Life of an Act and How to Live with It
description
Transcript of Life of an Act and How to Live with It
![Page 1: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/1.jpg)
Life of an ActLife of an Actand How to Live with Itand How to Live with It
Texas Public Funds Investment ActTexas Public Funds Investment ActLocal Government Code – Ch. 2256Local Government Code – Ch. 2256
1987 to the Present1987 to the Present
![Page 2: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/2.jpg)
Before 1987Before 1987 Local governments – except home Local governments – except home
rule entities – were bank dependentrule entities – were bank dependent Most used bank accounts and CDsMost used bank accounts and CDs Home rule cities could use the Home rule cities could use the
money markets – and didmoney markets – and did The PFIA was created and passed The PFIA was created and passed
initially in 1987initially in 1987
![Page 3: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/3.jpg)
Hanging with the TimesHanging with the Times
Starts to provide opportunity Grows as
the opportunities are recognized
Grows as markets and access is identified
Reacts as fears arise from market events
Grows with greed in low rate periods And will
continue to develop ……..
![Page 4: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/4.jpg)
1987 – The Basics1987 – The Basics Defined the entitiesDefined the entities Set collateral at 100%Set collateral at 100% Authorized specific investmentsAuthorized specific investments
CDsCDs US obligations including agencies/instrumentalitiesUS obligations including agencies/instrumentalities Repurchase agreementsRepurchase agreements Any bond guaranteed by TexasAny bond guaranteed by Texas
Required an Required an investment policyinvestment policy Established theEstablished the Prudent Person Rule Prudent Person Rule as as
standardstandard
![Page 5: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/5.jpg)
19891989 PoolsPools were added through ILCA were added through ILCA Pools were only generally defined and Pools were only generally defined and
assumed to be constant dollar, money market assumed to be constant dollar, money market equivalentequivalent
ReverseReverse repurchase agreements added repurchase agreements added Commercial paperCommercial paper added added Bankers acceptancesBankers acceptances added added
The Public Funds The Public Funds Collateral ActCollateral Act was created was created and passedand passed
![Page 6: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/6.jpg)
19911991 LimitsLimits in money market funds were in money market funds were
raised to specify use of authorized raised to specify use of authorized investment types onlyinvestment types only
LimitsLimits on which funds could be used in on which funds could be used in mutual funds were setmutual funds were set Bond funds can never be put in mutual Bond funds can never be put in mutual
fundsfunds Fear of loss of principal for bondholdersFear of loss of principal for bondholders
![Page 7: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/7.jpg)
1993 – Some Bad Timing1993 – Some Bad Timing Use of Collateralized Mortgage-backed Use of Collateralized Mortgage-backed
Obligations (Obligations (CMOsCMOs) were added) were added
Specific requirementsSpecific requirements were added for pools were added for pools including disclosure of pertinent information including disclosure of pertinent information through information statements, confirmations through information statements, confirmations and monthly reports.and monthly reports.
Written Written strategiesstrategies were now required with were now required with governing body approvalgoverning body approval
Israeli Notes addedIsraeli Notes added
![Page 8: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/8.jpg)
Greetin
gs from
..
