Introduction to School Business

Transcription

1 Introduction to School Business Managing Your Districts Funds Presented By: Nancy J. Rasinske Chief Financial Officer Grand Ledge Public Schools Brian K. Quinn Managing Director PFM Asset Management, LLC PFM Asset Management PFM 555 Briarwood Circle Suite 333 Ann Arbor, MI milaf.org 877-GO-MILAF

2 Table of Contents I. Cash Management: Big Picture II. III. IV. School Cash Management School Code What Am I Allowed to Invest In? Cash Flow Analysis Segmentation V. Case Study: Cash Management in Practice VI. Developing an Investment Policy Appendix: Investments Defined PFM

3 Cash Management: Big Picture PFM

4 D e f i n i t i o n Cash Management Cash management may be defined as all activities undertaken to ensure maximum cash availability and maximum investment yield on a government's idle cash. Cash management is concerned with the efficient management of cash from the time revenue is earned to the time a check or disbursement clears the bank. B a s i c E l e m e n t s Cash mobilization: get the cash in as quickly as possible. Controlled disbursement: release cash at the last possible moment. Investment program: make the cash work in the meantime. GFOAT.org Objectives of Cash Management PFM

5 ASBO Best Practices Cash Management & Investing The school business official understands and demonstrates the ability to: Select professional advisors/contractors such as bond counsel, rating agencies, financial advisors, and underwriters. Use lease purchasing and partner with other jurisdictions such as municipalities, counties, and other school districts. Develop/recommend investment policies for the governing board to include investment objectives such as maximizing investment income and preserving the investment principal. Develop specifications for the selection of banking and other financial services. Apply the concept of compensating balances. Comprehend procedures and legal constraints for cash collection and disbursement. Calculate the yields and understand the risks of various investment options legally available to a school district. Apply various methods of cash forecasting. Apply appropriate types of short-term debt financing instruments available to school districts. Analyze monthly internal transfers and loans. Analyze the legal constraints and methods of issuing long-term general obligation bonds, including the bond rating process and the role of the bonding attorney and rating services. Analyze the implication of arbitrage rules that may apply to the issuance of long-term general obligation bonds; provide for arbitrage payable when appropriate. Prepare a cash flow analysis, including a fund balance report, for the board of education. Review accrued receivables and understand permitted collection processes. Reference: Government Finance Officer Association Best Practice January 2017 PFM 5

6 Cash Management & Investment Objectives Safety Protect principal High quality investments Liquidity Provide necessary liquidity to cover both ongoing and unexpected cash needs Cash flow analysis Return Provide necessary recognizing need for safety and liquidity, and subject to restrictions specified by the state statutes and the local governing body Compliance with legal restrictions/regulations Accountability and Transparency Stability (Limited Volatility) Simplicity PFM 6

7 Internal Controls Objectives 1. To provide reliable data for management. Transactions that represent economic events are recorded in accordance with prescribed procedures in the right accounts in the correct amounts on a timely basis. 2. To safeguard assets and records. Access to assets and related documentation should be restricted to authorized personnel. Furthermore, the accounting records are maintained so that they continue to reflect the operation of the government. 3. To establish accountability. Responsibility for assets and other resources should be well defined. Timely verification and follow-up procedures are essential. 4. To promote operational efficiency. Internal controls should reduce unnecessary duplication of effort and deter inefficient use of government resources. 5. To facilitate financial reports. The system should assure that transactions are recorded to permit preparation of financial statements in conformity with generally accepted accounting principles (GAAP). PFM 7

8 School Cash Management PFM 8

9 Cash Flow Analysis Cash flow analysis is the estimate of cash receipts and disbursements during a given period; this management tool provides direction for: Determining cash balances needed to meet obligations Estimating timing for borrowing needs Ability to invest funds when cash flow permits Matching short-term investments with expected cash outflows Avoid the need to liquidate investments prior to maturity PFM 9

10 Types of Cash Cash & Cash Equivalents: Example: Checking Account, Short Term Investment Accounts Restricted Cash and Cash Equivalents: Example: Bond Proceeds to be used for capital projects of the District, or Voted Debt Service Deposits & Investments: Research Board Policy Consult your legal counsel PFM 10

