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Economic Outlook

VIEWS: 3 PAGES: 195

  • pg 1
									Treasury Management



       Denver, CO
     July 25-26, 2012
           Treasury Management


 A separate discipline within the organization.

 Reflects cash management objectives.

 Goal of safe and efficient utilization of cash.

 Activities are undertaken to insure planned cash
  availability and provide a reasonable market investment
  return on a government’s funds.


                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            2
  Treasury Management Activities

 Receipt and deposit of cash and negotiable payments
    Accurate documentation and reporting


 Investment of funds in authorized investments

 Disbursement of funds upon proper authorization
    Utilization of discounts and timely payments


 Debt management (borrowing) for needs


                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            3
                       Activities

 Cashiering

 Receipting and custody of monies and securities

 Daily cash management between investment alternatives

 Relationship management with financial institutions
    Managing bank relationships and communications
    Managing banking costs

 Cash flow analysis (and forecasting)




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              4
     Players in Treasury Management

 Internal
  Elected Officials
  Treasurer or Finance Director
  Payroll Division
  Accounts Payables
  Purchasing
  Debt Manager
  Central Cashiering
  Information technology
  Legal counsel
  Major departments
                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          5
  Players in Treasury Management

 External
  State Finance
  Service providers
    • Banks, credit unions, merchant service providers,
      software providers, custodians, safekeepers
  Financial market participants
    • Brokers/dealers, pools, funds
  Federal Reserve Bank



                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        6
                       Objectives

The treasury management system:
   supports the operations of government and departments
     • not the other way around

   must meet all legal obligations and constraints

   must continuousy protect government’s assets

   must provide liquidity to meet expected

   must provide for unexpected obligations

   must create and archive accurate documentation




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                7
            Operating Cycle


 Forecast cash flows

 Collect revenues

 Make investments

 Track investments

 Make disbursements

 Monitor, evaluate and audit FINANCE OFFICERS ASSOCIATION
                        GOVERNMENT
                       8
       Key Foundation Points

 Accounting principles
 Cash versus accrual accounting
 Time value of money
 Liquidity
 Float
 Financial reporting
 Debt management



                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     9
       Risks in Treasury Management

 All transactions involve risk

 Risk can not be avoided

 Risk can not be eliminated

 Risk must be managed

 Treasury management manages risks
   Knowing the risks is the first step
   Public management’s unique risk: headline risk
                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          10
                               Risks

 Credit and Default Risk
    Managed by contract and safekeeping

    The risk that the issuer of a security will not pay as promised.
      • Brokers
      • Securities
      • Banks

    The risk that a service provider will fail by default
      • Banks
      • Merchant service providers
      • Software providers

                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   11
                               Risks

 Market Risk
    The risk that the market price of a security will fall and create
     an unrealized or realized loss for the government.
      • Loss of market value



    Managed through planning and anticipation of needs
      • Mark to market
      • Maturity and WAM control
      • Maturity control
      • Policy controls



                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  12
                         Risks

 Liquidity Risk
   Government’s biggest risk that funds will not be
    available to meet obligations.
     • The risk causes over-reliance on liquidity.

   Managed through cash flow analysis and creating a
    buffer of liquid funds for unanticipated needs

   Not managed by staying totally liquid


                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           13
                           Risks

 Custody and Safekeeping Risks
    Custody implies fiduciary responsibility
      • Primarily custody of collateral or escrowed assets
      • Requires contract

    Safekeeping implies simply holding assets
      • Requires contract

    Managed through documentation and contracts detailing roles
     and controls
      • Delivery versus payment
      • Documentation
      • Reporting by custodian or safekeeping agent

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              14
                       Risks

 Collections Risk
    Fraud controls
      • Embezzlement, collusion, etc.

    Receivables management
      • Timely and accurate collections
      • Collections policy development
      • Central versus separate collections

    Float management
      • Funds availability


                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             15
                     Risks

 Transaction Risk

  Inaccurate or fraudulent transactions

  Managed through clear procedures, audits,
   controls, reporting
    • Securities dealers
    • Credit related



                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       16
 Treasury Management Process

 Establishment of policies and objectives
    Cash flow analysis
    Cash management and banking
    Investment policies

 Establishing counter-parties
    Brokers, banks, pools, etc.

 Monitoring systems and contracts
    Periodic reviews and timely re-bids

 Evaluating effectiveness and efficieny
    Annual reviews and possible re-adoption of policies

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           17
  The Life of Cash in Your Government

Invoice or bill for service                     Receiving cash/checks/
                                                ACH/wires/CR card


              Timely deposit to bank/
              pool or alternative


                                        Investment of funds




                                                         Payment by check/cash/
                                                         wire/ACH/CR card

                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                    18
Collections Management
        Collections Management
 Collection Methods
   Lockbox
   Automated Clearing House (ACH)
   Credit Cards


 Cash concentration

 Check 21 Legislation
   Overview
   Check Transformation
   Check 21 Cash Collection Solution

                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         20
            Cash Collection Methods
 Over-the-Counter collections (cash, checks, negotiable items)

 Drop-box

 Lockbox

 Automated Clearing House (ACH)

 Internet and IVR

 Credit Cards

 Remote Deposit Capture


                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               21
                Collection Concepts
 Float
    Delay between collection processes.
      • Mail float: Time between payment mailing and receipt
      • Processing float: Time between receipt and deposit
      • Clearing float: Time between deposit and good funds

 Receipting
    Key documentation for prevention of fraud/collusion
    Key documentation for balancing

 Reporting
    Key financial information for evaluation and posting

 Depositing
    Timely deposits are key to investment success


                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   22
       Cashiering: The First Frontier

 Cashier represents the government

 Cashiering procedures and controls are crucial
      Individual tills
      Daily assignment and processing
      Balancing
      reporting


 Responsibility
    Assignments, petty cash, departmental control


 Timely balancing and deposit
                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               23
      City Treasury Responsibilities


   Receive and retain funds
   Safeguard and disburse funds
   Invest funds at all times
   Receipt customers
   Maintain accurate records
   Maintain customer relations
   Understand emergency situations




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           24
       Inside Your Treasury
Consolidated or “Central” Cashiering vs. Decentralized

                   Treasurer
                 Central Cashier

         Depository


Department         Department           Department


  Cashier             Cashier              Cashier

                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         25
Know the Money and the Rules




                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
             26
         If you get a counterfeit bill

   Keep the bill
   Delay passer if possible
   Telephone police or Secret Service
   Observe the passer
   Initial and date on white section of bill
   Surrender the bill to Secret Service or bank




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             27
            Secret Service Form

 Counterfeit Note Report (SSF 1604)
     instructions on completion
     Secret Service listed in front of phone book
     description of note
     information about note




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            28
     GOVERNMENT FINANCE OFFICERS ASSOCIATION
29
     GOVERNMENT FINANCE OFFICERS ASSOCIATION
30
       Counting       is 1 - 2 - 3

 3 Three Ways to Count

 2 Two Counts on Each
   (Double Count)


 1 One Total




                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     31
         Mutilated Money Rules

 Will your bank credit you?