Californ
ia
![Page 9: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/9.jpg)
1995 – Burned by CA1995 – Burned by CA ProhibitionProhibition added on certain MBS/CMOs added on certain MBS/CMOs
Reverse repurchase agreements were Reverse repurchase agreements were restrictedrestricted by term and by term and tied to the reverse termtied to the reverse term
TrainingTraining for investment officers was added for investment officers was added
Policy Policy certificationcertification requirement added requirement added ““imprudent investments”imprudent investments”
Added Added maximummaximum maturities and WAM maturities and WAM
Investment officers had to be Investment officers had to be designateddesignated
Written quarterlyWritten quarterly reports new required reports new required
![Page 10: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/10.jpg)
1995 – and Some Additions 1995 – and Some Additions State agency training addedState agency training added
TX Higher Ed Coordinating Board to provideTX Higher Ed Coordinating Board to provide
Prior authorized investments not required to be Prior authorized investments not required to be liquidatedliquidated is is authorization is removedauthorization is removed
Pools must be rated no less than Pools must be rated no less than AAAAAA
Municipalities with utilities authorized to Municipalities with utilities authorized to hedgehedge
State purchase and State purchase and deliverydelivery of securities of securities
Loss of required rating requires Loss of required rating requires prudent measuresprudent measures to liquidate to liquidate
State Treasury was abolished and transferred to ComptrollerState Treasury was abolished and transferred to Comptroller
![Page 11: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/11.jpg)
19971997 Investment officer Investment officer training extendedtraining extended to 10 to 10
hours within 12 months and every two hours within 12 months and every two yearsyears
Delivery versus paymentDelivery versus payment added added
Officer Officer disclosuredisclosure added added
List of List of brokersbrokers must be approved annually must be approved annually
![Page 12: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/12.jpg)
19991999 Investment Investment advisersadvisers added with contracts added with contracts
Initial 2-year period then no limitInitial 2-year period then no limit
Annual Annual compliance auditscompliance audits added added
GICs addedGICs added
Municipal utilityMunicipal utility section added for section added for sale/distribution of gas/electricity allowing sale/distribution of gas/electricity allowing hedging for supplieshedging for supplies
![Page 13: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/13.jpg)
20012001 Water code directors excluded from Water code directors excluded from
some training requirementssome training requirements
Letters of creditLetters of credit added as added as government obligation for PFCAgovernment obligation for PFCA To cut bank costs on collateralTo cut bank costs on collateral
![Page 14: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/14.jpg)
20032003 Securities lendingSecurities lending section added section added
New service push by banks for feesNew service push by banks for fees CollateralizedCollateralized Primary dealer or TX bank onlyPrimary dealer or TX bank only
Expansion of investment authority Expansion of investment authority now requires state audit reviewnow requires state audit review [Obviously gutless.. As we will see][Obviously gutless.. As we will see]
![Page 15: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/15.jpg)
20052005 CD definitionCD definition changes changes
““domiciled” became “main office or branch in TX”domiciled” became “main office or branch in TX” Codification induced – same requirementCodification induced – same requirement
Added ability to use Added ability to use CDARSCDARS Entry bank must be in TexasEntry bank must be in Texas Reciprocity requiredReciprocity required Safe spreading of CD fundsSafe spreading of CD funds
Decommissioning trust fundsDecommissioning trust funds investment investment authority expanded to include Trust Codeauthority expanded to include Trust Code Gas or electricity utilities selling to publicGas or electricity utilities selling to public
![Page 16: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/16.jpg)
20072007 Municipal Municipal hedginghedging on coal and on coal and
nuclear fuel expanded to commodity nuclear fuel expanded to commodity futures and related transportation futures and related transportation costscosts
![Page 17: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/17.jpg)
20092009 Municipalities with Municipalities with mineral rightsmineral rights
leases and contracts expanded leases and contracts expanded investment authorityinvestment authority Barnett Shale and Eagle Ford impetusBarnett Shale and Eagle Ford impetus Includes oil, gas or other mineral rightsIncludes oil, gas or other mineral rights Establishes a Trustee authorityEstablishes a Trustee authority Funds must be separated Funds must be separated Investments can be made under Trust Investments can be made under Trust
CodeCode
![Page 18: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/18.jpg)
2011 – A Rush to Yield2011 – A Rush to Yield Proposed for 2011Proposed for 2011 Corporate notes/bonds for CIP funds Corporate notes/bonds for CIP funds
ISDs with >50,000 students onlyISDs with >50,000 students only Born of low interest rates and g---dBorn of low interest rates and g---d
Investing in employee life insurance policy Investing in employee life insurance policy from employee (!!)from employee (!!) Your city as your beneficiary - yikesYour city as your beneficiary - yikes
Remove change in market value from Remove change in market value from reportingreporting
A requirement for 5% of A requirement for 5% of everyevery portfolio in portfolio in Texas based corporations (!!)Texas based corporations (!!) Could economic development be speaking here?Could economic development be speaking here?
