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Economic Outlook

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					Internal Reviews for Banking
 Banking as Part of Treasury

 Collections
    Speedy and timely receipt of funds
    Streamlining collections
 Safekeeping and Custody
    Safety of funds
    Investment safekeeping
 Collateral
    Safety of assets
 Reporting

 Cost efficiencies – net cost
                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Internal Reviews

 Banking relationships are business relationships

 An internal review of government uses and
  needs is critical

 New technologies may require new system view




                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
Optimum Banking Relationships
        Depend on:
 The competitive environment

 Abilities and services of local banks to respond to
  government’s needs

 Ability of government to effectively
  use bank services




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Review Current Banking
    Relationships and Services
 Using outdated or inefficient services?
       Controlled disbursement
       Dual signature review
       Faxes, mail notifications and paper reports
       CD
       Excess accounts (don’t make it another g/l)

 Improve internal efficiency
       Consolidate bank accounts
       Web based reporting current or prior day
       Bank center versus vault
       Change orders
       Reconciliation
       Lockbox
       Remote deposit


                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
    Review Current Banking
   Relationships and Services
 Improve investment returns
       Sweeps
       Investment account options (MMA)
       Use of ECR in low interest rates
       Funds availability

 Control costs
       Account analysis monthly reviews
       Carry-over basis
       Over-draft facility
       Short term borrowing

 New Services
       what new services do you need or are you looking for?
       EDI



                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
      Review Current Banking
     Relationships and Services
 Safety factors
    Depositing with city employees – liability issues


 Fraud
    Positive pay – payee pay
    ACH filters and blocks
    PIN access control
    Smart safes




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Major Relationship Factors
 Obtaining competitive proposals
   Bids versus proposals
 Structure
   Services and structures
 Constraints (political and legal)
    Local banks
    Rotating banks
    State and local laws
    CRA or HUB considerations
 Agreements and Contracts
 Ongoing relationship



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
Establishing the Relationship
 Negotiated process
    Negotiated and best offer options
    Not aware of market prices
    One bank towns


 Competitive process
    Know what the market offers
    Often best prices and best services
    Defensible



                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
Banking Services Agreements
 Written Master Contract
    Establishes a depository relationship
    Identifies major parties and sub-contractors
    Prices carry through to service agreements
    RFP and Proposal attached as part of contract


 Service agreements
    Address each specific technical service
    Tie to master for authorities and prices
    Standard terms from master


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
       Services Agreements
 Service agreement examples
   Positive Pay
   ACH and Debit Block
   Wires and transfer
   Vault collections
   Concentration services
   On-line services
   Reconciliation services
   Lockbox agreements
   Safekeeping agreement
   EDI

                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
 Community Reinvestment Act
           (CRA)
 Federal regulators rate banks’ community involvement
     Areas of: lending, service, investments
     ratings: outstanding; high satisfactory; low satisfactory; needs
      to improve; substantial non-compliance


 Some governments have instituted a “linked deposit”
  program
     CRA grade a requisite for participation
     Lump sum deposit
     Loan-by-loan approach


                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Bank Value Consideration
 Historical information is needed as well as internal review

 Value is provided by improvement in process

 Savings can dwarf price increases
    Time savings
    reduction in DSO
    “green” statement delivery

 Incumbent bank has inside track, and little reason to innovate
    Closed minds or polities may discourage other banks


                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
      What should you expect?
 A good bank should
   Ask a multitude of process and procedure questions
   Inspect your documents, your workflow diagrams,
     and your reports
   Plumb the depths of your knowledge regarding
     customer habits and demographics
   Question and review your A/P and A/R systems and
     how you enter data
   Review your data security systems, dual controls,
     and loss prevention procedures

                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
          How to get to the value

 The RFP should state very general goals, not specific
  requirements
 Replication of existing structure will be considered, but
  not preferred
 New structures will be considered, but not preferred
 Total economic impact is measured
    Using fees, rates and earnings
 Respect and reward the integrity of innovation



                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
Paying for Banking Services
               Two Ways to Pay
 It all goes back to the cost i.e. fees

 It all depends on interest rates

 Fee Basis
     Paying the service fees directly in cash
     Earn more in outside investments and then pay the toll



 Compensating Balance
     Providing a balance which earns interest that then pays the fees
     The earnings credit rate (ECR) is used to earn the interest




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Rates Make the Difference

 Current low rate environment

 Pool rates are about 0.08%
 ECR rates are 0.65% - 1.00%

 Your fees are $ 1,500
 Fees = balance*ECR/12

 Balance required $ 2,769,231
    Or earn $ 184 in the pool

                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
       Rates Make the Difference
                Below 3% Fed Funds


 Balance required $ 2,769,231

 In bank target balance you earn $ 1,500
  You pay no fee


 In pool you earn $ 184
  You pay $ 1,500 -----net = <$ 1,316 >



                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Rates Make the Difference

 In a higher rate environment

 Pool rates at about 5.00%
 ECR rates would be 2.50% (usually roughly half)

 Your fees are $ 1,500
 Fees = balance * ECR/12

 Balance required $ 720,000
    Or earn $ 3,000 in the pool and keep $1,500

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Rates Make the Difference
                      Above 3% Fed Funds


 Pools at 5% and ECR at 2.5%
 Balance required $ 720,000

 In bank target balance you earn $ 1,500
    You pay no fee


 In pool you earn $ 3,000
    You pay $ 1,500 -----net = 1,500




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Calculating a
     Compensating Balance
 Daily Ledger Balances
 - Federal Reserve Requirement (10%)
 - Average Daily Float
 Average Collected Balance
 x Earnings Credit Rate (1.25%) (annualized)

 Net Monthly Earnings


                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
Carry-over on Compensating Balance
   Daily ledger                                   550,000
   - Federal Reserve                               66,000
   -Daily Float                                    35,000
   Average Collected                              449,000
   x ECR                                           3.25%/12

 Earnings on ECR                                     1,216
 Fees                                                1,000
 Excess Paid                                           216
     Bank retains the excess earnings and entity left money on
     the table unless “carried over”


                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
Carry-over on Compensating Balance
   Daily ledger                                  396,384
   - Federal Reserve                              66,000
   -Daily Float                                   35,000
   Average Collected                             295,384
   x ECR                                          3.25%/12

 Earnings on ECR                                      800
 Fees                                               1,000
 Excess Paid                                         <200>

     Results in an ‘account analysis debit ‘
             unless charges are “carried over”


                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Compensating Balance

 A basic view

 Fees = (Balance Required * ECR%) / 12

 $1,500 = (3,600,000 * 0.0050 ) / 12




                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Compensating Balance
 CB =       monthly service charge
           (1.00 - reserve requirement)
                  Monthly ECR


 Monthly service charge = $4,116
 Earnings credit rate:  = .00255
 Reserve requirement:       10%



                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      Account Analysis
                        Your Invoice
   Lists each service used
   States cost of each service
   States amount of service used in period
   Calculates fee basis of service
   Calculates compensating balance for service
     Based on a reduced ‘earnings credit rate’ (ECR)
 Totals all fees
 Computes excess/(deficit)




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
Volume    * price =      Fee   or
Balance
              Required


