil Resolutions No. 1 185
(adopted October 7, 1986) and No. 1719 (adopted May 14, 1991) authorize the City Treasurer or his designee
to conduct transactions necessary for investment of City funds. Pursuant to the Public Funds Investment Act
2256.005 (b)(3), this document must also address the quality and capability of investment management.
Accordingly the City Treasurer shall have the following investment and cash management capabilities and
qualifications as stated in the City's Job Classification for that position:
I. Knowledge of,
a. Functions and operations of municipal government,
b. Techniques and systems of cash management.
c. Techniques of financial ratio analysis.
d. Prineiples and practices of municipal finance, investment securities, and financial money markets.
e. Methods of financial and economic analysis and forecasting.
f. Principles of supervision. training and performance evaluation.
g. Research and analysis methods.
h. Pertinent Federal, State and local laws, codes and regulations governing municipal funds and investments,
2, Ability to:
a. Conduct cash flow and financial ratio analysis.
b. Monitor and report money market investments.
c. Present financial asset and investment information to the City Administration, City Council, and citizens.
d. Analyze complex financial and economic data.
e. Prepare clear and concise reports.
f. Communicate clearly and concisely, both orally and in writing.
g, Communicate effectively at all levels, both internal and external to the City, in order to obtain or provide
information.
B. Cash Management Programs and Activities:
In the City's view, overall cash management success can only be achieved by carefully coordinating a broad
range of disparate but interdependent activities; and success in each area is crucial to the achievement of the
City's ultimate objectives. Therefore, the City has designed ongoing programs which address a wide variety of
issues, including the following:
I. The design and implementation of reliable and effective cash -flow forecasting programs to assist in the
determination of the amounts of cash available for investment: the time period for which the funds may be
invested with a reasonable level of confidence, and a measure of the volatility of its internally- generated
forecasts, allowing for viable determination of the required liquidity which must characterize the City's
investment portfolio.
2. The design and implementation of appropriate "revenue acceleration" programs, aimed at enhancing the
speed at which monies are collected and deposited.
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3. The design and implementation of suitable and appropriate "controlled disbursement" programs, ensuring
that City expenses are met in a timely manner, but not in such a way as to jeopardize the earnings potential
of the City's investment portfolio.
4. The utilization of modern and efficient techniques for the physical movement of money, taking advantage
of the various technological and operational procedures which have evolved in recent years.
5. The design of specific investment policies which %%ill allow the City to maximize its interest earnings, while
at the same time establishing operational rules and regulations which A i I I ensure the total safety of all funds
entrusted to the care and control of City personnel.
6. The cost - effective utilization of independent investment advisory support services.
7. The design and implementation of banking relationships which are both favorable to the Laity and
responsive to the day -to -day requirements of the City's complex financial operations.
8. The design and implementation of appropriate administrative approaches and operational procedures with
regard to the proper and effective use of the City's municipal credit authority.
9. Access to ongoing cash management training. designed both to maintain the technical skills of assigned
personnel and to ensure adequate cross - training of back -tip personnel.
10. The design and administrative implementation of specific, written documentational requirements in support
of the City's formal policies, rules and regulations.
C. Financial Disclosure Statement, Ethics Disclosure and Conflicts of Interest
Ordinance No. 7650, adopted by the City Council of the City of Fort Worth, Texas, on October 25, 1977,
requires the City Treasurer annually to complete and file a financial disclosure statement with the City
Secretary. Futhermore the Public Funds Investment Act requires the investment officer(s) to file a disclosure
statement with the Texas Ethics Commission and the governing body if:
the officer has a personal business relationship with a business organization offering to engage in an
investment transaction with the City (as defined in 2256.005 (i)(1 -3)); or
2. the officer is related within the second degree by affinity or consanguinity, as determined under Chapter
573 of the Texas Government Code. to an individual seeking to transact investment business with the
entity. PFIA 2256.005 (1).
IV. CRITERIA FOR SELECTING THE CITY'S FINANCIAL INTERMEDIARIES
Day -to -day implementation of the City's diverse cash management programs and activities typically
necessitates regular interaction with a variety of financial intermediaries, such as commercial banks, savings
and loan associations, broker /dealers (who make markets in negotiable investment securities) and professional
independent investment advisors.
Since any failure, inadequacy or ineptness on the part of any one of these financial intermediaries can
potentially result in financial disaster for the City, it is imperative that such entities meet the highest standards
of both reliability and capability in the performance of their various functions.
There are also a number of procedural and documentational issues which must be properly observed in the
dispatch of such external functions. However, this segment of the City's rules and regulations deals primarily
with eligibitity criteria; while many of the City's procedural and documentationaI requirements are addressed in
Section V.
A. Commercial Banks:
5
The creditworthiness, liquidity, and overall financial strength of financial institutions into which the City
deposits money, insofar as such elements can be measured through recognized industry rating serviees, shall be
the primary determining factor in the City's eligibility criteria. Furthermore, eligible financial institutions shall
demonstrate acceptable rating compliance under the terms of the Community Reinvestment Act, thereby
supporting the City's ongoing efforts to encourage lending in low and moderate income areas.
In all events, deposits of City monies in commercial banks may only be made with institutions which possess
the overall financial strength, capitalization, and liquidity to reasonably ensure the safety and availability of
such monies. To assess the overall financial strength of potential depositories, the City may utilize third -party
rating agencies to perform periodic reviews of various commercial banks. and relies upon such reports to
determine the appropriateness and eligibility of depositories.
S. Savings and Loan Associations:
Deposits of City monies in Texas savings and loan associations shall be subject to the same kinds of rating
criteria which are applied to commercial banks. Therefore, their acceptability as depositories will be based on
the third -party rating of appropriate rating organizations.
City policy prohibits deposits (in savings and loan associations) of any amount (including accrued interest)
which exceeds prevailing federal insurance limits.
C. Securities Dealers and Other Qualified Representatives:
The "primary" securities dealers are those major investment banking firms listed by the Market Reports
Division of the Federal Reserve Bank of New York. These dealers are unique within the government securities
industry in that they both "report" and are "regulated" in an industry that is typically "non- reporting" and
"unregulated." included on this "blue chip" list are major securities firms and some of the world's largest
banks. City policy is generally to restrict transactions relating to the purchase and sale of U. S. Government
securities to this list of "primary" securities dealers. Such policy, therefore, will preclude the City From doing
business with other brokers and dealers whose financial strength and operational capabilities cannot be
confidently determined. given the absence of "reporting" and "regulation" requirements, except as permitted
below.
1. Certification Form For Qualified Representatives
The Public Funds Investment Act requires that investments shall only be made with those business
organizations (including money market mutual Funds and local government investment pools) that have
provided the City with a written instrument, executed by a qualified representative of the firm, acknowledging
that the business organization has:
a. received and reviewed the City's investment policy and strategy as included in The Cash Management Rules
Regulations: and
b. implemented reasonable procedures and controls in an effort to preclude investment transactions conducted
between the City and the organization that are not authorized by the City's investment policy as presented
in The Cash Management Rules & Regulations. WFIA Section 226,005 (Iod))
Given the foregoing. the City has designed a Form entitled The Or►v of Fort Worfh, Texas Public Funds lnvestmeprl
Act Ceriyicarion Form for Qualified Representalives which must be submitted to the City For its approval prior to
designation of an individual as a representative who is eligible to eonduet securities business with the City. A
copy of this document is availahle for inspection upon request.
2. Selection and Annual Review For Qualified Represen[aiives
W
Ultimately, the City must satisfy itself that the individual representative with whom the City has direct day -to-
day contact can demonstrate the prerequisite skill, experience and reputation to deservedly conduct business
with the City. Therefore, only individuals who can clearly demonstrate this professionalism and business
integrity will qualify as financial intermediaries with regard to the City's investment portfolio. The Cash
Management Task Force, serving as the City's designated investment committee, will annually review and
adopt a list of qualified representatives who are authorized to engage in investment transactions with the City.
3. Selection of Non - primary Securities Dealers
From time to time the Cash Management Task Force may approve up to three non - primary securities dealers to
do business with the City in order to maintain an adequate list ol'experienced, knowledgeable representatives.
These firms and their representatives must submit a completed The 0q, o�' Farr Worth, Texas Public Fund,
Investment Act Cerfif7carion Firm for Qualified Representatives. Furthermore, as with representatives of primary
securities dealers, the fact that an individual representative seeks to do business with the City is insufficient
reason for the Cash Management Task Force to approve such a representative, Preference will be given to
those individual dealers who demonstrate a clear understanding of the Texas Public Funds Investment Act and
the City's cash management program through prior experience with the City or with other Texas cities.
4. Documentation of Investment Authority
The City will furnish qualified representatives with a copy of the City's resolution authorizing the Director of
Finance and the City Treasurer to establish and maintain accounts for the purpose of purchasing and selling
securities authorized under the laws of the State of Texas and the guidelines outlined in this Statement.
D. Investment Advisors:
The City may elect to seek professional investment advisory support services. Such services will allow the
City to improve its investment capabilities in several areas, including enhanced competitive market aecess,
reliable estimates of interest -rate trends, isolation and realization of portfolio trading profits, advanced
investment accounting tcehnology and meaningful access to computer -based evaluation models,
The City has established strict guidelines regarding the selection of such investment advisors to ensure that
such support services are consistent with the City's established policies, rules and regulations. These guidelines
include, but are not limited to, the following:
L Any investment advisor wishing to advise the City shall be a "Registered Investment Advisor" as defined
and regulated by the Securities and Exchange Commission (SEC).
2. It is preferred that any such investment advisor shall be completely independent of any financial institution
or securities brokerage firm. Any investment advisor lacking such complete independence shall fully and
continuously disclose any relationships with any financial institution(s) and/or securities brokerage firm(s),
and shall further fully disclose any commissions, bonuses, or soft - dollar payments resulting from his/her
relationship with the City.
3. Any such investment advisor shall not take possession of any City monies or investment securities, nor
have access to or control over such monies and/or securities. [Procedures for delivery, possession and
safekeeping arc described in Section V ofthis statement. Such procedures shall remain precisely the same,
regardless of the City's relationship with an investment advisor.]
4. Any such investment advisor shall not be empowered to execute investment or liquidation transactions on
behalf of the City. All such transactions shall be executed by C it) personnel.
7
5. Any such investment adviser shall provide the City with periodic reports regarding the accounting
treatment and performance level of the City's investment portfolio. Such reports shall be verifiable within
the definition of generally accepted accounting principles (GAAP).
6. Fees for investment advisory services shall be established in advance and fully disclosed in a written
agreement.
It is imperative that any investment advisor who provides support services to the City be both highly qualified
and demonstrably independent. Furthermore. a prospective advisor should be able to provide clear evidence of
his/her capabilities on behalf of clients similar to the City. The City bas designed a form entitled Invesinient
,Idvrsor Questionnaire & C'errili(whon which must be submitted to the City for its approval before an
investment advisor will be considered by the Cite to serve in an advisory capacity. A copy of this document is
available for inspection upon request.
V. INVESTMENT CRITERIA
Generally, the City invests only in "money market instruments" which are defined as very creditworthy, highly
liquid investments with maturities of one year or less, in intermediate -term securities with maturities no greater
than five years, in public funds investment pools created under the State of Texas interlocal Cooperation Act
with a AAA or AAA -m rating, and in SEC- registered, no -load money market mutual Funds rated AAA.
A. Eligible Investments
The Public Funds Investment Act, Sections 2256.009 — 2256.016 and Section 2256.019 — 2256-020 1, lists the
authorized investments permitted to investing public entities. The City Treasurer andlor his designce(s) shall
invest the City's investable funds in those instruments which are listed below, insofar as they satisfy the City's
maturity and liquidity requirements:
1. Fully - insured and/or fully - collateralized Certificates of Deposit, maturities no greater than five years, issued
by eligible commercial banks and savings and loan associations located within the State of Texas.
2. Direct obligations of the United States Treasury, including Bills, Notes, Bonds and STRIPS.
However, there are a number of instruments which may be generically represented as "Treasury" securities
which are not actually direct Treasury obligations. For example, U. S. Treasury STRIPS (Separate Trading
of Registered Interest and principal of Securities) are direct U. S, Treasury obligations, while seemingly -
similar instruments such as CATS (Certificates of Accrual on Treasury Securities) and TIGRs (Treasury
Investment Growth Receipts) are not. Instead, they are certificates and receipts issued by entities other
than the U. S. Treasury.
3. Obligations of certain United States government agencies rated AAA and which arc backed by the full faith
and credit of the United States government. Eligible agency obligations include Export Import Bank issues
(XMs), Farmers Home Administration Insured Notes (FHAs), and certain securities issued by the
Government National Mortgage Association (GNMAs).
However, other agency obligations, even though guaranteed by the full faith and credit of the United States
government, enjoy less active secondary markets than the more traditional Bills, Notes, Bonds and STRIPS,
or the broad and orderly markets enjoyed by certain GNMA issues. Therefore, the City will refrain from
purchasing such instruments as "SBA" loans. "AID" bonds, Penn Central Transportation Certificates,
Washington Metropolitan "l- ransit Authority bonds, etc., unless special circumstances prevail which suggest
their appropriate use For specific investments. Any such "special circumstances" must be Fully documented
at the time of such purchases, and approved in writing by the Finance Director. The City will restrict
investments in eligible obligations described in this section to discount notes, coupon- bearing issues,
medium term notes, and callable issues.
Ez-
4. Obligations ot'certain U. S. Government instrumentalities rated AAA, including (but not limited to) such
instruments as Federal Home Loan Batik debt (FHL13s), Federal National Mortgage Association debt
(FNMAs), Federal Home I..oan Mortgage Corporation debt (FHLMCs), Federal Farm Credit Bank debt
(FFCBs) and certain discount notes issued by instrumentalities such as the foregoing.
Other U. S. Government instrumentality issues, such as Asian Development Bank notes. InterAmerican
Development Barak bonds, World Bank bonds, Postal Service bonds, Tennessee Valley Authority bonds,
and intermediate- and long -term "Federal Farm Credit "' and "Student Loan Marketing Association"
instruments do not enjoy widespread. orderly snarketplaces, and are therefore ineligible. The City will
restrict investments in eligible obligations described in this section to discount notes, coupon- bearing
issues, medium term notes, and callable issues.
5. Purchases of the "Treasury ", "agency" or "instrumentality" securities mentioned in paragraphs 2, 3 and 4
above, under the terms of repurchase agreements (or in support of the City's "Sweep Account ") which meet
the City's established criteria fur such transactions.
The City's standards for such purchases (under terms of repurchase agreements) are somewhat different
than the standards applied to actual "hold to maturity" or "long" purchases held within the City's portfolio.
For example, the City might never purchase GNMA securities w'sth a final stated maturity date which is 10
years in the future for its permanent portfolio; but such securities should be perfectly acceptable as the
securities purchased under the terms of a repurchase agreement. [See Section VI for additional detail
regarding repurchase agreements.]
6. Commercial paper with an original stated maturity date of 270 days or less, subject to the following
criteria:
a. The paper must be rated by at least two of the nationally- recognized credit rating agencies at the
time of purchase, and the minimum rating must be A I+ (Standard and Poors), PI (Moodys). or D1
(Duff and Phelps).
b. if the issuer has senior debt outstanding, such debt must be rated at least A+ (Standard and Poors)
and A I (Moodys).
7. Public funds investment pools created under the State of Texas Interlocal Cooperation Aet which have
attained a AAA or AAA -m rating from at least one nationally recognized rating agency and which comply
with the Public Funds Investment Act.
Eligible pools must also explicitly follow Securities and Exchange Commission Rule 2a 7. This rule, which
regulates the operation of money market mutual funds, limits funds' average maturity to 90 days maximum,
requires them to maintain a constant $1.00 net asset value, and restricts their investments to Treasury Bills
and Notes and obligations of U.S. agencies and instrumentalities with maturities less than 13 months. Staff
will consider other characteristics of pools before authorizing them as eligible investments. These
characteristics include line size of the pool, number of participants and the size of their deposits, and the
pool's use of reverse repurehase agreements. In general, the City will avoid pools with less than S1 billion
in deposits and a small number of participants because of possible instability in the pools and the resulting
threat to the City's funds.
8, SEC - registered, no -load money market mutual funds rated AAA which meet the criteria prescribed in the
Public Funds Investment Act of the State of Texas.