![Page 19: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/19.jpg)
2011 Additional Proposals2011 Additional Proposals Policy must include procedures to monitor credit Policy must include procedures to monitor credit
ratings and procedures to liquidateratings and procedures to liquidate State agency training for officers tied to the bienniumState agency training for officers tied to the biennium Local government training tied to fiscal years as Local government training tied to fiscal years as
starting pointstarting point Authorized investment full faith and credit of FDICAuthorized investment full faith and credit of FDIC Pools can invest total funds in a money market fundPools can invest total funds in a money market fund Pools must say how yield is calculatedPools must say how yield is calculated Pools must have financial statements available to Pools must have financial statements available to
usersusers Pools report differences based on amount of funds Pools report differences based on amount of funds
investedinvested
![Page 20: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/20.jpg)
What is the law supposed to do?What is the law supposed to do? Provide guidelines for Provide guidelines for safetysafety
Apply to all entitiesApply to all entities Let local entity decide based on unique situations and conditionsLet local entity decide based on unique situations and conditions Allow entities to set their own parametersAllow entities to set their own parameters WAM and maturities and authorized investmentsWAM and maturities and authorized investments
Define Define guidelinesguidelines on investments on investments Set limits for high credit quality and safetySet limits for high credit quality and safety
Provide for flexibility (maturity)Provide for flexibility (maturity) To fulfill local needsTo fulfill local needs
Provide for control on extension risk (WAM)Provide for control on extension risk (WAM) To control volatility which represents To control volatility which represents riskrisk
![Page 21: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/21.jpg)
How should/must you comply?How should/must you comply? Address you own local considerationsAddress you own local considerations
Risk tolerance limits Risk tolerance limits Cash flow needsCash flow needs Build your own from a wide variety of Build your own from a wide variety of
choiceschoices
Establish set compliance schedule Establish set compliance schedule
![Page 22: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/22.jpg)
Specific PFIA Specific PFIA RequirementsRequirements
Write a PolicyWrite a Policy (2256.005)(2256.005)Emphasize safety and liquidityEmphasize safety and liquidityAddress diversification, yield, maturity & Address diversification, yield, maturity & capabilitycapabilityList authorized investmentsList authorized investmentsSet a maximum maturity and WAMSet a maximum maturity and WAMTell how prices are monitoredTell how prices are monitoredRequire DVPRequire DVP
Review and Review and adoptadopt policy annually policy annually
![Page 23: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/23.jpg)
PFIA RequirementsPFIA Requirements
2256.005d 2256.005d Write a Write a StrategyStrategy 2256.005e 2256.005e Review and Review and adoptadopt strategy annually strategy annually 2256.005f 2256.005f Designate an Designate an investment officerinvestment officer 2256.005i 2256.005i DiscloseDisclose personal/business relationshipspersonal/business relationships 2256.005k 2256.005k Provide policy for written Provide policy for written certificationcertification 2256.005m 2256.005m Obtain annual management Obtain annual management auditaudit 2256.008 2256.008 Provide for Provide for trainingtraining 2256.023 2256.023 Report Report quarterly for Board approvalquarterly for Board approval
![Page 24: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/24.jpg)
Other PFIA ItemsOther PFIA Items
.005 CDs bought orally and in writing.005 CDs bought orally and in writing .005 .005 Ethics considerationsEthics considerations .005 May specify unauthorized investments.005 May specify unauthorized investments .006 .006 PrudencePrudence is based on the whole portfolio is based on the whole portfolio .017 No need to liquidate if authorized at purchase.017 No need to liquidate if authorized at purchase .021 Prudence to liquidate at .021 Prudence to liquidate at loss of ratingloss of rating .025 Mineral rights funds (added in 2009).025 Mineral rights funds (added in 2009) .024 Chapter is sub-cumulative to other law.024 Chapter is sub-cumulative to other law
![Page 25: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/25.jpg)
Who is Covered?Who is Covered? Local entities and schoolsLocal entities and schools State agenciesState agencies Higher educationHigher education
Not:Not: Pension fundsPension funds Veterans Land Board fundsVeterans Land Board funds County registry fundsCounty registry funds Deferred compensation fundsDeferred compensation funds Securities donated to entities (except once Securities donated to entities (except once
liquidated)liquidated)
![Page 26: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/26.jpg)
Number One in PriorityNumber One in Priority Write an Write an Investment PolicyInvestment Policy
Must be Must be adoptedadopted by governing body by governing body annuallyannually
Resolution must include Resolution must include changes changes made made List the type of investments authorizedList the type of investments authorized