11 District s Board Policies and the Business Office Procedures What is your District s Investment Policy? Depository of Funds Policy? Who are your Authorized Signors? Does your District have a ACH Policy? Internal Controls are imperative! PFM 11

12 Preparing a Cash Flow Doesn t need to be complex we use excel Gather your information first Determine weekly, monthly, etc. Usually Largest: General Fund Involve your accounts payable and payroll staff Cash Flow Spreadsheets Monthly? Weekly? Combined? (or even daily) PFM 12

13 Knowing Your Cash Flows Understanding your liquidity needs is vital There are opportunity costs to excess and insufficient liquidity Cash flow analyses can increase earnings potential Historical analysis Stability of school district Reliability of historical data Projections Student enrollment Educational programs Outsourcing Payroll cycle Revenue stream PFM 13

14 Benefits of Cash Flow Forecast Ensures liquidity Can increase investment income / decrease interest expense Amounts available for investment Period of time to hold the investment Assists with investment strategies Forecasts problems: trend lines Revenues not being collected properly Expenditures exceed budget PFM 14

15 Cash Flow Considerations Need to know cash balance highs and lows for operations How do you track? Do you pay employees bi-weekly or bi-monthly? Some districts have successfully transferred to bi-monthly payroll making sure second pay of the month is after the state aid Months with three pays typically are periods of cash balance lows Are you prepared? Be sure to look at weekly balance to determine your cash low points Property tax collections When are your operating taxes collected? (100% summer tax collections solves a lot of cash flow issues) Funds collected at the beginning of the school year to eliminate / prevent state aid borrowing; improves timing of cash receipts A substantial amount of tax collections are received by September 15th, making it easier to cover expenses during the month when no state aid is received PFM 15

16 Cash Flow Timing Considerations State Aid is paid on the 20th of each month (except September) No State Aid paid in September Be careful for the three pay month Some districts have successfully transferred to bi-monthly payroll making sure second pay of the month is after the state aid (15th & 30th) Be sure to look at weekly balance to determine your cash low points Property tax collections When are your operating taxes collected? (100% summer tax collections solves a lot of cash flow issues) Funds collected at the beginning of the school year to eliminate / prevent state aid borrowing; improves timing of cash receipts A substantial amount of tax collections are usually received by September 15th, making it easier to cover expenses during the month when no state aid is received PFM 16

17 4 Largest Sources of Cash In-Flows State Aid Payments 11 payments only October to August Tax Collections General Fund &/or Debt Federal Grants State Grants PFM 17

18 Largest Sources of Cash Out-Flows Payrolls: (Gross cost) General Fund, Food Service, Community Service ORS (MPSERS) 147 C Payments Usually start in November Health Insurance Use gross cost -100% is paid Debt & Loan Payments: Buses, Leases, Non-voted Bonds, Equipment Daily Operations: Utilities, teaching supplies, bus fuel, property & liability, legal, audit PFM 18

19 Cash Flow Projection July August Sept. Oct. Nov. Dec. Fri Amount Fri Amount Fri Amount Fri Amount Fri Amount Fri Amount Beginning Cash/Investments 6,194, ,170, ,942, ,676, ,983, ,583, Receipts: 20 3,548, ,548, ,521, ,521, ,521, Taxes received 258, , ,165, ,965, , , Date/Loan received-no Set Asides Set Asides Miscellaneous Income 287, , , , , , Interfund TOTAL RECEIPTS 4,094, ,990, ,762, ,648, ,832, ,966, Expenditures Payroll (Wage/Tax/ORS/TSA) 6 1,785, ,355, ,397, ,679, ,616, ,593, ,605, ,305, ,853, ,685, ,384, ,022, Other Invoices 3 394, , , , , , , , , , , , , , , , , , , , , , , , , Misc -Srv fee,non PR ACH,Sales tax INS Employee Contributions 60, , , Date/Loan Payment (Debt) Date/Loan Payment (State Aid) 100, ,537, Miscellaneous Invoices TOTAL EXPENDED 4,118, ,219, ,028, ,341, ,233, ,218, Ending Cash/Investments 6,170, ,942, ,676, ,983, ,583, ,331, TOTAL 18/19 STATE AID 38,789, TOTAL 18/19 TAX RECEIPTS 7,894, TOTAL 18/19 OTHER INCOME 5,373, TOTAL 18/19 OTHER FIN SOURCE 70, TOTOL 18/19 INTERFUND TOTAL 18/19 P/R/FICA/RET 41,177, TOTAL 18/19 OTHER 10,923, PFM 19

