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LTC 166-2019 S&P Global Ratings on the City of Miami Beach Investment Program MIAMI BEACH City of Miami Beach, 1700 Convention Center Drive, Miami Beach, FL 331 39, www.miamibeachfl.gov LTC # 166-2019 LETTER TO COMMISSION TO: Mayor Dan Gelber and Members ofhe City Co mission FROM: Jimmy L. Morales, City Manager DATE: March 25, 2019 SUBJECT: S&P Global Ratings on the City of iami Beach Investment Program The purpose of this Letter to the Commission ("LTC") is to inform the Mayor and City Commission regarding the results of the first ever rating review performed by Standard & Poor's (S&P) Global Ratings on the City's Investment Program. On December 12, 2018 the City Commission approved a comprehensive update of the City's Investment Policy. As part of the update, Administration recommended having the City's investment policy reviewed by S&P to verify that the proper safety, liquidity, and diversification objectives are being adhered to. S&P Global Ratings has assigned an `AAAf' and `S1' rating to the City's Investment Program, the highest possible rating (see attached S&P Global Ratings Definitions), affirming that the City's investment portfolio exposure is extremely strong, and exhibits low volatility of returns comparable to a portfolio of short-duration government securities, typically maturing within one to the three years and denominated in the base currency of the fund. The City has maintained an investment program for over 23 years with the primary goal of safeguarding the City's capital, liquidity of funds, and return on investment. This S&P "AAAf' rating assignment places the City among a select group of municipalities that are recognized by a Nationally Recognized Statistical Rating Organization (NRSRO) identified by the Securities and Exchange Commission (SEC) with a "AAAf' rating for the investment program. To derive the rating, S&P conducted a detailed quantitative and qualitative review of the City's investment program, internal controls, policies and procedures as well as a comprehensive review of the City's investment advisor. The City of Miami Beach is one (1) of only two (2) municipalities in the State of Florida to be assigned a AAAf/S1 rating. Please see enclosed full rating report from S&P Global Ratings dated March 13, 2019. The City's Investment Policy will also be reviewed and certified by the Association of Public Treasurers (APT). The results of that pending review will be shared by LTC when completed. If you have any questions or require additional information, please feel free to contact John Woodruff. S&P Global Ratings RatingsDirect® City of Miami Beach Investment Program Assigned 'AAAf/S 1' Ratings Primary Credit Analyst: Joseph Giarratano,New York+ 1 (212)438 8942;joseph.giarratano@spglobal.com Secondary Contact: Peter L Rizzo,New York(1)212-438-5059;peter.rizzo@spglobal.com NEW YORK (S&P Global Ratings) March 13, 2019--S&P Global Ratings today said it assigned its 'AAAf' fund credit quality rating (FCQR) and 'S1 ' fund volatility rating (FVR) on the City of Miami Beach Investment Program. An FCQR of 'AAAf' signifies that the credit quality of the City of Miami Beach's investment portfolio exposure is extremely strong. The 'S1' FVR signifies that the portfolio exhibits low volatility of returns comparable to a portfolio of short-duration government securities, typically maturing within one to three years and denominated in the base currency of the fund. The City of Miami Beach has maintained an investment policy governing the investment of the city's internal funds for more than 23 years. The policy establishes the framework for the city's investment activities to ensure effective management of the city's funds. The primary objectives of the city's investment program are safety of capital, liquidity of funds, and return on investment. The City of Miami Beach seeks to achieve these objectives by investing in a high-quality portfolio structured to match the city's cash flow requirements for ongoing operations, while investing operating funds primarily in shorter-term securities. The program will invest in a diversified portfolio of investment-grade fixed-income securities selected by the investment adviser that will include obligations guaranteed by the full faith and credit of the U.S. , U.S. government agency obligations, corporate obligations, asset-backed securities, bank obligations, and other obligations permitted by applicable Florida statutes. The fund is expected to be invested in such a manner that WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 13,2019 1 City of Miami Beach Investment Program Assigned 'AAAf/S1' Ratings average duration does not exceed three years. The City of Miami Beach has appointed Public Trust Advisors