 If more than 3/5 exists (2 serial numbers)
      -you receive face value
 If more than 2/5 exists (40%)
      -you receive face or 1/2 value
 If less than 2/5 exists
      -you receive nothing

                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        32
                Mutilated Money

 What constitutes mutilation
    torn bills         - missing parts
    bills written on   - bent coins


 Ask for a substitute if possible
 But, it is still legal tender

 Separate for return to bank


                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         33
        Receiving and Receipting

   Procedures
   Numbered Receipts
   Double counts
   Customer service

 Invoiced versus cash (service) transactions




                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        34
        Establish Procedures for:

   Setting up cash drawer
   Receiving and receipting
   Overages and Shortages
   Closing and Balancing
   Locating Errors
   Revenue Sheet/Statement
   Deposits



                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       35
   Standard Deposit Requirements

 Each city differs but standards include:
      daily deposit of funds
      consolidated deposit or departmental deposits
      secure, locked storage of all deposits
      standardized cash receipt forms
      department deposit forms forwarded to treasury daily
       simultaneously with deposit to bank




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            36
    Preventing a Cashiering Problem

 Keep a clear counter space
 Keep unauthorized people out of area
 Check security devices
 Maintain only necessary cash
  balances
 Use bait money
   recorded serial numbers



                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    37
    Train Cashiers for Their Reaction
   Assume there is a weapon
   Be polite and calm
   Keep talking
   No heroics
   Observe and listen
   Protect evidence
   Call for help (911)
     after you are safe!
      • After they are gone

                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      38
                 Receivables

 Governments excel in “ageless” receivables

 Centralization of receivables
     Cuts costs
     Uses staff effectively
     Creates a control over additional receivables
     Best practice




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         39
      Mail Lockbox Processing
 Lockbox process reduces all 3 floats

 Types of lockboxes
  Banks or non-financial firms
  Retail: low dollar - high volume
  Wholesale: high dollar - low volume
  Whole-tail: both wholesale and retail (common now)
  Image lockbox: everything imaged at starting point


                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       40
                 Lockbox Issues

 Cost-Benefit Analysis
     Float
     Fixed and variable costs
     Site selection (political issues)
     Availability schedules
     System interaction
     Detail posting alternatives
     Networked systems



                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              41
        Lockbox – How It Works
                        Think Visa and MC
 Unique PO established for automated USPS handling

 Remittance document design
     Remittance document bar-coded for payments
     Remittance envelope strip coded for automated USPS handling

 Payment and remittance document sent to P.O. Box

 Remittances imaged and captured with account information
     Discrepancies handled manually
     No physical documents returned to government

 Deposits made 10-12 times daily to designated account

 Information sent electronically to government on accounts

 Information updated direct to general ledger by governments


                                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                       42
            Lockbox – Benefits
 A reduction of all 3 float types

 Funds availability

 Reduction in internal staffing costs
     staff can be reallocated to higher-value tasks

 Reduction in staff processing delays
     Limited work day, vacation, holidays, etc.

 Reduction in processing errors




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  43
     Automated Clearing House

 Automated Clearing House
   Nationwide network which consolidates DR and CR
   Lower costs


 Collections through ACH
   Credits processed as citizens/users pay
   Direct debit collection by government on approval

  Government web site
     • ACH payment initiated by citizen
     • Linked through a provider or direct into government


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            44
                 ACH - Benefits
 Electronic funds movement instead of physical documents

 Cash flow certainty by date

 Improved reconciliation

 Reduction in late payments and delinquencies
    If date controlled

 Reduced bank fees over physical handling

 Reduced processing time and errors


                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            45
   Credit and Debit Card Collections
 “Merchant services”
   Credit or Debit Card payment initiated by resident
     • On web site or through bill pay provider


 POS (Point of Sale) card present payment
   Over the counter
   Lower interchange rate


 Card not Present
   Written on return advice
   Higher interchange rate

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               46
   Merchant Services Key Concepts
 PCI Compliance (Payment Card Industry)

 Payment Basis
    Dependent on type of payments being made
    Percentage of transaction or set cost
    Chargebacks

 Card providers
    Control and provider interaction

 Merchant locations, equipment, linkage, reporting

 Credit versus Debit cards
    Convenience fees
    Types of cards represent different fees

                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                        47
  Credit Cards – Benefits & Obstacles
 Business decision based on cost-benefit analysis

 Cash flow settlement certainty

 Reconciliation and cash flow forecasting

 Reduction in late payments and delinquencies

 Convenient method for your residents

 Increased fees
    interchange rate fees changed by processor
    Processing fees


                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   48
        Check Truncation: The Check
       Clearing for the 21st Century Act
Implementation focused by 9/11

 Designed to encourage innovation in the payment system by removing
  barriers to check truncation and aide electronic processing (overdrafts)

 To improve efficiency in the U.S. banking system by eliminating the need to
  transport paper checks for presentment between banks

 To facilitate check truncation

 To facilitate broader use of electronic check processing without mandating
  any bank change its current check collection process

 Allows banks to provide a substitute check, Image Replacement Document
  (IRD), in lieu of an original physical check



                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                      49
             Truncated Checks
Legal standing of truncated check does not
 change
  Still considered a check and continues to be governed by the
   Uniform Commercial Code (UCC)
  Has no dollar limits


Check truncation applies to all checks
  Corporate and consumer
  This includes travelers checks, money orders and cashiers’
   checks




                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               50
            Check Transformation
 Check Conversion
  transforms a check to electronic settlement
   Converting a paper check mid-life cycle to something electronic
   Example: conversion of returned checks to ACH transactions


 Check Truncation
  transforms a check to image-enabled electronic or
   paper settlement
   Example: electronic check presentment




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               51
                 Check Conversion and
               Check Truncation Differences
     Check Conversion:                    Check Truncation:
 Changes the check’s legal           No change the check’s legal
  standing
                                       standing
 Transaction no longer governed
  by UCC, but FRB Reg E               Still considered a check and
                                       continues to be governed by
 Some transaction types have          the UCC
  dollar limits (POP and RCK)
                                      No dollar limits
 Requires customer authorization
  (except for RCK - notification)
                                      Requires no customer
                                       authorization
 Applies to consumer transactions
  only
 Is available today                  Applies to all checks
                                      Is available today

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                52
     Check Transformation: Benefits?

 Faster access to funds
 Expedited check processing internally
   Remote deposit
 Reduced transportation or courier
 costs/liabilities
 Faster notification of returned items
 Frees up staff resources
 Lower cost in bank processing


                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       53
    A Check 21 Solution for Deposits
 Features of a typical bank deposit

 Processed daily

 Time to prepare: 20 – 60 minutes

 Usually hand-delivered to banking center by
  local staff (not armored carrier)


                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         54
Best Fit Analysis
 Substitute Checks                                                  Non-
                                                                   image
 • For larger value checks if expedited clearing is                points
   available, or if transportation costs or delays exceed
   cost of image handling.                                         Large-
                                                                value checks
 • For distributed-capture checks on non-image
   exchange banks.                                           Expedited clearing

Image Exchange and ECP
• Image exchange or ECP applies if
  expedited clearing is not available.                       Low-value business
• Low-value business or consumer                            or consumer payments
  payments                                                   Distributed capture
• Distributed capture of business or                  business or consumer payments
  consumer payments

 ACH Check                                    Low-value consumer remittance payments
 • Low value consumer
   remittance payments via                    Distributed capture of consumer payments
   lockbox (ARC)
 • Low value consumer
   remittance payments in
   person (POP)
                                                                 Volume


                                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                                 55
               Remote Deposit

Internal
 Remote Deposit can replace your current process
   of accepting and processing checks with a more
          efficient and cost-effective process




                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       56
          Remote Deposit Services