20 Cash Flow Daily ACH Club Open Swim Community Athletic Preschool Checks Checks Payschools Date Description Dep # Transaction Balance Deposits Deposits Receipts Receipts Rec Receipts Receipts Receipts Issued Paid Deposits 2019 Balance Forward 4,080, /2 Deposit - Preschool 3, ,083, , /2 ACH Credit-PaySchools 1, ,085, , , /2 SOM DDS ,085, /2 Checks Paid (3,913.11) 4,081, , /3 ACH Credit-PaySchools 1, ,083, , , /3 SOM Refund 6, ,089, /3 Checks Paid (441.23) 4,089, /5 ACH Credit-PaySchools ,089, /5 Rec One 23, ,113, /5 TRF TO SELF INSURANCE (83,666.18) 4,029, /5 Deposit - Adventure Club 11, ,041, , /5 Checks Paid (480.00) 4,040, /6 Deposit , ,047, , /6 ACH Credit-PaySchools 1, ,049, , , /6 Deposit ,049, /6 Payroll 0706 (633,749.46) 3,415, /6 Fed Tax 0706 (206,320.04) 3,209, /6 TSA 0706 (22,720.33) 3,186, /6 Payroll MISC 0706 (143.76) 3,186, /6 Checks Paid (7,621.11) 3,179, , /9 ACH Credit-PaySchools 1, ,180, , , /9 Meal Magic (22.86) 3,180, /9 Payroll MISC 0706 (2) (2,168.43) 3,178, /9 Checks Paid (188,883.08) 2,989, , /10 Printer Loan 383, ,372, /10 ACH Credit-PaySchools 1, ,374, , , /10 NSF (79.00) 3,374, /10 Checks Paid (109,881.62) 3,264, , PFM 20

21 Benefit of a Daily Cash Flow Analysis Focus on day-to-day cash on hand Use as a tool for projecting cash flow requirement for borrowing Timing of cash in and out Monthly bank reconciliations PFM 21

22 Operational Borrowing Options State Aid Note: Most common Set asides decisions The district must show a cash flow deficit to issue a state aid note Borrowing levels continue to decline as a percent of state aid Timing is critical Tax Anticipation Note: Similar to state aid notes, but pledges tax revenues instead of state aid Not as common for local school districts Line of Credit: Potentially less appealing to school districts due to Treasury approvals required, even if it is qualified Costs Additional filings for each draw down PFM 22

23 Reducing/Eliminating Need to Borrow Summer Tax Collections 100% Operating tax from two largest municipalities Switch from 26 pays to 24 pays Corporate purchase card Vendors paid via credit; delay of cash leaving bank account (added benefit REBATE!) PFM 23

24 School Code What Am I Allowed to Invest In? PFM

25 Revised School Code Section 1221 Treasurer shall deposit funds in a "financial institution" or "joint investment authorized by Section 1223" and as designated by the board of education "Financial institution" is defined as: State or national chartered bank State or federally chartered savings and loan association Savings bank Credit union whose deposits are insured by an agency of the U.S. government Must maintain a principal office or branch office located in this state under the laws of the state of Michigan or U.S. Be an eligible depository for state funds as well PFM 25

26 Revised School Code Section 1223: Permitted Investments Sector Maximum Maturity Minimum Credit U.S. Treasuries No Limit n/a Federal Agencies No Limit n/a Obligations of the State of Michigan 5 years n/a Commercial Paper 270 days Rated Prime Certificates of Deposit Including CDAR s No Limit n/a Repurchase Agreements* No Limit n/a Bankers Acceptances No Limit n/a Mutual Funds** No Limit n/a Investment Pools** No Limit n/a *Agreements must be collateralized with U.S. Treasury or Federal Agency obligations **Mutual Funds and investment pools must be composed entirely of investment vehicles legal for direct investment by a school district PFM 26