                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
Your address




               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              BASED ON FEES SET BY CONTRACT

                                                               Mo.      Contract        Total

                                         Service Description   Vol          Fee         Cost

                   Master Account Maintenance Fee                             8.0000        0.00

From the           Subsidiary Account Maintenance                             8.0000        0.00

monthly account    Money Market Account Maintenance Fee                       8.0000        0.00

analysis, input                                                                             0.00


the volumes for    Investment Sweep Maintenance                              50.0000        0.00


each service.
                          Dr/Cr Sweep Transaction Fee                         0.0000        0.00
                                                                                                   A critical
                                                                                                   monthly
                          ZBA Account - Subsidiary                            8.0000        0.00


Match the total                                                                             0.00
                                                                                                   responsibility
                   Checks/Debits Posted                                       0.0500        0.00
fees in the        Branch Credits Posted - Electronic                         0.1000        0.00

spread sheet to    Automated Services - Balance & Detail

the account        Acct Balance Report                                                      0.00

analysis.          Online Access Maintenance Fee                              5.0000        0.00

                   Online Access Subscription Fee                             5.0000        0.00

                     Previous day Reporting                                  10.0000        0.00

                     Previous Day Dr/Cr Items                                10.0000   35,210.00

If they do not     Image Capture Per Item                                     0.0300        0.00

match then a fee   Image Retention Per Item                                   0.0200        0.00

is wrong.          Branch Deposits

                   Commercial Account Maintenance                            20.0000        0.00

                   Branch Credits Posted                                      0.5000        0.00

                   Branch Immediate Verification                              0.1000        0.00
Check it!
                   TOTAL FEES AT CURRENT MONTH VOLUMES




                                                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Compensating Balances vs.
           Direct Fees
 In terms of what should be done: direct fees

 Private and public sector moving to fees

 Payments with direct fees are less expensive than
  payments with balances

 Reality: Some fees and some balances



                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Compensating Balances vs.
              Direct Fees
 In either case a pricing schedule should be used
   Competitive bid process
   Negotiation

 Increasingly a combination of balances and fees
  is used

 Monthly monitoring is required




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Current Added Advantage to CB

 Until January 1, 2014

   All “non-interest bearing” accounts are 100% FDIC
    insured

   Reduces collateral cost for banks

   Added safety insurance for entity




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Compensating Balances

 Compensating balances are popular
  because:

  “That’s the way we’ve always done it”

  “I don’t pay the banks anything” “FREE”

  No budgeting impact


                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
      Compensating Balances
 Compensating balances are popular because:
    With fees direct investment program must beat the monthly
     average of the 91 day T-Bill rate

    Little time or resources to monitor collected balances

    If using balances make sure any over payment reverts back
     to you on an annual basis

    Requires annual settlement process

    Popular and pushed by smaller banks especially


                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
    Advantages of Using Fees
   When rates are above 3%

   Required bank reserves (10%) become earning
    assets

   Direct investment of balances normally exceeds bank
    earnings credit rate

   Lower balances mean lower FDIC assessment

   Lower balances mean reduced state collateral
    requirements


                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Advantages of Using Fees
 Bank charges clearly noted

 Bank fees can be verified monthly

 Fees debited from designated account
     After review and approval by entity




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Compensating Balances
           Formula
 CB = Monthly service charge divided by (1.00 -
  reserve requirement) / Monthly ECR

 Where:
  ECR = earnings credit rate
  Reserve requirement:
      • Bank’s current Federal Reserve requirement
        (percentage) as applied to the positive collective
        balance maintained in the demand deposit account



                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
Compensating Balances Formula
 Note:

  If the compensating balance is retained as a non-
   interest bearing certificate of deposit (in lieu of a
   demand deposit), the amount of balance required
   is reduced because of the zero reserve
   requirement




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
Techniques to Decrease Collected
           Balances

   Daily monitoring of accounts

   Active investing

   Daily (O/N) repos

   Sweep accounts

   Controlled disbursements
                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
Collateral, Custody and
      Safekeeping
          Custody vs Safekeeping

 Custodian has fiduciary responsibilities
    Holding collateral
    Becomes your bailee in an event of default
    Usually you agree to but not chose a custodian

 Safekeeping agents simply hold securities
    For securities owned by the entity
    You chose the safekeeping agent (normally your depository)


 Key factors for either one
    Independence on trades or pledgor
    Reporting directly to you


                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    Collateral
 Bank Collateral
    Securities pledged to repay a debt
    Deposits protected by FDIC and collateral
      • Collateral above

 Collateral is held by a “Custodian”

 Bank collateral is “pledged” to the entity
    not owned by your

 FDIC issues
    Levels of security
    Who is covered?

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Managing Collateral Risk

 Collateral risk is managed with 3 basic questions:

    What collateral is authorized?
      • What should be authorized?

    How much collateral do I need for safety?
      • What margin do I need?

    Do we have control of the collateral in an event of default?




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Types of Collateral
   Non- Perfected Claim

   “Perfected” Claim
     Test by N. Arkansas Medical Center v. Barrett

     Based on FIRREA




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             FIRREA

   For FDIC only compliance with FIRREA will protect you
        Financial Institutions Reform, Recovery, and Enforcement
         Act of 1989

   FIRREA’s four conditions
        Agreement must be in writing
        Must be approved by resolution of Bank Board or Bank
         Loan Committee
        Must be in the official records of the bank
        Must be simultaneous with movements of collateral itself
          • i.e. don’t ever list the collateral in the agreement

   Federal Banking Statutes - Section 1823(e)

                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
    The Uniform Commercial Code

   You do not have a “perfected” interest in a
    security unless you control it.

   Control means that swaps, sales and transfers
    cannot occur without your written approval.




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
      Sound Collateralization Practices

   Obtain a copy of the state statute regarding
    collateralization

   Identify depository risk exposure

   Establish a written depository collateralization
    agreement

   Establish effective safekeeping procedures

   Prepare for financial reporting disclosures

                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Written Collateral Agreement

   Should state that all deposits must be collateralized
    (checking accounts and certificates of deposit)


   A list of eligible collateral

   Market value should be reported monthly

   Safekeeping procedures

   Substitution

                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Collateral Agreement

Bank warranties that:
       Legal owner of pledged collateral

       Collateral is free and clear of liens and claims

       No other person has right, title or interest

       Collateral not pledged or assigned for other
        purposes




                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Key Custody Factors

 Custodian must be independent
    Independent from holding company of pledging bank

 Custodian should report to you directly
    Will not report market values but holdings

 Custodian must verify key factors
    authorized collateral
    margins




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
             The Fed as Custodian

 Perhaps the best custodian

 Standard Pledgee Agreement Form is used
    The Fed will not sign a collateral agreement


 Supplements the Collateral Agreement
    Reference the Circular 7 in your agreement


 Fed will ask for authority to use e-mail to contact you




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
           GOVERNMENT FINANCE OFFICERS ASSOCIATION
Page Two
Authorizing
use of
e-mail for
contact
purposes




              GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Managing Collateral Risk

 Define the authorized collateral (in policy and RFP)
    “Obligations of the US Government, its agencies and
     instrumentalities, including mortgage backed securities with
     CMOs passing the bank test”
    Monitored and maintained by the bank at all times.