Currently policy limits investments to those listed in paragraphs I through 8 above. However, these are
numerous other money market instruments which are widely recognized its prudent vehicles for effective cash
management; even though they may not be currently U01i7ed by the City. Such money market investments
include "eligible" domestic bankers' acceptances (BAs): negotiable, variable rate, Eurodollar, or Yankee
9
certificates of deposit (CDs), etc. As the City develops appropriate investment sophistication, it may examine
and eventually utilize such alternatives, assuming that such alternatives are at that time legatly authorized by
Texas Revised Statutes.
Under normal circumstances. no variation from the criteria listed above shall be allowed. However, the City
may elect., at its discretion, to amend and/or refine its List of Eligible Investments as conditions warrant. This
process will be initiated by the City's permanent Cash Management Task Force. with oversight by the City
Manager and /or the City Council. In any event, no variances from the list will be allowed in the absence of
specific, written approval from the Finance Director.
The public Funds Investment Act does not require the City and other local government entities to liquidate
investments that were authorized investments at the time (if purchase and subsequently were made ineligible by
amendments to the Act.
On occasion, the City may elect to "reverse" certain of its portfolio securities under the terms of a "reverse
repurchase agreement" or "portfolio lending" program. This authority shall be restricted, requiring written
authorization from the Finance Director. However, under no circumstances will the City utilize reverses as a
tool to effect "margined purchases" of investment securities, or as an actii•ity which might essentially serve to
"disguise" or "cover up" unrecognized portfolio losses. The City will only enter into reverse repurchase
agreements with defined maturity dates. The proceeds may not be invested in any security with a maturity date
longer than the maturity date of the reverse repurchase agreement. Reverse repurchase agreements will not
have a term exceeding 94 days.
B. Credit Risk and Market Price Changes
The City Treasurer, acting in accordance with procedures specified herein and exercising due diligence, shall
not be held personally responsible for a specific security's credit risk or market price changes, provided that
these changes are reported in a timely manner and the appropriate actions are taken to control adverse
developments.
f. Credit Risk — Loss of Required Rating
All prudent measures will be taken to liquidate an investment that is downgraded to less than the required
minimum rating. The City Treasurer shall immediately inform the Cash Management Task Force of any rating
downgrade.
2. Market Price Changes
All fixed income securities, even direct obligations of the United States Treasury, are subject to market price
changes. During times of cconoinic expansion and inflation, fixed income securities generally decline in value
as interest rates rise. During times ofeconomic contraction and falling prices, fixed income securities generally
increase in value as interest rates fall. While the City will strive to avoid investment losses, the incurrence of a
"book" or "accounting" loss dues not necessarily indicate an inappropriate investment activity or faulty
portfolio management strategy. In fact, incurrence of a "book" loss may actually be part of a transaction
producing an aggregate gain. In other cases, incurrence of a smaller "book" loss may be preferable to
incurrence of a much larger potential loss. Therefore_ no legal or administrative prohibitions are imposed
against incurrence of portfolio losses, so long as such transactions can be justified in the overall portfolio
management process or are explained by trends in the economy.
C. Diversification
The City shall maintain a weighted average maturity no greater than 2 years by investing funds according to the
following schedule:
Maturity Cash I year 2 year 3 year 4 year 5 year
10
Day Range 0 1 -365 365 -730 730 -1095 1095 -1460 1460 -1825
°ro Portfolio 15 28 14.25 14.25 14.25 14.25
At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. There may
he times when the City has more or less of its funds in any one maturity cell. This maturity diversification
schedule serves as a general guideline for making investment decisions. In this tray. the portfolio will be able
to take advantage of rising yields by re- investing maturing securities at higher yields. In falling rate
environments, it will profit from having investments that were made at higher interest rates. Setting targets for
positions in each maturity cell puts in place an additional safeguard. Following this discipline ensures that the
City never has too much money in any one maturity, whether it be short-term or long. Just as there are risks
from having too much money invested in the 5 year area, there are risks in short maturities. In the former, one
runs the risk of having to sell before maturity at a loss to raise cash. In the latter, one misses the added return
offered by iungcr maturities.
While there may be certain circumstances in which long -term securities are utilized, such as investments of
long -term sinking fund contributions, maturity - matched construction funds, or securities purchased under the
terms of short -term repurchase agreements, the general use of long -term securities shall be avoided. Such long-
term instruments are typically inappropriate for the City, since the purchase of such securities infers a certain
level of "speculation," given the significant "tnarket risk" andlor "interest -rate risk" which characterizes long-
term investments.
The exception to this rule involves securities purchased under the terms of short -term repurchase agreements,
as specifically discussed in this document.
Prevailing Texas statues require that entities such as the City of Fort Worth give appropriate consideration to
"diversification" of its investment portfolio. Traditionally, diversification is a logical methodology for
minimizing overall portfolio risk by limiting (either in percentage or dollar amount) the amount of the City's
investments in certain classes of investments which may be exposed to measurable credit and/or market risk.
Alternativelv, diversification inay be viewed as a procedure which "spreads the risk" throughout the aggregate
portfolio.
However, the City's currently - eligible investments are all virtually "riskless," given their inherent individual
creditworthiness and the maturity limitations which the City has specifically imposed. In such circumstances,
simply requiring some designed "mixture" (of security types) neither improves the portfolio's level of safety nor
enhances its yield. Therefore, no maximums or minimums are currently observed with regard to the City's
portfolio mix.
D. Ineligible Investments (in permanent portfolio)
1. All United States Treasury, Agency or Instrumentality securities with maturity dates in excess of 5 years
from the date of purchase.
2. All United States Government Agency or Instrumentality securities which are defined as "mortgage -
backed" securities. (Since such securities are inherently "callable," regardless of their final stated maturity
date, they are ineligible as permanent City investments.)
3. Certain United States Government Agency securities, including those issued by the Small Business
Administration (SBA), the Agency for International Development (AID), Penn Central Transportation
Certificates, Washington Metropolitan Transit Authority bonds, and any other U. S. Government Agency
securities which do not enjoy a ►Aide- spread, competitive marketplace.
4. Certain United States Government tnstrutnentatity securities, including those issued by the Asian
Development Bank, the Inter- American Development Bank, the World Bank, the U. S. Postal Service, the
Tennessee Valley Authority, the Student Loan Marketing Association, and any other U. S. Government
Instrumentality securities which do not enjoy a widespread, competitive marketplace.
11
5. Any investment securities which have been "securilized." constructed or othem,ise invented by the
investment banking community, and subsequenti) represented (either bk eommission or omission) as being
some form of "U.S. Government securities." Examples of'such instruments include CATS (Certificates of
Accrual on Treasury Securities), T16Rs (I reasury investment Gro%rtith Receipts), CMOs (Collateralized
Mortgage Obligations), or even stranger "invented securities," sueh as CARS and REMICs.
Vl. SAFEKEEPING, COLLATF.RALIZATION AND INVESTMENT PROCESSING
While the investment criteria established in Seetion V of this policy are designed to afford significant
protection to the City, there are required procedural and operational elements of the investment program which
are essential to the ultimate proteetion or the City's portfolio. Specifically, these elements deal with the
delivery, possession and safekeeping criteria which must be observed in all investment activities.
A. Safekeeping Criteria
All ownership of investment securities shall be evidenced by an acceptable safekeeping receipt issued by a
third -party financial institution which is aceeptable to the City (t }r by a safekeeping receipt from a Federal
Reserve Sank, should sueh services become available).
1. Smurities Safekeeping with L3ep0si`10TV flank
In most cases, the City will accept a safekeeping receipt issued by its "lead bank" which clearly indicates that
the securities are being held by the City's lead bank in the City's name, accompanied by a copy of the lead
bank's safekeeping receipt from the Federal Reserve Bank. (The latter receipt will indicate that the securities
are held in the lead bank's name "on behalf of a customer," as indicated by an "02" elassifseation.)
However, the lead bank may not provide securities safekeeping services in cases in whieh the lead hank is a
"prineipal" or "counterparty" in the investment transaction itself. to such cases, safekeeping documentation
similar to that described in the preceding paragraph must be provided by a "third -party bank" which is
acceptable to the City.
Furthermore, such third -party bank safekeeping may not be provided by a "parent" or "holding company" bank
whieh is financially related to any bank whieh is a principal in a specific securities transaction. The City has
designed a form entitled Third-Party Custodial Agent Agreement which specifieally delineates the role and
responsibilities of such third -party banks. A copy of this document is available for inspection upon request.
[Note: In cases in which the City's lead bank merely "executes" the necessary wire - transfer services to support
the City's investment transactions, and is not a principal in the transaction, the hank's role is defined as that of a
"settlement Agent," rather than that of a "countcrparty," as described by the Govemmental Accounting
Standards Board (GASB),]
2. Securities Lending Program
Securities Sending is a cash management strategy involving the lending of the City's "vestment securities to a
primary dealer with the substitution of securities of greater market value being safekept by a third party
custodial bank in an aceount in the City's name. The program is designed so that the City earns supplemental
income on the portfolio without losing ownership or interest payments on the loaned securities. The City
Council first approved the contract for a securities lending program with Morgan Stanley and with the Bank of
New York as custodian on October i7. 1989. The agreement, Paired Repurchase Transactions Custody
Agreement, establishes a Bank of New York safekeeping account in the City's name to hold all securities
submitted by Morgan Stattley as collateral for the City's investment securities. Collateral reports are faxed to
the City daily for review.
3. Deposit Collateral Policy
12
In addition to the securities which are actually "owned" by the City, Texas Revised Statutes, the Public Funds
Investment Aet and Chapter 7757, Texas Government Code, Collateral For Publie Funds, require that alt
uninsured eollected balances, plus accrued interest, if any, of the City held in eommereial banks be fully
collateralized by acceptable securities. The Federal Reserve Bank (the "Fed ") has specifically designed a
system by which the Fed itself may act as the safekeeping agent of both the City and the bank which is
"pledging" the collateral (to secure City deposits). Upon acceptance by the City and proper transfer by the
pledging bank into a "joint custody account" (classification "07 "), the Fed will issue a "joint custody receipt" to
both the pledging bank and the City. Thereafter, the Fed will not release the securities prior to their maturity
(For purposes of reassignment or liquidation) without the express consent of both parties. Collateral will be
valued monthly, and reports will be sent from the depository bank and the Fed on a monthly basis for review.
The collateral agreement is part ofthe City's Banking Services Agreement with its depository bank.
The City has established its 0%%rn joint custody account at the Federal Reserve Bank, represented by a "psuedo"
ABA number. All joint custody receipts issued by the Fed shall note that the City's ABA number. (The City
has signature cards on file with the Fed, and has establ'sshed telephonic and written documentation procedures
for the release of securities so held.)
B. Delivery vs. Payment
All investment (or divestment) transactions will be implemented on a "delivery vs. payment" (or "payment vs.
delivery") basis as specified in the City's Banking Services Agreement. In the absence of acceptable delivery
(or payment), the City will refuse to enter the transaction, All securities processing required to implement the
aforementioned purchase and sale transactions will be supported by written instructions to The City's bank,
unless the timely preparation of such written instructions would hinder the orderly completion of the
transaction itself. In such cases, the City will prepare follow -up letters confirming the oral (typically
telephonic) instructions, and forward such written instructions to the bank without undue delay, either by mail
or facsimile transmission.
C. Repurchase Agreements
Repurchase agreements will meet the aforementioned delivery criteria, and will be accompanied by an
acceptable "haircut" (i.e., excess of the market value of securities over the principal amount of the investment).
The required haircut will be established by the City, and shall be specifically addressed in a written Master
Repurchase Agreement which supports the repurchase transaction. In general, the extent of the haircut
requirement will increase in direct proportion to the length of maturity (if the securities purchased under the
terms of the repurchase agreement.
Furthermore, securities purchased under the terms of a repurchase agreement shall generally have maturity
dates of ten years or less, and shall be "wirable" instruments through the U. S. Federal Reserve system. Any
departure from these "maturity" or "wirability" standards shall require the specific, written authorization of the
Finance Director.
In the absence of authorisation to the contrary, the City will require the following minimum ratios of market
value of securities purchased (under the tcrms of the repurchase agreement) to the principal dollar amount of
such investments:
U. S. 'treasury Bills, Notes, Bonds and STRIPS which mature in I year or less: 101 %
U. S. Treasury Notes, Bonds, and STRIPS ti }hich mature in 1 to 10 years: 102%
U. S. Government agency or instrumentality issues which mature in up to 10 years: 102%
Naturally, the haircut ratios listed above must be cxamiricd can a daily basis, to ensure that the haircut or
"margin" does not drop below minimum acceptable levels. 1n cases of securities which require "physical"
rather than "book entry" delivery and safekeeping, the City will require a higher haircut ratio, and must approve
the aeeeptabiiity ofsueh securities. Similarly, ifseeurities have maturities in excess often years, the City may
require a higher haircut ratio. and must specifically approve the aceeptability of such securities.
[Whenever possible, the City will only aceept "wirable" securities with maturities of 10 years or less.
However, the City may accept (at its discretion) certain physical delivery and safekeeping of nonwirable and/or
longer -term securities.]
D. Competitive Binding
All individual security purehases and sales (excluding transactions with money market mutual funds and local
government investment pools, "hich arc deemed to be made at prevailing market rates) will require at least
three competitive offers or bids.
VII. PERFORMANCE EVALUATION AND REPORTING
A. Reeording
The City will use an appropriate portfolio management software system to record investmenl purchases, sales
and maturities. The selected system will maintain the portfolio inventory, accrue interest, amortize /accrete
(premiums /diseounts), calculate yields and provide other accounting and performance data as necessary,
Monthly investment reports are produced from this data for periodic financial reporting and management
review.
B. Treasurer's Cash Management Reports
On a monthly basis, the City Treasurer and /or his dcsignce(s) will prepare a eash management report. The
report will be reviewed by the Cash Management Task Force and signed by the Treasurer, Deputy Treasurer
and Finance Director. Periodically but no less than quarterly this report will be provided to the City Council.
The Treasurer's Cash Mangemcnt Report will be 'included in any periodie Financial Report provided to the City
Council by the Finance Director. The Public Funds Investment Act requires that the cash management reports
be formally reviewed at least annually by an independent auditor and reported to the governing body. This
shall be completed by the City's external auditors in the proceass of the preparation of the City's Comprehensive
Annual Finaneial Report.
1, Reporting Requirements
This report will include, but not be limited to, a summary of the sceurities held at the end of the month; a
portfolio cash -flow report, showing the purchases, sales, maturities, accrued interest sold /purchased and the
interest received; and a report on the return on investment, showing the interest earned, the gain or loss on any
sales during the month, the accretion /amortization, any "securities lending" eamings and any fees paid.
Furthermore, the Public Funds Investment Act requires the report to:
a. describe in detail the investment position of the City on the date of the report;
b. be signed by the City Treasurer, Deputy Treasurer and Finance Director;
c. contain a summary statement that states the:
(1) beginning market value for the reporting period;
(2) additions and changes to the market value during the period:
(3) ending market value for the period, and
14
(4) fully accrued interest for the reporting period;
d. state the book value and market value of each investment at the beginning and end of the reporting period;
C. state the maturity date of eaeh investment;
f. state the compliance o1 the investment portfolio as it relates to:
(1) the Cash Management Rules and Regulations including the Cash Management Policy and Statement
of Investment Strategy; and
(2) the Public Funds Investment Act.
2. Calculation of Ketum on the Portfolio
The return on the portfolio will be calculated by adding the interest earned, the gain or loss on any sale, the
accretion or amortization of any discounts or premiums and any "securities lending" fees. The estimated
annualized return for the month will be computed by using the daily weighted average book value for the
month. Unrealized gains and/or losses Nvill not be considered in the computation of the portfolio's monthly
retum.
3. Performance Benchmark
The benchmark for comparing the perforinancc of the City's investment portfolio will be the 12 month moving
average of the yield of the 1 -year Treasury Bill on the last day of the month being reported. The 1 -year
Treasury Bill is the simplest. safest security a portfolio can own. The 12 month moving average of its yield
represents the return of a purely passive management approach in which equal amounts of the portfolio are
invested in every month's current Treasury Bill. As one month's investment matures, it is automatically
invested in the new ] -year gill. The City's objective is to exceed the 12 month moving average of the 1 -year
Treasury Bill rate each month through active portfolio management as governed by its Cash Management Rules
and Regulations.
4. Portfolio Pricing
As of the end of each month, the City will re -price each security using Interactive Data Corporation's database
of market prices or by pricing the security based on its spread to the appropriate Treasury security. By this
method, the City will monitor the market price of its investments.