27 Allowable Bank Accounts and FDIC Insurance P.A. 20 allows for deposits into checking, NOW, savings, money market, CD s, and CDARs Note: Public entities are not allowed to invest in banks that do not have a physical place of deposit in the state of Michigan PFM 27

28 Cash Flow Segmentation PFM

29 Millions Cash Flow Analysis Leads to Prudent Investment Decisions Excess liquidity in an investment management program can be an opportunity cost Detailed cash flow analysis can help prudently define fund balances that can be invested in intermediate to longer-term investments at potentially higher yields Sample Cash Flow Analysis June 2017 through June Overnight Liquidity 100% liquid Fully flexible Overnight Liquidity Surplus Laddered investments to known upcoming cash flows Core Reserves Intermediate and longer investments Potentially higher returns over time Employ active management tactics For Illustrative purposes only PFM 29

30 Basics of a Cash Management Program Overnight Liquidity Liquidity Surplus Core Reserves GOAL: meet daily operating expenses GOAL: match assets to future liabilities GOAL: actively manage reserve fund to provide long-term growth Key Components: Safety and 100% liquidity Low cost banking relationship Online banking Transaction functionality ACH/Wire capability Daily fund balances and monthly statements Key Components: Safety and liquidity Understanding of known cash flow dates Ladder investments with maturities aligned to known future payment dates Enhance earnings potential Key Components: Safety, liquidity, and return Prudent reserve balance should not be anticipated to withdrawn on for at least 1-5 years Total return strategy Understanding of historical cash needs and month-end balances Proposed Investment Strategy: Bank deposits LGIP Money market funds Typical Investment Types: MILAF+ TERM Treasury Bills/Notes Federal Agency Securities Certificates of Deposit Typical Investment Types: Treasury Notes GNMA MBS Agency Notes Corporate Securities PFM 30

31 Sample Investment Account Structure Investment Account Separate Custody Account Investment Accounts Safety based on underlying security. Permitted Investments listed in School Code Local Government Investment Pool State Aid $ Debt Account TERM Bank Accounts FDIC backed Overnight Liquidity General Fund Checking Food Service Account Payroll Account Payables Clearing PFM 31

32 Case Study: Cash Management in Practice PFM

33 Banking Math Banks make most of their income through spread Loan Rate Deposit Rate = Spread Interest Spread was compressed when Fed Funds went to 0%. Deposit rates bottomed at 0% while loan rates continued spiral down = compression Banks focused on service fees and ancillary revenue areas (brokerage, wealth management, etc) to bolster revenues Although Fed Funds have been increased 7 times in 30 months, bank deposit rates have not moved in step with the Fed. PFM

34 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Historical Rates 7 rate hikes but banks barely budge 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% MILAF+ MAX Class Fed Funds Target Rate Sample Bank ECR Prime Rate PFM

35 Earnings Credit In store credit Bank ECR Math Investible Balance * ECR Rate / 365 days in year * 28 days in month $828,592 * ECR rate / 365 * 28 = $238 earnings credit to offset fees Earnings Credit Rate 0.375% (Store Credit) Deposit Admin Fee 0.110% (aka FDIC Charge) Net ECR 0.265% PFM IMPORTANT NOTE: EXCESS ECR DEFAULTS TO BANK

36 Opportunity Cost: Leaving Money at Bank Description Current Reduce Bank Balances Invest Excess in Money Market Net Advantage Investable Balance $9,861,174 1,861,174 $8,000,000 0 Earnings Credit 1, (714) - Deposit Fee (1,085) (157) Other Bank Fees (1,804) (1,804) 0 0 Net Bank Fees (1,640) (1,426) 214 +Interest Earned 1, ,090 10,611 Monthly Net Benefit (161) (1,426) 12,397 10,971 Projected Annual (2,099) (18,589) 161, ,110 Almost $10mm and still pay net fees to bank Lower bank balances reduce fees Difference in Yield is Substantial Cash Management Matters! Summary of Benefits Increased Interest earnings of $157,600 annually & do not give up liquidity Reduce bank fees by nearly $12,000 annually Reduce credit risk associated with single bank depository (Footnote 3 uninsured deposit) Increase diversification through AAAm rated fund No money left on the table through excess ECR PFM Note: Interest Earned assumed to be invested in MILAF+ Max account at 2.02% * $8,000,000 MILAF+ Max 7 day yield as of September 11, 2018