 The options by law include:
      Surety bonds
      Treasury notes and bills
      US Agencies
      Municipals rated A or better
      Letters of Credit




                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                   Surety Bonds

 Surety bonds are insurance policies

 Verify:
   Company (and its strength)

   Recipient (is it the District?)

   Terms (tie it to the contract)



                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Letters of Credit

 Initiated for CD business

 LOC issued by FHLB and backed by pledged
  unrestricted securities

 Created to replace collateral




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                Collateral Pooling

 Many variations
    State controlled
    State holds collateral
    Independent custodians by banks
    Voluntary or mandatory


 Key factors to examine
    Your role and reporting requirements
    Players and controls
    Margins
    Authorized colalteral
    costs


                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
          Other Events of Default

 Bank failure is not the only use of collateral

 Your custodian becomes your bailee
   A key player




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      Brokered CDs

 If two banks issuing you brokered CDs are merged or acquired, you
  will not be given additional FDIC coverage.

 You will have to sell the CD taking you over $250,000 immediately.

 Suggested language:
    The Investment Officer or Investment Adviser shall monitor, on no less
     than a weekly basis, the status and ownership of all banks issuing
     brokered CDs owned by the City based upon information from the
     FDIC. If any bank has been acquired or merged with another bank in
     which brokered CDs are owned, the Investment Officer or Adviser shall
     immediately liquidate any brokered CD which places the City above the
     FDIC insurance level.




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Use Sweeps to Reduce Collateral

 When the markets are suitable (not now)
 Sweeps move funds out of the bank daily
 Investment in a Fund eliminates collateral

 Repo Sweeps are unique
  Dependent on type of take-over
  No precise procedure
  Segregation not buy-sell


                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      FDIC

 Are you a “public unit”




                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
FDIC Coverage




                  Make sure you are
                  a “public unit” at
                  FDIC




         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       FDIC Insurance

 Based on Tax Identification Number
    within the entire holding company of the bank

 Based on Type of Account
    FDIC defines only two types of accounts
      • Non-interest bearing accounts have $250,000
      • Interest earning accounts are combined for $250,000

 Based on Location of city and bank
    If the bank’s HQ is in your same state
        • then both type accounts receive FDIC insurance
    If the bank’s HQ is not in your state
        • all accounts types together receive only $250,000




                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
              FDIC Insurance

 Coverage is for the custodian

 Testamentary Accounts (I&S Accounts)
  Funds set aside to discharge a debt
  Applies to debt holders
  Coverage is $250,000 for each bond holder


 Currently the $250,000 is permanent


                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        FDIC Coverage
 Currently all non-interest bearing accounts are fully FDIC insured
     Banks will try to move you to these accounts to avoid collateral costs
     Until 1/1/14

 Only “public units” can have collateral pledged
    If created under express authority of law
    Has some function of government delegated
    If it executes exclusive control of its funds for exclusive use

 Special cases
     4a and 4b corporations
     Water supply corporations

 Dependent on several factors
     12 C.F.R. Part 330.15


                                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
            What Can I Do to Monitor the Situation with My Bank ?




Pay
                                                                    What is the
attention
                                                                    first thing
to the
                                                                    you do in
news
                                                                    this
                                                                    situation?




                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
Using a Rating Service




              GOVERNMENT FINANCE OFFICERS ASSOCIATION
HIGHLINE – not the easiest to use




                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
BEST COMPANY – Simple to use




                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        FIRREA

 Financial Institutions Resource
     and Recovery Act

 Requires:
   that depository/collateral agreement be in writing
   That agreement be approved by resolution of the Bank Board or
    Bank Loan Committee
   resolution be in official bank records
   not contain a list of specific securities pledged




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Collateral Margins

 Industry standard is 102%

 You are protecting against volatility risk

 Unnecessarily high margins cost you alot

 Tie it to margin level and mar-to-market
    102% when marked – to-market daily or weekly
    105% when marked – to-market monthly

                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
 Collateral Ratios: A Gauge of Risk

Form of Collateral                              Collateral Ratio
Pledged
U.S. Treasury Bills, Notes, and
Bonds in less than 1 year
Maturing                                            102%
Maturing in 1-5 years                               105%
Maturing in more than 5 years                       110%

Actively Traded U.S. Government Agencies
Maturing in less than 1 year                        103%
Maturing in 1-5 years                               107%
Maturing in more than 5 years                       115%

U.S. Government Agency Variable Rate Securities 115%

State General Obligation Bonds
General obligation bonds issued in same state
Maturing in less than 1 year                        102%
Maturing in 1-5 years                               107%
Maturing in more than 5 years                       110%

                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Use Sweeps to Reduce Collateral

 When the markets are suitable (not now)
 Sweeps move funds out of the bank daily
 Investment in a Fund eliminates collateral

 Repo Sweeps are unique
  Dependent on type of take-over
  No precise procedure
  Segregation not buy-sell


                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 Key Custody Factors

 Custodian must be independent

 Custodian should report to you directly

 Custodian should verify authorized collateral and margin




                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Fees include:
           Account Maintenance
           Clearing
           Safekeeping
           Income Distribution




GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Linking it into a Bank Contract
                    or Not…
 Safekeeping need not be at banking services bank
    Banking services bank is convenient
    Other banks may be needed or less expensive
    A second bank requires ongoing transfers and an account

 Agreements
    Depository/Collateral Agreements at banking services bank

    Collateral Agreements at any bank over FDIC

    Master Agreements are for banking services

    Safekeeping agreements for safekeeping only
      • Will probably involve collateral as funds move through account



                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Recommendations for Bank Credit
               Criteria
   Establish credit criteria for depository bank
      Highline Banking Data (fka Sheshunoff) rating of 30
       or higher
         On a scale of 0 to 99 with 0 being the lowest and
          99 being the highest
         Remember this is a peer group rating only

   Establish credit criteria for custodial bank
      Highline rating of 20 or higher
         On a scale of 0 to 99 with 0 being the lowest and
          99 being the highest
         Issue should be sophistication of services not
          credit rating

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
    How can you protect yourself?

   Know with whom you are dealing and only
    deal with financially stable institutions
    (there are firms that rate financial
    institutions for risk)




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                  Protect yourselves
   Do not rely only on state statutes or past practices

   Do not cut corners when executing or monitoring an
    agreement

   Make sure that each step outlined by the Banking statute and
    reiterated by the court is carefully followed

   Insist upon a written, jointly signed, agreement

   Take care to establish a clear audit trail


                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Avoiding Collateral
   Limit deposits to $249,000/institution (too
    cumbersome)

   Purchase insured certificates of deposit

   Use non-interest bearing accounts for ECR

   CDARS spread funds



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
   GFOA’s Committee on Treasury and
       Investment Management

 Best Practice: Collateralization of Public Deposits
  (1984, 1987, 1993, 2000 and 2007)

 Revised Security Agreements (2001)

 An Introduction to Collateralizing Public Deposits for
  State and Local Governments (2006)

 www.gfoa.org

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Banking Services:
A Changing Environment
                 Focus on
             Expediting Funds !
 Fed started movement to increased automation in 1980s
    impetus added in 2011

 Move funds and documents as expeditiously and efficiently as
  possible to reduce float in system

 Use technology to minimize cost

 Use technology to increase access to funds for longer earning
  period

 Add physical and electronic mechanisms
    Changing internal processes



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Tools for Expediting Funds
 Physical Minimization
    Moving away from documents
    Capturing documents electronically
    Minimizing physical handling

 Electronic Maximization
      Wires
      ACH
      Check 21
      Reporting
      Payment/receivable processing

 Monetary Rewards
    Availability schedules and policies
    Staff time




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
      Banks are Looking Ahead – Are You?