Limit by maturity and perhaps qualityLimit by maturity and perhaps quality Such as: LGIP “constant dollar”Such as: LGIP “constant dollar”
Set a Set a maximum maturitymaximum maturity of of anyany security security Require delivery versus payment (Require delivery versus payment (DVPDVP) !!!) !!! (Allows for (Allows for allall transactions to be verbal) transactions to be verbal)
![Page 27: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/27.jpg)
Governing Board DutiesGoverning Board Duties Regardless of ‘investor’ they retain ultimate Regardless of ‘investor’ they retain ultimate
fiduciary responsibilityfiduciary responsibility Approve investment policy annuallyApprove investment policy annually Approve written strategy annuallyApprove written strategy annually Designate investment officersDesignate investment officers Review, revise, adopt broker/dealers list annuallyReview, revise, adopt broker/dealers list annually Provide for training for officersProvide for training for officers
Approve training organizationsApprove training organizations Receive and review quarterly reportsReceive and review quarterly reports
![Page 28: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/28.jpg)
Investment OfficersInvestment Officers Must be designated by governing bodyMust be designated by governing body
Serves until removed or leaves entityServes until removed or leaves entity
Allowed to transfer, deposit, withdraw, Allowed to transfer, deposit, withdraw, and manageand manage Put language in resolution to avoid Put language in resolution to avoid
corporate resolutions later requiredcorporate resolutions later required
![Page 29: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/29.jpg)
Investment Officers MustInvestment Officers Must Attend investment trainingAttend investment training
10 hours within 12 months of obtaining responsibilities10 hours within 12 months of obtaining responsibilities 10 hours every two years10 hours every two years By organization approved by governing bodyBy organization approved by governing body TreasurerTreasurer, or CFO if not Treasurer, , or CFO if not Treasurer, andand investment officer investment officer Board Treasurer assumed to require trainingBoard Treasurer assumed to require training Organizations report attendance to ComptrollerOrganizations report attendance to Comptroller
Exercise prudenceExercise prudence
Disclose potential conflict relationshipsDisclose potential conflict relationships By blood or marriageBy blood or marriage Disclose to governing body and TX Ethics CommissionDisclose to governing body and TX Ethics Commission
Provide policy for certification to anyone attempting to sell Provide policy for certification to anyone attempting to sell offering to engage in an investment transactionoffering to engage in an investment transaction
![Page 30: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/30.jpg)
Investment Officers MustInvestment Officers Must Only transact with entities which have Only transact with entities which have
provided policy certificationprovided policy certification Broker/dealers, banks and poolsBroker/dealers, banks and pools
Must perform an annual compliance audit Must perform an annual compliance audit and audit management controlsand audit management controls Compliance with Act and your PolicyCompliance with Act and your Policy State agencies perform only bi-annuallyState agencies perform only bi-annually
If invested in other than CDs and poolsIf invested in other than CDs and pools Must have auditor review quarterly reportsMust have auditor review quarterly reports
![Page 31: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/31.jpg)
Investment Officers MustInvestment Officers Must On loss of a required ratingOn loss of a required rating
Take ‘prudent measures’ to liquidateTake ‘prudent measures’ to liquidate In accordance with your policyIn accordance with your policy Primarily refers to commercial paper, BA, pools Primarily refers to commercial paper, BA, pools
and municipal notes/bondsand municipal notes/bonds
On newly ‘unauthorized’ securityOn newly ‘unauthorized’ security No need to liquidate if authorized at time of No need to liquidate if authorized at time of
purchasepurchase Prudence is still your guidelinePrudence is still your guideline
![Page 32: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/32.jpg)
Investment Officers MustInvestment Officers Must Provide for Provide for quarterly quarterly reportingreporting
Requires Officer knows accounting rulesRequires Officer knows accounting rules
Describing in detail the positionsDescribing in detail the positions Book Book and and marketmarket values are required values are required Trying to show volatility (change in market)Trying to show volatility (change in market) Full earnings (interest accrues + amortization)Full earnings (interest accrues + amortization) Give summary information (diversification)Give summary information (diversification)
Must be signed by IO as in complianceMust be signed by IO as in compliance With policy and the ActWith policy and the Act
![Page 33: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/33.jpg)
Broker/Dealers MustBroker/Dealers Must Review you policyReview you policy
Complete a policy certificationComplete a policy certification
Not a guarantee or safeguardNot a guarantee or safeguard Don’t fool yourself the responsibility is Don’t fool yourself the responsibility is
yours!yours!
