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Life of an Act and How to Live with It

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Life of an Act and How to Live with It Texas Public Funds Investment Act Local Government Code Ch. 2256 1987 to the Present Before 1987 Local governments ... – PowerPoint PPT presentation

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Title: Life of an Act and How to Live with It


1
Life of an Actand How to Live with It
  • Texas Public Funds Investment Act
  • Local Government Code Ch. 2256
  • 1987 to the Present

2
Before 1987
  • Local governments except home rule entities
    were bank dependent
  • Most used bank accounts and CDs
  • Home rule cities could use the money markets
    and did
  • The PFIA was created and passed initially in 1987

3
Hanging with the Times
Starts to provide opportunity
Grows as the opportunities are recognized
Reacts as fears arise from market events
Grows as markets and access is identified
Grows with greed in low rate periods
And will continue to develop ..
4
1987 The Basics
  • Defined the entities
  • Set collateral at 100
  • Authorized specific investments
  • CDs
  • US obligations including agencies/instrumentalitie
    s
  • Repurchase agreements
  • Any bond guaranteed by Texas
  • Required an investment policy
  • Established the Prudent Person Rule as standard

5
1989
  • Pools were added through ILCA
  • Pools were only generally defined and assumed to
    be constant dollar, money market equivalent
  • Reverse repurchase agreements added
  • Commercial paper added
  • Bankers acceptances added
  • The Public Funds Collateral Act was created and
    passed

6
1991
  • Limits in money market funds were raised to
    specify use of authorized investment types only
  • Limits on which funds could be used in mutual
    funds were set
  • Bond funds can never be put in mutual funds
  • Fear of loss of principal for bondholders

7
1993 Some Bad Timing
  • Use of Collateralized Mortgage-backed Obligations
    (CMOs) were added
  • Specific requirements were added for pools
    including disclosure of pertinent information
    through information statements, confirmations and
    monthly reports.
  • Written strategies were now required with
    governing body approval
  • Israeli Notes added

8
Greetings from.. California
9
1995 Burned by CA
  • Prohibition added on certain MBS/CMOs
  • Reverse repurchase agreements were restricted by
    term and tied to the reverse term
  • Training for investment officers was added
  • Policy certification requirement added
  • imprudent investments
  • Added maximum maturities and WAM
  • Investment officers had to be designated
  • Written quarterly reports new required

10
1995 and Some Additions
  • State agency training added
  • TX Higher Ed Coordinating Board to provide
  • Prior authorized investments not required to be
    liquidated is authorization is removed
  • Pools must be rated no less than AAA
  • Municipalities with utilities authorized to hedge
  • State purchase and delivery of securities
  • Loss of required rating requires prudent measures
    to liquidate
  • State Treasury was abolished and transferred to
    Comptroller

11
1997
  • Investment officer training extended to 10 hours
    within 12 months and every two years
  • Delivery versus payment added
  • Officer disclosure added
  • List of brokers must be approved annually

12
1999
  • Investment advisers added with contracts
  • Initial 2-year period then no limit
  • Annual compliance audits added
  • GICs added
  • Municipal utility section added for
    sale/distribution of gas/electricity allowing
    hedging for supplies

13
2001
  • Water code directors excluded from some training
    requirements
  • Letters of credit added as government obligation
    for PFCA
  • To cut bank costs on collateral

14
2003
  • Securities lending section added
  • New service push by banks for fees
  • Collateralized
  • Primary dealer or TX bank only
  • Expansion of investment authority now requires
    state audit review
  • Obviously gutless.. As we will see

15
2005
  • CD definition changes
  • domiciled became main office or branch in TX
  • Codification induced same requirement
  • Added ability to use CDARS
  • Entry bank must be in Texas
  • Reciprocity required
  • Safe spreading of CD funds
  • Decommissioning trust funds investment authority
    expanded to include Trust Code
  • Gas or electricity utilities selling to public

