Investment 101 - The Foundation - 2011

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Investment 101 - The Foundation - 2011 Powered By Docstoc
					Investment 101 –
The Foundation
                   Sarah C. Koser,
                  CPA, CGFO, CPFO
          Yield


        Liquidity


         Safety
Session Objectives
   Detailed look at Statutory Investment
    Policy requirements.
   Review GFOA Best Practice for “Creating
    an Investment Policy (2010)”.
   Review elements of Citrus County’s
    investment policy relative to the
    Statutory requirements.
     Legislative History
   Prior to 1993 – Vendor wanted to add
    “open end mutual funds” to the list of
    authorized investments.

   1993 – FGFOA supports adoption of
    a model investment policy statute.
    Legislative History

   1994 – Legislature adds “open end
    mutual funds” to the list of
    authorized investments for all
    local governments.

   1994 (Fall)
       Derivatives Crisis occurs, most
        notably in Orange County, California
Legislative History
(Continued)

         1995 – Legislature
          passes model
          investment policy
          statute
           (Section 218.415)
 Local Government
 Investment Policies

Section 218.415 –
  Provides for the adoption of Local
  Government Investment Policies
  which contains 15 elements:
     Element 1 - Scope
   Applies to funds under the control
    of the unit of local government in
    excess of those required to meet
    current expenses.
   Does not apply to pension funds,
    including 175 and 185 plans.
   Does not apply to debt proceeds.
      Element 2
Investment Objectives
   Safety of Capital
   Liquidity of Funds
   Investment Income (Yield)
       Element 3
Performance Measurement
   Policy shall specify
    performance measures as are
    appropriate for the nature and
    size of the public funds within
    the custody of the unit of local
    government.
    Element 4 - Prudence and
        Ethical Standards
    Policy shall describe the level of
     prudence and ethical standards to
     be followed by the unit of local
     government in carrying out its
     investment activities.
    The unit of local government shall
     adopt the Prudent Person Rule.
Element 4 - Prudence and
    Ethical Standards
  "Investments should be made with
  judgment and care, under
  circumstances then prevailing, which
  persons of prudence, discretion, and
  intelligence exercise in the
  management of their own affairs, not
  for speculation, but for investment,
  considering the probable safety of
  their capital as well as the probable
  income to be derived from the
  investment."
     Element 5 - Listing of
    Authorized Investments
    Shall list authorized
     investments.
    Subject to the provisions of
     subsection (16).
    Investments not listed in the
     investment policy are prohibited.
     Element 5 - Listing of
    Authorized Investments
   Derivative products are authorized,
    but personnel must have:
     Developed sufficient understanding of
      the derivative products and
     Have the expertise to manage them.
     Element 5 - Listing of
    Authorized Investments
    For purposes of this subsection,
     a "derivative" is defined as a
     financial instrument the value of
     which depends on, or is derived
     from, the value of one or more
     underlying assets or index or
     asset values.
     Element 5 - Listing of
    Authorized Investments
    Reverse repurchase agreements.
       Policy must limit to:
           Transactions in which the proceeds are
            intended to provide liquidity.
           Local government has sufficient
            resources and expertise.
     Element 5 - Listing of
    Authorized Investments
    Authorized Investments
     (Subsection 16):
       The Local Government Surplus Funds
        Trust Fund.
           OR any intergovernmental investment pool
            authorized pursuant to the Florida Statute
            163.01.
 Element 5 - Listing of
Authorized Investments
    Securities and Exchange Commission
     registered money market funds.
    Interest-bearing time deposits or savings
     accounts in qualified public depositories.
    Direct obligations of the United States
     Treasury.
    Federal agencies and instrumentalities.
    Bonds, notes or instruments backed by
     the full faith and credit of the
     government of Israel.
 Element 5 - Listing of
Authorized Investments
    Securities of, or other interests in, any
     open-end or closed-end management-
     type investment company or investment
     trust.
        Must be registered under the Investment
         Company Act of 1940.
        Portfolio is limited:
           Obligations of the US Government.
           Repurchase agreements fully collateralized
             by US Government obligations.
        Investment company or Trust take delivery of
         collateral directly or through an authorized
         custodian.
 Element 5 - Listing of
Authorized Investments
      Other investments authorized by law or
       by ordinance for a county or a
       municipality.
      Other investments authorized by law or
       by resolution for a school district or a
       special district.
Element 6 - Maturity and
Liquidity Requirements
     Must structure to provide
      sufficient liquidity to pay
      obligations as they come due.
         Attempt to match investment
          maturities with known cash needs
          and anticipated cash-flow
          requirements.
      Element 7
Portfolio Composition
   The investment policy shall
    establish guidelines for
    investments and limits on:
     Security issues
     Issuers
     Maturities
       Element 8
Risk and Diversification
    Diversified to control the risk of
     loss resulting from over-
     concentration of assets in:
        Specific maturity
        Issuer
        Instrument
        Dealer
        Bank through which financial
         instruments are bought and sold.
       Element 8
Risk and Diversification
     Diversification strategies shall be
      reviewed and revised
      periodically.
  Element 9 - Authorized
Investment Institutions and
        Dealers
    Specify the authorized entities
     from whom securities may be
     purchased, including:
      Securities dealers
      Issuers
      Banks
  Element 9 - Authorized
Investment Institutions and
        Dealers
 Possible Criteria:
     Primary dealers (20)
     Regional dealers
     Creditworthiness
     Qualified Public Depositories
Element 10 - Third Party
 Custodial Agreements
    Securities should be held with a
     third party.
      Properly designated as an asset of the
       unit of local government.
      Withdrawals shall be made by an
       authorized staff member of the unit
       of local government.
      Securities transactions must be made
       on a "delivery vs. payment" basis.
  Element 11 – Master
Repurchase Agreement
   Requires Execution of a Master
    Repurchase Agreement:
     All approved institutions and dealers
      must execute agreement.
     All repurchase agreement
      transactions must adhere to the
      agreement.
                Element 12
             Bid Requirement
   Staff must:
       Determine an approximate maturity date
           cash-flow needs
           market conditions
     Analyze and select one or more optimal
      types of investment
     Competitively bid the security in question
      when feasible and appropriate
     Select bid determined to best meet
      investment objectives
             Element 13
         Internal Controls
   Written system of internal controls
    and operational procedures designed
    to prevent losses of funds from:
     Fraud
     Employee Error
     Misrepresentation by Third Parties
     Imprudent actions by staff