 Internal deposit of checks electronically
      Captures check and deposit by scanning
      Batches and balances deposits
      Transmits directly to bank for daily deposit
      Reduces float and courier/staff deposit cost
      Can reduce default (NSF) risk with faster presentation
      Allows multiple location deposits or central deposit point
      Requires temporary archiving of paper check for clearing
      Eliminates paper check earlier in the cycle for efficient
       paperless processing




                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                 57
        How Remote Deposit Works
                                                                    Depository Bank captures
                                                                   image and MICR information




                            You scan checks,     Depository Bank
  You receive checks        transmit to bank


                                                  Software determines if check
                                                   is ARC-eligible (option) or
                                                  not, and determines optimal
                                                  clearing route, ARC or Image


                              Paying Bank


                                                       Item routed through
Consumers receive
                                                          payment system:
  information on
                                                       • ARC – to Fed or
  their statement:     Paying Bank                        Clearing House
• ACH (ARC)             processes                      • IRD or Image– to
• IRD                  ARC, IRD or                        Paying Bank
• Check truncated      check image



                                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                            58
Remote Deposit Implementation

 Provider – usually bank

 Check Scanner
   • Often provided by bank

 Web access

 Software to store the images and create the deposit
   • Provided by bank
                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       59
                     Smart Safes

 Safes for cash and currency deposit

 Provides for daily credit at banks without deposit

 Counts coin/currency and verifies for counterfeits

 Provided by courier services
    Pick-up schedules controlled by dollar amounts




                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               60
Disbursement Management




         Long Beach, CA
       January 23-24, 2012
         Cash Disbursements
 Function to disburse on a timely basis taking
  advantage of discounts if available

 Link to accounts payable and treasury functions

 Safety and accuracy of disbursements

 Planning for timing and amounts

 Centralized and decentralized disbursement
  processes options


                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     62
       Disbursement Concepts

 Information access
 Relationship management
 Fraud prevention
 Disbursement float
 Bank structures
 Reconciliation
 Integrated payables



                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                     63
     Centralization of Disbursement Process


    helps to streamline the number of accounts that must be
     maintained.

    reduces the number of transactions (checks issued).

    limits the amount of oversight needed to monitor account
     activity and related transactions.



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             64
  Disbursement Process Decentralization
 Allowance for satellite locations or for emergency
  purchases

 Decentralization requires frequent reporting and
  supervisory oversight
    Reporting to the central location to monitor cash requirements
    Account reconciliations to ensure proper controls .


 Quality training



                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              65
                Disbursement Process

 Documentation and verification

 Float

 Vendor relations

 Presentations
    Checks
    Credit/Debit cards
    ACH
    Fed Wire
                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          66
      Electronic Banking Services to
         Optimize Disbursement
 Bank functions supporting disbursement
     Positive pay
     Payee name verification
     Teller line positive pay
     ACH filters and blocks
     Wire Transfers
     Credit cards
     Electronic Data Interchange (EDI)



                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      67
                  Stored Value Cards
 Established originally as “pay card” function
     debit card that can have dollars placed in the account via an ACH transfer
      initiated by the government
     Reduces time and liability on ‘lost cards’

 Creates virtual account for non-account holders
     Can link with drafts to comply with state payroll statutes allowing
      mandated use if employee doesn’t elect direct deposit.

 Uses besides payroll

 Uses ACH to fund the Card
     Mark usually Visa or MC
     Generic or specialized

 Allows for POS and ATM and teller access

                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     68
   Purchasing/Procurement Cards

 PCI cards assigned for specific SCI
     VISA/MasterCard/Discover/American Express
     Card restrictions
     Rebate possibilities
     Purchasing Card Program Internal Controls
     Software requirements minimal
     Bank provider
     Requires supervisory sign-off



                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        69
         GFOA Best Practice on Cards

 Governments explore use of purchasing cards to
  improve efficiency of their purchasing

 Use competitive process in selection

 Internal control includes written agreement between
  government and provider

 Integration with existing G/L

 Automation of approvals and reconciliation

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           70
Liquidity and Short-term Cash
           Investing



           Long Beach, CA
         January 23-24, 2012
                   Objective

 Continuous investment of all assets and cash

 Short-term for liquidity purposes

 Longer term for investment income and safety




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        72
  Establishing Objectives &
          Investment Policy
 Safety

 Liquidity

 Diversification

 Yield (Return)


                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                    73
    How do I achieve Safety?

   Document all transactions
   Use competitive transactions
   Recognize changes in your and the markets’ situation
   Learn about the various securities/opportunities
   Use independent counter-parties
   Delivery versus Payment Settlement
   Review and report regularly
   Establish controls and procedures
   Review contracts
      establish equality
      Review for practicality
 Establish Collateral
      Independent reporting on collateral
 Diversify


                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   74
       How do I achieve Liquidity?

 Create and understand your cash flow

 Invest to known liabilities

 Always have a small cash buffer for emergencies

 Buy high quality securities
    High quality assures a secondary market




                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                75
      How do I achieve Diversification?

 Create competition in every transaction
    Never rely on one institution or broker
    Do not allow a broker to do competitive bidding for you


 Diversification by type of security
    Knowledge of the securities
    Use securities that make sense for the period


 Diversification maturity
    Create a ladder to meet your liabilities




                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  76
            How do I achieve Yield?

 Invest to your cash flow needs

 Knowing your securities and use appropriate ones

 Assure there is always competition

 Use time and attention for the portfolio

 Know your alternatives and compare them

 Use the alternatives



                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   77
                 Key Concepts
 Portfolio management = Risk management

 Risk/return generally has positive correlation
   You only get paid for risk
   Risk is two edged sword


 Flexibility and control are key

 Compliance is critical

                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       78
Debt Service Cash Flow




               GOVERNMENT FINANCE OFFICERS ASSOCIATION
          79
   Constraints: Identifying Risks

 Liquidity risk

 Market and volatility risk

 Credit risk

 Extension risk

 Reinvestment risk

 Event risk


                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        80
                    Managing risk
 Market and volatility risk
   Interest rate risk; price sensitivity
   Yields and prices move inversely
   Normally greatest risk in public entity’s operating
    investment portfolio


 Credit risk
   Ratings can change & spreads will vary over time



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           81
                            Diversification

 Diversification tables in policy
   • Setting maximums not minimums

 Diversification manages risk
    •       Establish risk tolerances
    •       Determine levels of diversification
        – investing in securities with dissimilar risk characteristics
        – Match to liquidity also
    •       Diversification areas
        –    Maturity distribution
        –    Sector allocation
        –    Issuer allocation
        –    Structures
                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     82
            Safety: Risk & Return

 Higher risk creates higher returns over time.
 Higher risk creates volatility of return
 Higher risk can result in principal loss




    The objective of safety requires establishing
        investment limits and constraints.