5. Annual Audit of Cash Management Program
In conjunction with the annual audit and the preparation of'City's Comprehensive Annual Financial Report, a
compliance audit of management Controls on investments and adherence to the City's established investment
policies will be conducted.
C. Daily Operating Procedures Manual
The City Treasurer and/or his designee(s) will develop and maintain a procedures manual, describing in detail
how to obtain hank balances, calculate the City's liquidity needs, make daily 'investments, record investment
purchases and sales, and distribute daily bank reports. The procedures manual will include forms, agreements,
reports and other documents utilized to carry out the intent of the City Council's policy and this Statement.
D. Cash Management Task Force
15
The City's Cash Management Task Force will be comprised of an Assistant City Manager, the Finance
Director, the City Treasurer and other appropriate City personnel. The Task Force will meet periodically to
review and approve the Cash Mangemerit Rcport, to review portfolio performance, to discuss investment
strategies and to resolve any challenges and opportunities arising in the each management process.
E. Outside Professional Support Services
The City may, from time to time, engage the support Services of outside professionals, so long as it can be
clearly demonstrated that such engagements produce "net financial advantage" or necessary financial protection
of the City's resources.
Such services may include engagement of financial advisors in conjunction with debt issuances; portfolio
management advisory support services; special legal representation; appropriate independent rating services;
third -party custodial services: and other supportive services which cannot be efficiently addressed through "in-
house" treatments.
All such engagements shall require the written authorization of the Finance Director, who will provide written
justification for the engagement to the City Manager and /sir the City Council.
VIII. UTILIZATION OF MUNICIPAL CREDIT AUTHORITY
A. Utilization of Debt
The City, like other governmental and quasi - governmental entities throughout the United States, has authority
to issue various forms of tax - exempt debt. The interest on such debt is exempt from federal (and sometimes,
state) taxation. While the unrestrained use of this authority is inappropriate, there are many circumstances in
which the application of specific borrowing techniques is in the financial interest of the City.
Such borrowing is closely regulated by federal law, Internal Revenue Service regulations, specific previsions of
the Tax Equity and Fiscal Responsibility Act (TEFRA), and various elements of Texas Revised Statutes.
Within the established regulations and guidelines, however, the City has a great deal of latitude with regard to
the timing and general nature of its financing activities. The City will utilize those financing alternatives and
techniques which produce positive financial advantages.
The Finance Direetor will, from time to time, recommend to the City Manager and/or the City Council various
financing opportunities which should be of ultimate financial and operational benefit to the City. City
personnel will constantly monitor the City's existing and potential financing alternatives to ensure that full
advantage is being taken of the financing alternatives which are available to the City.
B. Arbitrage Rebate Compliance
For any tax exempt municipal bonds issued after August 31, 1986, the City must remit to the Internal Revenue
Service any cumulative interest earnings from the investment of bond proceeds that are in excess of the yield
on a particular bond issue. In arbitrage regulations released in May, 1989, the U. S. Treasury Department
stated its approval of commingling bond proceeds for compliance purposes. As a result, the City has changed
its arbitrage - compliance approach from a specific bond issue portfolio method to a pooled -funds method. This
approach uses the City's accounting records to determine the daily remaining balance of Funds on hand for each
issue. Interest is then allocated to daily remaining balance based on the average monthly yield from the
investment of bond proceeds in the City's consolidated portfolio. Interest earnings in excess of the allowable
amount are set up as a liability in the City's accounting records and rebated to the federal government at least
once every five years.
SECTION IX. CASH MANAGEMENT AND INVESTMENT TRAINING
16
As required by the Public Funds Investment Act, all designated investment officers of the City will attend a
training session not less than once in a two -year period and receive not less than 10 hours of instruction relating
to cash management and investment responsibilities. These officers inelude the Finance Director, the Assistant
Finance Director, the City Treasurer and the Deputy 'Treasurer. The following organizations are approved by
the Cash Management Task Farce as training providers: the Government Treasurers Organization of'Texas, the
Treasury Management Association. the Government Finance Officers Association, the Government Finance
Officers Association of Texas, the Texas Municipal League, the Municipal Treasurers Association, and the Fort
Worth Treasury Management Association. The Cash Management Task Force will annually review and
approve the list of authorized training providers.
17
1.
-2.
3.
4.
5.
b.
7.
8.
a
1111
RECORD OF AMENDMENTS
August, 1992:
Section V - Addition of money market mutual funds as eligible investments,
April, 1994:
Section V - Change in average maturity limit of portfolio and addition of
maturity diversification schedule.
April, 1994:
Section VII - Change in benchmark from 4 week average of 1 -year
Treasury Bill to 12 month average of 1 -y ear Treasury Bi11.
January, 1995:
Section V - Further restrictions on eligible investments.
August, 1995:
Section V - Change in criteria for eligible local government investment
pools.
August, 1995:
Section V - Establish maximum term for reverse repurchase agreements.
August, 1995:
Section If - Add Investment Strategy Statement.
March, 1997:
Section II - Change maturity distribution schedule to increase investments
maturing in one year or less and to decrease the maximum portfolio
maturity from 2.5 year to 2.0 years.
September, 1997:
Section I - Name Cash Management Task Farce as City's designated
investment eommittee.
Section IV - Authorize the Cash Management Task Force to review and
Approve list of qualified broker/dealers on annual basis.
Section VII - Describe method for re- pricing securities.
Section IX - List authorized providers of required investment training,
January, 1998
Section IV - Authorize the Cash Management Task Force to review and
approve up to three non - primary broker - dealers to do business with the
City.
July 21, 2002
Section I — Clarit} to explicitly state the purpose of the document is to comply
with provisions of the Public Funds Investment Act
Section Ili — Add sub- seetions A. and C. to comply with the Public Funds
Investment Act requirements that the policy specifically designate investment
officer(s), list qualifications and address ethics and financial disclosure.
Section IV, Sub- Section C. I. — Specify Public Funds Investment Act compliance
requirements for investment policy certification form to be signed by
representatives seeking to transact investment transactions with the City.
Section V, Sub - Section D. — Add listing of ineligible Investments onee specified
in a separate document to comply with the Public Funds Investment Act
requirements.
Section VI, Sub- Section A. 2. — Add description of security lending program and
related custodial procedures and agreements to comply with the Public Funds
Investment Act requirements,
Section VI, Sub - Section A. 3. -- Add reference to Banking Services Agreement to
describe collateral ization requirements of Public Funds Investment Act and
Collateral of Public Funds Act.
Section VII, Suh- Section B. l — List Specific reporting requirements of the Public
Funds Investment Act.
Section VII, Sub - Section B. 5 -- Add requirement for annual review of cash
management program by external auditor as pan of Comprehensive Annual
Financial Report to comply with the Public Funds Investment Act requirements.
W]
Y
Patterson Capital Management
ARV PART 2 - 2011 Brochure
ITEM 1 COVER PAGE
BROCHURE DATE March 31, 2011
Patterson Capital Management LP
dba Patterson & Associates
301 Congress Avenue
Suite 570
Austin, TX 78701
www,oatterson.ne
Primary contact for the firm is:
Linda Thomson Patterson
President
(900) 817 -2442 / (Six) 32D -SU2
Linda @patterson.net
(512) 320 -5042
Though registered and regulated by the Securities and Exchange Commission that registration does not imply any
particular or certain level of skill or training.
This brochure provides information about the qualification and business practices of Patterson &
Associates. If you have any questions about the contents of this brochure, please contact the firm at
800-817 -2442 or (512)320-5042 or through info atterson.n t. The information In this brochure has
not been approved or verified by the United States Securities and Exchange Commission or by any state
securities authority.
Additional Informatlon about Patterson & Associates is also available on the SEC's website at
www. advi sori n f o.s a c. aov.
ITEM MATERIAL RANGES
The information regarding Patterson & Associates and its employees included in this brochure has not
materially changed since the last annual update to the Securities and Exchange Commission (SEC) dated
April 1, 2010.
Patterson Capital Management
ADV PART 2 - 2011 Brochure
ITEM 3 TABLE OF CONTENTS
This Brochure is presented in nineteen separate sections fulfilling the requirements of SEC Rule 284
although not all sections are applicable to the Firm. Those items not applicable have been so designated
and completed in the Brochure.
Item 1
Cover Page .......................................................... ..... ................... ........ _. ........ .. ................. 1
Item 2
Material Changes .............................................. ......... ....................... . .............................. i
Item3
Table of Contents ............................................................................... ..............................2
Item4
Advisory Busf ness ............................................................................. ............................... 2
Item 5
Fees and Compensation .................................................................... ..............................3
Item 6
Performance Based Fees and side -by -side Management ............ ..............................4
Item7
Types of Clients .................................................................................. ..............................4
Item 8
Methods of Analysis, Investment Strategies and Risk of Loss ..... ..............................4
Item9
Disciplinary Information ...... (not applicable) ..................................... ..............................6
Item 10
Other Financial Industry Activities and Affiliations ....................... ..............................6
Item 11
Code of Ethics, Participation/ Interest in Client Transactions & Personal Trading -5
Item 12
Brokerage Practices ............................................................................ ..............................7
Item 13
Review of Accounts ............................................................................ ..............................8
Item 14
Client Referrals and Other Compensation ...................................... ..............................8
Item15
Custody ......... (not applicable) ................................................................. ..............................8
Item 16
Investment Discfetlon ........................................................................ ..............................9
Item 17 Voting Client Securities ............ ;not appacablel .................................... ..............................9
Item 18 Financial Information....... ........ (no t Ap P1 Ica b le) ..................................................................... 9
ITEM 4 ADVISOR' BUSINESS
Patterson Capital Management LP, dba Patterson & Associates, was founded in 1994 in Austin, Texas as a
SEC registered investment advisory firm for public and corporate institutional clients. The firm was
originally established and remains structured as a partnership, but currently the sole principal owner of
the firm is Linda T. Patterson.
Patterson & Associates is firm independent from any other financial or other company. As such, the firm
believes it can best objectively analyze investment decisions for price, composition, and value.
The firm offers investment advisory services and treasury consulting services within a philosophy that
funds management is a part of the wider treasury function. Public advisory clients currently are located in
Texas, New Mexico, Arizona and Illinois. In addition, we furnish investment advice through consultations
not included in a direct management service agreement. The firm offers investment advisory services for
a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs of
the clients. The film does not serve individuals.
The focus of the firm has been the institutional public sector. Primarily serving the institutional public
sector in the U5, the firm invests client funds in short and intermediate range US domestic money markets
Patterson Capital Management
ASV PART 2 — 2011 Brochure
and fixed income markets. The firm generally uses US government and GSEs securities, commercial
paper, municipals and certificates of deposit.
The operating and bond funds of public entities (cities, school, airports, hospitals, higher education, etc.)
are by nature short term and are working funds with a higher reed for liquidity than long term funds.
Most portfolios the firm manages can not buy longer than five years to stated maturity.
Clients not statutorily required to have an adopted investment policy, are strongly encouraged to adopt a
formal investment policy to set portfolio limitations and to explain risks inherent in the management of
the funds.
An additional supporting service the firm provides is treasury consulting; ranging from internat control
and procedural development/review to banking. This service is available to all funds management clients
and to non - management clients alike.
The short-terrn and operating profile of most public funds requires that few portfolios can rarely be
managed on a purely discretionary basis because the cash flaws of the moneys is dynamic and requires on
going communication. The firm manages longer -term reserve funds on a discretionary basis. As of
December 31, 2010, the firm managed $ 5,212,295,954 in non - discretionary funds based on book value
and $ 30,900,000 on a discretionary basis.
All clients of the firm have written investment policies (and if, in Texas, a policy adopted by the governing
body of the client) which imposes controls on all aspects of the covered portfolios with maximum
maturities, maximum weighted average maturities and market sectors. In addition, the clients have
ultimate approval rights on the broker/dealers the firm utilizes. The clients' policy and the internal needs
and cash flows of the clients guide the portfolios and the firm therefore tailors each portfolio to the
unique needs of each portfolio.
See also Item 8.
ITEM 5 FEES AND COMPEN5ATION
Patterson & Associates offers investment advisory services on the basis of a percentage of assets under
management, hourly charges, or fixed fees, dependent upon the needs and requirements of the client.
We do not deduct our fees from the client's assets. The firm does not custody client assets or securities.
Paterson & Associate's basic fee schedule for the provision of investment advisory services is as follows:
Up to $5 million 0.20%
$5 million to $1D million 0.18%
$10 million to $25 million 0,15%
$25 million to $50 million 010 %
Over $50 million negatiabie
Advisory fees may vary, but generally will not exceed the fees noted in the schedule above.
In addition, the basic fee schedule described may vary due to the particular circumstances of the client or
as negotiated with particular clients. Fees for non - discretionary and discretionary management services
are generally billed in arrears on either a monthly or quarterly basis. in the event a client terminates its
contract with Patterson prior to the end of a billing cycle, the fee for that period is prorated based on
actual days in the period. At times, Patterson may also recommend that a client utilize a money market
3
Patterson Capital Management
ADV PART 2 — 2011 Brochure
fund. If the client invests in such a fund, the client may have to pay a fee in addition to that paid to
Patterson.
Certain clients are charged a fixed fee, or an hourly fee, which varies from client to client, and which are
billed in arrears on a quarterly or monthly basis.
All fees paid to Patterson for investment advisory services are separate and distinct from the fees and
expenses charged by LGIP pools or mutual funds to their shareholders. These fees and expenses are
disclosed in the statement (pool) or prospectus (funds). Clients can invest in pools or funds directly
without the services of Patterson.
Clients will incur brokerage and custodial costs in connection with the services Patterson provides. Please
see item 12, Brokerage Practices, of the Brochure for a description of those costs.
ITEM § P RFRa MANCE PASED FE KS AND SIQE -BY -SIDE MANAGEMENT
Patterson & Associates does not charge any performance -based fees to clients, accounts or funds.
ITEM 7 TYPES QF CLIENTS
Patterson & Associates provides investment advisory and investment consulting services to both public
and private institutional clients, including cities, school districts, hospitals, foundations, airports, counties.
These services are provided in accordance with clients' liquidity and risk tolerances and within the clients'
investment policies and objectives.
There are no minimum investment amounts or requirements for a client. Patterson & Associates
generally recommends a minimum account size of $1 million to justify a net positive return for the service
(earnings minus fees).
See also item 4,
ITEITE 1_ METNQDS QF ANALYSIS. NYVESTME NT STRATEGIES AND RfSKOFLOSS
Patterson & Associates manages all client funds as separately managed portfolios defined by their unique
objectives. Certain clients have several separately managed portfolios that are based on the specific type
of and use of moneys (such as operating money, bond money, and reserves).
Strategies for each unique client portfolio are discussed with the client initially and included as part their
investment policy. Discussions are held with clients on a periodic basis, at least annually, to identify
Patterson Capital Management
ADV PART 2 — 2D11 Brochure
strategic opportunities for the portfolios and to explain associated market and credit risks. Strategies are
limited generally by cash flow needs of the funds.
The firm primarily utilizes fundamental and technical analysis along with charting and cyclical analysis to
support the individual strategies for the separately managed portfolios. The basic tools used include yield
curve analysis, market trends and actual and perceived monetary policy. The generally short -term nature
of the majority of clients' assets focuses market analysis in the short and intermediate term markets.
Patterson relies primarily, but not exclusively, on multiple unaffiliated, nationally recognized securities
rating organizations (NRSRO) such as Standard & Poor's and Moody Investor Services for basic analysis of
credit risk on corporate entities. Such ratings are supplemented by an on -going monitoring of corporate
actions, influences and developments derived from all available independent news sources.
As discussed in Advisory Business, Patterson & Associates invests client funds in short and intermediate
range US domestic money and fixed income instruments. Portfolios for operating and bond funds are
policy controlled and generally use a buy- and -hold strategy. Securities are normally laddered in a manner
reflecting the cash flow needs of the funds. Each portfolio is defined by policy with a maximum maturity
and a maximum weighted average maturity which is continuously monitored by the firm. The primary risk
associated with such investments is liquidity risk because these funds are used for ongoing operations and
projects. Liquidity risk is mitigated with (a) maturities targeting cash needs, (b) a periodic cash flow
review with the client and (c) a verification of viability before each trade. Any market risk is reduced
through the buy -and -hold process which matches the maturity of investments with known liability dates.
