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Life of an Act and How to Live with It


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

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

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

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 ..
1987 The Basics
  • Defined the entities
  • Set collateral at 100
  • Authorized specific investments
  • CDs
  • US obligations including agencies/instrumentalitie
  • Repurchase agreements
  • Any bond guaranteed by Texas
  • Required an investment policy
  • Established the Prudent Person Rule as standard

  • 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

  • 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

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

Greetings from.. California
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

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

  • 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

  • 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

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

  • 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

  • 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

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

  • 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

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?

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

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

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

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

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
  • 2256.005k Provide policy for written
  • 2256.005m Obtain annual management audit
  • 2256.008 Provide for training
  • 2256.023 Report quarterly for Board approval

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
  • .021 Prudence to liquidate at loss of rating
  • .025 Mineral rights funds (added in 2009)
  • .024 Chapter is sub-cumulative to other law

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

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)

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
  • Provide for training for officers
  • Approve training organizations
  • Receive and review quarterly reports

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

Investment Officers Must
  • Attend investment training
  • 10 hours within 12 months of obtaining
  • 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
  • Provide policy for certification to anyone
    attempting to sell
  • offering to engage in an investment transaction

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

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
  • Prudence is still your guideline

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

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

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

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

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 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
  • Obligations of US, its agencies and
    instrumentalities excluding mortgage backed

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

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

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

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

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

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

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

  • Built on Interlocal Cooperation Act
  • Requires governing body action to join
  • 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

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

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

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!)

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

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

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

PFCA Requirements
  • Entity shall inform bank of changes in
  • 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
  • Subsitution rights
  • Events of default actions

  • 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!

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

So what do I do??
  • Analyze your cash needs and decide risk
  • Chose securities you understand
  • Chose and designate investment officer(s) by
  • 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

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