                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          83
             Collateral Issues

 Pledged not owned

 Key safety factors
   Margin of 102% minimum (check state law)
   Independent custodian
     • Outside holding company of bank
   Authorized collateral types
   Custodial reporting



                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        84
               Sources of Return

 Coupon income (accrued interest)


 Principle income
   Amortization of premiums
   Accretion of discounts


 Capital gain/loss from price change in bond



                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       85
                  Know the Players

 Brokers/Dealers
      Put a buyer and seller together
      Transaction based – works off daily inventory
      Not allowed to “advise”
      Conduit to trader

 Traders
    Trading the firm’s own portfolio in specific quadrants
    The person making the bid/offer (sets prices)

 Advisers
    Portfolio perspective
    Not allowed to sell/buy


                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                 86
                Standard Market Sectors
 Money markets
     Money funds and pools
     Commercial paper
     Bankers acceptances

 Certificates of Deposit
     Depository
     brokered

 Treasury obligations
     Treasury bills and notes

 Agencies/Instrumentalities

 Municipal and state obligations

 Corporates

                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                    87
                                                         U.S. T-Bills

                                                         U.S. T-Notes and Bonds




                                           Low Risk
                                                         Repos
                                                         (102% DVP Treasuries)

                                                         U.S. Govt. Agencies


                                                         U.S. Govt. Enterprises




88
                                                         Bank CDs (Insured
                                                         and Collateralized)

                                                         Local Government Investment Pools
                                                         Money Market Funds - AAA
                                                                                         Credit (Default) Risk




                                                         Bankers’ Acceptances

                                                         Commercial Paper - A-1/P-1
                                           Higher Risk

 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                                         U.S. T-Bills

                                                         Local Government Investment Pools
                                                         Money Market Funds - AAA




                                           Low Risk
                                                         U.S. T-Notes (Short-term)

                                                         Bankers’ Acceptances

                                                         Commercial Paper - A-1/P-1
                                                         Bank CDs - (Short-term)




89
                                                         U.S. Govt. Enterprises
                                                            Discount Notes
                                                                                             Market Risk




                                                         U.S. Govt. Agencies


                                                         U.S. Govt. EWnterprises


                                                         Treasury Securities (Long-term)
                                           Higher Risk
 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                                                    Overnight Repos




                                                         Cash
                                                                    Local Government Investment Pools
                                                                    Money Market Funds - AAA

                                                                    U.S. T-Bills

                                                                    U.S. T-Notes (Short-term)

                                                                    U.S. Govt. IEnterprises
                                                                    (Large issue sizes)




90
                                                                    Bankers’ Acceptances

                                                                    Commercial Paper - A-1/P-1

                                           Degree of Liquidity
                                                                    Long-term Treasury Bonds
                                                                                                            Liquidity Risk




                                                                    U.S. Govt. Agency Bonds

                                                                    U.S. Govt. Enterprises
                                                                    (Smaller issue sizes and derivatives)
                                                                    Non-negotiable Bank CDs
                                                         Illiquid

 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 Portfolio Segments
 Cash buffer
    One month


 Short-term
    Normally 1-6 months on FY basis

 Longer term
    Normally 6-12 months on FY basis

 Bond funds

 Reserves or core
                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              91
                       Cash Instruments

 Bank accounts
      Non-interest bearing (current status until 1/1/14)
      Interest bearing
      Money market accounts
      sweeps

 Local government investment pools

 Money market mutual funds
    AAA rating for GASB reporting
    New regulations out in 2011

 Repurchase agreements


                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                      92
           A Special Note on CDs


 Depository versus brokered
  Depository is a relationship with bank
  Brokered is a security
    • FDIC weekly monitoring required
 DVP requirements
 Year basis
 Maturity date
 Collateral
 CDARS
                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         93
Special Note on Structured Securities


 Agencies create additional yield through structure
    Are these “derivatives”?


 Callable notes
    Various structures for callables


 Variable rate notes

 Indexed or floating rate securities

                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            94
                Special CD Issues
 Direct Purchase

 Brokered CD’s

 Collateral Issues

 GFOA YieldAdvantage

 CDARS

                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      95
   Passive & Active Management
 Both are disciplined ‘horizon investing’

 Passive – low to no market analysis
    Use of liquidity investment as buffer
    Cover next disbursement to build ladder
      • Matching assets and liabilities
    Roll maturities (ladder)
    Buy and hold


 Active – built on ladder but with market direction
    Use of liquidity investment as buffer
    yield curve placement, trading

                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            96
           Passive Management
 Buy and Hold
    Money is invested when it is available to a date
     when cash is needed.
    There is no further activity with that investment,
     except for reinvestment of income


 Liquid fear drives entities too short-
  term
   giving up valuable income opportunities




                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              97
         Passive Management

 Maturity Ladder
  Funds are invested to match liabilities
  At maturity, the funds are reinvested or rolled
  Buy and Hold


 Horizon investing
  Use cash forecast
  Stay within each horizon being addressed



                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       98
      Passive Management Pros/Cons
 Advantages of passive management
   Wear many hats
   Low cost of staff, training & equipment
   Best performance would be average
   Defensible


 Disadvantages of passive management
   Opportunity cost – loss
   Forego adjustments
   Ignores shifting spread relationships


                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            99
         The Lure of Lazy Liquidity

 It is December 2010,
    Pools yield 0.16%
    6 month CD yields 0.60% ( FDIC 0.85%)
    1 year CD yields 0.75% (FDIC 0.85%)


 In 6 months
    Pool = $641 in 6 months
    6 Mo CD = $3,000 - $4,250
    You just had a $2,359 opportunity loss




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               100
            Active Portfolio Management
 Creating and maintaining a portfolio structure
  using market to advantage

 Still requires initial asset-liability match for FY

 Striving to achieve reasonable market return
      Yield curve placement
      Sector weighting decisions
      Individual security selection
      Purchase Timing

                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                 101
    Active Management Strategies

   Yield curve analysis
   Riding the yield curve
   Spread analysis
   Quality downgrading
   Market timing
   Portfolio realignments




                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       102
   Active Management Pros/Cons

 Advantages of active management
   Realize reasonable relative yields
   Lock in high yields in falling rate environment
   Take advantage of shifting yield spreads


 Disadvantages of active management
   Risk
   Requires time, training and equipment
   Requires market view



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           103
               Benchmarking


 Measure of risk not yield/return in public
  investing

 Benchmark must match authorized
  investments and cash flow requirements

 Must be comprehensible and retreivable


                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                      104
Four Pillars of a Strategy


              Portfolio
              Duration


 Individua                    Term
 l Security                 Structure



               Sector
              Selection

                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                105
                Yield Curve Today

 How do you position investments?

 What are the risks?




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        106
        Other Investment Considerations

 What is the role of a broker?

 What is the role of an Investment Adviser?




                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       107
            Investing Caveats
 REMEMBER – SECURITIES ARE SOLD,
  NOT PURCHASED
  (Buyer beware)

 WATCH OUT FOR DEALS

 WHO DOES THE BROKER WORK FOR?



                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 108
               Portfolio Reporting
 Risk
    Volatility risk (change in market value)

 Recognition of policy parameters
    Liquidity
    Use of authorized securities
    diversification

 Performance
    Yield
    Benchmark comparison




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                109
    Accounting and Reporting Concepts

 Two types of securities
    Discount securities
    Fixed income securities (with a coupon)

 Two values
    Market value = price of you sell it
    Book value = your value net of amortization

 Three computations
    Interest accrual (coupons)
    Accretion (earnings)
    Amortization (expense)




                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  110
            Accounting for the Portfolio

 Buying securities
      At par = $1 for $1 face (price of 100) at par
      Below par = below $1 or 100            at a discount
      Above par = above $1 or 100            at a premium
      All affect the principal only

 Accounting for securities
    The book value at maturity must equal face value (100)
    Straight line amortization/accretion

 Earnings from securities are from:
    Earning from the changes in principal (premium/discount)
    Earning from interest accrued in a coupon (accrued interest)




                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     111
        Market Value Changes Daily

 Market value is quoted as principal only

 Market value equals:
     price x face value
     101.22 x $100,000 = $101,220
     98.3 x $100,000 = $ 98,300

 Certificates of Deposit
     always priced at 100
     Market will always equal face amount
     100 x $100,000 = $100,000




                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  112
                               Pricing

 Require an independent source

 Gains and Losses
    realized and unrealized

 Structured securities can be tricky
    Calls, step-ups, floaters, indexed, TIPS, pools
 Mortgage backed securities need more
    particularly subjective/judgmental pricing
    Prepayment speed assumptions, PSA rates
 Small issue pricing
    comparables



                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                    113
                          Earnings

 Earnings = amortization + accrued

 Note – bought at a premium
    Monthly amortization = daily amort. * # days plus
    Coupon earnings = coupon rate * face/12


 Note – bought at a discount
    Monthly accretion = daily accretion * # days plus
    Coupon earnings = coupon rate * face/12




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                114
                     What did I earn?