Debt and other Income Producing Risk. Income securities including money market instruments, are
subject to interest rate, market and credit risk. Interest rate risk relates to changes in a security's value as
a result of changes in interest rates generally. Even though such instruments are investments that may
promise a stable stream of income, the prices of such securities are inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price fluctuations. In general, the values of
fixed income securities increase when prevailing interest rates fall and decrease when interest rates rise.
Market risk relates to the changes in the risk and perceived risk of an issuer, country or region. Credit risk
relates to the ability of the issuer to make payments of principal and interest. A clients could lose money
if the issuer of a fixed income security is unable to pay interest or repay principal when due. Credit risk
applies to most fixed income securities. The values of income securities may also be affected by changes
in the credit rating or financial conditions of the issuing entities.
Municipal Bond Risks. Municipal securities can be significantly affected by political changes as well as
uncertainties related to taxation, legislative changes or the rights of municipal security holders. Because
many municipal securities are issued to finance similar projects (for example, education, healthcare or
transpo- tation), conditions in those securities can affect the overall municipal market.
Money Market Mutual Fund Risks — Money market funds, and local government investment pools
structured as a "2a -7 fund ", are subject to market, credit and interest rate risk. Interest rate risk relates
to changes in the value of securities held in the portfolio as a result of changes in interest rates generally.
Credit risk relates to the ability of the issuer to make payments of principal on securities held in the
portfolio. Credit risk applies to the securities in the portfolio as well as any credit rating on the fund or
pool itself.
The strategy for reserve funds are also reviewed on the basis of potential fund usage and are restricted by
policy as to maximum maturity and maximum weighted average maturity. If market or volatility risks are
expected to affect the client's access to the funds and that access is in question by the client, the
portfolios are shortened to reduce this risk.
Patterson Capital Management
ADV PART 2 — 2011 Brochure
ITEM DISCIPLINARY INF RMATION
Not applicable.
ITEM 10 OTHER FINANCIAL INDUSTRY ACTIVITIES AND AFFILIATIQNS
Patterson & Associates, its employees and supervised persons, have no financial affiliates. The firm is not
actively engaged in any business other than giving investment advice and treasury consulting.
ITEM 11 CODE OF ETHICS PARTICIPATION OR INTEREST IN C IENT TRANSACTIONS AND
PERSONAL TRADING
Patterson & Associates has adopted a Code of Ethics and Personnel Regulations. The Code includes:
- Mission statement
- standards of conduct
- protection of material non - public information
- personal trading procedures and reporting
- reporting requirements and violations
- reviews and enforcement
SEC requirements
Affirmative action statements
- Confidential ►ry
- Internal controls
- Systems controls
brokerage controls
trade controls
settlement and clearing controls
The Mission Statement and Code of Conduct are available on request to any client or prospective client.
Neither Patterson & Associates nor any employee, supervisor, or management persons have any financial
interest in any related financial industry participant.
Patterson & Associates, its employees and its supervisory or management persons may invest in the same
securities it recommends to its clients. With strict client written and policy limitations of investments: to
the US Government and GSE markets. money markets and commercial paper, the firm sees no conflict of
interest. The markets are deep and broad and, unlike equities, investments in the securities could not
affect market prices.
All related persons of Patterson & Associates are required to report quarterly, to the Chief Compliance
Officer, all investment transactions. These records are reviewed for potential conflicts of interest and the
investment records are maintained.
0
Patterson Capital Management
ADV PART 2 — 2011 Brochure
Also included in the Patterson Code of Ethics is the provision that no employee or member of their family
may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection
with any business or investment transaction.
ITEM 12 BROKERAGE PRACTICES
Soft Dollars
Patterson & Associates does not participate in any soft dollar arrangements. The firm has no incentive to
select or recommend any broker /dealer. No fees or any type compensation is paid to Patterson &
Associates from broker/dealers or funds. No research is done for any broker/dealer.
Broker/Dealers
Patterson & Associates requires that all public clients approve a list of authorized broker/dealers for
Patterson to use on their behalf. Patterson will only recommend a broker /dealer for a client that suits the
client's portfolio needs. It may consider client referrals from a broker/dealer in selecting broker/dealers
for an account; however, all investments are made on a competitive basis eliminating any potential
conflict of interest. Broker/dealers are not selected based on client referrals to Patterson. Clients may
require that a specific broker/dealer be included in the competitive list of client authorized broker/dealers;
however, all investments are made on a competitive basis eliminating any potential conflict of interest.
Not ail clients direct brokerage. Clients should understand that if they direct the firm to utilize a specific
broker/dealer, Patterson may not be able to obtain best execution on the client's trade as they may incur
additional costs.
Under Texas law, Patterson & Associates may not place a trade far Texas governmental clients with a
broker/dealer unless Patterson has received a certification from the broker/dealer that it has received the
client's investment policy and the broker /dealer agrees to establish procedures which control the
purchase of unauthorized securities.
Prior to placing a trade for any client, Patterson obtains at least three bids /offers from authorized
broker/dealers who have provided the requisite certification or who are on the client's authorized list.
Internally, Patterson will only seek bids /offers from a broker/dealer that has provided Patterson with the
following documents at a minimum: the broker /dealer's state registration, a completed Patterson
questionnaire for background and contact information, FINRA registration and CRD numbers, and annua,
financial statements. All information on broker /dealers is maintained by Patterson.
Aggregation of Trades
Patterson & Associates does occasionally aggregate the purchase and sale of securities for various clients.
Trade aggregation is addressed in the Patterson's Code of Ethics. In its sole discretion Patterson may
aggregate trades for several clients with similar needs. Individual accounting for the security is applied on
each client's documentation. Each client participating in an aggregated trade will receive a client
confirmation.
When trades are aggregated, (a) the actual price shall be applied to each client's exact portion of the
transaction, (b) all transactions costs are assessed in a pro rata basis to each client (as applicable), (c) each
clients receives a complete and separate broker/dealer confirmation on the trade designating their
ownership in their port ion (par value) of the trade.
Patterson Capital Management
ASV PART 2 — 2011 Brochure
ITEM 13 REVIEW OF ACCOUNTS
In order to understand client needs and objectives and to assure that those objectives are met, Patterson
& Associates completes a thorough review and discussion with each new client to obtain necessary
guidance and policy documents and establish guidelines.
On a periodic basis, and no less than annually, Patterson reviews the client portfolio(5) and all pertinent
client documents, cash flows, and policies. The procedures of separate account management are
thoroughly reviewed with each new client and as needed. The review includes: proposed portfolio
structure, portfolio policy limitations, pricing mechanisms and sources, and assignment of responsibilities
inside Patterson. These reviews are noted but not written.
A Patterson internal team review with all advisory persons, including the firm's President/ClO and client
adviser, is made at least quarterly. An annual review of each client portfolio, expectations and needs is
made. In addition, should conditions or personnel change at the client or in Patterson a complete review
of client needs and the existing portfolio(s) is made immediately. The client does not receive any report
of these reviews.
ITEM 14 CLIENT REFERRALS AND OTHER COMPENSATION
The firm has no incentive to select or recommend any broker/dealer. No soft dollars are offered by the
firm to clients. No fees or any type compensation is paid to Patterson & Associates from broker/dealers
or funds. The firm has no intention of relying upon the safe harbor provisions of the Exchange Act of 1934
Section 28(e) for soft dollar use.
Also included in the Patterson Code of Ethics is the provision that no employee or member of their family
may acceptgifts or gratuities when there is an attempt to influence or reward the employee in connection
with any business or investment transaction.
No other person provides benefits in connection with the firm services
No one provides client referrals to the firm.
See also Item 12.
ITEM 1S CUSTODY
Not applicable. Patterson & Associates never takes custody, nor directs custody, for clients.
8
�V
Patterson Capital Management
ASV PART 2 — 2011 Brochure
ITEM 16 INVESTMENT DISCRETION
Patterson & Associates provides discretionary and non - discretionary management services to its clients.
Where discretionary authority has been granted, Patterson manages the portfolio and makes investment
decisions without consultation with the client that would involved determinations regarding which
securities are bought and sold, the broker/dealer with whom orders For the purchase or sale of securities
are placed for execution. In some instances, Patterson's discretionary authority in making these
determinations may be limited by conditions imposed by the client in their investment guidelines, cash
flow needs or objectives or instructions otherwise provided to Patterson.
If discretionary authority is granted by the client it is documented in the advisory contract
See also Items 4, 11, and 12.
ITEM 17 VOTING CLIENT SECURITIES
Not applicable in fixed income and money market instruments.
ITEM 18 FINANCIAL INFORMATION
Patterson & Associates is not subject to any the financial condition that would likely impair its ability to
meet contractual commitments.
4
VII.
To invest the City's cash in such a manner so as to ensure the safety of principal and interest, to meet the
liquidity needs of the City, and to achieve the highest reasonable market yield.
A. Cash Management Policy (M &C U -9552, March 12, 1992)
Subject to approval by the City Manager and the Director of Finance, the City Treasurer is both
authorized and required to promulgate a written Statement of Cash Management Rules and
Regulations governing the City's cash management and investment activities (exclusive of the
investment activities of the Employees' Retirement fund), and to institute and administer such
specifie procedures and criteria as may be necessary to ensure compliance with the City's cash
management policy and the Public Funds Investment Act (Texas Government Code Chapter
2256). Specifically, this policy mandates the pursuit of the following overall goals and
objectives:
1. All aspects of cash management operations shall be designed to ensure the safety and
integrity of the City's financial assets.
2. Cash management activities shall be conducted in full compliance with prevailing local,
state, and federal regulations. Furthermore, such activities shall be designed to adhere to
guidelines, standards, and practices promulgated by such professional organizations as
the American Institute of Certified Public Accountants (A1CPA), the Governmental
Accounting Standards Board (GASB). and the Government Finance Officers Association
(GFOA).
3. Operating within appropriately established administrative and procedural parameters, the
City shall aggressively pursue optimum financial rewards, while simultaneously
controlling its related expenditures. Therefore, cash management functions that engender
interaction with outside financial intermediaries shall be conducted in the best financial
and administrative interests of the City. In pursuit of these interests, the City will utilize
competitive bidding practices wherever practicable, affording no special financial
advantage to any individual or corporate member of the financial or investment
community.
4. The City shall design and enforce written standards and guidelines relating to a variety of
cash management issues, such as the eligibility or selection of various financial
intermediaries and counterparties, documentation and safekeeping requirements;
philosophical and operational aspects of the investment function; and such other
functional and administrative aspects of the cash management program which necessitate
standard setting in pursuit of appropriate prudence, enhanced protection of assets or
procedural improvements.
.
5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be
made with the exercise of that judgment and care, under circumstances then prevailing,
which persons of prudence, discretion, and intelligence exercise in the management of
their own affairs, not for speculation, but for investment, considering the probable safety
of their capital, as well as the probable income to be derived.
B. Investment Strategy (M&C G- 11199, August 21. 1995 - Afodijied March 31, 1997)
The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for
investment purposes. The City's cash management program seeks to achieve four objectives in
this order of priority: safety of principal, adequate liquidity to meet daily cash needs,
diversification, and finally a reasonable yield commensurate with the preservation of principal
and liquidity. The following investment strategy has been designed to accomplish these
objectives:
The City invests in "money market instruments," high credit quality, highly liquid
investments with maturities of one year or less, and in intermediate -term securities of
high credit quality with maturities no greater than five years. The City will only invest in
those securities specified in its "List of Eligible Investments ". These include U.S.
Treasury Bills and Notes, high quality obligations of certain U.S. agencies and
instrumentalities, and AAA -rated local government investment pools and no -load money
market mutual funds. Any securities not on this list will not be eligible investments.
2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity
requirements. This will be accomplished by maintaining approximately 15 percent of the
total portfolio in money market funds, local government investment pools, bank accounts,
and/or overnight repurchase agreements. The City shall also position some investments
to provide liquidity for certain predictable obligations such as debt service payments.
3. The City shall not exceed a weighted average maturity of two years for the Consolidated
Portfolio. The City shall strive to maintain this weighted average maturity by investing
funds according to the following general maturity diversification guidelines:
Maturity Cash I Year 2 Year 3 Year 4 Year 5 Year
Day Range 0 1 -365 365 -730 730-I095 1095 -1460 1460-1825
% 15 28 14.25 14.25 14.25 14.25
Portfolio
There may be times when the City has more or less of its funds in any one maturity cell due to
cash flow needs, prevailing market conditions, and other factors. The maturity diversification
schedule serves as a general guideline for making investment decisions. In this way, the
portfolio will be able to take advantage of rising interest rates by re- investing maturing securities
at higher yields. In falling rate environments, it will profit from having investments that were
made at higher interest rates.
Following this discipline ensures that the City will always have sufficient cash available for daily
needs, preserves its principal and encourage diversification in multiple maturity areas, short-term
of long -term. In this manner, the Consolidated Portfolio will endeavor to earn a competitive
market yield without assuming unacceptable risk.
P
C. Interest Earnings
Interest earned from investments shall be distributed to the operating, internal service, and other
City funds from which the money was provided, with the exception that interest earnings
received on the investment of bond proceeds shall be attributed and allocated to those debt
service funds responsible for paying the principal and interest due on the particular bond issue.
D. Designated Investment Committee
Upon Council adoption of the Crash Management Policy and the promulgation of the Statement
of Cash Management Rules and Regulations, a Cash Management Task Force comprised of the
Assistant City Manager over Finance, the Finance Department Direetor, the City Treasurer, and
other City staff as deemed appropriate by the City Manager is established. This group serves as
the City's designated investment committee required under the State Public Funds Investment
Act. The Task Force will regularly examine and evaluate the City's cash management and
investment activities and recommend revisions to operational rules and regulations, the Cash
Management Policy, and the Investment Strategy. Modifications to the administrative rules and
regulations will be submitted to the City Manager for approval. Amendments to the Cash
Management Policy an&or Investment Strategy will be presented to the Council for adoptiuts.
Aecording to State statute, the Investment Policy and Strategy will be reviewed and adopted by
Council at least annually.
E. Investment Portfolio Rating
The City will strive to maintain the highest possible portfolio rating. The City will massage its
cash according to procedures and strategies to maintain sueh a rating.
FORTWORTH
THE CITY OF FORT NORTH, TEXAS
SrATEMM of CASH MANAGENWW RULES & WGULAUONs
I. INTRODUCTION
A. Purpose
Prevailing Texas Revised Statutes provide the City of Fort Worth, Texas (hereinafter referred to as the "City ")
with the legal authority to promulgate and implement reasonable standards for its cash management and
investment operations. Specifically the Public Funds Investment Act (Chapter 2256 of Title ID of the Local
Government Code) requires the City to adopt a written investment policy regarding the investment of its funds
and funds under its control.
In order to comply with all statutes, rules and regulations governing the investment of public funds, and
subject to approval by the City Council, the City Manager and the Finance Director, the City Treasurer is
authorized and required to promulgate reasonable rules, regulations and other appropriate procedures to ensure
the effective and judicious management of City funds. To this end, this Statement of Cash Management Rules
and Regulations has been prepared. On March 12, 1992, the City Council approved M &C G -9552 and
formally adopted the Statement of Crash Management Rules and Regulations.
B. Establishment of Cash Management Task Farce as Designated Investment Comm ittee
Both the City's formal policies and administrative rules and regulations have been designed to refleet a prudent,
conservative, orderly and exacting approach in the conduct of its cash management activities. In support of its
ongoing efforts, the City has established a permanent Cash Management Task Force comprised of an Assistant
City Manager, the Finance Director, the City Treasurer and other City staff deemed appropriate by the City
Manager and approved by the City Council to serve as its designated investment committee as required under
the Public Funds Investment Act. This group regularly examines and evaluates the City's cash management
activities and considers any potential need for refinement or revision of its operational rules and regulations.
The Cash Management Task Force will also periodically review the Consolidated Portfolio and monitor
compliance with the City's Investment Strategy.
C. Ongoing Review
The Statement of Cash Management Rules and Regulations will be reviewed and evaluated on an annual basis
to ensure that the rules and regulations expressed herein are responsive to the prevailing cash management and
investment environment. The City Treasurer is directed to appropriately amend and/or revise the City's rules
and regulations as conditions warrant, subject to administrative approval by the City Manager and Finance
Director and legislative oversight by the City Council. If any changes are contemplated which substantially
alter or deviate from the intent and purpose of the policies adopted by the City Couneil (other than to effect
administrative or procedural efficiencies), the City Treasurer will discuss and suhmit such changes to the Cash
Management Task Force for recommendation to the City Manager and/or the City Council for appropriate
administrative and/or legislative action.
