Section 15 The Public Funds Investment Act

Transcription

1

2 Section 15 The Public Funds Investment Act 2017 Basics of County Investments Course Linda T. Patterson Patterson & Associates, Austin

3 What is PFIA Designed to Do? Provide guidelines for safety Highest credit quality limits Requires controls (maximum maturity, maximum WAM, DVP) Provide for flexibility to match individual needs Allow flexibility for entities to set their own parameters Allow for adjustments to internal and external change Apply to all entities 3

4 Prudence Prudent Person Standard Investments shall be made with judgment and care under circumstances then prevailing that persons of prudence, discretion and intelligence exercise in the management of their own affairs not for speculation but for investment considering probable safety as well as probable income. Addresses the cyclical nature of investing Creates regular cycles for your compliance Periodic reviews address changes 4

5 PFIA Changes over Time 1987 Splitting banking and investments to give entities access to markets 1989 Pools created and Public Funds Collateral Act enacted 1991 Limits on money market mutual funds added ($1 NAV) 1993 CMOs specifically added 1994 Orange County, CA lost $1.6 billion and Texpool had a run on pool 5

6 1995 Legislative Reaction to Orange County Adding controls and responsibility - Certain extremely volatile CMO securities declared unauthorized - Reverse repurchase limitation added on reinvestment to prevent leverage - Designation of investment officers added - Training requirement added but no set time requirements - Broker/dealer certification process added - Requirement for maximum maturity and maximum weighted average maturity limits - Requirement for written quarterly reports to governing body - Pools required to be rated AAA or equivalent - Liquidation required on loss of credit rating - Prudent liquidation required if security becomes unauthorized 6

7 1995 Continuing Concerns - Training defined as 10 hours in first 12 months and then 10 hours each 2 years - Delivery versus payment required and required to be in policy - Requirements for ethics disclosure by investment officers - Requirement for an authorized broker/dealer list to be approved annually 7

8 And Still It Changes With Banks and Large cities taking the Lead Israeli bonds and GICS added and cities can now hedge Letters of credit added to be authorized for collateral use under PFCA Securities lending added CDARS added specifically under CDs - Decommissioning trusts for nuclear plants access to the Trust Code Hedging expanded for cities Requirement to have procedure to monitor credit in policy - Training period conforms to the entity s fiscal year - Pools may invest all their proceeds in money market funds by policy - Substantial additions to pool reporting and yield calculations added 8

9 Changes Continue FDIC/FICA securities authorized, DVP conflict on brokered CD added No PFIA changes - PFCA changes to require public entities to request a monthly report City and school district training reduced in successive training -City officers have no continuous training but only if in bank deposits Broker certification removed only pools and discretionary advisors -Interest bearing accounts recognized as investments (put in reporting) -Spread money market accounts added -MMMF must comply with SEC Rule 2a-7 -MMMF need not be $1 NAV opens to ultra short term bond funds 9

10 Changes Continue ultra short term bond funds must be invest grade and no asset backeds - Pools must state policy on cash & Board decides on breaking buck -ISDs now can extend banking contract to 3 terms (six yrs) & negotiate -Housing Authorities need only 5 hours of training but only if interest bearing accounts and CD only no pools -Entities must divest from terrorist scrutinized companies -Higher Ed endowment go from $95 to $150mm before using Trust Code -Hedging by cities expanded for costs to be assigned as project cost -Jr colleges may use Trust Code for mineral rights funds 10

11 Lessons from History Not all the legal changes made affect you or should affect you Unique situations must be judged as such Change must be evaluated and if necessary change with it Not all the changes are necessarily good Often result of reach for yield or outside influence The devil is in the details You have to understand why the change occurred 11

12 PFIA Outline Definitions and applicability Policy requirements Training requirements Authorized and unauthorized investments Controls (DVP, brokers, rating monitoring, etc.) Reporting Special investment situations Hedging Mineral rights Nuclear decommissioning funds

13 PFIA Required Standard of Care Investments shall be made in accordance with Standard Exercise the judgment and care under prevailing circumstances that a prudent person would exercise in the management of their own affairs Investments are governed in order of priority by: Preservation and safety of principal Liquidity Yield Determination of prudence takes into consideration: Investment of all funds not a single investment Whether the investment was consistent with the policy 13