Income equals:

         Total Accrued + Net Amortization


 Investment Earnings
    recognizes coupon flow (accrued)
    recognizes original price of security (principal)

 Accrual basis
    does not include cash coupons




                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     115
        A Cardinal Reporting Rule

 Weight the Information
    Recognize impact of
      • size
      • Maturity
      • yield


 $ 10,000 CD          100 days
 $ 500,000 CD        10 days
                                       =     12 day WAM



                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           116
                  Weighted Average Maturity


 This measure is useful in determining the degree of market or
  interest rate risk.

 The longer the WAM, the more exposure to the market and more
  potential for capital gains and loses.

 Portfolio managers typically shorten or lengthen average maturities
   depending on their interest rate outlook.




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  117
         Calculating Weighted Average Maturity

        Multiply book value by days remaining to maturity

        Divide Sum by total book value of portfolio
 Current              Book   Remaining Days     to          Book x Days
           Value                   Maturity
    6,568,777                   14                      91,962,878
    3,211,222                   48                     154,138,656
    5,999,158                   300                   1,799,747,400
    1,425,177                   540                    769,595,580
    1,920,575                   270                    518,555,250
  19,124,909                                          3,333,999,764
3,333,999,764/19,124,909
                               174.3 days
Equals WAM =


                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                      118
                 Weighted Average Yield



 The weighted average yield will accurately describe the performance
  of a buy-and-hold portfolio.

 Weighted yield is a measure against your benchmark.

 This measure does not consider market value impact.




                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                    119
            Calculating Weighted Average Yield

             Multiply book value by purchase yield
           Divide Sum by total book value of portfolio

        Book Value                Purchase Yield           Book x Yield
    6,568,777                   2.25                     147,797
    3,211,222                   2.10                      67,435
    5,999,158                   1.99                     119,383
    1,425,177                   2.75                      39,192
    1,920,575                   3.20                      61,458
   19,124,909                                            435,265
435,265 / 19,124,909
Equals WAY =
                               2.27 %


                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                       120
                Interest Distribution

 Distribution of interest to various funds
 Replaces separate accounts for securities
 Distributed on a pro rata basis by percent of fund

 Accuracy
 Ease
 Timeliness




                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                 121
              Distributing Interest

 Total interest to be distributed = $10,000

Fund/              Avg*                 % of                 Interest
Project            Bal                  Total                Received

Fund A             $ 150,000 50.49 %               $ 5,049.00
Fund B             $ 40,000 13.40 %                $ 1,340.00
Fund C             $ 101,500 34.43 %               $ 3,443.00
Fund D             $ 5,000 1.68 %                  $ 168.00

                   $ 296,500                       $10,000.00


          *Use either month-end balance or average balance




                                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  122
                Reporting Issues

   Accuracy
   Timeliness
   Compliance
   Risk Identification
   Pricing
   Value Representation
   Formats

 Information




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           123
    Report Policy Parameters

 Key report parameters reflect your policy
    Maximum maturity limitations
    Maximum average maturity limitations
    Diversification goals and limits
    Performance benchmarks
    Philosophy (Strategy) on the portfolio
    Volatility (change in market value)


 Reports reflect risk tolerance




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          124
           Specific Requirements
 Compliance statement and signatures

 Detail
    Each investment position (including bank accounts) with maturity date
    Book and market values of each position at end of period
    Portfolio/fund investment belongs to

 Summary
    Beginning and ending market value of portfolio
    Earnings for the period
    Market sector summaries




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               125
          Inventory Report Elements
 Description of the holding
      Type (T-Bill, T-Note, FNMA, CD Bank XX, etc.)
      Par (face amount)
      Coupon rate
      Purchase yield
      Purchase date
      Maturity Date (and call date if applicable)

 Book value – amortized value of the security
 Market value – price it could be sold

 Earnings for the period
    Accrued + Net Accretion/Amortization




                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  126
     Diversification by Sector

70
                        By Market Sector
60

50
              Treas
40
                        Shows diversification
              Agency
30            CD
              Pool
20

10

0                       Illustrates Risks
                            Too short
                            Too long
                            Barbelled




                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 127
            Diversification by Maturity
       35

       30

       25                                                 O/n
       20                                                 0-3 mo
                                                          3-6 mo
       15                                                 6-9 mo
       10                                                 9-12 mo

        5

        0




 By maturity breakdown
 Shows coverage of liabilities

 Funds concentration on near-by liabilities
     Plus use of longer opportunities


                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   128
                  Pool/Fund Reporting

 Pools and Funds price and value
     designed to show risk to investor


 Constant dollar (money market equivalents)
     Price is always $1
     Days-to-maturity is always 1 day


 Mutual fund equivalents
     Price is the net asset value or share price that day
     Days to maturity is the WAM of the underlying portfolio




                                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                         129
                     Summary Report

 Beginning Book Value                   10,100,000
 Beginning Market Value                 10,400,000
 Beginning WAM                             240 days

   Ending Book Value                    10,150,000
   Ending Market Value                  10,500,000
   Change in market value                  100,000
   Earnings for Period                      4,160
   Ending WAM                                   280 days

 Period Average Yield                             4.50 %
 Period Average Benchmark Yield                   5.00 %

If you are more than 0.75% from your benchmark you should know why!

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               130
Cash Forecasting




     Long Beach, CA
   January 23-24, 2012
What is a Cash Flow Forecast?
 Projection of anticipated receipts

 Projection of anticipated disbursements

 Estimate of investable cash balances
   Liquid funds
   Core funds



                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        132
              Why a Cash Flow
 Match sources and uses of funds

 Improves investment earnings

 Ensures liquidity for disbursements

 Identifies short-term cash deficits

 Warns of impending budget problems


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            133
            Major Impediments

 Try to make it a full employment act

 Budget year focus not ongoing calendar year

 Distinguish between ledger balance and cash balance

 Unpredictability of revenues and expenditures

 Lack of information and communication



                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             134
   Types of Cash Flow Forecasts
 Annual forecast
   Sets monthly cash position
   Determine cash availability
   Provides monthly overview for investment decision-
    making
   Prepared for this fiscal year
   Can extend to three fiscal years




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         135
   Roll Up Cash Flow Forecasts
 Monthly forecast focus
    Estimates weekly cash position
    Determines cash available less than 30 days
    Monitors accuracy of annual forecast
 Weekly forecast
    Estimates daily cash position
    Determines cash available for investments of less than 7
     days
    Monitors accuracy of monthly forecast
 Daily forecast (not worth trouble)
    Predicts available fund balances
    Based on actual bank balances
    Operational in nature

                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             136
   Types of Cash Flow Forecasts
 Project-based forecast
   Provides monthly data on status of capital projects
   May require input from contractors or in-house
     project managers
   Can be stand alone or be combined into
     consolidated cash forecast




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          137
        Appropriate Formats
 Resources available