LLC, based in Denver, as investment manager of the fund. As of March 2019, Public Trust Advisors had approximately $32 billion in assets under management. SunTrust Bank serves as the banking services provider, and Fiduciary Trust serves as the custodian for the city's investment account. To derive the FCQR, we conducted a detailed quantitative and qualitative review of the portfolio and the investment manager. After applying our fund credit quality matrix (which reflects the weighted average credit risk of the portfolio of investments) to determine the quantitative assessment of the portfolio was credit quality of 'AAAf' , we considered our analysis of fund management, as well as a portfolio risk assessment. We assessed the qualitative components of the investment manager, Public Trust Advisors, as adequate, and the portfolio risk assessment as neutral, and our final FCQR is 'AAAf' . To assign the FVR, we first assessed the historical volatility and dispersion of the Bloomberg Barclays 1-3 Year US Government/Credit Total Return Index, which we view as a representative proxy for the city's investment portfolio given the City of Miami Beach has not historically calculated monthly returns. This preliminary assessment indicated a volatility profile of 'S1 ' . Next, under our portfolio risk assessment, we reviewed the investment policies related to duration, credit exposures, liquidity, derivatives, leverage, foreign currency, and investment concentration. We viewed all of the portfolio risk factors as consistent with the level of volatility displayed in the preliminary assessment, resulting in an intermediate FVR of 'S1 ' . Finally, we applied our assessment of the qualitative components to determine no adjustment was required and thus the final FVR was 'S1 ' . In determining the FCQRs and FVRs, we performed a comparable rating analysis with other funds that have similar portfolio strategy and composition. Here, we focused on a holistic view of the portfolio's credit quality and characteristics relative to its peers. The comparative rating analysis did not result in any adjustment to the ratings. An FCQR, also known as a "bond fund rating, " is a forward-looking opinion about the overall credit quality of a fixed-income investment fund. FCQRs, identified by the 'f ' suffix, are assigned to fixed-income funds, actively or passively managed, typically exhibiting variable net asset values. The ratings reflect the credit risks of the portfolio investments, the level of the fund's counterparty risk, and the risk of the fund's management ability and willingness to maintain current fund credit quality. Unlike traditional credit ratings (e.g. , issuer credit ratings) , an FCQR does not address a fund's ability to meet payment obligations and is not a commentary on yield levels. An FVR is a forward-looking opinion about a fixed-income investment fund's volatility of returns relative to that of a "reference index" denominated in WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 13, 2019 2 City of Miami Beach Investment Program Assigned 'AAA f/S1' Ratings the base currency of the fund. A reference index is composed of government securities associated with the fund's base currency. FVRs are not globally comparable. FVRs reflect our expectation of a fund' s future volatility of returns to remain consistent with its historical volatility of returns. FVRs reflect S&P Global Ratings' view of a fund's sensitivity to interest rate risk, credit risk, and liquidity risk, as well as other factors that may affect returns such as use of derivatives, use of leverage, exposure to foreign currency risk and investment concentration, and fund management. Different symbology is used to distinguish FVRs from S&P Global Ratings' traditional issue or issuer credit ratings. We do so because FVRs do not reflect creditworthiness, but rather our view of a fund's volatility of returns. We review pertinent fund information and portfolio reports monthly as part of our surveillance process of our fund credit quality and volatility ratings. RELATED CRITERIA • Criteria - Financial Institutions - Fixed-Income Funds: Fund Volatility Ratings Methodology, June 26, 2017 • Criteria - Financial Institutions - Fixed-Income Funds: Fund Credit Quality Ratings Methodology, June 26, 2017 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 13, 2019 3 Copyright©2018 by Standard&Poor's Financial Services LLC.All rights reserved. 