 Ancillary services have added to bank scope
 Segregation of ACH initiation
 Investment online reporting

 Regulation changes
    SS# masking last four digits
    Reg CC: $200 availability on deposits
    Req Q repeal: non-interest bearing ECR accounts are FDIC insured
     100%
    FRB and clearinghouse extended field length
       • Funds transfer Business Remittance extension
 Mobile access and alerts/reporting
 ZBA to Automated Dollar Transfers flexibility
 Insurance and HSA products

                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Stepping Up with Tech

 Electronic and Imaging Changes
  Remote deposit checks at bank
  Cut internal costs and bank costs
 Image Lockbox
 Merchant Services
  Capture checks at point of sale (POS)
  Faster but slow for customer
 Capture checks in back office (BOC)
 Capture checks and stub information
 Receive check and stub information direct to G/L
                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Focus on Safety
 Same old issues: safety and service
    Collateral and margins
    FDIC coverage
    Bank credit
    Delivery versus payment settlement
    Independent transactions and parties

 New approaches
    Electronic processing
    Positive pay
    Courier options
    Pooling of collateral
    Security sign-ons (PINS and secure-cards)



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Focus on Information Needs
 Balance and detail reporting
    Reporting: cross functionality – drill down
    Location capture
    Imaging and storage
    Archived bank and city information
      • Paper >> CD >> image download

 Reconciliation
    Partial and full eliminates staff time

 Speed of information retrieval

 New Processes to Outsource

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Focus on Technology Tools

 Reporting and imaging

 Electronic transactions
    Wires
    ACH
      • New uses of ACH

 Check 21 and beyond – a huge business impact
    E-payables and e-receivables
    Consumer and corporate checks
    Remote back-office processing




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Focus on Hands-off Imaging

 All services moving to imaging
  Eliminate cost of paper and faxing


 Banks move to archiving documents
  Bank and non-bank documents
  Other services (printing)


 All documents are imaged and transmitted
  Utilize electronic capture

                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                Virtual Receivables

 Electronic capture and replacement of documents
    Targeting expedition of funds and cost savings
    Streamline invoicing and reporting
    Maintains compliance discipline


 Tied to a lockbox type transaction
    Scan the check and the document at site
    Checks and documents imaged and captured


 Combines with all receivables
    Transmitted to your g/l with detail
    Archived at bank

                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          ERP

 Enterprise Resource Planning

 Business integrated solutions
    Business processes
      • Planning
      • Purchasing
      • CRM (Customer Relationship Management)
      • Inventory control
      • Accounting
      • Finance
      • HR


                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 Lockbox Goals

 Lockbox basic functions
     Reduce mail float
     Reduce processing float
     Reduce clearing float
     Retail or wholesale lockbox use


   Mail                   Processing                   Clearing
Unique PO box               20 hr/day
  and coded                                            Multiple same-
                           automated                  day deposits into
    return               operation opens,
  envelopes                                              your bank
                        reads & transmits

 Taxes, utility payments, any repetitive payments, court payments

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                   Image Lockbox

 Replacing traditional lockbox

 Documents fully imaged at receipt
    All checks, envelopes and “white stuff”
    Paper retained minimal time at lockbox


 Reporting and posting to G/L electronically

 Specialized areas developing
    Health care
      • Matching

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Remote Check Acceptance
 Next generation of lockbox
     Imaged at your site
     Creates a lockbox on-your-site

 Timing of scan denotes service
     Cashiers scan on receipt at counter – “point-of-sale” (POS)
     Cashiers consolidate and back office scans after balance “Back Office Conversion” (BOC)
     Accounts Receivable Conversion (ARC)

 Transmission of scanned image
     Daily deposit without transport to bank
     Customization of fields and account capture

 Benefits and Savings
       Float savings on deposit speed
       Courier savings
       Liability savings over staff deposit
       Extended deposit times (9:00pm)




                                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
             How Remote Deposit Works




1                       2                          3                     4

    1. Customer pays with a check
    2. Checks are scanned at cashier or in back office balancing - balanced
    3. Images transmitted directly to the bank for processing same day
    4. Real time reports and deposits on line multiple times per day


                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Remote Deposit Capture
 Reduced check clearing costs
    Spend a little – save a lot
      • $0.06 average to $0.03 average
    Courier costs
    Multiple depository costs


 Next generation
    Capture of PO, invoice or stub information
    Moving to true EDI




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
       Alternative Providers

 Banks are competing against outside vendors
  for system checking, clearing and reporting
  alternatives

 Costs are declining

 Use is increasing



                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Consolidating Payments

 Then
   Invoice preparation and mailing
   Manual sorts, opening and extracting
   Manual batching and balancing
   Armored car delivery
   Check clearing availability


 Now – E-Payables
   Produce a tape of the bills for print/mail service
   Receive a transmission of bills paid and funds deposited




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        E-payables

 Creates channel to make AP payments

 Bank systems can chose most effective payment mode
     Bank puts AP charges on credit card payment automatically creating credit
      card spend credits
     Bank sends email to notify vendor who initiates payment
     Bank prints a check and sends it
     Bank wires

 Bank directory of suppliers can submit invoices directly
       Sends invoice directly electronically – matches to ship notice
       Validates invoices
       routes info
       delivers remittances documents




                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      E-Payables
 E-payables (and “e-payables lite”)
       A/P sends invoice and PO details electronically
       Assignment of one-time credit card number
       “Any-to-Any” connectivity
       Built on existing standard systems
       Populates invoice information from PO info
       Multiple bank and non-bank providers

 Process (Hillsborough Schools, Tampa)
     Vendors submit invoices to A/P
       • A/P matches and approves
     Vendor receives email notification
       • Simultaneously card is debited
       • Virtual card # is disabled to eliminate second use
     Vendor logs into secure site with restricted sign-on



                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                  E-Payables

 Capture of payment information
   Electronic capture


 Bank determines best remittance vehicle
   Wires, ACH, card, etc.
   Multiple providers – bank and non-bank




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
             E-Receivables

 Provides information to customers via web

 Customers remit via EFT or credit card

 Requires vendor collaboration
   Sharing of documents electronically
   Dashboard approach normally




                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
GOVERNMENT FINANCE OFFICERS ASSOCIATION
            E-Commerce Terms

 ARC: accounts receivable conversion
      Requires consumer consent
      Converts to ACH
 POP: point of purchase conversion
      Checks under $25,000
   BOC: back office conversion
   IRD: image replacement document
   ACH: automated clearinghouse
   NACHA: national association of ACH
   Truncation: conversion to an electronic format
   E-Check: converting a check to a direct debit