 Type and amounts of funds
    Predictable cash flows
    Erratic cash flows
    Liquidity considerations


 Need for accurate information

 Desire to improve cash management practices
                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          138
Using Your Cash-flow Analysis




                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
             139
   Consolidating Cash Forecasts

 Assumes flexibility in inter-fund borrowing

 Smoothes cash flow stream

 Improves investment earnings potential by pooling
  cash




                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          140
Tools for Cash Flow Forecasting
 Historical data from general ledger

 Historical data from bank and pool statements

 Current year budget

 Capital project spending projections

 Schedule of investment maturities and coupon payments




                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              141
                                                                                  SALES, AUTO, USE & PHOTO TAX RECEIPT ANALYSIS
                                                                                                       MONTH EARNED
      Month
      Earned           FY 2000           FY 2001        Change     FY 2002        Change      FY 2003         Change     FY 2004        Change     FY 2005        Change       FY 2006        Change     FY 2007        Change     FY 2008        Change




      January            375,432.70       417,608.41      11.23%    399,747.16      -4.28%      362,645.08      -9.28%    363,273.67       0.17%    427,168.10        17.59%    413,975.72      -3.09%    423,781.86      2.37%              -    #N/A
                A             1,370.58       1,571.45     14.66%       3,750.33   138.65%               -       0.00%        1,299.09   #DIV/0!        1,094.22      -15.77%       1,618.06     47.87%        978.11     -39.55%             -    #N/A
                U         34,720.97        35,059.31       0.97%     28,483.22     -18.76%       27,025.16      -5.12%     38,534.52      42.59%     30,021.65       -22.09%     39,601.83      31.91%     35,749.74      -9.73%             -    #N/A
                P             6,555.77       6,463.38     -1.41%       6,271.65     -2.97%              -       0.00%              -       0.00%             -         0.00%             -      0.00%              -      0.00%              -    #N/A
            Total        418,080.02       460,702.55      10.19%    438,252.36      -4.87%      389,670.24     -11.09%    403,107.28       3.45%    458,283.97        13.69%    455,195.61      -0.67%    460,509.71      1.17%              -    #N/A


   February              405,806.71       436,475.19       7.56%    367,875.93     -15.72%      378,778.08      2.96%     359,597.41      -5.06%    380,709.75         5.87%    422,900.82      11.08%    403,005.04      -4.70%             -    #N/A
                A             1,369.91       1,801.93     31.54%       1,291.55    -28.32%        1,990.14     54.09%        1,080.63    -45.70%       1,395.68       29.15%        980.67     -29.74%       1,297.91    32.35%              -    #N/A
                U         18,411.24        32,063.23      74.15%     23,990.61     -25.18%       22,630.38      -5.67%     35,830.35      58.33%     33,767.71        -5.76%     39,717.52      17.62%     34,480.10     -13.19%             -    #N/A
                P             6,440.85       6,488.54      0.74%       6,511.49     0.35%               -       0.00%              -       0.00%             -         0.00%             -      0.00%              -      0.00%              -    #N/A
            Total             6,440.85    476,828.89    7303.20%    399,669.58     -16.18%      403,398.60      0.93%     396,508.39      -1.71%    415,873.14         4.88%    463,599.01      11.48%    438,783.05      -5.35%             -    #N/A


      March              461,261.03       498,769.49       8.13%    412,115.45     -17.37%   594,761.87 (1)    41.89%     419,046.24      44.32%    445,412.09        44.32%    494,515.91      44.32%    458,279.15      -7.33%             -    #N/A
                A              736.09        1,837.34    149.61%       4,828.23   162.78%         1,051.58     -78.22%       1,060.47      0.85%        456.29       -56.97%       1,243.96    172.62%       1,187.42     -4.55%             -    #N/A
                U                 -        14,157.68    #DIV/0!      30,259.27    113.73%        30,601.47      1.13%      34,875.63      13.97%     38,594.00        10.66%     37,534.83      -2.74%     42,029.26     11.97%              -    #N/A
                P             2,283.92       3,277.26     43.49%       7,052.61   115.20%               -       0.00%              -       0.00%             -         0.00%             -      0.00%              -      0.00%              -    #N/A
            Total        464,281.04       518,041.77      11.58%    454,255.56     -12.31%      626,414.92     37.90%     454,982.34     -27.37%    484,462.38         6.48%    533,294.70      10.08%    501,495.83      -5.96%             -    #N/A


        April            454,885.61       484,525.13       6.52%    432,335.99     -10.77%      398,820.43      -7.75%    403,956.26       1.29%    433,030.79         7.20%    503,123.94      16.19%    459,537.83      -8.66%             -    #N/A
                A             1,916.77       1,697.54    -11.44%        999.65     -41.11%          140.84     -85.91%       1,156.99    721.49%       1,063.67       -8.07%       1,127.91     6.04%        1,081.70     -4.10%             -    #N/A
                U         97,237.36        62,098.65     -36.14%     27,970.31     -54.96%       28,914.78      3.38%      31,397.04       8.58%     46,310.70        47.50%     45,670.31      -1.38%     42,871.55      -6.13%             -    #N/A
                P         12,465.29        10,836.50     -13.07%     11,710.14      8.06%               -       0.00%              -       0.00%             -         0.00%             -      0.00%              -      0.00%              -    #N/A
            Total        566,505.03       559,157.82      -1.30%    473,016.09     -15.41%      427,876.05      -9.54%    436,510.29       2.02%    480,405.16        10.06%    549,922.16      14.47%    503,491.08      -8.44%             -    #N/A




Sales                   5,141,073.24     5,663,135.77     10.15%   5,395,902.10     -4.72%    5,369,940.99      -0.48%   4,797,348.52    -10.66%   5,394,214.66       12.44%   5,581,947.31     3.48%    5,656,443.63     1.33%    2,464,172.09      -56.44%
Auto                      15,393.80        19,026.07      23.60%     29,022.30     52.54%        11,372.47     -60.81%     17,491.20      53.80%     13,017.36       -25.58%     13,539.05      4.01%      14,439.97      6.65%        6,309.64      -56.30%
Use                      452,344.68       466,540.70       3.14%    380,467.65     -18.45%      356,592.95      -6.28%    395,794.70      10.99%    432,566.34         9.29%    487,259.78      12.64%    522,122.89      7.15%     229,858.34       -55.98%
Photo                     82,625.53        81,732.36      -1.08%     88,258.69      7.99%               -       0.00%              -       0.00%             -         0.00%             -      0.00%              -      0.00%              -    #N/A



GRAND
TOTAL                   5,691,437.25     6,230,434.90      9.47%   5,893,650.74     -5.41%    5,737,906.41      -2.64%   5,210,634.42     -9.19%   5,839,798.36       12.07%   6,082,746.14     4.16%    6,193,006.49     1.81%    2,700,340.07      -56.40%


                    MISCELLANEOUS RECEIPT CODES:
                    A = AUTO                                                                                                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                                                                                                                                                                     302
                    P = PHOTO                                                                                             142
                    U = USE
               Analysis of Monthly Receipt by Category
Property Tax
                                                                             Annual
  Year       January   % Total February    % Total   March      % Total       Total
  2001        $2,250     18.8%    $750        6.3%       $0        0.0%      $11,968
  2002        $2,500     18.9%    $800        6.1%       $0        0.0%      $13,228
  2003        $2,500     17.9% $1,000         7.0%       $0        0.0%      $13,966