![Page 34: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/34.jpg)
Investment CommitteesInvestment Committees Only mentioned once in ActOnly mentioned once in Act
Can approve broker/dealer list Can approve broker/dealer list annuallyannually As opposed to governing body passageAs opposed to governing body passage
![Page 35: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/35.jpg)
Security SpecificsSecurity Specifics All must be delivered DVPAll must be delivered DVP
NO broker safekeepingNO broker safekeeping No No brokerbroker advisors advisors Know the playersKnow the players
An entity can ‘un-authorize’ An entity can ‘un-authorize’ securities in policysecurities in policy
![Page 36: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/36.jpg)
Act’s Unauthorized SecuritiesAct’s Unauthorized Securities All unauthorized are All unauthorized are mortgage backedmortgage backed securities securities
These are not the debentures of an agencyThese are not the debentures of an agency Interest OnlyInterest Only MBS MBS – IO – pay only interest and no – IO – pay only interest and no
principalprincipal Principal Only MBS – PO – pay only principal and no Principal Only MBS – PO – pay only principal and no
interestinterest CMOS with stated maturities over 10 yearsCMOS with stated maturities over 10 years Inverse Floaters – float inversely on indexInverse Floaters – float inversely on index
Easy way to eliminate danger is in authorized Easy way to eliminate danger is in authorized listlist Obligations of US, its agencies and instrumentalities Obligations of US, its agencies and instrumentalities
excluding mortgage backed securitiesexcluding mortgage backed securities
![Page 37: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/37.jpg)
US ObligationsUS Obligations Treasury Bills, Notes and the ‘Bond’Treasury Bills, Notes and the ‘Bond’ Agencies and InstrumentalitiesAgencies and Instrumentalities
GSE – government sponsored enterprisesGSE – government sponsored enterprises A note on FNMA and FHLMCA note on FNMA and FHLMC
Under conservatorship until 1/1/14Under conservatorship until 1/1/14 Currently full faith and credit of USCurrently full faith and credit of US
Other obligations insured full faith & Other obligations insured full faith & creditcredit Basically GNMABasically GNMA
![Page 38: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/38.jpg)
US ObligationsUS Obligations Set your maximum maturitySet your maximum maturity
These extend to 30 years by definitionThese extend to 30 years by definition
![Page 39: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/39.jpg)
Certificates of DepositCertificates of Deposit MUST BE in TexasMUST BE in Texas Can not be “brokered” or “securitized” CDsCan not be “brokered” or “securitized” CDs
Must be collateralized above FDIC coverageMust be collateralized above FDIC coverage
May be CDARS (cdars.com) May be CDARS (cdars.com) initiatlly placed in TX bankinitiatlly placed in TX bank Protects from merger and acquisition dangers of Protects from merger and acquisition dangers of
undercollateralization/insuranceundercollateralization/insurance
Don’t have to be but you need to bid Don’t have to be but you need to bid competitively!!competitively!!