14 PFIA Policy Specific Requirements Write and adopt a policy annually which must: ( ) Must be adopted by resolution The resolution must show any changes made Be written Primarily emphasize safety and liquidity State the maximum stated maturity authorized Address diversification, yield, maturity & capability of officers List authorized investments Include a procedure to monitor credit rating changes Set a maximum weighted average maturity (WAM) Method to monitor market prices Require delivery versus payment (DVP) Policy may un-authorize any type investment 14

15 PFIA Strategy Specific Requirement Write and adopt a strategy ( ) Governing body must review and adopt the strategy annually Strategy must be approved by resolution Resolution adopting policy can also adopt strategy Resolution must note the changes made To include the maximum weighted average maturity (WAM) The objectives of the portfolio must address in priority order: Suitability of the investments to the entity s financial requirements Preservation and safety of principal invested Liquidity Marketability if need arises to liquidate Diversification of the portfolio Yield 15

16 PFIA Investment Officers Governing Body Designates Investment Officer(s) Designation by rule, order ordinance or resolution ( ) Governing body may choose anyone as IO IO is responsible for investment consistent with policy A contracted adviser/entity can also be an IO Effective until rescinded or terminated from employment IO must follow Prudent Person Rule No person can deposit, withdraw, transfer or manager unless authorized by law Council has the option to chose officers (no necessary set position) Regional Planning Commission can only serve Commission as IO Governing body retains ultimate fiduciary responsibility 16

17 The Investment Officer IO for County must be a local designated officer (Treasurer if office exists) Must act in accordance with Standard of Care Must disclose personal/business relationships by officer Refers to personal business relationships IO must file a statement disclosing the relationship If IO relationship is within two levels of blood or marriage Filed with the Texas Ethics Commission If IO owns >10% of voting stock/shares or >$5,000 in fair market value of firm If IO received >10% of IO s prior year income from the firm If IO received >$2,500 in investments in prior year for his personal account Specific income limits are set but full disclosure is safer/easier 17

18 PFIA Required Officer Training Applicable to Treasurer and investment officer(s) and CFO (if Treasurer is not the CFO) Must use an independent source approved by governing body or investment committee This is not an annual designation All officers take 10 hours within 12 months of taking position All officers take 10 hours each successive two fiscal years Fiscal year begins on first day of fiscal year City and ISD only: 8 hours each successive fiscal year Training must include: IO responsibilities, controls, security risks, strategy risks, market risks, diversification and compliance to Act 18

19 Training Exceptions ( ) No continued training for municipalities if: It does not invest municipal funds only investing in certificates of deposit Toll Roads and Conservation and Reclamation Districts If using an RIA and has < 5 employees Officer of the governing body attends one-time 4 hours training Designated investment officers must attend the training with the full provisions Housing Authorities Initial 10 hours in first 12 months Continuing training is 5 hours each two years or none if only CD and bank i.e. no pools Emergency Service Districts (Health & Safety Code Ch. 775) Training is not required for the district BUT Without training investment only in US Obligations, CDs, pools Water Districts (Water Code Ch. 36) Training of at least 6 hours in first year Training of at least 4 hours each two years 19

20 PFIA Governing Body Requirements At least annually Court must review and adopt policy Court must review and adopt strategy Court must review and adopt broker/dealer list Court must receive quarterly reporting Court must designate investment officers by resolution Court must provide for IO training

21 PFIA Policy Certification Requirement Policy certification now required only from pools and discretionary advisers The certificate must be received before any transaction takes place Certificate language must be acceptable to both parties not set by PFIA Nothing relieves entity of responsibility to monitor investments You chose whether to get certificates before or after firm is approved Get it first. Warning Note : Discretionary advisers means you have no say on trades or portfolio Not reasonable for public entities which must protect the cash flow needs 21

22 PFIA Specific for Brokers Court must adopt list of broker/dealers at least annually The list of broker/dealers must be approved annually by Court or Court designated Investment Committee List only broker/dealers not banks or pools Although no certification is required send it as a best practice Good idea to get basic information Contacts and backup staff SEC registration (CRD #) 22