3 Year Avg               18.5%               6.5%                   0.0%




                                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     143
   Projected Property Tax Receipts by Month
        Annual                   Percent                    Projected
Month Budget ($000)             Distribution                 Monthly

 Jan     $15,000      x           18.5%            =           $2,775
 Feb     $15,000      x            6.5%            =             $975
 Mar     $15,000      x            0.0%            =               $0



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          144
     Forecasting Disbursements
 Establish reasonable number of categories

 Compile historical data of actual monthly disbursements

 Identify significant changes

 Identify non-recurring items from prior years and for coming year

 Develop analysis of recurring monthly disbursements as a percent of
  annual

 Adjust historical distribution for known differences

 Include debt service payments



                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  145
          Analysis of Monthly Disbursements by Category
Payroll
                                                                        Annual
  Year       January   % Total February    % Total   March      % Total  Total
  2001        $1,025      8.4% $1,000         8.2%     $975        8.0% $12,238
  2002        $1,050      8.3% $1,000         7.9%   $1,025        8.1% $12,651
  2003        $1,125      8.2% $1,100         8.1%   $1,138        8.3% $13,720

3 Year Avg                8.3%               8.1%                   8.1%




                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     146
       Projected Payroll Disbursements by Month

        Annual                   Percent                     Projected
Month Budget ($000)             Distribution                  Monthly

 Jan     $13,614      x            8.3%             =            $1,130
 Feb     $13,614      x            8.1%             =            $1,103
 Mar     $13,614      x            8.1%             =            $1,103




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          147
                       Projected Monthly Disbursements
                      Jan      Feb      Mar      Apr       May         Jun       Total

Payroll            $1,130   $1,103   $1,103   $1,103    $1,144     $1,144    $13,614

Payables             $65      $65      $65      $65        $65        $65        $780

Capital Projects     $32      $33      $35      $38        $44        $47        $456

Debt Service         $23       $0       $0      $46         $0          $0        $86

Other                $25      $25      $25      $25        $25        $25        $540

Total              $1,275   $1,226   $1,228   $1,277    $1,278     $1,281    $15,476


                                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                      148
2004 G.O. Bond
Expenditure
Projections

    Project       Budget       1st Q       2nd Q        3rd Q         4th Q

Court remodel       300,000      50,000     150,000      75,000        25,000
Library addition 2,500,000      100,000     500,000   1,500,000       400,000
Parking structure 4,000,000   1,000,000   1,000,000   1,000,000     1,000,000
Total             6,800,000   1,150,000   1,650,000   2,575,000     1,425,000




                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   149
                 The Resulting Graph

80                                        40
60                                        30
40                                        20
20                                        10
  0              core                      0
      What is the apparent maximum maturity and WAM of each of these?


 A core is money you have not touched for an extended period – this allows you
  to extend the portfolio
 If you have no core you have a maximum maturity of one year or less

 Your WAM should fit the cycles of your cash flow
 Your WAM will set a benchmark
                                            GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   150
 Creating a Cash Flow Forecast
 Beginning balance of cash and investments

 Monthly revenue projections

 Monthly expenditure projections

 Projected net change

 Projected cumulative balance of cash and investments

 Schedule of current investments and coupon payments

                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             151
Cash Flow Forecast – Borrowing
  Identify timing and term of cash deficits

  Provide tool for planning and borrowing

  Warn of deficit trends




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            152
        Maintaining the Cash Flow
 Update at least quarterly

 Compare actual versus forecast

 Identify reasons for variances

 Adjust assumptions if warranted

 Follow up with department heads on capital project slippage




                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   153
Debt Management




     Long Beach, CA
   January 23-24, 2012
            Borrowing Strategies
 Lump-sum Financing

   Borrow entire amount needed to cover the deficit
    prior to its occurrence and retire the debt when
    sufficient revenues become available.

   Cost-effective when interest rates are going up.




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       155
                  Strategies


 As-needed Financing
   Borrow only as much money as needed to cover immediate
    expenditures.

   Advantage is that it can minimize borrowing and possibly
    reduce interest costs.

   Disadvantage is the cost of issuance.

   Cost-effective when interest rates are going down.



                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         156
                        Strategies
 Staged Financing
    Borrowing a required amount each month (or other time
     period) throughout the course of the deficit cycle.


 Debt Rollover
    Issuing an initial amount of debt and reissues the debt
     on a monthly(or other time period) basis to the extent
     that it is required.


 Consider AAA guarantee to reduce borrowing
  expense

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          157
          Short-term Debt Instruments
 Bank Loans

   Primary sources for financing temporary cash
    flow shortages

   Much of bank debt is unrated because it is a loan


    Internal – Fund Loans


                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         158
         Short-term Debt Instruments
 Credit Markets – Tax-exempt Note Financing
    Revenue Anticipation Notes (RANS) – Issued in anticipation of
     receiving non-tax revenues
    Tax Anticipation Notes (TANS) – Issued in anticipation of
     collecting revenues from taxes
    Grant Anticipation Notes (GANS) – Issued in anticipation of
     receipt of federal or state grant funds


 Liquidity Pools
    Created by short- and/or long-term issuance of state agency
    Often source for schools


                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            159
                    Arbitrage Issues
 Arbitrage is the practice of investing funds borrowed
  on a tax-exempt basis into higher-yielding, taxable
  securities


 Tax Reform Act of 1986
    Investing tax-exempt proceeds tightly regulated by federal
     tax laws
    Placed restrictions on the investment of proceeds from tax-
     exempt borrowing
    Placed requirement of reporting earnings from investment of
     tax-exempt proceeds

                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           160
           Evaluating Short-Term Debt

 Factors that affect market access:
    Creditworthiness of issuer
    Ability & experience of management in implementing a
     financing plan
    Favorable market environment - stable rates
    Demonstrated record of performance in credit markets


 Negative implications of short-term borrowing
    Long-term debt ratings may be jeopardized by excessive short-
     term borrowing


                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                              161
   Using Securities Portfolio for Liquidity
                   Needs
 Sell securities if cash needed
    Policy issue
    Business issue not a sin or weakness of plan


 Reverse repurchase agreements

 BANS and TRANS
    Using the short term rates effectively




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               162
Internal Treasury Controls




         Long Beach, CA
       January 23-24, 2012
           Internal Control

There are two ways to steal funds from
         governments…


    On the way in and on the
            way out!




                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                 164
                   Internal Control

 Systems and procedures for internal controls

 Vital to cash management

 What can happen when systems are not in place?




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         165
            Identifying Potential Risks
 What loss could occur?

 How could it occur?

 What is the probability it might occur?

 What are the possible consequences?

 What conceivable situations could occur?