37 Opportunity Cost: Leaving Money at Bank Sample 2 MILAF+ Description $ Amounts Option Difference Average Collected Balance 3,000,000 3,000,000 Banking Fees Interest Paid 247 4,981 4,734 Calculated Yield * 0.10% 2.02% Annualized Interest 3,000 60,600 57,600 Note: * Interest rate calculated based on sample bank April 2018 statement MILAF+ Interest rate based on 7 day yield as of September 11, 2018 Summary of Benefits Increased Interest earnings of $57,600 annually & do not give up liquidity Reduce credit risk associated with single bank depository (Footnote 3 uninsured deposit) Increase diversification through AAAm rated fund Every dollar invested earns interest PFM

38 Banking Optimization Strategies to Reduce Fees / Increase Efficiency Reduce bank balances to minimize Deposit Charge. Utilize Local Government Investment Pool as State Aid Depository move money to bank as needed to cover payroll and payables. Based on Cash flows, invest available funds in TERM to increase return Utilize Bank for what they do best transactions and data Look for opportunities to become more efficient / enhance internal controls through bank services (positive pay, reconciliation services, data exports, etc.) Evaluate usage of banking services to determine which services could be eliminated or replaced with more inexpensive services Review bank analysis statement with banker at least annually to eliminate unnecessary services and creepage. PFM

39 Helpful Hints Remember S L Y Safety, Liquidity, and Yield (in that order) Safeguarding of assets safety comes first No award for higher earnings, but public flogging for loss Calculate your credit exposure (uninsured portion) If uninsured or not backed by the U.S., then you need to do credit analysis on the bank Take steps to mitigate risk through informed investing Historically, yield curve provides higher earnings longer-term Avoid timing market by consistently investing Cash flow analysis is fundamental to managing public funds Avoid timing market (need to get it right 2x in and out); consistent investing If you can t explain it, don t buy it. Ask questions and tap into your colleagues and MSBO PFM 39

40 Developing an Investment Policy PFM 40

41 Investment Management Balancing Risk and Return Cash Flow Forecasting Investment Policy PFM 41

42 Investment Policy A written investment policy is the single most important element in a public funds investment program. GFOA BEST PRACTICE Creating an Investment Policy (2010) PFM 42

43 Why Develop a Formal Investment Policy? Purpose of an Investment Policy Build framework for investment practices Protect assets of the entity and the liability of the entity s staff Communicate the entity s investment objectives Establish limits Delineate staff roles Target Audience Internal finance staff Public agency board / council Members of the public Investment providers PFM 43

44 Investing Public Funds: Recommended Procedures Adopt a written investment policy Develop adequate controls and oversight Know what you are buying and get it in writing Match investment maturities with cash flow requirements Diversify investments PFM 44

45 Investment Policy Components Scope of the Policy Investment Objectives Responsibility Standard of Prudence Internal Controls Permitted Investments Maximum Maturities Diversification Competitive Selection of Investment Instruments Safekeeping and Custody Performance Benchmarks Authorized Financial Institutions Reporting Requirements Investment Policy Adoption PFM 45

46 Investment Policy Scope What funds are covered by the policy? Are retirement and / or pension funds involved? Are funds pooled for investment purposes? Does the school district serve as a fiscal agent for another organization? PFM 46

47 Investment Policy Objectives 1. Safety Operating Funds: Safety of capital is normally the #1 priority 2. Liquidity Liquidity must be sufficient to meet all school district cash flow requirements 3. Return/Yield Attain a market rate of return assure liquidity and safety while obtaining reasonable market performance Invested to obtain the highest total return that is consistent with safety PFM 47

48 Investment Policy Summary An investment policy is the roadmap for successful investing Key investment objectives 1. Safety 2. Liquidity 3. Return/Yield Compliance with the investment policy is necessary investment reports should be thorough and easy to understand An investment policy will provide internal guidance and serve as a management tool PFM 48