23 Two PFIA Required Audits Audit by independent auditor ( d) Required if investing in more than bank products, MMMF, and pools Audit consists of review of the quarterly reports Result of review is to be reported to the Court Internal compliance audits required ( m) Entity must annually complete an annual compliance audit In conjunction with annual financial audit Compliance with management controls Compliance with County s established investment policy

24 PFIA Specific Reporting Quarterly Reporting must: ( ) prepared for all funds under PFIA (including bank accounts) be prepared jointly and signed by each investment officers state compliance with Policy and PFIA be presented to Court and chief executive (Judge) quarterly on a timely basis within a reasonable time contain summary information on the total portfolio beginning and ending market value fully accrued interest (i.e. net earnings) including amortization/accretion contain in detail the investment positions of the County detail each position by book/market, maturity date, fund 24

25 PFIA Required Controls Delivery versus payment ( b.4.e) Not required to liquidate an investment if authorized at time of purchase ( ) A loss of required credit rating requires liquidation of security in prudent manner ( ) Requires policy procedure to monitor credit ratings ( b) Requires policy procedure to monitor market prices ( ) Requires market prices from independent source ( ) Policy must address safety, liquidity and yield ( )

26 PFIA Specific Investment Requirements No maximum maturities are set by PFIA YOU set them but within PFIA limitations State and Local Obligations are authorized if: Rated A, or its equivalent, or better Interest bearing deposits at banks and credit unions must: Must be insured or collateralized Insurance through the FDIC Insurance through the National Credit Union Insurance Fund (NCUIF) Must be a Texas bank (or through Texas broker)** Includes ICS (Insured Cash Sweep) 26

27 PFIA Specific Investments Certificates of deposit are authorized if: Collateral must be 100% of principal value Collateral can not include PFIA unauthorized MBS Can include CDARS Repurchase and Reverse Agreements are authorized if: Has a defined termination date Secured by authorized investments or cash Securities are bought and sold DVP Placed through a primary dealer Funds invested from the reverse mature before end of the reverse 27

28 PFIA Specific Investment Requirements Securities lending is authorized if: 100% collateralized or secured consistent with PFIA Allow for termination at any time Securities are pledged and held in entity s name Placed through a primary dealer Have a term of one year or less Bankers acceptances are authorized if: It has a maturity < 270 days Is eligible as Fed collateral Accepted by US bank with short term rating at least A1/P1 28

29 PFIA Specific Investment Commercial paper is authorized if: It has a maturity less than 270 days Is rated A1/P1 or equivalent by two NRCRA Is rated A1/P1 by one NRCRA with also a US bank LOC Money market mutual funds are authorized if: Comply with SEC Rule 2a-7 Mutual fund is authorized if: Registered with the SEC and a duration < one year, WAM >2 years Duration < one year, investment grade securities and no asset backs Investment is less than 15% of operating fund average No bond proceeds are invested in the mutual fund No investment can exceed 10% of the fund itself 29

30 PFIA Specific Investment Guaranteed Investment Contracts (GIC) must: Have a defined termination Be fully collateralized to 100% Be pledged to the entity Be no longer than five years Be specifically authorized by governing body, bid, highest yield and have reasonable admin costs 30

31 PFIA Specific Investment Requirements Investment Pools have many restrictions Contents, reporting, NAV, rating, website contents Must state its policy on holding cash Must provide its information statement and monthly reporting Investor restrictions include that: The governing body authorizes particular pool as participant Pool stays continuously rated AAA or AAA-m or equivalent Policy should designate different types of pools if applicable 31

32 PFIA Specific Investment Requirements Higher Education investments include: Cash mgmt and fixed income funds if Tax Code 501(f) eligible Negotiable CDs with banks having a CD rating of 1 Corporate bonds and debentures in two highest long-term ratings Mineral rights money invested under the Trust Code 32

33 PFIA Specific Investment Requirements Schools Districts are authorized to buy corporate notes if: It is rated no less that AA- It is not convertible to stock and is secured The District has an average of over 50,000 students Hedging is authorized in several instances if: It complies with CFTC It is segregated and accounted for separately It is an eligible entity and uses for eligible projects 33

34 A Checklist for PFIA Compliance 34

35 Check Your Compliance Ratio Establish the Controls Build in Reasonable Flexibility Make that Money Work Linda Patterson Patterson & Associates, Austin

36