16
2007
  • Municipal hedging on coal and nuclear fuel
    expanded to commodity futures and related
    transportation costs

17
2009
  • Municipalities with mineral rights leases and
    contracts expanded investment authority
  • Barnett Shale and Eagle Ford impetus
  • Includes oil, gas or other mineral rights
  • Establishes a Trustee authority
  • Funds must be separated
  • Investments can be made under Trust Code

18
2011 A Rush to Yield
  • Proposed for 2011
  • Corporate notes/bonds for CIP funds
  • ISDs with gt50,000 students only
  • Born of low interest rates and g---d
  • Investing in employee life insurance policy from
    employee (!!)
  • Your city as your beneficiary - yikes
  • Remove change in market value from reporting
  • A requirement for 5 of every portfolio in Texas
    based corporations (!!)
  • Could economic development be speaking here?

19
2011 Additional Proposals
  • Policy must include procedures to monitor credit
    ratings and procedures to liquidate
  • State agency training for officers tied to the
    biennium
  • Local government training tied to fiscal years as
    starting point
  • Authorized investment full faith and credit of
    FDIC
  • Pools can invest total funds in a money market
    fund
  • Pools must say how yield is calculated
  • Pools must have financial statements available to
    users
  • Pools report differences based on amount of funds
    invested

20
What is the law supposed to do?
  • Provide guidelines for safety
  • Apply to all entities
  • Let local entity decide based on unique
    situations and conditions
  • Allow entities to set their own parameters
  • WAM and maturities and authorized investments
  • Define guidelines on investments
  • Set limits for high credit quality and safety
  • Provide for flexibility (maturity)
  • To fulfill local needs
  • Provide for control on extension risk (WAM)
  • To control volatility which represents risk

21
How should/must you comply?
  • Address you own local considerations
  • Risk tolerance limits
  • Cash flow needs
  • Build your own from a wide variety of choices
  • Establish set compliance schedule

22
Specific PFIA Requirements
  • Write a Policy (2256.005)
  • Emphasize safety and liquidity
  • Address diversification, yield, maturity
    capability
  • List authorized investments
  • Set a maximum maturity and WAM
  • Tell how prices are monitored
  • Require DVP
  • Review and adopt policy annually

23
PFIA Requirements
  • 2256.005d Write a Strategy
  • 2256.005e Review and adopt strategy annually
  • 2256.005f Designate an investment officer
  • 2256.005i Disclose personal/business
    relationships
  • 2256.005k Provide policy for written
    certification
  • 2256.005m Obtain annual management audit
  • 2256.008 Provide for training
  • 2256.023 Report quarterly for Board approval

24
Other PFIA Items
  • .005 CDs bought orally and in writing
  • .005 Ethics considerations
  • .005 May specify unauthorized investments
  • .006 Prudence is based on the whole portfolio
  • .017 No need to liquidate if authorized at
    purchase
  • .021 Prudence to liquidate at loss of rating
  • .025 Mineral rights funds (added in 2009)
  • .024 Chapter is sub-cumulative to other law

25
Who is Covered?
  • Local entities and schools
  • State agencies
  • Higher education
  • Not
  • Pension funds
  • Veterans Land Board funds
  • County registry funds
  • Deferred compensation funds
  • Securities donated to entities (except once
    liquidated)

26
Number One in Priority
  • Write an Investment Policy
  • Must be adopted by governing body annually
  • Resolution must include changes made
  • List the type of investments authorized
  • Limit by maturity and perhaps quality
  • Such as LGIP constant dollar
  • Set a maximum maturity of any security
  • Require delivery versus payment (DVP) !!!
  • (Allows for all transactions to be verbal)

27
Governing Board Duties
  • Regardless of investor they retain ultimate
    fiduciary responsibility
  • Approve investment policy annually
  • Approve written strategy annually
  • Designate investment officers
  • Review, revise, adopt broker/dealers list
    annually
  • Provide for training for officers
  • Approve training organizations
  • Receive and review quarterly reports