49 Developing an Investment Policy GFOA s Model Policies and Best Practices: PFM 49

50 Investment Policy Resources GFOA Publications: Investing Public Funds by Girard Miller with M. Corinne Larson and W. Paul Zorn (2nd Ed.) GFOA 1998 An Introduction to Investment Advisers for State and Local Governments (2nd Ed.) by Sofia Anastopoulos GFOA 2007 An Introduction to Broker-Dealers for State and Local Governments (2nd Ed.) by Sofia Anastopoulos GFOA 2008 PFM 50

51 Appendix: Investments Defined PFM

52 Security Types U.S. Treasuries The Treasury Department issues debt to meet budgetary needs in the form of U.S. Treasury securities: Highest credit rating (full faith and credit of the U.S. government) Most marketable security provides for liquidity Fixed rate and term Non-callable Description Maturities Interest Payments U.S. Treasury Bills U.S. Treasury Notes U.S. Treasury Bonds Short-term 4, 13, or 26 weeks Intermediate-term 1 to 10 years Long-term 10 years or more Issued at discount buy for less than par; at maturity receive full par Paid semi-annually; priced at current market Paid Semi-annually; priced at current market PFM 52

53 Security Types Federal Agencies Public Act 20 allows for investments in securities issued or guaranteed by agencies or instrumentalities of the U.S. Variety of debt instruments including bullets, callables, fixed, variable, etc. Federal Agency / GSE Short Name Government Backing / Rating Government National Mortgage Corporation Federal Home Loan Mortgage Corporation Ginnie Mae GNMA Freddie Mac FHLMC Full faith and credit of the U.S. government Implicit backing of the U.S. government, temporarily explicit backing, AAA rating Federal National Mortgage Association Fannie Mae FNMA Implicit backing of the U.S. government, temporarily explicit backing, AAA rating Federal Home Loan Bank FHLB Implicit backing of the U.S. government, temporarily explicit backing, AAA rating PFM 53

54 Security Types Commercial Paper Public Act 20 allows for investment in Commercial paper (CP) rated prime at the time of purchase and maturing not more than 270 days after the date of purchase Commercial paper is defined as short-term, unsecured notes used to finance corporations operations or current assets. CP can be issued from 1 to 270 days (usually less than 90 days) CP is issued at a discount (similar to T-Bills) Although CP is short-term critical assessment is credit risk Must be in two highest grades of commercial paper as determined by at least two rating agencies. A-1/A-2 = Standard and Poor s highest rating P-1/P-2 = Moody s highest rating PFM 54

55 Credit Rating Scale $229,756, PFM 55

56 Bank Cash Management Tools Banks offer multiple Cash Management Tools to make your job more efficient, increase security and earnings. Deposit Payment Data Services Security Employee Courier Check Online Reporting Positive Pay Armored Service ACH Prior / Same Day ACH Positive Pay ACH Wire ACH Block Wire Purchasing Card Account Reconciliation Dual Authentication Remote Deposit File Transfer Check Imaging Notifications Lockbox Merchant Processing Deposit Imaging ZBA / Sweeps PFM 56

57 Questions? Nancy Rasinske Chief Financial Officer Grand Ledge Public Schools Brian Quinn Managing Director PFM Asset Management, LLC PFM

58 Important Disclosures and Disclaimers This presentation is only intended for institutional and/or sophisticated professional investors. This material is intended for informational purposes only and should not be relied upon to make an investment decision, as it was prepared without regard to any specific objectives, or financial circumstances. It should not be construed as an offer or to purchase/sell any investment. Any investment or strategy referenced may involve significant risks, including, but not limited to: risk of loss, illiquidity, unavailability within all jurisdictions, and may not be suitable for all investors. To the extent permitted by applicable law, no member of the PFM Group, or any officer, employee or associate accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents, including for negligence. This material is not intended for distribution to, or use by, any person in a jurisdiction where delivery would be contrary to applicable law or regulation, or it is subject to any contractual restriction. No further distribution is permissible without prior written consent. The views expressed within this material constitute the perspective and judgment of PFM at the time of distribution and are subject to change. Any forecast, projection, or prediction of the market, the economy, economic trends, and equity or fixed income markets are based upon current opinion as of the date of issue, and are also subject to change. Opinions and data presented are not necessarily indicative of future events or expected performance. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. No representation is made as to its accuracy or completeness. PFM