   Periodic review by independent
    auditors as part of financial audit
      Element 14
Continuing Education
    Policy requirement:
        Annually complete 8 hours of
         continuing education
            Subjects or courses of study related to
             investment practices and products.
        Who:
            Staff responsible for making investment
             decisions
            OR the chief financial officer
Element 15 - Reporting
 Shall provide for preparation of
  appropriate periodic reports which
  shall include:
   Securities in the portfolio by class or
    type
   Book value
   Income earned
   Market value as of the report date
 Reports shall be available to public
  Authorized Investments
No Written Investment Policy
    May only invest in:
        The Local Government Surplus
         Funds Trust Fund
            OR any intergovernmental investment
             pool authorized by F.S. 163.01
      SEC registered money market funds
      Interest-bearing time deposits or
       savings accounts
      Direct obligations of the US Treasury
Miscellaneous Provisions of
  Section 218.415, F.S.
   Securities; Disposition (Safekeeping)
   Sale of Securities
   Preexisting Contract (October 1, 2000)
   Preemption (Section 218.415 takes
    precedence over any conflicting special
    act, municipal charter, or other law
   Authorized Deposits
Miscellaneous Provisions of
  Section 218.415, F.S.
     Audits
       As part of audit pursuant to Florida
        Statute 218.39
       Auditor shall report on compliance
        with this section.
     GFOA Best Practice
Creating an Investment Policy
            (2010)
Background
 Written investment policy single most
  important element in public funds
  investment program.
 Should describe objectives:
   Safety
   Liquidity
   Yield
     GFOA Best Practice
Creating an Investment Policy
Recommendation
 All governments adopt written investment
  policy – review and update as necessary
 Process
   Examine State Statutes on Investment of
    Public Funds
   Examine State Statues on Public Funds
    Collateral
   Review sample investment policies
     GFOA Best Practice
Creating an Investment Policy
 Drafting an investment policy – key questions
    Authorized investment officers
    Standard of care
    Eligible instruments
    How to ensure diversification
    Maximum term for any given investment
    What type of internal controls
    Composition of investment committee, if any
    Investment/performance reports
    Benchmarks
    Investment advisor
    Criteria for start/end investment relationship
     GFOA Best Practice
Creating an Investment Policy
  Reviewed  by appropriate parties
  Adopted by governing body
  Establish written investment procedures
  Annual review of policy

 Approved by the GFOA’s Executive Board, October 15, 2010.
Sample Investment Policy
      Citrus County, Florida
Element 1 - Scope

II. SCOPE
    In accordance with Section 218.415, Florida Statutes,
    this Policy applies to all financial assets, of the County
    with the exception of Pension Funds and funds related to
    the issuance of debt where there are other existing
    policies or indentures in effect for such funds. Funds
    held by state agencies (e.g., Department of Revenue)
    are not subject to the provisions of this Policy.
Sample Investment Policy
Element 2 – Objectives
III. INVESTMENT OBJECTIVES

  Safety of Principal The foremost objective of this investment
  program is the safety of the principal of those funds within the
  portfolio. . .