                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                   Positive Pay
 A requirement for safety
 Relieves liability for fraudulent checks received

 City sends bank the check register
 Bank data base of valid checks screens all checks received
     Check number and amount standard
     Payee and signatures new innovations

 City gets option to review and approve
     Timing critical – need large time window

 Without positive pay City retains liability




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Reconciliation (ARP)
 Serial Sort
    physical checks returned in order
    Phasing out with Check 21

 Partial Reconciliation
    paid check report

 Full Reconciliation
    matches issued and paid
    outstanding items, voids & cancels

 Deposit Reconciliation
     Location identification

 Combining with Positive Pay
    Price savings
    Staff time savings




                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
        RCK – Represented Check

 Transforming NSF consumer checks to ACH

 NSF checks are not represented next day
 NSF checks converted to ACH
 ACH direct debits are processed on a specific date

 Increased collections benefit




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Stored Value Cards
 Originally for payroll alternative (“pay card”)
     Extended to reimbursements, ongoing payments, etc

 Creates a debit card for employee
     Creates ‘virtual account’ for employee

 Internal payroll processed as ACH direct deposit
     Funds go to the card
     Minimize cost and liability on lost checks

 Point of sale, bank or ATM use
     Limited free transactions then fee

 Cuts cost of checks
     $0.06 versus $0.03



                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Purchasing Cards
 Limits purchases on SCI product types
 Limits use by day or week

 Agreement issues
    Liability for unauthorized use
    Billing disputes and chargebacks
    Credit limits
    Proprietary information
    Arbitration
    Termination and revocation



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Controlled Disbursement
 Little or no use now with alternatives available

 Sweeps eliminate usefulness
     Cost is lower to sweep

 Using remote bank to clear checks

 Cash management purposes - not delay

 Elimination with electronic capture

 Costs




                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Pros and Cons – Credit Card Acceptance
 Pros:
    Meets customer demands for payment options
    Aligned with private sector practices
    Control improvements:
       • Simplified cashiering, reduce cash theft, “bounced” checks, improve cash
          flow, enables internet-based transactions to occur
 Cons:
    Nature of government bills may result in a low number of transactions with high
     admin effort
    Full “bill” not realized as fees to credit card companies
    Some states prohibit payment any amount less than full bill
       • no provision for fees to be paid – convenience fee
       • Credit card companies prohibit the addition of the fee to the bill
    Lockbox processing sites may limit applicability
    Possible merchant liability



                                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Credit Card Acceptance

 GFOA Best Practice

 recommends that the costs and benefits of credit card
  acceptance be evaluated compared to other payment
  mechanisms




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 Merchant Services
 Multiple providers involved and contracted

 Payment Companies
    Visa, MasterCard, Discover, AmEx, Diners, etc.


 Card types
    Card present and card-not-present
    Credit, debit, gift, fastpay, etc.


 Merchant types assigned by payment company
    Defined by sector and types
      • Governmental, transport, charity, retail, etc.

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Merchant Service Players

 Merchant: accepts credit card

 Acquiring bank: merchant’s bank
    Provides merchant a merchant account
    Front money for the issuing bank
    Pays issuing bank and card association

 Issuing bank: customer’s bank (Issuer)
    Physically provides card to customer for use

 MSP: Merchant Service Provider
    Provides access to bank
    Provides all communications and flow

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Merchant Service Players

 Payment Gateways
    Connect merchant to bank or MSP


 Card Associations
    MC, Visa, Discover, AmEx, etc
    Make rules for acceptance
      • security, data requirements
 Processors
    Provide point of connectivity for merchant
    Front-end or back-end
    Grouped by BIN (Bank Id Number)

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
          Merchant Services RFPs
 More effective to bid outside depository
  services
  Bring in alternative providers


 Bank merchant services is separate division
  No correspondence with banking services




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
          Merchant Service Providers
 Volume of transactions and dollars determine service
  provider
    Providers charge by % or transaction
    Combine units for greater purchasing power
      • State contracts
    Provide details for best estimate of cost


 Key determining factors in pricing services:
    Transaction volume
    Transaction dollars
    Average ticket
    Ticket range typically gets best price quotations

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Key RFP Questions
   Firm Information
   Client Base
   Relationship Representatives
   Card acceptance - Interface processing
   Authorization processing
   Settlement processing
   Ticket Retreival and Charge-backs
   Debot Card Processing
   Technical capabilities                          Merchant Services
   Security and PCI Compliance                     is not a simple
   Disaster Recovery                               matter…
   Information Reporting
   Implementation
   Customer service
   Pricing and contracts



                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Merchant Services Fees

 Discount rate (add-on or pass-thru)
    Issuing bank deducts interchange fee from amount paid
     acquiring bank

 Interchange fees
    Fee between banks on acceptance
    Merchant’s bank (acquiring bank) pays customer’s bank (issuing bank)



 Assessment fees are not negotiable
    same for all providers
    Payment card company cost
    Cost per transaction PC Association members
    Fees charged by merchant processor xx

                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                           Check for State Contracts
Service
    Fees

                Line Item Detail                                                                                     Credit
  Group         Description                       FY08
                                                     Qu
                                                      an                                                                 Visa or
                                                      tit                                                                   Master
                                                       y      Detailed Description                                           Card
  Responde      Bank Discount Rate                  $         Percent of dollar value per transaction
       nt                                               61,         Fee paid to Respondent for services
       Fee                                              89
       s                                                0,9
                                                        23.
                                                        46                                                                    0.0300%
                Bank Per Transaction Fee         1,075,46     Fixed dollar amount per Transaction                    $
                                                        9            Fee paid to Respondent for services                      0.03
  Other         Bank AVS                           NA         Fixed dollar amount Per Transaction
          Fee                                                        Fee paid to Respondent for address              $
          s                                                          verification service                                     -
                Chargeback Fees                    NA         Per occurrence fee for chargebacks. See Part A -       $
                                                                    Special Instructions for more details                     5.00
                Retrieval Fees                     NA         Fees generated by inquires for sales draft retrieval   $
                                                                    requests                                                  5.00
                Online Reporting                   NA         Access fees related to user IDs or access to network
                                                                    for viewing of transaction information           $
                                                                    electronically or online                                  -
                Statement Fees                     NA         Fees related to each merchant statement                $
                                                                                                                              -



                                                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    Convenience Fees

 Fees charged to payer to recoup processing costs
 Card Associations rules govern how and when convenience fees
  can be charged
 Rules subject to change and interpretation
 Typically “convenience fees” tied to the transaction
    Card not present payments
 Rules differ for tax programs vs. non-tax programs
 Mastercard and Visa rules differ
    if you take both cards, Visa rules take precedent
 Merchant (your government) is ultimately responsible for compliance
  with rules



                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Convenience Fees

Tax Payments
 Convenience fees on Visa/MC transactions
  allowed
  in all payment environments, including in-person
  can be percentage based or tiered based on dollar
   amount of transaction


 Differentiated convenience fees allowed for
  check (ACH) vs. card payments

                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Convenience Fees

Non-Tax Payments
 Convenience fees not allowed in person (Visa)

 Convenience fees are allowed in person (MC)

 Differentiated convenience fees
  not allowed by Visa but are allowed by MC (if you’re
   using both, Visa rules take precedent)


 Convenience fees are to be flat, set $$ fee
                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                   PCI Compliance



 Payment Card Industry
    PCI Security Standards Council

 Requirements for merchant

 Focus on security of information

 Non-compliance can cost your ability to be a merchant

 https://www.pcisecuritystandards.org/


                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
        PCI Data Security Standards
                  PCIDSS
 Work only with service providers dedicated to keeping
  payment data secure

 Data security and assessments required

 Training opportunities (Trustwave, etc.)