D. AAA Rating for Portfolio
The City has earned a AAA rating for its Investment Portfolio from Fitch Investor Services. This rating reflects
the nigh quality of the portfolio's composition and cash management process as well as the City's commitment
to ensure the absolute safety and integrity of its financial assets. The City will manage its cash according to
procedures and strategics appropriate to maintain such a rating. Once this goal has been effectively achieved,
the City endorses appropriate operational and strategic activities designed to address its secondary eoncern -
optimization of the City's overall investment performance,
II. CITY COUNCIL POLICY (adopted by M &C G -9552, March 12, 1992)
INVESTMENT STRATEGY (adopted by M &C G- 11199, August 22,, 1995)
The City Council has formally adopted the following cash management policy statement and investment
strategy statement which form the basis for the City's related rules and regulations:
A. STATEMENT OF CASH MANAGEMENT POLICY
Subject to approval by the City Manager and the Finance Director, the City Treasurer is both authorized and
required to promulgate a written Statement of Cash Management Rules and Regulations governing the City's
eash management and investment activities (exclusive of the investment aetivities of the Employees'
Retirement Fund), and to institute and administer such specific proeedures and criteria as may be necessary to
ensure compliance with the City's cash management policy. Specifically, this policy mandates the pursuit of
the following overall goals and objectives:
I . All aspects of cash management operations shall be designed to ensure the absolute safety and integrity of
the City's financial assets.
2. Cash management aetivities shall be conducted in full compliance with prevailing local, state and federal
regulations. Furthermore, such activities shall be designed to adhere to guidelines and standards
promulgated by such professional organizations as the American Institute of Certified Public Accountants
(AICPA), the Governmental Accounting Standards Board (GASB) and the Government Finance Officers
Association (GFOA).
3. Operating within appropriately - established administrative and procedural parameters, the City shall
aggressively pursue optimum financial rewards, while simultaneously controlling its related expenditures.
Therefore, cash management functions which engender interaction with outside financial intermediaries
shall be conducted in the best financial and administrative interests of the City. In pursuit of these interests,
the City will utilize competitive bidding practices wherever practicable, affording no special financial
advantage to any individual or corporate member of the financial or investment community.
4. The City shall design and enforce written standards and guidelines relating to a variety of cash management
issues, such as the eligibility or selection of various financial intermediaries; documentation and
safekeeping requirements; philosophical and operational aspects of the investment function; and such other
functional and administrative aspects of the cash management program which necessitate standard setting in
pursuit of appropriate prudence, enhanced proteetion ofassets or procedural improvements.
5. Investments of the City, or of funds held in its possession in a fiduciary capacity, shall be made with the
exercise of that judgment and care, under circumstances then prevailing, which persons of prudence,
discretion, and intelligence exercise in the management of their own affairs, not for speculation. but for
investment, considering the probable safety of their capital, as well as the probable income to be derived.
B. STATEMENT OF INVESTMENT STRATEGY
2
The City of Fort Worth maintains a Consolidated Portfolio in which it pools its funds for investment
purposes. The City's cash management program seeks to achieve three objectives in this order of priority:
safety of principal, adequate liquidity to meet daily cash needs, and finally a reasonable yield commensurate
with the preservation of principal and liquidity. The following investment strategy has been designed to
accomplish these objectives:
I. The City invests in "money market instruments." very creditworthy, highly liquid investments with
maturities of one year or less, and in intermediate -term securities of high credit quality with maturities no
greater than five years. The City will only invest in those securities specified in Section V. Investment
Criteria of the Cash Management Rules and Regulations. These include U.S. Treasury Bills and Notes,
high quality obligations of certain C.T.S. agencies and instrumentalities, and AAA rated local government
investment pools and no -load money market mutual funds. Any securities not on this list will not be
eligible investments.
2. At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. This
will be accomplished by maintaining approximately 15 percent of the total portfolio in money market
funds, local government investment pools and/or overnight repurchase agreements. The City shall also
position some investments to provide liquidity for certain predictable obligations such as debt service
payments.
3. The City shall not exceed a weighted average maturity of two years for the Consolidated Portfolio. The
City shall strive to maintain this weighted average maturity by investing funds according to the following
general maturity diversification guidelines:
Maturity
Cash
1 year
2 year
3 year
4 year
5 year
Day Range
0
1 -365
365 -730
730 -1095
1095 -1460
1460 -1825
% Portfolio
15
28
14.25
14.25
14.25
14.25
There may be times when the City has more or less of its funds in any one maturity cell due to cash flow
needs, prevailing market conditions. and other factors. The maturity diversification schedule serves as a
general guideline for making investment decisions. In this way, the portfolio will be able to take
advantage of rising interest rates by re- investing maturing securities at higher yields. In falling rate
environments, it will profit from having investments that were made at higher interest rates.
Following this discipline ensures that the City will always have sufficient cash available for daily needs,
preserves its principal and never has too much money in any one maturity arm whether it be short -term
or long. In this manner, the Consolidated Portfolio will earn a competitive yield without assuming
unacceptable risk..
C. Annual Review by City Council
The City Council will annually adopt the Financial Management Policy Statements stating that it has reviewed
the Cash Management Policy and Statement of Investment Strategy. The Financial Management Poliey
Statements so adopted shall record any changes made to either the policy or strategy.
Ill. OVERVIEW OF CASH MANAGEMENT
3
Inasmuch as both the legislative policies and administrative rules and regulations of the City are designed to be
completely congruent, all of the City's cash management activities shall be conducted within the carefully -
defined framework which is described throughout this Statement. Activities which represent any departure
from this procedural or conceptual framework are unacceptable.
A. Cash Management Capabilities and Qualifications:
Chapter 2, Section 2-114 of the Code of the City of Fort Worth and City Council Resolutions No. 1 185
(adopted October 7, 1986) and No. 1719 (adopted May 14. 1991) authorize the City Treasurer or his designee
to conduct transactions necessary for investment of City funds. Pursuant to the Public Funds Investment Act
2256.005 (b)(3), this document must also address the quality and capability of investment management.
Accordingly the City Treasurer shall have the following investment and cash management capabilities and
qualifications as stated in the City's Job Classification for that position:
1. Knowledge of:
a. Functions and operations of municipal government.
b. Techniques and systems of cash management.
c. Techniques of financial ratio analysis.
d. Principles and practices of municipal finance, investment securities, and financial money markets.
e. Methods of financial and economic analysis and forecasting.
f. Principles of supervision, training and performance evaluation.
g. Research and analysis methods.
h. Pertinent Federal, State and local laws, eodes and regulations govern ing municipal funds and investments.
2. Ability to:
a. Conduct cash flow and financial ratio analysis.
b. Monitor and report money market investments.
c. Present financial asset and investment information to the City Administration, City Council, and citizens.
d. Analyze complex financial and economie data.
e. Prepare clear and concise reports.
f. Communicate clearly and concisely, both orally and in writing.
g. Communicate effectively at all levels, both internal and external to the City, in order to obtain or provide
information.
B. Cash Management Programs and Activities,
In the City's view, overall cash management success can only be achieved by carefully coordinating a broad
range of disparate but interdependent activities; and success in each area is crucial to the achievement of the
City's ultimate objectives. Therefore, the City has designed ongoing programs which address a wide variety of
issues, including the following:
1. The design and implementation of reliable and effective cash -flow forecasting programs to assist in the
determination of the amounts of cash available for investment; the time period for which the funds may be
invested with a reasonable level of confidence: and a measure of the volatility of its internally- generated
forecasts, allowing for viable determination of the required liquidity which must characterize the City's
investment portfolio.
2. The design and implementation of appropriate "revenue acceleration" programs, aimed at enhancing the
speed at which monies are colleeted and deposited.
4
The design and implementation of suitable and appropriate "controlled disbursement" programs, ensuring
that City expenses are met in a timely manner, but not in such a way as to jeopardize the earnings potential
of the City's investment portfol io.
4. The utilization of modern and efficient techniques for the physical movement of money, taking advantage
of the various technological and operational procedures which have evolved in recent years.
5. The design of specific investment policies which will allow the City to maximize its interest earnings, while
at the same time establishing operational rules and regulations which will ensure the total safety of all funds
entrusted to the care and control of City personnel.
6. The cost - effective utilization of independent investment advisory support services,
7. The design and implementation of banking relationships which are butt] favorable to the City and
responsive to the day -to -day requirements of the City's complex financial operations.
S. The design and implementation of appropriate administrative approaches and operational procedures with
regard to the proper and effective use of the City's municipal credit authority.
9. Access to ongoing cash management training, designed both to maintain the technical skills of assigned
personnel and to ensure adequate cross - training of back -up personnel.
10. The design and administrative implementation of specific, written documentational requirements in support
of the City's formal policies, rules and regulations.
C. Financial Disclosure Statement, Ethics Disclosure and Conflicts of Interest
Ordinance No. 7650, adopted by the City Council of the City of Fort Worth, Texas, art October 25, 1977,
requires the City Treasurer annually to complete and file a financial disclosure statement with the City
Secretary. Futhermore the Public Funds Investment Act requires the investment officer(s) to file a disclosure
statement with the Texas Ethics Commission and the governing body if
1. the officer has a personal business relationship with a business organization offering to engage in an
investment transaction with the City (as defined in 2256.005 (i)(1 -3)); or
2. the officer is related within the second degree by affinity or consanguinity, as determined under Chapter
573 of the Texas Government Code, to an individual seeking to transact investment business with the
entity. PFIA 2256.005 (1).
IV. CRITERIA FOR SELECTING THE CITY'S FINANCIAL INTER IEDIARIES
Day -to -day implementation of the City's diverse cash management programs and activities typically
necessitates regular interaction with a variety of financial intennediar'ses, such as commercial hanks, savings
and loan associations, broker;'dealers (who make markets in negotiable investment securities) and professional
independent investment advisors.
Since any failure, inadequacy or ineptness on the part of any one of these financial intermediaries can
potentially result in financial disaster for the City, it is imperative that such entities meet the highest standards
of both reliability and capability in the performance of their various functions.
There are also a number of procedural and documentational issues which must be properly observed in the
dispatch of such external functions. However, this segment of the City's rules and regulations deals primarily
with eligibility criteria; while many of the City's procedural and documentational requirements are addressed in
Section V.
A. Commercial Ranks:
5
The creditworthiness, liquidity, and overall financial strength of financial institutions into which the City
deposits money, insofar as such elements can be measured through recognized industry rating services, steal l be
the primary determining factor in the City's eligibility criteria. Furthermore, eligible financial institutions shall
demonstrate acceptable rating compliance under the terms of the Community Reinvestment Act, thereby
supporting the City's ongoing efforts to encourage lending in low and moderate income areas.
In all events, deposits of City monies in commercial banks may only be made with institutions which possess
the overall financial strength, capitalization, and liquidity to reasonably ensure the safety and availability of
such monies. To assess the overall financial strength of potential depositories, the City may utilize third- party
rating agencies to perform periodic reviews of various commercial banks, and relies upon such reports to
deterrnine the appropriateness and eligibility of depositories.
B. Savings and Loan Associations:
Deposits of City monies in Texas savings and loan associations shall be subject to the same kinds of rating
criteria which are applied to commercial banks. Therefore, their acceptability as depositories will be based on
the third -party rating of appropriate rating organizations.
City policy prohibits deposits (in savings and loan, associations) of any amount (including accred interest)
which exceeds prevailing federal insurance limits.
C. Securities Dealers and Other QualiCed Representatives:
The "primary" securities dealers are those major investment banking firms listed by the Market Reports
Division of the Federal Reserve Bank of New York. These dealers are unique within the government securities
industry in that they both "report" and are "regulated" in an industry that is typically "non- reporting" and
"unregulated." Included on this "bloc chip" list are major securities firms and some of the world's largest
banks. City policy is generally to restrict transactions relating to the purchase and sale of U. S. Government
securities to this list of "primary" securities dealers. Such policy, therefore, will preclude the City from doing
business with other brokers and dealers whose financial strength and operational capabilities eartnot be
confidently determined, given the absence of "reporting" and "regulation" requirements, except as permitted
below.
1. Certification Form for Qualified Representatives
The Public Funds Investment Act requires that investments shall only be made with those business
organizations (irneluding money market mutual funds and local government investment pools) that have
provided the City with a written instrument, executed by a qualified representative of the firm, acknowledging
that the business organization has:
a. received and reviewed the City's investment policy and strategy as included in The Cash Management Rules
& Regulations: and
b. implemented reasonable procedures and controls in an effort to preclude investment transactions conducted
between the City and the organization that are not authorized by the City's investment policy as presented
in The Cash Management Rules & Regulations. (PFIA Section 2256.005 (k -1))
Given the foregoing, the City has designed a form entitled The Cary of Fort worth, Texan Pvblr'c Funds Investment
,4rt Certification Form for Qualified Representatives which trust be submitted to the City for its approval prior to
designation of an individual as a representative who is eligible to conduct securities business with the Cite. A
copy of this document is available for inspection upon request.
2. Selection and Annual Review for Qualified Representatives
6
Ultimately, the City must satisfy itself that the individual representative with whom the City has direct day -to-
day contact can demonstrate the prerequisite skill, experienee and reputation to deservedly conduct business
with the City. Therefore, only individuals who can clearly demonstrate this professionalism and business
integrity will qualify as financial intermediaries with regard to the City's investment portfolio. The Cash
Management Task Force, serving as the City's designated investment committee, will annually review and
adopt a list of qualified representatives who are authorized to engage in investment transactions with the City.
3. Selection of pion- primary Securities Dealers
From time to time the Cash Management Task Force may approve up to three non - primary securities dealers to
do business with the City in order to maintain an adequate list of experienced, knowledgeable representatives.
These firms and their representatives must submit a completed The City of Fort Worth, Texas Public Funds
Investment .4ce Certification Form for Qualified Represenfafives. Furthermore, as with representatives of primary
securities dealers, the fact that an individual representative seeks to do business with the City is insufficient
reason for the Cash Management Task Force to approve such a representative. Preference will be given to
those individual dealers who demonstrate a clear understanding of the Texas Public Funds Investment Act and
the City's cash management program through prior experience with the City or with other Texas cities.
4. Documentation of Investment Authority
The City will furnish qualified representatives with a copy of the City's resolution authorizing the Director of
Finance and the City Treasurer to establish and maintain accounts for the purpose of purchasing and selling
securities authorized under the laws of the State of Texas and the guidelines outlined in this Statement.
D. Investment Advisors:
The City may elect to seek professional investment advisory support services. Such services will allow the
City to improve its investment capabilities in several areas, including enhanced competitive market access,
reliable estimates of interest -rate trends, isolation and realization of portfolio trading profits, advanced
investment accounting technology and meaningful access to computer -based evaluation models.
The City has established striet guidelines regarding the selection of such investment advisors to ensure that
such support services are consistent with the City's established policies, rules and regulations. These guidelines
include, but are not limited to, the following:
1. Any investment advisor wishing to advise the City shall be a "Registered Investment Advisor" as defined
and regulated by the Securities and Exchange Commission (SEC).
2. It is preferred that any such investment advisor shall be completely independent of any financial institution
or securities brokerage firm. Any investment advisor lacking such complete independenee shall fully and
continuously disclose any relationships with any financial institution(s) and/or securities brokerage firm(s),
and shall further fully disclose any commissions, bonuses, or soft - dollar payments resulting from his/her
relationship with the City.
3. Any such investment advisor shall not take possession of any City monies or investment securities, nor
have access to or control over such monies and/or securities. [Procedures for delivery, possession and
safekeeping are described in Section V of this statement. Such procedures shall remain precisely the same,
regardless of the City's relationship with an investment advisor.]
4. Any such investment advisor shall not be empowered to execute investment or liquidation transactions on
behalf of the City. All such transactions shall be executed by City personnel.
7
5. Any such investment advisor shalt provide the City with periodic reports regarding the accounting
treatment and performance level of the City's investment portfolio. Such reports shall be verifiable within
the definition of generally accepted accounting principles (GAAP).
6. Fees for investment advisory services shall be established in advance and fully disclosed in a written
agreement.
