Comprehensive Annual Financial Report - City of Santa Monica

CITY OF SANTA MONICA, CALIFORNIA
Notes to Basic Financial Statements, Continued
For the fiscal year ended June 30, 2008
Investments Authorized by Actions of the City Council
Cemetery and Mausoleum Perpetual Care funds are received from cemetery users for the perpetual care
of cemetery grounds and of the mausoleum. The funds are legally restricted to the extent that only
earnings, and not principal, can be used for restricted perpetual care purposes. These funds represent
the accumulation of unspent monies from non-government sources and are not considered by the City to
constitute “surplus funds” of a local government. Accordingly, these funds are not considered by the
City to be subject to the provisions of the California Government Code Section 53601 or the City’s
investment policy. These funds have been invested per instructions of the City Council. The table
below identifies the investment types generally authorized for these investments. Current City Council
instructions limit amount invested in equities (common stock) to 60% of the total portfolio with the
balance to be invested in fixed income securities. The table also identifies certain provisions of these
debt agreements that address interest rate risk, credit risk, and concentration of credit risk.
Maximum Maximum
Authorized Maximum percentage Investment
investment type maturity allowed in one issuer
U.S. Treasury obligations None None None
U.S. agency securities None None None
Common stock None 60% None
Corporate bonds None None None
Disclosures Relating to Interest Rate Risk
Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an
investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair
value to changes in market interest rates. The fair value of callable securities is also sensitive to market
changes in that if interest rates decrease between the time of purchase and the call date, the likelihood
that a bond will be called and reinvested at a lower interest rate increases. One of the ways that the City
manages its exposure to interest rate risk is by purchasing a combination of shorter term and longer term
investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or
coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed
for operations.
Information about the sensitivity of the fair values of the City’s investments (including investments held
by bond trustee and Charnock funds held jointly with another party in an escrow account) to market
interest rate fluctuations is provided by the following table that shows the distribution of the City’s
investments by maturity. For purposes of the schedule shown below, any callable securities are assumed
to be held to maturity.
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