 Providers check Visa/MasterCard websites
    listing of compliant service providers
    search CISP-compliant service providers


                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Vaults and Deposits

 Vault services are expensive
    Reduce through internal planning


 Online vault services replicate deposits

 Online vault provide for coin/currency orders

 Deposit location tracking




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Bank Investment Services

 Should be limited to safekeeping

 Legal and policy constraints

 Registration of firm as RIA
  Banks normally require safekeeping
  Eliminates Delivery versus payment
  Safekeeping may be in bank or brokerage
   (unacceptable)

                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Banking Services
Request for Proposals
    Banking Words of Wisdom

 If you don’t ask for it, you won’t get it!

 Ask for the Order!

 Who do you work for? City or Bank?




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
              GFOA Best Practice


 Periodically evaluate banking services:
   Initiate competitive bidding and negotiation
   Establish specific contracts
   Evaluate benefits and costs of bank compensation
   Evaluate all available banking services
   Look at optional services




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Request for Proposal or Bid
 Request for Proposal formal request
    Allows for definition of needs
    Allows for clear comparison of services and fees
    Allows for negotiation
    State laws may require Applications/Information/bids
 Bids
    Formalized set prices discourages “wiggle room”
 Request for Qualifications informal request
    Does not allow for clear definition of needs
    Does not allow for clear comparisons
    Information only

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
       What is a Request for Proposal ?

   Designed to obtain competitive pricing
   Designed for fair comparison
   Designed to assist in final negotiations
   Obtains quantitative and qualitative information
   Good for specific definable services




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                Why a Formal Process

 Smaller jurisdiction
     Need to eliminate local political pressures
     With technology ability to open viable non-local bank options

 Use proposal process to negotiate best terms

 Establishes time table for periodic review and RFP
     Dependent on state law
     3-year to 5-year schedules
     Include requirement for competitive process in investment policy

 Likely to establish a new relationship
     even with incumbent banks



                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Why a Formal Process


 Requires a review of your situation to prepare

 Adds to responsiveness of financial institutions
   Clarifies ability of bank to meet needs

 Provides competitive environment

 Provides basis for Master Agreement
    RFP and Proposal become part of agreement
    Locks in your requirements
                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    Local Banks

 More prevalent in small communities
 Can involve higher level of political pressures
    “Share the wealth” mindset among community banks
    Political consideration can be factored in
       • Contributions, employee involvement
 “Local” Banks
    State chartered banks vs interstate
    State holding companies
 Technologies change the game in suburban areas


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Assessment and Preparation

 Internal practices review
    Current practices – gather information
    Account Analysis – current services
    Current System and Procedures
 Internal needs – today and in the future
    Problem Areas
    Reporting and Audit Requirements
    Goals
      • determine targeted needs
      • eliminate weaknesses


                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
       Assessment and Preparation

 Major tasks
  Identify “users” of services to be evaluated
  If large enough, develop checklist for distribution to
    each department that will be included

 Benefits
   Understanding of current environment
   Understanding of key business issues
   Listing of technical requirements
   Identification of service gaps
                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Who are the Process Stakeholders
• Government Entity
   County
   City
   State
 Staff
    Finance Staff
    Treasury and Cashiering Staff
    Building Personnel
    IT Personnel
    Community


                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Establish a Timeline
 Manage and Monitor the RFP process
    Target Key Dates
       • Issuance
       • Q&A
       • Submission
       • Council Approval
       • Contract Commencement
    Include each Phase
       • Deadlines for Deliverables


 Provide for flexibility or change in schedule
                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Preliminary Questions
 Are we willing to move from current bank?

 What is the vision?
   Begin with the end in mind
   Best value vs. low cost

 What are you trying to accomplish internally?
   Improve efficiency - collection process, number of accounts,
    etc.
   Identify and manage information better
   Lower the cost of disbursements
   Implement new technologies



                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Preliminary Questions
 Bank communications needs?
    Frequency and usefulness

 Are resources available to implement the results?

 How do I choose which banks to ask?
    State ;aw requirements rule

 Should I use a consultant for the process?

 How many banks should I include?


                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     Preliminary Questions
 What expertise is available for process?
     Use of a independent consultant
     How should bank responses be compared?
     Who should be involved in the evaluation of responses?

 What factors should be considered when selecting the final bank?

 Handling RFP questions?

 How and when to communicate results to the banks?

 What implementation factors should be considered?

 Contractual issues?

 How often should banking services be competitively bid?


                                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Writing and Issuing the RFP
 Common Requested Information

  Resumes of Key Relationship Personnel
  Community Involvement
  Credit Rating
  Ownership
  Organization Structure
  References and Experience



                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Writing and Issuing the RFP
 Be Informative
   Provide Detailed Information
   State Objectives, Selection Criteria and Timeline
 Be Interactive
   Schedule a Pre-bidder’s Conference,
   Allow for Questions Submission
 Be Specific
   References and Pricing
 Adhere to Bidding Requirements

                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Submission Instructions

 Clear schedule

 Format criteria
      Deadline of proposals
      Cover letter limited in size gives contact info
      Paper and one electronic copy for archiving
      Stress concise answers but allow additional info

 Purchasing boilerplate inclusion (attachment?)

 Q&A
    Have all questions in by e-mail on date certain
    Respond to all (or post) to all on date certain

                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Government Overview Info

 Structure of finance and cashiering

 Historical data on account balances

 Do not release statements or account analyses
    Bids will just barely beast the current
    Limits competition and innovation


 To assign responsibilities in contract
                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
      The Request for Proposal

 Introduction

 Scope of Banking Services

 Bidding Instructions

 Proposed Evaluation




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    Introduction
 Historical government entity information
   Size of community, # of accounts, services provided
   Budget and audit report info should be available
 Timeline and due dates for RFP process
   RFP issuance through implementation
 Evaluation criteria
 Contract term
 General and specific qualifications
 Response format
                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
Financial Institution Requirements

 Transition or retention incentives
 Credit factors
     Senior and subordinate debt
     Rating company report
     Changes during contract requirements
   Holding company information
   Customer service focus
   Representational contacts
   Disaster support
   Local presence
   CRA rating
   HUB status rating


                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
  Sample Minimum Qualifying Criteria

 Minimum criteria to submit a proposal
  Banking structure
      •   Holding company
      •   State charter
      •   HQ
      •   FDIC status and FRB status
   Locations
      • Locations within government offices and ETJ
   Financial statements (unqualified) - annual
   Quarterly call reports (really?)
      • Consolidated Report on Condition and Income

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                  Bank and Staff