![Page 40: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/40.jpg)
Repurchase AgreementsRepurchase Agreements Must have:Must have:
Defined termination dateDefined termination date Collateral defined by ActCollateral defined by Act An independent custodianAn independent custodian A primary dealer or TX bank as counterpartyA primary dealer or TX bank as counterparty A Bond Market Association Master AgreementA Bond Market Association Master Agreement
Securities Lending – a form of RepoSecurities Lending – a form of Repo TX Bank or primaryTX Bank or primary Specific reinvestment optionsSpecific reinvestment options Same pledging and custody requirementsSame pledging and custody requirements Agreement can only be one year in durationAgreement can only be one year in duration
![Page 41: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/41.jpg)
Money Market AlternativesMoney Market Alternatives Commercial PaperCommercial Paper
Must be: Must be: A1/P1 by two NRSRO A1/P1 by two NRSRO or one rating and an irrevocable LOCor one rating and an irrevocable LOC Law states 270 days but you should use 90!
Banker AcceptancesBanker Acceptances Must be:Must be:
Able to liquidate at maturityAble to liquidate at maturity Same credit requirementsSame credit requirements Law states 270 days but you should use 90 or 180
days
![Page 42: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/42.jpg)
Money Market Mutual FundsMoney Market Mutual Funds Must be:Must be:
Registered with and regulated by SEC Registered with and regulated by SEC which includes all Act requirementswhich includes all Act requirements
Will always have a net asset value of Will always have a net asset value of $1$1
Note: Require rating in Policy for GASBNote: Require rating in Policy for GASB
![Page 43: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/43.jpg)
Mutual FundsMutual Funds Must:Must:
Only have ACT authorized investmentsOnly have ACT authorized investments Registered and regulated by SECRegistered and regulated by SEC Average WAM less than 2 yearsAverage WAM less than 2 years Be AAA ratedBe AAA rated
Not authorized for any bond fundsNot authorized for any bond funds
Note: these represent a real potential for Note: these represent a real potential for loss of principalloss of principal
![Page 44: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/44.jpg)
PoolsPools Built on Interlocal Cooperation ActBuilt on Interlocal Cooperation Act
Requires governing body action to join cooperativeRequires governing body action to join cooperative Has specific reporting requirement built on MMMFsHas specific reporting requirement built on MMMFs Must basically have a Policy available to allMust basically have a Policy available to all Must report all transactions and balancesMust report all transactions and balances Must establish a ½ cent collar on $1 poolsMust establish a ½ cent collar on $1 pools
Need Need notnot be constant dollar be constant dollar
Investment Officer Investment Officer mustmust understand their pool understand their pool
![Page 45: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/45.jpg)
Special: Higher EducationSpecial: Higher Education Sponsored cash management and Sponsored cash management and
investment pools (Common Fund)investment pools (Common Fund)
Bank issued Bank issued negotiable certificates of depositnegotiable certificates of deposit with banks rated at least 1 or A1/P1with banks rated at least 1 or A1/P1
Corporate bonds Corporate bonds Investment grade (two highest ratings)Investment grade (two highest ratings) Primarily for foundation usePrimarily for foundation use
![Page 46: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/46.jpg)
Special: Municipal UtilitySpecial: Municipal Utility Electric utility or sales of natural gasElectric utility or sales of natural gas
Hedging contracts for supplies or Hedging contracts for supplies or reservesreserves
Fuel oil, natural gas,coal, nuclear Fuel oil, natural gas,coal, nuclear fuel, elctric futures/options fuel, elctric futures/options Including transportation costsIncluding transportation costs
![Page 47: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/47.jpg)
Special: Mineral RightsSpecial: Mineral Rights Funds from a lease or contractFunds from a lease or contract
Must be separately reported and Must be separately reported and investedinvested
Must be estbalished as a Trustee Must be estbalished as a Trustee
Can use Trust Code (basically anything!)Can use Trust Code (basically anything!)