  Maintenance of Liquidity The portfolio shall be managed in such a
  manner that funds are available to meet reasonably anticipated cash
  flow requirements . . .

  Return on Investment The investment portfolio shall be designed
  with the objective of attaining a market rate of return throughout
  budgetary and economic cycles. . . Return on investment is of least
  importance compared to the safety and liquidity objectives described
  above.
Sample Investment Policy
Element 3 – Performance Measurements

XVI.   PERFORMANCE MEASUREMENTS
       In order to assist in the evaluation of the portfolio’s
       performance, the County will use performance benchmark. . .

       A.     The State Board of Administration’s Local Government
              Surplus Funds Trust Fund (“SBA Pool”) will be used as
              a benchmark as compared to the portfolios’ net book
              value rate of return for current operating funds.

       B.     Investment performance of funds designated as core
              funds and other non-operating funds that have a
              longer-term investment horizon will be compared to an
              index comprised of U. S. Treasury or Government
              securities. . .
Sample Investment Policy
Element 4 – Prudence & Ethical
 Standards

V. STANDARDS OF PRUDENCE

  The standard of prudence to be used by the Authorized Staff shall
  be the “Prudent Person” standard and shall be applied in the context
  of managing an overall portfolio. . .

       Investments shall be made with judgment and care, under
       circumstances then prevailing, which persons of prudence,
       discretion and intelligence exercise in the management of their
       own affairs, not for speculation, but for investment,
       considering the probable safety of their capital as well as
       the probable income to be derived from the investment.
Sample Investment Policy
Element 4 – Prudence &
 Ethical Standards
 (continued)
VI.   ETHICS AND CONFLICTS OF INTEREST

      Employees involved in the investment
      process shall refrain from personal business
      activity that could conflict with proper
      execution of the investment program, or
      which could impair their ability to make
      impartial investment decisions. . .
  Sample Investment Policy
Element 5 – Listing of Authorized Investments &
Element 7 Portfolio Composition.
XV. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION
    A.   The State Board of Administration’s Local Government Surplus Funds Trust Fund (“SBA Pool”)
         1.         Investment Authorization
                    Authorized Staff may invest in the SBA
         2.         Portfolio Composition
                    A maximum of 100% of available funds may be invested in the SBA.
    B.   United States Government Securities
         1.         Purchase Authorization
                    Authorized Staff may invest in negotiable direct obligations, or obligations the
                    principal and interest of which are unconditionally guaranteed by the United
                    States Government. Such securities will include, but not be limited to the
                    following:
                                Cash Management Bills
                                Treasury Securities – State and Local Government Series (SLGS)
                                Treasury Bills
                                Treasury Notes
                                Treasury Bonds
                                Treasury Strips
         2.         Portfolio Composition
                    A maximum of 75% of available funds may be invested in the United States
                    Government Securities.
         3.         Maturity Limitations
                    The length to maturity of any direct investment in the United States
                    Government Securities is five (5) years from the date of purchase. Maturities
                    longer than five (5) years require the Clerk’s approval.
Sample Investment Policy
Element 5 – Listing of Authorized Investments &
Element 7 Portfolio Composition.

XV.    AUTHORIZED INVESTMENTS AND PORTFOLIO
       COMPOSITION
  C.   United States Government Agencies (full faith and credit of the
       United States Government)
  D.   Federal Instrumentalities (United States Government
       sponsored agencies which are non-full faith and credit).
  E.   Non-Negotiable Interest Bearing Time Certificates of Deposit
  F.   Repurchase Agreements
  G.   State and/or Local Government Taxable and/or Tax-Exempt
       Debt
  H.   Registered Investment Companies (Money Market Mutual
       Funds)
  I.   Intergovernmental Investment Pool
Sample Investment Policy
Element 6 – Maturity & Liquidity Requirements

X. MATURITY AND LIQUIDITY REQUIREMENTS

  A. . . . Investments of current operating funds shall
     have maturities of no longer than twenty-four
     (24) months. . . . bond reserves, construction funds,
     and other non-operating funds (“core funds”) shall
     have a term appropriate to the need for funds and in
     accordance with debt covenants. . . . core funds
     with maturities longer than five (5) years requires the
     Clerk of the Circuit Court’s approval prior to
     purchase. . . . underlying securities of a repurchase
     agreement will follow the requirements of the Master
     Repurchase Agreements.
Sample Investment Policy
Element 6 – Maturity & Liquidity Requirements

X. MATURITY AND LIQUIDITY REQUIREMENTS

  B.   Investments do not necessarily have to be made for the same
       length of time that the funds are available. The basic criteria . .