   Size of bank
   Location where services are to be provided
   Experience in providing services
   Organization structure
   Collateralization of deposits
   Creditworthiness of bank
   Qualifications of personnel (bios included)
   Community involvement (CRA)
   References

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          Timeline
   Issue date
   Pre-bid conference (rarely useful)
   Questions and answers on RFP
   Submission date
   Interviews/presentations
   Contract award/approval
   Contract implementation




                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Community Reinvestment Act (CRA)
 Support of low income areas in service area

 Bank’s demonstrated commitment to the community

 CRA score and scorer certification

 Other examples of community support




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                  Bidding Instructions
 Imperative that clear bidding instructions provided
    Require answer to each question


 Finite timelines for submission

 Pre-proposals conferences rarely useful
    Provide for standardization of questions and answers
    Control the process




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                  Responses to RFP
 RFP process should strive to maintain confidentiality

 Many banks may note “proprietary” information which
  may enable protection of such information from public
  viewing

 Winning bid documentation info may be sought from
  vendors not awarded contract



                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
           Scope and Objectives

 Core services should be defined with sufficient detail
  to allow the prospective vendor to understand scope
  of operations and level of service needed

 Example core services:
   collections (inflows)
   disbursements (outflows)
   on-line banking services/reporting
   reconciliation services and account analysis
   Account structure

                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Scope of Services
Describe services desired with detailed questions to
 evaluate the differences between providers

Ask the “right” questions
Do not set minimums/set requirements
  • to get best possible options and differences
   • Concise questions
   • Open-ended questions = open-ended answers
   • Use fill in the blank sparingly or to save time
      – Cutoff time for deposits is _______.
      – Final presentment time is ______.
      – Branch hours are _______.

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Expedite Cash Flows

 Services to expedite inflows
    Electronic fund transfers (EFTs)
    Lockbox (ACH options)
    Credit card acceptance
    Improved check processing
 Services to manage outflows
    Electronic disbursement
    Payroll direct deposit and cards
    Credit card payments
    ACH, EDI
 Security and fraud deterrence needs


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Required Services

 Account structure
   Sweeps
   ZBA structures
   Compensating balance and fee basis flexibility
     • Carry-over
   Indexed account bases




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Required Services

 Collections
   Positive pay
   Deposits
   Vault services
     • Immediate verification
     • Change orders
   Remote deposit
   RCK – represented checks by ACH
   Stale-date and NSF processing


                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Required Services

 Disbursements
   Positive pay
   Payee positive pay
   Stored value cards


 ACH
   Filters and blocks
   Reporting of trailers



                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     Required Services
 Information Services
    Web based
    Cross functionality
    Reports and report writing
    Availability


 Reconciliation
    Partial or full
    Deposit reconciliation
    Location idenitification



                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
               Required Services

 Collateral

 Set standard conditions and require confirmation
      List authorized collateral
      Stipulate margin (102%
      Require independent custodial counterparty name
      Require collateral agreement
      Monthly reporting by custodian



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
               On-line Banking Services
 Detail of on-line services (web-based)
 Reporting
 Execution of transactions
    Correspondent use
 Internal controls
    Security Authorizations and control


 Download to G/L capabilities




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Required Services

 Stop pay
   Manual versus on-line
   Renewals


 Safekeeping
   Format of fees
   Non-bank brokerage trades only
   Correspondent use


 Company Banking

                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                Optional Services

 Purchasing cards

 Smart Safes

 Image lockbox

 Merchant services
    best done outside banking contract

 ATM

 Short term financing availability

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Alternative Services

 E-payables

 E-receivables

 Newly available and unanticipated services

 Services that the bank may provide outside requirements

 Request suggestions for innovations and/or value-added
  services

                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Proposal Evaluation
 Preparation for evaluation committee

 What evaluation criteria were set?

 Services provisions need to be weighted and scored


 Fees need to be compared
    Verify bundled for accuracy
    As much art as science
    Requires depth of knowledge of service provision


 Earnings Rates

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
     Class Input into Criteria Weight
 Fees

 Net interest rates
    Rates, fees and compensating balance basis results


 Service requirements

 Bank credit and representatives

 References
                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
          Purchasing Selection Criteria
                         % Vendor A Vendor B Vendor C

Meet scope             20%      15           16           17
Quality of personnel   20%      17           15           13
Meet service needs     25%      20           23           15
Responsiveness         15%      10           11            9
Cost                   20%      20           18           16

                       100%     82           83           70

Cost detail:
 Vendor quote                 7,000      8,000        9,000
 % of best quote               100%        88%          78%
 Evaluation score                20         18           16

                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                                                    Fee Analysis
                                            Current Contract        Bank 1                      Bank 2                      Bank 3                      Bank 4                      Bank 5
Item                            Quanity     Price    Cost           Price       Cost            Price       Cost            Price       Cost            Price       Cost              Price       Cost

Account Maintenance                   120     19.500     2,340.00     19.500      2,340.00        10.000      1,200.00          7.000        840.00       15.000      1,800.00          10.00     1,200.00
Checks Paid                         4,000       .100       400.00       .100        400.00          .150        600.00           .050        200.00         .120        480.00           0.08       320.00
Number of Deposit Slips             1,000       .150       150.00       .500        500.00         1.000      1,000.00           .350        350.00         .650        650.00           0.50       500.00
Items Deposited - non LB           28,000       .085     2,380.00       .085      2,380.00          .100      2,800.00           .050      1,400.00         .090      2,520.00           0.08     2,240.00
FDIC Assessment                                              0.00       .000          0.00          .000          0.00                         0.00         .000          0.00           0.00         0.00
Wire Transfers:                                              0.00                     0.00                        0.00                         0.00                       0.00                        0.00
   Incoming                            35      5.000       175.00       5.000       175.00          1.000        35.00          5.000        175.00        5.000        175.00           5.00       175.00
   Outgoing                            10      7.500        75.00       7.500        75.00          7.500        75.00          4.000         40.00       10.000        100.00           8.00        80.00
Notification of Wire Transfer          45                    0.00       3.250       146.25          3.500       157.50           .000          0.00         .000          0.00           0.00         0.00
Transfer Between Accts                135      1.000       135.00       1.000       135.00           .500        67.50           .100         13.50         .125         16.88           0.00         0.00
ACH Transactions:                                            0.00                     0.00                        0.00                         0.00                       0.00                        0.00
   ACH Maint. Fee                      12                    0.00                     0.00        80.000        960.00                         0.00                       0.00                        0.00
   ACH in                             130       .080        10.40       .080         10.40          .080         10.40          .040           5.20          .125        16.25           0.08        10.40
   ACH out                         27,500       .085     2,337.50       .085      2,337.50          .080      2,200.00          .040       1,100.00          .125     3,437.50           0.08     2,200.00
   Ach Origination                     50     10.000       500.00     10.000        500.00                        0.00         5.000         250.00        7.500        375.00           5.00       250.00
   ACH Returned (RCK)                  75      4.500       337.50      4.500        337.50           .500        37.50         1.500         112.50        6.000        450.00           5.00       375.00
   ACH/ (RCK) Base Fee                 12       .000         0.00       .000          0.00                        0.00          .000           0.00       45.000        540.00           0.00         0.00
Notification of incoming ACH          130                    0.00       .000          0.00         3.500        455.00          .000           0.00          .000         0.00           0.00         0.00
Returned Checks (RCK)                 250      4.500     1,125.00       .080         20.00         1.000        250.00         4.500       1,125.00        6.000      1,500.00           1.00       250.00
Currency Processing                13,000       .049       637.00       .049        637.00          .000          0.00          .001          13.00       0.0025         32.50          0.002        26.00
Stop Payments                          10     10.000       100.00     10.000        100.00         7.500         75.00         3.000          30.00        9.000         90.00          10.00       100.00
Payee Positive Pay/ARP                 24                    0.00     50.000      1,200.00        50.000      1,200.00        20.000         480.00       80.000      1,920.00          40.00       960.00
Payee Positive Pay trans.              24                    0.00                     0.00                        0.00                         0.00          .000         0.00          10.00       240.00
EDI                                   300                    0.00       .085         25.50           .080        24.00          .050          15.00          .220        66.00           0.50       150.00
EDI maintenance                        12       .000         0.00       .000          0.00                        0.00          .000           0.00          .000         0.00          30.00       360.00
Payee Positive Pay/check            4,000       .050       200.00       .000          0.00           .070       280.00          .010          40.00          .090       360.00           0.04       160.00
Payee Positive Pay except.             15      5.000        75.00      5.000         75.00          1.000        15.00         1.000          15.00        2.500         37.50           2.00        30.00
On-line check/deposit archiv           12                    0.00    100.000      1,200.00                        0.00          .100           1.20          .000         0.00           0.00         0.00
Check Imaging                       4,000                                             0.00                        0.00          .030         120.00          .000         0.00           0.00         0.00
Courior Service                        12       .000        0.00                      0.00          .000          0.00          .000           0.00          .000         0.00           0.00         0.00
PC Banking Software                    12                   0.00      45.000        540.00        50.000        600.00        25.000         300.00      125.000      1,500.00         100.00     1,200.00
Monthly Account Maint.(SW)            120      5.000      600.00       5.000        600.00         5.000        600.00          .000           0.00        5.000        600.00           0.00         0.00
Check Truncation/CD Rom                12     40.000      480.00      10.000        120.00        50.000        600.00        25.000         300.00       25.000        300.00          25.00       300.00