It is imperative that any investment advisor who provides support services to the City be both highly qualified
and demonstrably independent. Furthermore, a prospective advisor should be able to provide clear evidence of
his/her capabilities on behalf of clients similar to the City. The City has designed a form entitled Investment
Advisor Questionnaire & Certification which must be submitted to the City for its approval before an
investment advisor will be considered by the City to serve in an advisory capacity. A copy of this document is
available for inspection upon request.
V. INVESTMENT CRITERIA
Generally, the City invests only in "money market instruments" which are defined as very creditworthy, highly
liquid investments with maturities of one year or less, in intermediate -term securities with maturities no greater
than five years, in public funds investment pools created under the State of Texas interlocal Cooperation Act
with a AAA or .AAA -m rating, and in SEC - registered, no -load money market mutual funds rated AAA.
A. Eligible Investments
The Public Funds Investment. Act, Sections 2256.009 — 2256.016 and Section 2256.019 — 2256.0201, lists the
authorized investments permitted to investing public entities. The City Treasurer and/or his designee(s) shall
invest the City's investable funds in those instruments which are listed below, insofar as they satisfy the City's
maturity and liquidity requirements:
1. Fully- insured and/or fully- collateralized Certificates of Deposit, maturities no greater than five years, issued
by eligible commercial banks and savings and loan associations located within the State of Texas.
2. Direct obligations of the United States Treasury, including Bills, Notes, Bonds and STRIPS.
However, there are a number of instruments which may be generically represented as "Treasury" securities
which are not actually direct Treasury obligations. For example, U. S. Treasury STRIPS (Separate Trading
of Registered Interest and Principal of Securities) are direct U. S. Treasury obligations, white seemingly -
similar instruments such as CATS (Certificates of Accrual on Treasury Securities) and TIGRs (Treasury
Investment Growth Receipts) are Trot. Instead, they are certificates and receipts issued by entities other
than the U. S. Treasury.
3. Obligations of certain United States government agencies rated AAA and which are backed by the full faith
and credit of the United States government. Eligible agency obligations include Fxport import Bank issues
(XMs), Fanners Home Administration insured Notes (FHAs), and certain securities issued by the
Government National Mortgage Association (GNMAs).
However, other agency obligations, even though guaranteed by the full faith and credit of the United States
government, enjoy less active secondary markets than the more traditional Bills, Notes, Bonds and STRIPS,
or the broad and orderly markets enjoyed by certain GNMA issues. Therefore, the City will refrain from
purchasing such instruments as "SBA" loans, "AID" bonds, Penn Central Transportation Certificates,
Washington Metropolitan Transit Authority bonds, etc., unless special circumstances prevail which suggest
their appropriate use for speeific investments. Any such "special circumstances" must be fully documented
at the time of such purchases, and approved in writing by the Finance Director. The City will restrict
investments in eligible obligations described in this section to discount notes, coupon - bearing issues,
medium term notes. and callable issues.
E' _�
4. Obligations of certain U. S. Government instrumentalities rated AAA, including (but not limited to) such
instruments as Federal Home Loan Bank debt (FHLBs), Federal National Mortgage Association debt
(FNMAs), Federal Home Loan Mortgage Corporation debt (FHLMCs), Federal Farm Credit Bank debt
(FFCBs) and eertain discount notes issued by instrumentalities such as the foregoing.
Other U. S. Government instrumentality issues, such as Asian Development Bank notes, InterAmerican
Development Bank bonds, World Bank bonds, Postal Service bonds, Tennessee Valley Authority bends,
and intermediate- and long -term "Federal Farm Credit "' and "Student Loan Marketing Association"
instruments do not enjoy widespread, orderly marketplaces, and are therefore ineligible. The City will
restrict investments in eligible obligations described in this section to discount notes, coupon- bearing
issues, medium term notes, and callable issues.
5. Purchases of the "Treasury ", "agency" or "instrumentality" securities mentioned in paragraphs 2, 3 and 4
above, under the terms of repurchase agreements (or in support of the City's "Sweep Account ") which meet
the City's established criteria for such transactions.
The City's standards for such purchases (under terms of repurchase agreements) are somewhat different
than the standards applied to actual "hold to maturity" or "long" purchases held within the City's portfolio.
For example, the City might never purchase GNMA securities with a final stated maturity date which is 10
years in the future for its permanent portfolio; but such securities should be perfectly acceptable as the
securities purchased under the terms of a repurehase agreement. [See Scction VI for additional detail
regarding repurchase agreements.]
6. Commercial paper with an original stated maturity date of 270 days or less, subject to the following
criteria:
a. The paper must be rated by at least two of the nationally- recognized eredit rating agencies at the
time of purchase, and the minimum rating must be A l+ (Standard and Poors), P (Moodys), or Dl
(Duff and Phelps).
b. If the issuer has senior debt outstanding, such debt must be rated at least A+ (Standard and Poors)
and Al (Moodys).
Public funds investment pools created under the State of Texas Interlocal Cooperation Act which have
attained a AAA or AAA -m rating from at least one nationally recognized rating agency and which comply
with the Public Funds investment Act.
Eligibte pools must also explicitly follow Securities and Exchange Commission Rule 2a 7. This rule, which
regulates the operation of money market mutual funds, limits funds' average maturity to 90 days maximum,
requires them to maintain a constant $1.00 net asset value, and restricts their investments to Treasury Bills
and Notes and obligations of U.S. agencies and instrumentalities with maturities less than 13 months. Staff
will consider other charaeteristics of pools before authorizing them as eligible investments. These
eharacteristics include the size of the pool, number of participants and the size of their deposits, and the
pool's use of reverse repurchase agreements. In general, the City will avoid pools with less than $1 billion
in deposits and a small number of participants because of possible instability in the pools and the resulting
threat to the City's funds.
8. SEC - registered, no -load money market mutual funds rated AAA which meet the criteria prescribed in the
Public Funds Investment Act of the Statc of Texas.
Currently policy limits investments to those listed in paragraphs 1 through 8 above. However, there are
numerous other money market instruments which arc widely recognized as prudent vehicles for effective cash
management; even though they may not be currently utilized by the City. Such money market investments
include "eligible" domestic hankers' acceptances (BAs); negotiable, variable rate, Eurodollar, or Yankee
9
certificates of deposit (CDs); etc. As the City develops appropriate investment sophistication, it may examine
and eventually utilize such alternatives, assuming that such alternatives are at that time legally authorized by
Texas Revised Statutes.
Under normal circumstances, no variation from the criteria listed above shall be allowed. However, the City
may elect, at its discretion, to amend and/or reline its List of Eligible Investments as conditions warrant. This
process will be initiated by the City's permanent Cash Management Task Force, with oversight by the City
Manager and/or the City Council. In any event, no variances from the list will be allowed in the absence of
specific, written approval from the Finance Director.
The Public Funds Investment Act does not require the City and other local government entities to liquidate
investments that were authorized investments at the time of purchase and subsequently were made ineligible by
amendments to the Act.
On occasion, the City may elect to "reverse" certain of its portfolio securities under the terms of a " reversc
repurchase agreement" or "portfolio lending" program. This authority shall be restricted, requiring written
authorization from the Finance Director. However, under no circumstances will the City utilize reverses as a
tool to effect "margined purchases" of investment securities, or as an activity which might essentially serve to
"disguise" or "cover up" unrecognized portfolio losses. The City will only enter into reverse repurchase
agreements with defined maturity dates. The proceeds may not be invested in any security with a maturity date
longer than the maturity date of the reverse repurchase agreement. Reverse repurchase agreements will not
have a term exceeding 90 days.
B. Credit Risk and Market Price Changes
The City Treasurer, acting in accordance with procedures specified herein and exercising due diligence, shall
not be held personally responsible for a specific security's credit risk or market price changes, provided that
these changes are reported in a timely manner and the appropriate actions are taken to control adverse
developments.
1. Credit Risk — Loss of Required Rating
All prudent measures will be taken to liquidate an investment that is downgraded to less than the required
minimum rating. The City Treasurer shall immediately inform the Cash Management Task Force of any rating
downgrade.
2. Market Price Changes
All fixed income securities, ever, direct obligations of the United States Treasury, are subject to market price
changes. During times of economic expansion and inflation, fixed income securities generally decline in value
as interest fates rise. During times of economic contraction and falling prices, fixed income securities generally
increase in value as interest rates fall. While the City will strive to avoid investment losses, the incurrence of a
"book" or "accounting" loss does not necessarily indicate an inappropriate invcstment activity or faulty
portfolio management strategy. In fact, incurrence of a "book" loss may actually be park of a transaction
producing an aggregate gain. In other cases, incurrence of a smaller "book" loss may be preferable to
incurrence of a much larger potential loss. Therefore, no legal or administrative prohibitions are imposed
against incurrence of portfolio losses, so long as such transactions can be justified in the overall portfolio
management process or are explained by trends in the economy.
C. Diversification
The City shall maintain a wcighted average maturity no greater than 2 years by investing funds according to the
following schedule:
Maturity Cash 1 year 2 year 3 year 4 year 5 year
10
Day Range 0 1 -365 365 -730 730 -1095 1095 -1460 1460 -1825
% Portfolio 15 28 14.25 14.25 14.25 14.25
At all times, the City shall maintain a cash position sufficient to meet daily liquidity requirements. There may
be times when the City has more or less of its funds in any one maturity cell. This maturity diversification
schedule serves as a general guideline for making investment decisions. In this way, the portfolio will be able
to take advantage of rising yields by re- investing maturing securities at higher yields. In falling rate
environments, it will profit from having investments that were made at higher interest rates. Setting targets for
positions in each maturity cell puts in place an additional safeguard. Following this discipline ensures that the
City never has too much money in any one maturity, whether it be short-term or Iong. Just as there are risks
from having too much money invested in the 5 year area, there are risks in short maturities. In the former, one
runs the risk of having to sell before maturity at a loss to raise cash. In the latter, one misses the added return
offered by longer maturities.
While there may be certain circumstances in which long -term seeurities are utilized, such as investments of
long -term sinking fund contributions, maturity - matched construction funds, or securities purchased under the
terms of short -term repurchase agreements, the general use of long -term securities shall be avoided. Such long -
term instruments are typically inappropriate for the City, since the purchase of such securities infers a certain
level of "speculation," given the significant "market risk" and/or "interest -rate risk" which characterizes long-
term investments.
The exception to this rule involves securities purchased under the terms of short-term repurchase agreements,
as specifically discussed in this document.
Prevailing Texas statues require that entities such as the City of Fort Worth give appropriate consideration to
"diversification" of its investment portfolio. Traditionally, diversification is a logical methodology for
minimizing overall portfolio risk by limiting (either in percentage or dollar amount) the amount of the City's
investments in certain classes of investments which may be exposed to measurable credit and /or market risk.
Alternatively, diversification may be viewed as a procedure which "spreads the risk" throughout the aggregate
portfolio.
However, the City's currently- eligible investments are all virtually "riskless," given their inherent individual
creditworthiness and the maturity limitations whieh the City has specifically imposed. In such circumstances,
simply requiring some designed "mixture" (of security types) neither improves the portfolio's level of safety nor
enhances its yield. Therefore, no maximums or minimums are currently observed with regard to the City's
portfolio mix.
D. Ineligible Investments tin permanent portfolio)
1. All United States Treasury, Agency or Instrumentality securities with maturity dates in excess of 5 years
from the date of purchase.
2. All United States Government Agency or Instrumentality securities which are defined as "mortgage -
backed" securities. (Since such securities are inherently "callable," regardless of their final stated maturity
date, they are ineligible as permanent City investments.)
3. Certain United States Government Agency securities, including those issued by the Small Business
Administration (SBA), the Agency for International Development (AID), Penn Central Transportation
Certificates, Washington Metropolitan Transit Authority bonds, and any other U. S. Government Agency
securities which do not enjoy a wide - spread, competitive marketplace.
4. Certain United States Government Instrumentality securities, including those issued by the Asian
Development Bank, the Inter - American Development Bank, the World Bank, the U. S. Postal Service, the
Tennessee Valley Authority, the Student Loan Marketing Association, and any other U. S. Government
Instrumentality securities which do not enjoy a widespread, competitive marketplace.
11
5. Any investment securities which have been "seeuritized," constructed or otherwise invented by the
investment banking community, and subsequently represented (either by commission or omission) as being
some form of "U.S. Government securities." Examples of such instruments include CATS (Certificates of
Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), CMOs (Collateralized
Mortgage Obligations), or even stranger "invented securities," such as CARS and REMICs.
VI. SAFEKEEPING, COLLATERALIZ kTION AND INVESTMENT PROCESSING
While the investment criteria established in Section V of this policy are designed to afford significant
protection to the City, there are required procedural and operational elements of the investment program which
are essential to the ultimate protection of the City's portfolio. Specifically, these elements deal with the
delivery, possession and safekceping criteria which must be observed in all investment activities.
A. Safekeeping Criteria
All ownership of investment securities shall be evidenced by an acceptable safekceping receipt issued by a
third -party financial institution which is acceptable to the City (or by a safekeeping receipt from a Federal
Reserve Bank, should such services became available).
1. Securities Safekeeping with Depository Bank
In most cases, the City will accept a safekeeping receipt issued by its "lead bank" which clearly indicates that
the securities are being held by the City's lead bank in the City's name, accompanied by a copy of the lead
bank's safekeeping receipt from the Federal Reserve Bank. (The latter receipt will indicate that the securities
are held in the lead bank's name "on behalf of a customer," as indicated by an "02 " classification.)
However, the lead bank may not provide securities safekeeping services in cases in which the lead bank is a
"principal" or "counterparty" in the investment transaction itself in such cases, safekeeping documentation
similar to that described in the preceding paragraph must be provided by a "third -party bank" which is
acceptable to the City.
Furthermore, such third -party bank safekeeping may not be provided by a "parent" or "holding company" bank
which is financially related to any bank which is a principal in a specific securities transaction. Ibe City has
designed a form entitled Third -Party Currodial Agent Agreement which specifically delineates the role and
responsibilities of such third -party banks. A copy of this document is available for inspection upon request.
[Note: In cases in which the City's lead bank merely "executes" the necessary wire- transfer services to support
the City's investment transactions, and is not a principal in the transaction, the bank's role is defined as that of a
"settlement Agent," rather than that of a "counterparty," as described by the Governmental Accounting
Standards Board (GASB).]
2. Securities Lending Program
Securities lending is a cash management strategy involving the lending of the City's investment securities to a
primary deafer with the substitution of securities of greater market value being safekept by a third party
custodial bank in an account in the City's name. The program is designed so that the City cams supplemental
income on the portfolio without losing ownership or interest payments on the loaned securities. The City
Council first approved the contract for a securities lending program with Morgan Stanley and with the Bank of
New York as custodian on October 17, 1999. The agreement, Paired Repurchase Transactions Custody
Agreement, establishes a Bank of New York safekeeping account in the City's name to hold all securities
submitted by Morgan Stanley as collateral for the City's investment securities. Collateral reports are faxed to
the City daily for review.
3. Deposit Collateral Policy
12
In addition to the securities which are actually "owned" by the City, Texas Revised Statutes, the Public Funds
Investment Act and Chapter 227, Texas Government Code, Collateral for Publie Funds, require that all
uninsured collected balances, plus accrued interest, if any, of the City held in commercial banks be fully
collateralized by acceptable securities. The Federal Reserve Bank (the "Fed ") has specifically designed a
system by which the Fed itself may act as the safekeeping agent of both the City and the bank which is
"pledging" the collateral (to secure City deposits). Upon acceptance by the City and proper transfer by the
pledging bank into a "joint custody account" (classification "07 "), the Fed will issue a "joint eustody receipt" to
both the pledging bank and the City. Thereafter, the Fed will not release the securities prior to their maturity
(for purposes of reassignment or liquidation) without the express consent of both parties. Collateral will be
valued monthly, and reports will be sent from the depository bank and the Fed on a monthly basis for review.
The collateral agreement is part of the City's Banking Services Agreement with its depository bank.
The City has established its own joint custody account at the Federal Reserve Bank, represented by a "psuedo"
ABA number. All joint custody receipts issued by the Fed shall note that the City's ABA number. (The City
has signature cards on file with the Fed, and has established telephonic and written documentation procedures
for the release of securities so held.)
