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Chapter 1Overview of Cash Management
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Objectives
� Recall the management of cash in the treasury management process
� Identify the two cycles and components of the treasury management process
� Recognize the goals of a treasury manager
4
3
Introduction
Treasury management involves the management of cash from the time revenue is earned to the time an expenditure payment clears the bank.
5
Treasury management and cash management are used interchangeably.
Basic Functions
There are three basic functions of cash managers:
• Collecting revenues promptly and accurately
• Disbursing monies owed
• Investing in the interim period between collection and disbursement
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4
Goals of a Treasury Manager
Simply stated – the goals of a treasury manager are:
� Safety
� Liquidity
� Legality
� Yield
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Safety
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� The cash manager must be aware of all risks.
� Mistakes can damage reputation of government.
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Liquidity
We exist to provide services to our residents.
We collect taxes and fees in order to provide services.
The cash manager must ensure that cash is available to support services.
Must balance meeting cash needs and maximizing each dollar.
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Legality
All applicable federal and local requirements must be followed.
The treasury manager must be aware of all legal constraints and requirements.
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Yield
A good cash manager will seek the highest yield with the least amount of risk.
More services can be provided if more cash is collected/earned.
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Constraints to Goals
� Politics
� Can determine what cash collection and disbursement procedures are acceptable.
� Can determine investments.
� Can even determine selection of bank.
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Continued on next slide
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Constraints to Goals
� Past practices
� Unwillingness to change is sometimes difficult to overcome.
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Continued on next slide
Constraints to Goals
� Risk
� Defined as the possibility of loss.
� Usually, the greater the risk taken, the greater the return.
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Treasury Management Process
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Cyclical process with a systems and an operating cycle operating at the same time.
See diagram on next slide.
Collecting Revenues
Making Investments
Tracking Investments
Making Disbursements
Monitoring, Evaluating &
Auditing
Forecasting Cash Flow
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Establishing Objectives
Establishing Bank & Broker Relations
Establishing Accounting Systems
Evaluating Needs
Establishing Policies
Operating Cycle
Systems Cycle
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Systems Cycle
Actions are infrequent.
Primary elements:
• Evaluating needs.
• Establishing policies.
• Establishing annual objectives.
• Establishing relationships with financial institutions.
• Establishing accounting systems.
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Evaluating Needs
State the objectives of the treasury management program.
Define long-term (3-5 year) cash flow pattern that the government can expect.
• Identify general trend in revenues and expenditures.
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10
Establishing Policies
Improves consistency, creates accountability and helps insure that laws and ordinances are followed.
Most common: investment policy
• State objectives of the investment activity, assign responsibility, establish internal controls, define safekeeping and collateral procedures, and establish a system of monitoring and reporting performance.
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Continued on next slide
Establishing Policies
Less common: cash availability policy
• Revenue collection
• Should state the methods used to collect revenues and establish procedures for collecting overdue accounts.
• Expenditures
• Should establish regular payroll and expenditure dates.
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11
Establishing Annual Objectives
Objectives should cover four measures of performance:
• Availability
• Difficult to set but can be based on something simple like maintaining an excess cash balance equal to one week’s expenditures.
• Yield
• Absolute percentage or as an amount above or below an index rate.
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Continued on next slide
Establishing Annual Objectives
• Dollar return
• Combines measures of cash availability and investment yield to set a target for total interest earnings for the year.
• Program efficiency
• Should state the percentage of idle cash to keep and invest during the year.
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Establishing Relationships with Financial Institutions
� Policies should establish minimum requirements for brokers, dealers and banks.
� There is a political element involved regardless of the selection process.
� Encourage competition through a formal selection process.
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Continued on next slide
Establishing Relationships with Financial Institutions
Selection process for brokers and dealers is usually less formal:
• Relationships with multiple dealers
• Investments are generally of a short-term nature
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Establishing Accounting Systems
Four systems are important to the cash manager
• Cash Accounting System
• Investment Accounting System
• Receivables System
• Payables System
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Cash Accounting System
Tracks cash entering and leaving.