![Page 48: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/48.jpg)
Special: Decommissioning TrustsSpecial: Decommissioning Trusts
Nuclear Regulatory Commission TrustsNuclear Regulatory Commission Trusts
Regardless if public funds by PFIA Regardless if public funds by PFIA definitiondefinition
Basically uses Trust CodeBasically uses Trust Code Most cities use long treasuries or mutual Most cities use long treasuries or mutual
funds funds
![Page 49: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/49.jpg)
Special: Housing Authority BondsSpecial: Housing Authority Bonds
Mortgage pass throughs certificatesMortgage pass throughs certificates Individual mortgage loansIndividual mortgage loans
![Page 50: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/50.jpg)
Compliance with the PFCompliance with the PFCCAA Public Funds Collateral ActPublic Funds Collateral Act
Prevails over all other lawsPrevails over all other laws
Public funds over FDIC limits must be Public funds over FDIC limits must be collateralized collateralized
Amount = principal Amount = principal plusplus accrued interest accrued interest Requires 100% collateralizationRequires 100% collateralization School districts require 110% on MBS onlySchool districts require 110% on MBS only
![Page 51: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/51.jpg)
PFCA RequirementsPFCA Requirements Entity shall inform bank of $$ Entity shall inform bank of $$ changeschanges in deposits in deposits
Entity Entity mustmust have a have a collateral policycollateral policy Put it inside your investment policy as sectionPut it inside your investment policy as section Designate what you will accept as collateralDesignate what you will accept as collateral Provide for substitutionProvide for substitution Methodology used for valuing securitiesMethodology used for valuing securities
Collateral AgreementCollateral Agreement must: must: Conditions for possession (safekeeping by bailee)Conditions for possession (safekeeping by bailee) Ownership provisions – on and off events of defaultOwnership provisions – on and off events of default Subsitution rightsSubsitution rights Events of default actionsEvents of default actions
![Page 52: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/52.jpg)
PFCAPFCA Custodian must be approved by the entityCustodian must be approved by the entity
CustodianCustodian Your bailee – pay attentionYour bailee – pay attention State or national bank, TTSTC, capital stock >$5 million, FHLBState or national bank, TTSTC, capital stock >$5 million, FHLB
Custodian must:Custodian must: Immediately identify securities on their booksImmediately identify securities on their books Promptly deliver a “trust receipt” to entityPromptly deliver a “trust receipt” to entity Keep separate and accurate booksKeep separate and accurate books File a collateral report with Comptroller (Comptroller’s File a collateral report with Comptroller (Comptroller’s
manner)manner) SHOULD send you a collateral report monthly!SHOULD send you a collateral report monthly!
![Page 53: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/53.jpg)
PFCAPFCA Collateral Pooling estbalished in 2009Collateral Pooling estbalished in 2009
Voluntary basis for bank and entityVoluntary basis for bank and entity
Probably will not be implemented Probably will not be implemented
![Page 54: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/54.jpg)
So what do I do??So what do I do?? Analyze your cash needs and decide risk tolerancesAnalyze your cash needs and decide risk tolerances
Chose securities you understandChose securities you understand
Chose and designate investment officer(s) by resolutionChose and designate investment officer(s) by resolution
Write your investment policy and strategyWrite your investment policy and strategy
Get Council approval of policy and strategyGet Council approval of policy and strategy Use one resolutionUse one resolution
Set up brokers/banks/poolsSet up brokers/banks/pools Council action required on pools onlyCouncil action required on pools only
Have officer(s) disclose relationships,Have officer(s) disclose relationships, if if applicableapplicable
![Page 55: Life of an Act and How to Live with It](https://reader036.fdocuments.net/reader036/viewer/2022062315/56816011550346895dcf129f/html5/thumbnails/55.jpg)
It only hurts for a short time..It only hurts for a short time.. The foundation is critical The foundation is critical
The Acts are there to assist and The Acts are there to assist and guideguide
Linda T. PattersonLinda T. PattersonPatterson & AssociatesPatterson & Associates
Austin, TXAustin, [email protected]@patterson.net