B. Delivery vs. Payment
All investment (or divestment) transactions will be implemented on a "delivery vs. payment" (or "payment vs.
delivery") basis as specified in the City's Banking Services Agreement. In the absence of acceptable delivery
(or payment), the City will refuse to enter the transaction. All securities processing required to implement the
aforementioned purchase and sale transactions will be supported by written instructions to the City's bank,
unless the timely preparation of such written instructions would hinder the orderly completion of the
transaction itself. In such eases, the City will prepare follow -up letters confirming the oral (typically
telephonic) instructions, and forward such written instructions to the bank without undue delay, either by mail
or facsimile transmission,
C. Repurchase Agreements
Repurchase agreements will meet the aforementioned delivery criteria, and will be accompanied by an
acceptable "haircut" (i.e., excess of the market value of securities over the principal amount of the investment).
The required haircut will be established by the City, and shall be specifically addressed in a written Mover
Repurchase Agreement which supports the repurchase transaction. In general, the extent of the haircut
requirement will increase in direct proportion to the length of maturity of the securities purchased under the
terms of the repurchase agreement.
Furthermore, securities purchased under the terms of a repurchase agreement shall generally have maturity
dates of ten years or less, and shall be "wirable" instruments through the U. S. Federal Reserve system. Any
departure from these "maturity" or "wirability" standards shall require the specific, written authorization of the
Finance Director.
In the absence of authorization to the contrary, the City will require the following minimum ratios of market
value of securities purchased (under the terms of the repurchase agreement) to the principal dollar amount of
such investments:
U.S. Treasury Bills, Notes, Bonds and STRIPS which mature in l year or less: 101%
U. S. Treasury Notes, Bonds, and STRIPS which mature in l to lq years: 102%
U. S. Government agency or instrumentality issues which mature in up to 10 years: 102%
Naturally, the haircut ratios listed above must be examined on a daily basis, to ensure that the haircut or
"margin" does not drop below minimum acceptable levels. In cases of securities which require "physical"
13
rather than "book entry" delivery and safekeeping, the City will require a higher haircut ratio, and must approve
the acceptability of such securities. Similarly, if securities have maturities in excess often years, the City may
require a higher haircut ratio, and must specifically approve the acceptability of such securities.
[Whenever possible, the City will only accept "wirable" securities with maturities of 10 years or less.
However, the City may accept (at its discretion) certain physical delivery and safekeeping of nonwirable and/or
longer -term securities.]
D. Competitive Bidding
All individual security purchases and sales (excluding transactions with money market mutual funds and local
government investment pools, which are deemed to be made at prevailing market rates) will require at least
three competitive offers or bids.
VII. PERFORMANCE EVALUATION AND REPORTING
A. Recording
The City will use an appropriate portfolio management software system to record investment purchases, sales
and maturities. The selected system will maintain the portfolio inventory, accrue interest, amortize /accrete
(premiums /discounts), calculate yields and provide other accounting and performance data as necessary.
Monthly investment reports are produced from this data for periodic financial reporting and management
review.
B. Treasurer's Cash Management Reports
On a monthly basis, the City Treasurer and/or his designee(s) will prepare a cash management report. The
report will be reviewed by the Cash Management Task Force and signed by the Treasurer, Deputy Treasurer
and Finance Direetor. Periodically but no less than quarterly this report Kill he provided to the City Council.
The Treasurer's Cash Mangement Report will be included in any periodic Financial Report provided to the City
Council by the Finance Director. The Public Funds Investment Act requires that the cash management reports
be formally reviewed at least annually by an independent auditor and reported to the governing body. This
shall be completed by the City's external auditors in the process of the preparation of the City's Comprehensive
Annual Financial Report.
1. Reporting Requirements
This report will inelude, but not be limited to, a summary of the securities held at the end of the month; a
portfolio Cash -flow report, showing the purchases, sales, maturities, accrued interest sold/purchased and the
interest received; and a report on the return on investment, showing the interest earned, the gain or loss on any
sales during the month, the accretion /amortization, any "securities lending" earnings and any fees paid.
Furthennore, the Public Funds Investment Act requires the report to:
a. describe in detail the investment position of the City on the date of the report;
b. be signed by the City Treasurer, Deputy Treasurer and Finance Director;
c. contain a summary statement that states the:
(1) beginning market value for the reporting period;
(2) additions and changes to the market value during the period:
(3) ending market value for the period; and
14
(4) fully accrued interest for the reporting period;
d. state the book value and market value of each investment at the beginning and end of the reporting period;
e. state the maturity date of each investment;
f. state the compliance of the investment portfolio as it relates to:
(1) the Cash Management Rules and Regulations including the Cash Management policy and Statement
of Investment Strategy; and
(2) the Public Funds Investment Act.
2. Calculation of Retuni on the Portfolio
The return on the portfolio will be calculated by adding the interest earned, the gain or foss on any sale, the
accretion or amortization of any discounts or premiums and any "securities lending" fees. The estimated
annualized return for the month will be eomputed by using the daily weighted average book value for the
month. Unrealized gains and/or losses will not be considered in the computation of the portfolio's monthly
return.
3. Performance Benchmark
The benchmark for comparing the performance of the City's investment portfolio will be the 12 month moving
average of the yield of the 1 -year Treasury Bill on the last day of the month being reported. The 1 -year
Treasury Bill is the simplest, safest security a portfolio can own. The 12 month moving average of its yield
represents the return of a purely passive management approach in which equal amounts of the portfolio are
invested in every month's current Treasury Bill. As one month's investment matures, it is automatically
invested in the new [-year Bill. The City's objective is to exceed the 12 month moving average of the 1 -year
Treasury Bill rate each month through active portfolio management as governed by its Cash Management Rules
and Regulations.
4. Portfolio Pricing
As of the end of each month, the City will re -priee each security using Interactive Data Corporation's database
of market prices or by pricing the security based on its spread to the appropriate Treasury security. By this
method, the City will monitor the market price of its investments.
5. Annual Audit of Cash Management Program
In conjunction with the annual audit and the preparation of City's Comprehensive Annual Financial Report, a
compliance audit of management controls on investments and adherence to the City's established investment
policies will be conducted.
C. Daily Operating Procedures Manual
The City Treasurer and/or his designee(s) will develop and maintain a procedures manual, describing in detail
how to obtain bank balances, calculate the City's liquidity, needs, make daily investments, record investment
purchases and sales, and distribute daily bank reports. The procedures manual will include forms, agreements,
reports and other documents utilized to carry out the intent of the City Council's policy and this Statement.
D. Cash Management Task Force
15
The City's Cash Management Task Force will be comprised of an Assistant City Manager, the Finance
Director, the City Treasurer and other appropriate City personnel. The Task Force will meet periodically to
review and approve the Cash Mangement Report, to review portfolio performance, to discuss investment
strategies and to resolve any challenges and opportunities arising in the cash management process.
E. Ontside Professional Support Services
The City may, from time to time, engage the support services of outside professionals, so long as it can be
clearly demonstrated that such engagements produce "net financial advantage" or necessary financial protection
of the City's resources.
Such services may include engagement of financial advisors in conjunction with debt issuances; portfolio
management advisory support services-. special legal representation; appropriate independent rating services;
third -party custodial services: and other supportive services which cannot be efficiently addressed through "in-
house" treatments.
All such engagements shall require the written authorization of the Finance Director, who will provide written
justification for the engagement to the City Manager and/or the City Couneil.
VIII. UTILIZATION OF MUNICIPAL CREDIT AUTHORITY
A. Utilization of Debt
The City, like other governmental and quasi - governmental entities throughout the United States, has authority
to issue various forms of tax - exempt debt. The interest on such debt is exempt from federal (and sometimes,
state) taxation. While the unrestrained use of this authority is inappropriate, there are many eircumstances in
which the application of specific borrowing techniques is in the financial interest of the City,
Such borrowing iselosely regulated by federal law, Internal Revenue Service regulations, specific provisions of
the Tax Equity and Fiscal Responsibility Act (TEFRA), and various elements of Texas Revised Statutes.
Within the established regulations and guidelines, however, the City has a great deal of latitude with regard to
the timing and general nature of its financing activities. The City will utilize those financing alternatives and
techniques which produce positive financial advantages.
The Finance Director will, from time to time, recommend to the City Manager and /or the City Council various
financing opportunities which should be of ultimate financial and operational benefit to the City. City
personnel will constantly monitor the City's existing and potential financing alternatives to ensure that full
advantage is being taken of the financing alternatives which are available to the City.
B. Arbitrage Rebate Compliance
For any tax exempt municipal bonds issued after August 31, 1986, the City must remit to the Internal Revenue
Service any cumulative interest earnings from the investment of bond proceeds that are in excess of the yield
on a particular bond issue. In arbitrage regulations released in May, 1989, the U. S. Treasury Department
stated its approval of commingling bond proceeds for compliance purposes. As a result, the City has changed
its arbitrage - compliance approach from a specific bond issue portfolio method to a pooled -funds method. This
approach uses the City's accounting records to determine the daily remaining balance of funds on hand for each
issue. Interest is then allocated to daily remaining balance based on the average monthly yield from the
investment of bond proceeds in the City's consolidated portfolio. Interest earnings in excess of the allowable
amount are set up as a liability in the City's aceounting records and rebated to the Federal government at least
once every five years.
SECTION IBC. CASH MANAGEMENT AND INVESTMENT TRAINING
16
As required by the Public Funds Investment Act, all designated investment officers of the City will attend a
training session not less than once in a two -year period and receive not less than 10 hours of instruction relating
to cash management and investment responsibilities. These officers inelude the Finance Director, the Assistant
Finance Director, the City Treasurer and the Deputy Treasurer. The following organizations are approved by
the Lash Management Task Force as training providers: the Government Treasurers Organization of Texas, the
Treasury Management Association, the Government Finance Officers Association, the Government Finance
Officers Association of Texas, the Texas Municipal League, the Municipal Treasurers Association, and the Fort
Worth Treasury Management Association. The Cash Management Task Force will annually review and
approve the list of authorized training providers.
17
1.
2.
4
5
6.
7.
[In
RECORD OF AMENDMENTS
August, 1992:
Section V - Addition of money market mutual Funds as eligible investments.
April, 1994:
Section V - Change in average maturity limit of portfolio and addition of
maturity diversification schedule.
April, 1994:
Section VII - Change in benchmark from 4 week average of 1 -year
Treasury Bill to 12 month average of 1 -year Treasury Bi11.
January, 1995:
Section V - Further restrictions on eligible investments.
August, 1995:
Section V - Change in criteria for eligible local government investment
poufs.
A ugust, 1995:
Section V - Establish maximum term for reverse repurchase agreements.
August, 1995:
Section II - Add Investment Strategy Statement.
March, 1997:
Section 11 - Change maturity distribution schedule to inerease investments
maturing in one year or less and to decrease the maximum portfolio
maturity from 2.5 year to 2.0 years.
September, 1997:
Section I - Name Cash Management Task Force as City's designated
investment committee.
Section IV - Authorize the Cash Management Task Force to review and
Approve list of qualified brokcrldealers on annual basis.
Section Vil - Describe method for re- pricing securities.
Seetion IX - Gist authorized providers of required investment training.
January, 1998
Section IV - Authorize the Cash Management Task Force to review and
approve up to three non - primary broker- dealers to do business with the
City.
July 21, 2002
Seetion I — Clarify to explicitly state the purpose of the document is to comply
with provisions of the Publie Funds Investment Act
Section III — Add sub - seetions A. and C. to comply with the Publie Funds
Investment Act requirements that the policy specifically designate investment
officer(s), list qualifications and address ethics and financial disclosure.
Section IV, Sub - Section C. 1. — Specify Public Funds Investment Act eompliance
requirements for investment policy certification form to be signed by
representatives seeking to transact investment transactions with the City.
Section V, Sub- Section D. — Add listing of Ineligible Investments once speeified
in a separate document to Comply with the Public Funds Investment Act
requirements.
Section V1, Sub- Section A. 2. — Add description of security lending program and
related custodial proeedures and agreements to comply with the Public Funds
Investment Act requirements.
Section VI, Sub - Section A. 3. — Add reference to Banking Services Agreement to
describe collateralitation requirements of Public Funds Investment Act and
Collateral of Public Funds Act.
Section VII, Sub - Section B. 1 — List speeific reporting requirements of the Public
Funds Investment Act.
Section VII, Sub - Section B. 5 — Add requirement for annual review of cash
management program by external auditor as part of Counprehensivc Annual
Finaneial Report to comply with the Public Funds Investment Act requirements.
IV
Patterson Capital Management
ADV PART 2 — 2011 Brochure
ITEM 1 COVER PACE
BROCHURE DATE March 31, 7011
Patterson Capital Management LP
dba Patterson & Associates
301 Congress Avenue
Suite 570
Austin, TX 78701
www.patterson.net
Primary contact for the firm is:
Linda Thomson Patterson
President
(800) 817 -1442 / (512) 32x5042
Linda Opatterson.net
(512) 320 -5042
Though registered and regulated by the Securities and Exchange Commission that registration does not imply any
particular or certain level of skill or training.
This brochure provides information about the qualification and business practices of Patterson &
Associates. If you have any questions about the contents of this brochure, please contact the firm at
800 - 817 -24-42 or (512)320 -5042 or through info@natterson.net. The information in this brochure has
not been approved or verified by the United States Securities and Exchange Commission or by any state
securities authority.
Additional information about Patterson & Associates is also available on the SEC's website at
www.adviscrinfo.sec.gov.
ITEM 2 MATERIAL HAN ES
The information regarding Patterson & Associates and its employees included in this brochure has not
materially changed since the last annual update to the Securities and Exchange Commission (SEC) dated
April 1, 2010.
Patterson Capital Management
ADV PART 2 — 2011 Brochure
ITCM 3 TABLE OF CONTENTS
This Brochure is presented in nineteen separate sections fulfilling the requirements of SEC Rule 204
although not all sections are applicable to the Firm. Those items not applicable have been so designated
and completed in the Brochure.
Itemi
Cover Page .......................................................................................... ..............................1
Item2
Material Changes ............................................................................... ..............................1
Item3
Table of Contents ............................................................................... ..............................2
Item4
Advisory Business ............................................................................. ............................... 2
Item S
Fees and Compensation ........................... ............................... ...... ..............................3
Item 6
Performance Based Fees and Side -by -Side Management ............ ..............................4
Item7
Types of Clients .................................................................................. ..............................4
Item 8
Methods of Analysis. Investment Strategies and Risk of Loss ..... ..............................4
Item 9
Disciplinary Information ...... (not applicable) ..................................... ..............................6
Item 10
Other Financial Industry Activities and Affiliations ....................... ..............................6
Item 11
Code of Ethics, Participation/ Interest in Client Transactions & Personal Trading -6
Item12
Brokerage Pract ices ............................................................................ ..............................7
Item 13
Review of Ac counts ............................................................................ ..............................8
Item 14
Client Referrals and Other C ompensation ...................................... ..............................8
Item15
Custody ......... (not applkabie) ................................................................. ..............................B
Item 16
Investment Dlscretion ....................................................................... ..............................9
Item 17
Voting Client Securities. ........... ( notappllcable) .................................................................. 9
Item 18
Financial Information ..............{noe applicable) ..................................................................... 9
ITEM 4 ADVISORY BUSINESS
Patterson Capital Management LP, dba Patterson & Associates, was founded in 1994 in Austin, Texas as a
SEC registered investment advisory firm for public and corporate institutional clients. The firm was
originally established and remains structured as a partnership, but currently the sole principal/owner of
the firm is Linda T. Patterson.
Patterson & Associates is firm independent from any other financial or other company. As such, the firm
believes it can best objectively analyze investment decisions for price, composition, and value,
The firm offers investment advisory services and treasury consulting services within a philosophy that
funds management is a part of the wider treasury function. Public advisory clients currently are located in
'texas, New Mexico, Arizona and Illinois. In addition, we furnish investment advice through consultations
not included in a direct management service agreement. The firm offers investment advisory services for
a percentage of assets under management, hourly charges, or fixed fees, dependent upon the needs of
the clients. The firm does not serve individuals.
The focus of the firm has been the institutional public sector. Primarily serving the institutional public
sector in the US, the firm investstfient funds in short and intermediate range US domestic money markets
Pa
Patterson Capital Management
ADV PART 2 — 2011 Brochure
and fixed income markets. The firm generally uses US government and GSEs securities, commercial
paper, municipals and certificates of deposit.
The operating and bond funds of public entities (cities, school, airports, hospitals, higher education, etc.)
are by nature short term and are working funds with a higher need for liquidity than long term funds.
Most portfolios the firm manages can not buy longer than five years to stated maturity.