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Fund Credit Quality Ratings 19.An S&P Global Ratings fund credit quality rating,also known as a"bond fund rating:"is a forward- looking opinion about the overall credit quality of a fixed-income investment fund. Fund credit quality ratings, identified by the'f suffix, are assigned to fixed-income funds, actively or passively managed, typically exhibiting variable net asset values.They reflect the credit risks of the fund's portfolio investments, the level of the fund's counterparty risk,and the risk of the fund's management ability and willingness to maintain current fund credit quality. Unlike traditional credit ratings(e.g., issuer credit ratings), a fund credit quality rating does not address a fund's ability to meet payment obligations and is not a commentary on yield levels. Fund credit quality ratings are accompanied by fund volatility ratings (i.e., 'Af/S3')--when fund volatility ratings can be assigned--to communicate our opinion about certain risks not addressed by a fund credit quality rating. Table 5 Fund Credit Quality Ratings* Category Definition AAAf The credit quality of the fund's portfolio exposure is extremely strong. AAf The credit quality of the fund's portfolio exposure is very strong. Af The credit quality of the fund's portfolio exposure is strong. BBBf The credit quality of the fund's portfolio exposure is adequate. BBf The credit quality of the fund's portfolio exposure is weak. Bf The credit quality of the fund's portfolio exposure Is very weak. CCCf The credit quality of the fund's portfolio exposure is extremely weak. CCf The fund's portfolio has significant exposure to defaulted or near defaulted assets and/or counterparties. Df The fund's portfolio is predominantly exposed to defaulted assets and/or counterparties. *Ratings from'AAP to'CCCf may be modified by the addition of a plus(+)or minus(-)sign to show relative standing within the rating categories. S&P Global Ratings S&P Global Ratings Definitions 31-Oct-2018 05:00 GMT Table of Contents- C. Fund Volatility Ratings 20.A fund volatility rating is a forward-looking opinion about a fixed-income investment fund's volatility of returns relative to that of a"reference index"denominated in the base currency of the fund.A reference index is composed of government securities associated with the fund's base currency. Fund volatility ratings are not globally comparable. Fund volatility ratings reflect our expectation of the fund's future volatility of returns to remain consistent with its historical volatility of returns. Fund volatility ratings reflect S&P Global Ratings'view of the fund's sensitivity to interest rate risk, credit risk,and liquidity risk,as well as other factors that may affect returns such as use of derivatives,use of leverage,exposure to foreign currency risk,and investment concentration,and fund management. Different symbology is used to distinguish fund volatility ratings from S&P Global Ratings'traditional issue or issuer credit ratings.We do so because fund volatility ratings do not reflect creditworthiness but rather our view of a fund's volatility of returns. Table 6 Fund Volatility Ratings Category Definition A fund that exhibits low volatility of returns comparable to a portfolio of short-duration government securities, typically maturing within one to three years and denominated in the base currency of the fund,is rated'S1'. Within this category,a fund may be designated with a plus sign i+1.This indicates its extremely low volatility of S1 monthly returns compared with a portfolio of short-duration government securities representing the highest- quality fixed-income instruments available in each country or currency zone with a maturity of 12 months or less.In the absence of short-duration government securities in a given country or currency zone,the volatility of one-year commercial bank deposit rates denominated in the base currency of the fund will be used as a benchmark proxy for an'S1+'rated fund. A fund that exhibits low to moderate volatility of returns comparable to a portfolio of short-to medium-duration S2 government securities,typically maturing within three to seven years and denominated in the base currency of the fund,is rated'S2'. A fund that exhibits moderate volatility of returns comparable to a portfolio of medium-to long-duration S3 government securities,typically maturing within seven to 10 years and denominated in the base currency of the fund,is rated'S3'. A fund that exhibits moderate to high volatility of returns comparable to a portfolio of long-duration S4 government securities,typically maturing beyond 10 years and denominated in the base currency of the fund,is rated'S4'. A fund that exhibits high to very high volatility of returns comparable to a portfolio of long-duration S5 government securities,typically maturing beyond 10 years and denominated in the base currency of the fund,is rated'S5'.A fund rated'S5'may be exposed to a variety of significant portfolio risks such as high concentration risks,high leverage,and investments in complex structured and/or illiquid securities.