28
Investment Officers
  • Must be designated by governing body
  • Serves until removed or leaves entity
  • Allowed to transfer, deposit, withdraw, and
    manage
  • Put language in resolution to avoid corporate
    resolutions later required

29
Investment Officers Must
  • Attend investment training
  • 10 hours within 12 months of obtaining
    responsibilities
  • 10 hours every two years
  • By organization approved by governing body
  • Treasurer, or CFO if not Treasurer, and
    investment officer
  • Board Treasurer assumed to require training
  • Organizations report attendance to Comptroller
  • Exercise prudence
  • Disclose potential conflict relationships
  • By blood or marriage
  • Disclose to governing body and TX Ethics
    Commission
  • Provide policy for certification to anyone
    attempting to sell
  • offering to engage in an investment transaction

30
Investment Officers Must
  • Only transact with entities which have provided
    policy certification
  • Broker/dealers, banks and pools
  • Must perform an annual compliance audit and audit
    management controls
  • Compliance with Act and your Policy
  • State agencies perform only bi-annually
  • If invested in other than CDs and pools
  • Must have auditor review quarterly reports

31
Investment Officers Must
  • On loss of a required rating
  • Take prudent measures to liquidate
  • In accordance with your policy
  • Primarily refers to commercial paper, BA, pools
    and municipal notes/bonds
  • On newly unauthorized security
  • No need to liquidate if authorized at time of
    purchase
  • Prudence is still your guideline

32
Investment Officers Must
  • Provide for quarterly reporting
  • Requires Officer knows accounting rules
  • Describing in detail the positions
  • Book and market values are required
  • Trying to show volatility (change in market)
  • Full earnings (interest accrues amortization)
  • Give summary information (diversification)
  • Must be signed by IO as in compliance
  • With policy and the Act

33
Broker/Dealers Must
  • Review you policy
  • Complete a policy certification
  • Not a guarantee or safeguard
  • Dont fool yourself the responsibility is yours!

34
Investment Committees
  • Only mentioned once in Act
  • Can approve broker/dealer list annually
  • As opposed to governing body passage

35
Security Specifics
  • All must be delivered DVP
  • NO broker safekeeping
  • No broker advisors
  • Know the players
  • An entity can un-authorize securities in policy

36
Acts Unauthorized Securities
  • All unauthorized are mortgage backed securities
  • These are not the debentures of an agency
  • Interest Only MBS IO pay only interest and no
    principal
  • Principal Only MBS PO pay only principal and
    no interest
  • CMOS with stated maturities over 10 years
  • Inverse Floaters float inversely on index
  • Easy way to eliminate danger is in authorized
    list
  • Obligations of US, its agencies and
    instrumentalities excluding mortgage backed
    securities

37
US Obligations
  • Treasury Bills, Notes and the Bond
  • Agencies and Instrumentalities
  • GSE government sponsored enterprises
  • A note on FNMA and FHLMC
  • Under conservatorship until 1/1/14
  • Currently full faith and credit of US
  • Other obligations insured full faith credit
  • Basically GNMA

38
US Obligations
  • Set your maximum maturity
  • These extend to 30 years by definition

39
Certificates of Deposit
  • MUST BE in Texas
  • Can not be brokered or securitized CDs
  • Must be collateralized above FDIC coverage
  • May be CDARS (cdars.com)
  • initiatlly placed in TX bank
  • Protects from merger and acquisition dangers of
    undercollateralization/insurance
  • Dont have to be but you need to bid
    competitively!!