Clients not statutorily required to have an adopted investment policy, are strongly encouraged to adopt a
formal investment policy to set portfolio limitations and to explain risks inherent in the management of
the funds.
An additional supporting service the firm provides is treasury consulting; ranging from internal control
and procedural development/review to banking. This service is available to all funds management clients
and to non - management clients alike.
The short-term and operating profile of most public funds requires that few portfolios can rarely be
managed on a purely d+scretionory basis because the cash flows of the moneys is dynamic and requires on
going communication. The firm manages longer -term reserve funds on a discretionary basis. As of
December 31, 2010, the firm managed S 5,212,296,954 in non- discretionary funds based on book value
and $ 30,900,000 on a discretionary basis.
All clients of the firm have written investment policies (and if, in Texas, a policy adopted by the governing
body of the client) which imposes controls on all aspects of the covered portfolios with maximum
maturities, maximum weighted average maturities and market sectors. In addition, the clients have
ultimate approval rights on the broker/dealers the firm utilizes. The clients policy and the internal needs
and cash flows of the clients guide the portfolios and the firm therefore tailors each portfolio to the
unique needs of each portfolio.
See also Item 8
ITEM 5 FEES AND COMPENSATION
Patterson & Associates offers investment advisory services on the basis of a percentage of assets under
management, hourly charges, or fixed fees, dependent upon the needs and requirements of the client.
We do not deduct our fees from the client's assets. The firm does not custody client assets or securities.
Paterson & Associate's basic fee schedule for the provision of investment advisory services is as follows:
Up to $5 million 0.20 "A
$5 million to $10 million 0.18°%
$10 million to $25 million 015 %
$25 million to $50 million 0.10%
over $50 million negotiable
Advisory fees may vary, but generally will not exceed the fees noted in the schedule above.
in addition, the basic fee schedule described may vary due to the particular circumstances of the client or
as negotiated with particular clients. Fees for non - discretionary and discretionary management services
are generally billed in arrears on either a monthly or quarterly basis. In the event a client terminates its
contract with Patterson prior to the end of a billing cycle, the fee for that period is prorated based on
actual days in the period. At times, Patterson may also recommend that a client utilize a money market
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Patterson Capital Management
ADV PART 2 — 2011 Brochure
fund. if the client invests in such a fund, the client may have to pay a fee in addition to that paid to
Patterson.
Certain clients are charged a fixed fee, or an hourly fee, which varies from client to client, and which are
billed in arrears on a quarterly or monthly basis.
All fees paid to Patterson for investment advisory services are separate and distinct from the fees and
expenses charged by LGIP pools or mutual funds to their shareholders. These fees and expenses are
disclosed in the statement (pool) or prospectus (funds). Clients can invest in pools or funds directly
without the services of Patterson.
Clients will incur brokerage and custodial costs in connection with the services Patterson provides. Please
see item 12, Brokerage Practices, of the Brochure for a description of those costs.
EM 6 PERFRORIMANCE BASED FEES AND SIDE -BY -S OE MANAGEMENT
Patterson & Associates does not charge any performance -based fees to clients, accounts or funds.
ITEM 7 TYPES OF CLIENTS
Patterson & Associates provides investment advisory and investment consulting services to both public
and private institutional clients, including cities, school districts, hospitals, foundations, airports, counties.
These services are provided in accordance with clients' liquidity and risk tolerances and within the clients'
investment policies and objectives.
There are no minimum investment amounts or requirements for a client. Patterson & Associates
generally recommends a minimum account size of $1 million to justify a net positive return for the service
(earnings minus fees) .
See also Item 4.
ITEM a METHODS OF ANALYSIS I NVESTM ENT STRATEGIES AND RISK OF LOSS
Patterson & Associates manages all client funds as separately managed portfolios defined by their unique
objectives. Certain clients have several separately managed portfolios that are based on the specific type
of and use of moneys (such as operating money, bond money, and reserves).
Strategies for each unique client portfolio are discussed with the client initially and included as part their
investment policy. Discussions are held with clients on a periodic basis, at least annually, to identify
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Patterson Capital Management
ADV PART 2 —2011 Brochure
strategic opportunities for the portfolios and to explain associated market and credit risks. Strategies are
limited generally by cash flow needs of the funds.
The firm primarily utilizes fundamental and technical analysis along with charting and cyclical analysis to
support the individual strategies for the separately managed portfolios. The basic tools used include yield
curve analysis, market trends and actual and perceived monetary policy. The generally short-term nature
of the majority of clients' assets focuses market analysis in the short and intermediate term markets.
Patterson relies primarily, but not exclusively, on multiple unaffiliated, nationally recognized securities
rating organizations (NRSRO) such as Standard & Poor's and Moody Investor Services for basic analysis of
credit risk on corporate entities. Such ratings are supplemented by an on -going monitoring of corporate
actions, influences and developments derived from all available independent news sources.
As discussed in Advisory Business, Patterson & Associates invests client funds in short and intermediate
range US domestic money and fixed income instruments. Portfolios for operating and bond funds are
policy controlled and generally use a buy- and -hold strategy. Securities are normally laddered in a manner
reflecting the cash flow needs of the funds. Each portfolio is defined by polity with a maximum maturity
and a maximum weighted average maturity which is continuously monitored by the firm. The primary risk
associated with such investments is liquidity risk because these funds are used for ongoing operations and
projects. Liquidity risk is mitigated with (a) maturities targeting cash needs, (b) a periodic cash flow
review with the client and (c) a verification of viability before each trade. Any market risk is reduced
through the buy- and -hold process which matches the maturity of investments with known liability dates.
Debt and Other Income Producing Risk. Income securities including money market instruments, are
subject to interest rate, market and credit risk. Interest rate risk relates to changes in a security's value as
a result of changes in interest rates generally. Even though such instruments are investments that may
promise a stable stream of income, the prices of such securities are inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price Fluctuations. In general, the values of
fixed income securities increase when prevailing interest rates fail and decrease when interest rates rise.
Market risk relates to the changes in the risk and perceived risk of an issuer, country or region. Credit risk
relates to the ability of the issuer to make payments of principal and interest. A clients could lose money
if the issuer of a fixed income security is unable to pay interest or repay principal when due. Credit risk
applies to most fixed income securities. The values of income securities may also be affected by changes
in the credit rating or financial conditions of the issuing entities.
Municipal Bond Risks. Municipal securities can be significantly affected by political changes as well as
uncertainties related to taxation, legislative changes or the rights of municipal security holders. Because
many municipal securities are issued to finance similar projects (for example, education, healthcare or
transportation), conditions in those securities can affect the overall municipal market.
Money Market Mutual Fund Risks — Money market funds, and local government investment pools
structured as a "2a -7 fund ", are subject to market, credit and interest rate risk. Interest rate risk relates
to changes in the value of securities held in the portfolio as a result of changes in interest rates generally.
Credit risk relates to the ability of the issuer to make payments of principal on securities held in the
portfolio. Credit risk applies to the securities in the portfolio as well as any credit rating on the fund or
pool itself.
The strategy for reserve funds are also reviewed on the basis of potential fund usage and are restricted by
policy as to maximum maturity and maximum weighted average maturity. If market or volatility risks are
expected to affect the client's access to the funds and that access is in question by the client, the
portfolios are shortened to reduce this risk.
Patterson Capital Management
ADV PART 2 —2011 Brochure
ITEM 9 DISCIPLINARY INFORMATION
Not applicable.
ITEM 10 OTHER FINANCIAL INDUSTRY ACTIVITIES AND AFFILIATIONS
Patterson & Associates, its employees and supervised persons, have no financial affiliates. The firm is not
actively engaged in any business other than giving investment advice and treasury consulting.
ITEM 11 CODE OF ETHICS, PARTICIPATION OR INTEREST IN CLIENT TRANSACTIONS AND
PERSONAL TRADING
Patterson & Associates has adopted a Code of Ethics and Personnel Regulations. The Code includes:
- Mission statement
standards of conduct
- protection of material non - public information
personal trading procedures and reporting
reporting requirements and violations
reviews and enforcement
SEC requirements
- Affirmative action statements
Confidentiality
Internal controls
Systems controls
brokerage controls
trade controls
- settlement and clearing controls
The Mission Statement and Code of Conduct are available on request to any client or prospective client.
Neither Patterson & Associates nor any employee, supervisor, or management persons have any financial
interest in any related financial industry participant.
Patterson & Associates, its employees and its supervisory or management persons may invest in the same
securities it recommends to its clients. With strict client written and policy limitations of investments: to
the US Government and GSE markets, money markets and commercial paper, the firm sees no conflict of
interest. The markets are deep and broad and, unlike equities, investments in the securities could not
affect market prices.
All related persons of Patterson & Associates are required to report quarterly, to the Chief Compliance
Officer, all investment transactions. These records are reviewed for potential conflicts of interest and the
investment records are maintained.
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Patterson Capital Management
ADV PART 2 -2011 Brochure
Also included in the Patterson Code of Ethics is the provision that no employee or member of their family
may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection
with any business or investment transaction.
ITEM 12 BRQKERAGE PRACTICES
Soft Dollars
Patterson & Associates does not participate in any soft dollar arrangements. The firm has no incentive to
select or recommend any broker/dealer. No fees or any type compensation is paid to Patterson &
Associates from broker/dealers or funds. No research is done for any broker/dealer,
Broker /Dealers
Patterson & Associates requires that all public clients approve a list of authorized broker/dealers for
Patterson to use on their behalf. Patterson will only recommend a broker/dealer for a client that suits the
client's portfolio needs. It may consider client referrals from a broker/dealer in selecting broker/dealers
for an account; however, all investments are made on a competitive basis eliminating any potential
conflict of interest. Broker/dealers are not selected based on client referrals to Patterson. Clients may
require that a specific broker/dealer be included in the competitive list of client authorized broker/dealers;
however, all investments are made on a competitive basis eliminating any potential conflict of interest.
Not all clients direct brokerage. Clients should understand that if they direct the firm to utilize a specific
broker/dealer, Patterson may not be able to obtain best execution on the client's trade as they may incur
additional costs.
Under Texas law, Patterson & Associates may not place a trade for Texas governmental clients with a
broker/dealer unless Patterson has received a certification from the broker/dealer that it has received the
client's investment policy and the broker/dealer agrees to establish procedures which control the
purchase of unauthorized securities.
Prior to placing a trade for any client, Patterson obtains at least three bids /offers from authorized
broker /dealers who have provided the requisite certification or who are on the client's authorized list.
Internally, Patterson will only seek bids/offers from a broker/dealer that has provided Patterson with the
following documents at a minimum: the broker/dealer's state registration, a completed Patterson
questionnaire for background and contact information, FINRA registration and CRD numbers, and annual
financial statements. All information on broker/dealers is maintained by Patterson,
Aggregation of Trades
Patterson & Associates does occasionally aggregate the purchase and sale of securities for various clients.
Trade aggregation is addressed in the Patterson's Code of Ethics. In its sole discretion Patterson may
aggregate trades for several clients with similar needs. Individual accounting for the security is applied on
each client's documentation. Each client participating in an aggregated trade will receive a client
confirmation.
When trades are aggregated, (a) the actual price shall be applied to each client's exact portion of the
transaction, (b) all transactions costs are assessed in a pro rata basis to each client (as applicable), (c) each
clients receives a complete and separate broker/dealer confirmation on the trade designating their
ownership in their portion (par value) of the trade.
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Patterson Capital Management
ADV PART 2 — 2011 Brochure
ITEM 13 REVIEW OF ACCOUNTS
In order to understand client needs and objectives and to assure that those objectives are met, Patterson
& Associates completes a thorough review and discussion with each new client to obtain necessary
guidance and policy documents and establish guidelines.
On a periodic basis, and no less than annually, Patterson reviews the client portfofio(s) and all pertinent
client documents, cash flows, and policies. The procedures of separate account management are
thoroughly reviewed with each new client and as needed. The review includes: proposed portfolio
structure, portfolio policy limitations, pricing mechanisms and sources, and assignment of responsibilities
inside Patterson. These reviews are noted but not written.
A Patterson internal team review with all advisory persons, including the firm's President/CIO and client
adviser, is made at least quarterly. An annual review of each client portfolio, expectations and needs is
made. In addition, should conditions or personnel change at the client or in Patterson a complete review
of client needs and the existing portfollo(s) is made immediately. The client does not receive any report
of these reviews.
ITEM 14 CLIENT REFERRALS AND OTHER COMPENSATION
The firm has no incentive to select or recommend any broker/dealer. No soft dollars are offered by the
firm to clients. No fees or any type compensation is paid to Patterson & Associates from broker /dealers
or funds. The firm has no intention of relying upon the safe harbor provisions of the Exchange Act of 1934
Section 28(e) for soft dollar use.
Also included in the Patterson Cade of Ethics is the provision that no employeeor member of their family
may accept gifts or gratuities when there is an attempt to influence or reward the employee in connection
with any business or investment transaction.
No other person provides benefits in connection with the firm services.
No one provides client referrals to the firm.
See also Item 12.
ITEM 1 CUSTODY
Not applicable. Patterson & Associates never takes custody, nor directs custody, for clients.
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Patterson Capital Management
ADV PART 2 — 2011 Brochure
ITEM 15 INVESTMENT DISCRETION
Patterson & Associates provides discretionary and non - discretionary management services to its clients.
Where discretionary authority has been granted, Patterson manages the portfolio and makes investment
decisions without consultation with the cftent that would involved determinations regarding which
securities are bought and sold, the broker/dealer with whom orders far the purchase or sale of securities
are placed for execution. In some instances, Patterson's discretionary authority in making these
determinations may be limited by conditions imposed by the client in their investment guidelines, cash
flow needs or objectives or instructions otherwise provided to Patterson.
If discretionary authority is granted by the client it is documented in the advisory contract
See also Items 4, 11, and 12.
ITEM 17 VOTING Cll ENT SECUBJTIFS
Not applicable in fixed income and money marKet instruments.
ITEM YS RNAIVCIAt INFORMATION
Patterson & Associates is not subject to any the financial condition that would likely impair its ability to
meet contractual commitments.
W Review Page I of 2
Official si[.c of the City of Fort Worth, 7oxas
CITY COUNCIL AGENDA F"R71
COUNCIL ACTION: Approved on 6/12/2012
DATE: 6/12/2012 REFERENCE G -17615 LOG NAME: 1312 INVESTMNTSVCS
NO.;
CODE: G TYPE: CONSENT HEARING: NO
SUBJECT: Authorize Execution of an investment Advisory Services Agreement with Patterson Capital
Management, LP, in the Amount of $60, 000.00 Per Year with an Initial Three Year Term
and Two One Year Renewal Options (ALL COUNCIL DISTRICTS)
RECOMMENDATION:
It is recommended that the City Council authorize the execution of an Agreement with Patterson
Capital Management, LP, for investment advisory services in the amount of $60,000.00 per year with
an initial three year term and two one year renewal options.
DISCUSSION:
As part of the Enterprise Resource Planning (ERP) Phase II staffing model, responsibilities within the
Financial Management Services Department will be redistributed and the investment management
function will be outsourced during the term of the project. This approach will increase yield and
reduce the cost to backfill full -time project team members, thereby creating a positive net impact to
the City.
Patterson Capital Management, LP, is a Securities and Exchange Commission Registered
Investment Advisory firm, The firm's professionals will provide non - discretionary investment advisory
and coordination services and will work closely with Staff to provide reliable and timely cash flow
information and make the portfolio decisions that best meet those needs.
In order to ensure the cash flow needs and to provide information on market conditions and their
portfolio views and investment actions, Patterson Capital Management, LP, will work directly with
Staff on a regular basis. The firm will never have access to or control over the City's funds or the
securities in the portfolio. The firm will make investment decisions adhering to the City's established
Investment Policy and Strategy as market opportunities occur. Staff will have the final approval of any
investment transaction and will monitor execution with its safekeeping bank.
FISCAL INFORMATIONICERTIFICATION:
The Financial Management Services Director certifies that funds are available in the current operating
budget of the General Fund.
TO Fund/Account/Centers FROM FundlAccount/Centers
GG01 531200 0134010 60 000.00
Submitted for City Manager's Office by; Susan Alanis (8184)
Ori=ginating Department Head: Lena Ellis (8517)
http: /J apps. cfwnet .org /council _packetlmc_ review. asp ?ID = 16944 &councildate = 611212012 6/21/2012
M &C Review
Additional Information Contact. James Mauldin (2438)
ATTACHMENT
Page 2 of 2
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