       1.      Keep maturities short in a period of constantly rising
               interest rates . . .
       2.      Keep maturities short in a period of a flat or an inverted
               treasury yield curve.
       3.      Maturities should be lengthened when the treasury
               yield curve is normal . . .
       4.      Maturities should be lengthened when interest rates
               are expected to fall . . .
       5.      The yield curves of the market should be analyzed for
               significant breaks in yields . . .
Sample Investment Policy
Element 8 – Risk & Diversification

XI.   RISK AND DIVERSIFICATION

      Assets held shall be diversified to
      control risks resulting from over
      concentration of assets in a specific
      maturity, issuer, instruments, dealer, or
      bank . . .
Sample Investment Policy
Element 9 – Authorized Investment Institutions and Dealers

IX. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS

  The Finance Director or his designee and/or the Clerk’s Investment
  Advisor shall only purchase securities from financial institutions,
  which are qualified as public depositories by the Treasurer of the
  State of Florida, or institutions designated as “Primary Securities
  Dealers” . . .

  Authorized Staff and investment advisors shall only enter into
  repurchase agreements with financial institutions that are state
  qualified public depositories and primary securities dealers as
  designated by the Federal Reserve Bank of New York.

  For the investment of debt proceeds, Financial Institutions shall be
  selected pursuant to the debt covenants.
Sample Investment Policy
Element 10 – Third Party Custodial Agreements

XVIII. THIRD-PARTY CUSTODIAL AGREEMENTS

  All securities, with the exception of certificates of
  deposits, shall be held with a third party custodian . . .

  The Clerk will execute third party custodial agreement(s)
  with its bank(s) and depository institution(s). . .

  The custodian shall accept transaction instructions only
  from those persons who have been duly authorized by
  the Clerk of the Circuit Court . . .

  The custodian shall provide the Clerk of the Circuit Court
  with safekeeping reports that provide detail information
  on the securities held by the custodian. . .
Sample Investment Policy
Element 11 – Master Repurchase
  Agreements
XII. MASTER REPURCHASE
     AGREEMENT

   The Clerk will require all approved
   institutions and dealers transacting
   repurchase agreements to execute and
   perform as stated in the Master
   Repurchase Agreement . . .
Sample Investment Policy
Element 12 – Bid Requirements

XIV. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS

   . . . a minimum of three (3) reputable, qualified, and financially sound banks and/or dealers must
   be contacted and asked to provide bids on securities in question . . .
   However, on an exception basis, securities may be purchased utilizing the comparison to current
   market price method. . . . providers include . . .

   A.     Telerate Information System,
   B.     Bloomberg Information Systems,
   C.     The Wall Street Journal . . .
   D.     Daily market pricing . . .

   Selection by comparison to a current market price . . . only be utilized when . . . competitive
   bidding would inhibit the selection process.

   Examples . . .
   A.    When time constraints . . .
   B.    When no active market exists . . .
   C.    When a security is unique to a single dealer . . .
   D.    . . . new issues . . .

   Overnight sweep repurchase agreements will not be bid . . .
Sample Investment Policy
Element 13 – Internal Controls
VII.   INTERNAL CONTROLS AND INVESTMENT
       PROCEDURES
       The Finance Director shall establish a system of internal
       controls and operational procedures to protect the County’s
       assets and ensure proper accounting and reporting . . .
       Independent auditors shall conduct a review of the system of
       internal controls . . .
       Separation of functions . . .
       Custodial safekeeping . . .
       Clear delegation of authority to subordinate staff members . . .
       Written confirmation of electronically initiated transactions for
       investments and wire transfers . . .
       Documentation of transactions and strategies . . .
Sample Investment Policy
Element 14 – Continuing Education
VIII. CONTINUING EDUCATION
      The Finance Director and appropriate
      Authorized Staff shall annually
      complete 8 hours of continuing
      education in subjects or courses of
      study related to investment practices
      and products.
Sample Investment Policy
Element 15 - Reporting

XVII.   REPORTING
        The Finance Director and/or Investment Advisor shall provide the
        Clerk and/or the County with quarterly investment reports. . .

        A.       A listing of individual securities held . . .

        B.       Percentage of available funds represented by each
                 investment type

        C.       Coupon, discount or earning rate

        D.       Average life or duration and final maturity of all investments

        E.       Par value and market value

        On an annual basis, the Finance Director or designee shall prepare
        and submit to the County a written report on all invested funds . . .

        The annual report will show performance . . .
     Information Resources

   Florida Statutes 218.415 –
    http://www.leg.state.fl.us/STATUTES
   GFOA Best Practices –
    http://www.gfoa.org
   FGFOA Small Government Resource
    Manual & Sample Policies -
    http://www.fgfoa.org/resources
        Contact Me


Sarah C. Koser, CPA, CGFO, CPFO

         (352)341-6449

    skoser@clerk.citrus.fl.us

				
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