TOTAL                                                   12,057.40                13,854.15                   13,241.90                     6,925.40                  16,966.63                   11,126.40


Average Monthly Amount                                   1,004.78                 1,154.51                    1,103.49                         577.12                 1,413.89                     927.20

Balance Required to Support
 $1.00 of Services                                        261.65                       256.14                      318.08                      286.27                      270.37                  261.65

Required Monthly Compensating Balance                  262,901.56               295,716.83                  350,998.63                  165,211.19                  382,272.20                  242,601.88




                                                                                                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Finalist Presentations
 Final research and validation
    to ensure bank’s ability to meet the current and future
     requirements
    Not necessary but helpful on new service types


 Major tasks
    Restrict to short list of banks
    Timely notification for presentation
      • plenty of advance notice
    Require presentation format and provide to banks
    Schedule presentations
    Evaluate and debrief after each meeting with team
    Conduct on-site tours of finalist

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                Awarding of Contract

 Unbiased objective decision required
     Data and process driven decision
       • Fees
       • Services
       • Rates and net result to government


   Decide on contract execution timing on award
   Present summary findings with recommendations
   Be aware of open records requirements
   Formal governing body award


                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
               Use of Outside Consultants
 Benefits
    Time savings
    Banking services and market expertise
    Credibility and independent esp. in political situation
 Costs
   Cost of consultant usually hour basis with cap
   Orientation of consultant
   Cost benefit in end result
       •   Final contract less cost and more efficiency
       •   Increased earnings potential
       •   Additional services
       •   Cash management efficiencies identified


                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
              Contractual Issues
 Have banks provide contracts in proposal
    Allows for advance review


 Sample contract requirements in RFP as conditions
    RFP and proposal part of end contract


 Government attorney needs to be involved
    Finance folks add practical experience and need to review


 Master contract with service agreements attached

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Points of Contention
 Indemnification issues are key

 Venue and law guidance
    Use NY for certain issues for case law


 State and local laws

 Fee structure must be controlled by proposal
    Service agreements often allow for fee changes




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Transition to a New Bank
 Provide for sufficient time

 Set time limits for all services to be in place

 Define technology changes on date transmission
    ACH, positive pay, recon


 Bank’s platform will become default platform



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
        Implementing the Services
 Important Steps to ensure Success
   Agree on and set limits for timeline
   Timely Contract Negotiations
     • Review as part proposal beforehand
   Dedicated team use
   Responsible party identification




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
   Elements of Bank Conversion
 Building consensus

 Implementation team

 Project timeline

 Testing, training and follow-up




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
       Banking Conversion Success



   Consensus                 Change management
   Implementation teams      Testing
   Timeline                  External notification
   Terminology               Feedback to bank
   Business process          Post-conversion
    efficiencies               evaluation




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
Ongoing Banking Relationships
           Ongoing Relationship

 Requires periodic meetings
     Review account structure
     Review services
     Review costs
     Investigate new opportunities and services




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
Optimum Banking Relationships
        Depend on:
 Communication

 Ability of bank to respond to government’s needs

 Ability of government to effectively use bank
  services

 Bank’s approach and acceptance of new technology



                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
            Periodic Reviews
 Identify costs and benefits
 Identify new services and possible use
 Can increase income
 Can improve internal efficiency
 Can improve external efficiency
 Can improve investment returns
 Control costs



                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Ongoing Evaluations

 Service levels being provided versus proposal

 Account structure changes

 Payment basis in changing rates

 Availability of funds

 New technologies availability

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
             Bank Report Card
 Measures bank performance
    Program objective
    Scope
    After two representative periods - look for trends
    Delays
    Criteria measurements
    Requirements and capabilities met
    Reporting acceptability




                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
Bank Relations Management
  Manage bank relationships centrally
  Monitor bank credit
  Ensure collateral and FDIC
  Ensure bank provides maximum funds availability
  Evaluate benefits in automated services
  Monitor services
  Monitor balances
  Monitor charges and volumes with account analysis
  Use periodic RFP process to select depositories
  Require written agreements
    • FIRREA requirements



                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
         Ongoing Expectations

 The bank should continue to:
   Ask questions regarding process and procedures
   Inspect reports for efficiency
   Ask about customer habits and needs
   Review with you A/P and A/R systems
   Review data security systems and loss prevention
    procedures
   Check for fraud protection measures



                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
 Bank relationships must be
mutually beneficial and create a
   cost beneficial business
         relationship!!!




                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       Presenters
 Cynthia Evangelisti
   Deputy Treasurer, Chicago Park District
   541 N. Fairbanks Court, 6th Floor
   Chicago, IL 60611
   312-742-4289
   Cynthia.evangelisti@chicagoparkdistrict.com


 Linda T. Patterson
   President, Patterson & Associates
   301 Congress Avenue, Suite 570
   Austin, TX 78701
   800-817-2442
   linda@patterson.net
                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION

				
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