                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           166
                          Potential Risks
 Failure of counter-parties
     Banks
     Merchant service providers

 Embezzlement and Conversion
       Cash
       Property
       Securities
       Dealings with outside parties (kickbacks)

 Transaction errors
     Incorrect transaction amount
     Incorrect payees
     Wire transfer failures


                                             GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                   167
               Employee Controls

 Separate of transaction authority
    Separate transaction, accounting, and recordkeeping
 Delegate authority clearly
    Investment decision-making
    Subordinate staff limitations
    mandatory vacations/job rotation
    perform work during period
 Get and match written confirmations on all transactions
 Limit access to cash




                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                     168
                   Potential Risks
 Judgment errors
    Inappropriate or misguided securities selections
    Poor market timing
    Selection of insolvent or inappropriate dealer
    Depository failure




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            169
                     Potential Risks

 Cover-ups
   Fraud triangle
      • Motive (Pressure)
      • Opportunity
      • Rationalization
   Delaying or avoiding recognition of loss




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            170
               Organizational Design
 Segregation of duties
   Advantages
      • Barrier to collusion
      • Checks and balances


   Disadvantages
      • Difficult in smaller organizations
      • Functional fragmentation in larger organizations




                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             171
                   Design for Control

 Segregation of duties
   Examples
      •   Authorization of transactions
      •   Execution of transactions
      •   Recording of transactions
      •   Reconciling of transactions
      •   Maintaining custody of assets
      •   Cross training
      •   Vacations



                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               172
                 Design for Control
 Authorizations
   Clear lines of authority and authorizations
   Level of authorizations spelled out in procedures
   One “go-to” person for questions

 Compensating controls
   Mandatory vacations
   Rotating jobs
   Internal audit


                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          173
           Pre-employment Screening

 Check references and credentials

 Strict screening for financial positions with bona fide
  security requirements
   Check background for criminal activity

 Test skills, knowledge and accuracy

 Require drug tests

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           174
                             Training
 Provide training
     minimize loss from judgment errors and technical mistakes


 Establish and train staff on formal procedures and internal controls
     Evaluation points


 Train managers to detect erratic employee behavior
     Work with internal auditors


 Mandate reporting of perceived impropriety or errors
     Action on cashiers to accountants



                                          GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                    175
   Internal Control for Cash Collections
 Require use of numbered receipts
     Where receipts are impossible use counters or other device


 Use ACH for collections

 Limit access to registers and terminals
     Assign individual tills and require sign-offs


 Conduct periodic audits of cash drawers

 Balance terminal cash totals and receipts at each close
                                 GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                176
Internal Control for Cash Collections
 Secure cash prior to deposit
     Smart safes?


 Protect cash in transit to bank
    Armored car service limits liability
    Remote deposit services

 Timely reconciliation
     Match deposit slips and bank advices
     Reconcile cash receipts to bank statements


 Segregate collection from disbursements and accounting

                                      GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             177
Internal Control for Cash Disbursements

   Monitor petty cash or eliminate it preferably
   Limit use of manual checks
   Control access to check stock or new stock
   Checks security features
     Tamper resistant checks
     Three-dimensional holograms
     Artificial watermarks
     “Void” copy feature
     Micro-printing
     Bar codes



                                    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           178
Internal Control for Cash Disbursements

 Use fraud prevention bank services
   Positive pay
      • Liability issue for the government
      • Entity sends bank electronic list of checks issued
      • Payee verification services
   ACH Blocks and Filters
      • ACH blocks – no ACH debits allowed
      • ACH filters – only pre-approved debits allowed
          – Ranges or originators etc



                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               179
          Internal Controls for Cash
                Disbursements
 Reconcile all accounts promptly

 Segregate reconciliation from deposit and check writing

 Increase use of ACH collections and disbursements

 Establish procedures for wire transfers



                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         180
            Technology Needs Controls


   Wire Transfer Agreements
   Control and changes in PINs
   Log of system transactions
   Dollar Limits on accounts
   Positive Pay on accounts
   Filters and Blocks on ACH
   Credit cards, checks, fraud
   PCI compliance
   Remote Deposit




                                        GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                  181
    Internal Controls: Electronic Funds
                 Transfer
 Use bank generated PIN numbers
   Control access to PINs
   Change PINs frequently
   Require individual PINs for each employee
   Use secured tokens for random codes

 Have systems which report changes
 Electronic transfers
   Institute initiation, approval and release authorities

                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                           182
  Internal Controls for Electronic Funds
                 Transfer
 Phone transfers
    Require call back confirmation from the bank
    Consider limiting this approach to backup only

 On-line transfers
    Less expensive, better controls and better reporting

 Establish dollar limits for authorized users

 Create repetitive templates for repeat transactions

 Independent confirmations to different department
                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                183
     Internal Controls for Investments
 Investment policy

 Cash flow forecast

 Delivery versus payment and Independent safekeeping

 Competitive transactions

 Credit analysis and monitoring of securities
     Monitoring of FDIC status on banks

 Timely reporting


                                           GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                184
           The Trade Ticket Control


 Your best documentation
 Description of the security
 Accounting information
 Confirmation and verification of trade
 Competitive bidding documentation




                               GOVERNMENT FINANCE OFFICERS ASSOCIATION
                        185
                           TRADE TICKET
                       City of Anywhere, OK


   Trade Information                            Accounting Information


Settlement Date:                                PAR:


Fund:                                           Premium/<Discount>:


Security:                                       Principal:
 CUSIP:


                                                Accrued:
Coupon:


Maturity:                                       Net Settlement:




Competitive Bidding:                            Daily Amortization:
                   @
                   @                            Daily Accrued:
                   @
                                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                                              186
          Counterparty Risk

 Contract Protection

 Banks
    Clearing, service provision, custody, collateral
 Custodians
    Processing control and reporting
 Broker/Dealers
    Repurchase Agreements
    Policy Review Certification




                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
                          187
                      Banking Controls


•   Reconciliation
•   Account analysis
•   Payment methodology
•   Timely Reporting
•   Availability Policies
•   Independent safe-keeping
•   Collateral
    •   level
    •   maintenance
    •   receipts




                                  GOVERNMENT FINANCE OFFICERS ASSOCIATION
                            188
           Safekeeping and DVP
 Using your bank as a broker
     Better to not use in order to perfect ownership

 Never allow a broker/dealer to hold your securities
     It is illegal: must use DVP

 DVP is timing on the release of funds
 DVP is independence on safe-keeping

 Check your custody reports regularly.




                                         GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               189
         Safekeeping Controls

 Broker/dealer safekeeping
    Cheap but risky and illegal!
 Bank Safekeeping
    Is linked to specific DDA Account
 Trust Safekeeping
    Expensive fiduciary costs/controls
 Federal Reserve will not safekeep except for Treasury Direct
     They hold only your pledged collateral


 An Independent Third Party is Critical




                                       GOVERNMENT FINANCE OFFICERS ASSOCIATION
                             190
               Written Procedures

 Describe organizational structure

 Include governing statutes, regulations, policies, etc.

 Describe organizational structure and duties of
  personnel

 Specify limitations of employee authority

 Detail procedures for all activities

 Create a flowchart of processes
                                   GOVERNMENT FINANCE OFFICERS ASSOCIATION
 SAS 104-111               191
           Written Procedures

Define required documentation

 Describe forms and include samples

 Include timelines for report preparation and
  distribution

 Outline back-up and disaster recovery procedures

 Require regular reviews and updates
                              GOVERNMENT FINANCE OFFICERS ASSOCIATION
                       192
      Implementation of Internal Control

 Employees must buy into and understand the need for
  controls

 Procedures should be understandable and make sense

 Consequences for noncompliance or willful neglect of
  procedures should be established and enforced




                                GOVERNMENT FINANCE OFFICERS ASSOCIATION
                         193
           Monitoring of Internal Control
 Internal audits
   Authorization and execution
   Recording and accountability
   Exception monitoring
   Safeguards

 External audits
   Routinely change external audit firms

 Make sure the cost of establishing internal controls
  does not exceed the benefit    GOVERNMENT FINANCE OFFICERS ASSOCIATION
                               194
               Written Procedures

   Describe organizational structure
   Identify functions
   Assign responsibilities
   Detail procedures for all transactions
   Define required documentation
   Describe forms and include samples
   Require regular reviews and updates
   Keep to one page – not a manual




                                     GOVERNMENT FINANCE OFFICERS ASSOCIATION
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