40
Repurchase Agreements
  • Must have
  • Defined termination date
  • Collateral defined by Act
  • An independent custodian
  • A primary dealer or TX bank as counterparty
  • A Bond Market Association Master Agreement
  • Securities Lending a form of Repo
  • TX Bank or primary
  • Specific reinvestment options
  • Same pledging and custody requirements
  • Agreement can only be one year in duration

41
Money Market Alternatives
  • Commercial Paper
  • Must be
  • A1/P1 by two NRSRO
  • or one rating and an irrevocable LOC
  • Law states 270 days but you should use 90!
  • Banker Acceptances
  • Must be
  • Able to liquidate at maturity
  • Same credit requirements
  • Law states 270 days but you should use 90 or 180
    days

42
Money Market Mutual Funds
  • Must be
  • Registered with and regulated by SEC
  • which includes all Act requirements
  • Will always have a net asset value of 1
  • Note Require rating in Policy for GASB

43
Mutual Funds
  • Must
  • Only have ACT authorized investments
  • Registered and regulated by SEC
  • Average WAM less than 2 years
  • Be AAA rated
  • Not authorized for any bond funds
  • Note these represent a real potential for loss
    of principal

44
Pools
  • Built on Interlocal Cooperation Act
  • Requires governing body action to join
    cooperative
  • Has specific reporting requirement built on MMMFs
  • Must basically have a Policy available to all
  • Must report all transactions and balances
  • Must establish a ½ cent collar on 1 pools
  • Need not be constant dollar
  • Investment Officer must understand their pool

45
Special Higher Education
  • Sponsored cash management and investment pools
    (Common Fund)
  • Bank issued negotiable certificates of deposit
  • with banks rated at least 1 or A1/P1
  • Corporate bonds
  • Investment grade (two highest ratings)
  • Primarily for foundation use

46
Special Municipal Utility
  • Electric utility or sales of natural gas
  • Hedging contracts for supplies or reserves
  • Fuel oil, natural gas,coal, nuclear fuel, elctric
    futures/options
  • Including transportation costs

47
Special Mineral Rights
  • Funds from a lease or contract
  • Must be separately reported and invested
  • Must be estbalished as a Trustee
  • Can use Trust Code (basically anything!)

48
Special Decommissioning Trusts
  • Nuclear Regulatory Commission Trusts
  • Regardless if public funds by PFIA definition
  • Basically uses Trust Code
  • Most cities use long treasuries or mutual funds

49
Special Housing Authority Bonds
  • Mortgage pass throughs certificates
  • Individual mortgage loans

50
Compliance with the PFCA
  • Public Funds Collateral Act
  • Prevails over all other laws
  • Public funds over FDIC limits must be
    collateralized
  • Amount principal plus accrued interest
  • Requires 100 collateralization
  • School districts require 110 on MBS only

51
PFCA Requirements
  • Entity shall inform bank of changes in
    deposits
  • Entity must have a collateral policy
  • Put it inside your investment policy as section
  • Designate what you will accept as collateral
  • Provide for substitution
  • Methodology used for valuing securities
  • Collateral Agreement must
  • Conditions for possession (safekeeping by bailee)
  • Ownership provisions on and off events of
    default
  • Subsitution rights
  • Events of default actions

52
PFCA
  • Custodian must be approved by the entity
  • Custodian
  • Your bailee pay attention
  • State or national bank, TTSTC, capital stock gt5
    million, FHLB
  • Custodian must
  • Immediately identify securities on their books
  • Promptly deliver a trust receipt to entity
  • Keep separate and accurate books
  • File a collateral report with Comptroller
    (Comptrollers manner)
  • SHOULD send you a collateral report monthly!

53
PFCA
  • Collateral Pooling estbalished in 2009
  • Voluntary basis for bank and entity
  • Probably will not be implemented

54
So what do I do??
  • Analyze your cash needs and decide risk
    tolerances
  • Chose securities you understand
  • Chose and designate investment officer(s) by
    resolution
  • Write your investment policy and strategy
  • Get Council approval of policy and strategy
  • Use one resolution
  • Set up brokers/banks/pools
  • Council action required on pools only
  • Have officer(s) disclose relationships, if
    applicable

55
It only hurts for a short time..
  • The foundation is critical
  • The Acts are there to assist and guide
  • Linda T. Patterson
  • Patterson Associates
  • Austin, TX
  • linda_at_patterson.net
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