Must assign all cash transactions to the proper fund and bank account.
Easily reconcilable to other accounting systems and to bank statements.
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Investment Accounting System
Provide a record of all investments made by account, fund, investment institution and type, maturity and yield.
Should be able to appropriate interest between funds.
Should provide reports that match requirements of the investment policy and annual objectives.
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Receivables and Payables Accounting Systems
Can help cash manager prepare accurate cash flow forecasts and make informed decisions.
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15
Operating Cycle
Series of regular, repetitive actions taken to manage cash:
•Forecasting cash flows
•Collecting revenues
•Making investments
•Tracking investments
•Making disbursements
•Monitoring, evaluating and auditing
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Forecasting Cash Flows
Goal is to identify revenue and expenditure streams over a given period in the future.
The forecasted cash balances are used to select investment amounts and maturities or in the case of a cash deficiency, the need for borrowing of funds.
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Collecting Revenues
A government needs to develop systems that will ensure revenues are received in a timely manner, credited to the proper fund, and deposited into the correct bank account as quickly as possible.
Offices that collect and deposit revenue should be limited.
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Making Investments
Manager must use judgment in determining the amount, mix of funds, maturity, type of investment, and financial institution.
Cash manager must rely on experience as well as the information available from internal and external sources, the cash flow forecast, and the accounting system in making investment decisions.
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17
Tracking Investments
Treasury managers must keep track of all outstanding investments.
For investments that are collateralized, the manager should regularly verify that the market value of the collateral exceeds the amount invested.
• This must be done on a daily basis
If the investment accounting system is inadequate, tracking investments is difficult.
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Making Disbursements
Manager must be able to anticipate upcoming expenditures by working with the payroll and payables staff and accounting systems.
Managers have to consider the timing of disbursement float.
• Time between the day a payment is issued and the time funds leave the government’s bank account for the payment.
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Continued on next slide
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Making Disbursements
Disbursement pattern is the driving force that determines liquidity requirements;
Well worth the manager’s close attention.
35
Monitoring, Evaluating and Auditing
Monitoring normally consists of a check on receipts, cash balances, investment balances, and disbursements each day.
• Compare these values to the values that yesterday’s investment decisions were based on to determine the validity of those decisions.
36
Continued on next slide
19
Monitoring, Evaluating and Auditing
System performance is monitored again at the end of each month.
Monthly data are usually combined to prepare annual reports, which are used in setting the next year’s objectives and forecasts.
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Continued on next slide
Monitoring, Evaluating and Auditing
The program is usually audited annually as part of the government’s financial audit.
The process of monitoring, evaluating, and auditing performance thus completes and ties together both the systems cycle and the operating cycle.
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20
Players in the Process
Internal
• Revenue collection
• Payroll and accounts payable
• Purchasing
• Debt management
• Budgeting
39
� External
◦ Government
◦ Financial service providers
◦ Financial market
◦ Citizens
40
CHAPTER 1EXERCISE
21
Chapter 2Banking Services
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Objectives
Define the various banking service categories
Recognize the steps involved in the competitive bid process
42
22
Introduction
� Georgia has some of the strongest banking laws in the United States
� Banks are an integral partner in a government’s goal of maximizing the cash management function
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It’s About the Relationship
Creating and maintaining a common partnership is one of the treasury manager’s most important goals.
44
23
Politics, Politics, Politics
Impacts both
large and small
governments
45
Selecting a Bank
Politically select one or more banks to maintain accounts
Select one or more banks with the intention of rotating periodically
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Continued on next slide
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Selecting a Bank
•Select a bank based on the competitive bid
• Usually is the most cost effective, and the decision is based on business principles rather than politics when the government uses a comprehensive Request for Proposal (RFP) process
• This method helps ensure the government is getting the best price for the best service
47
Evaluation Process
GFOA has published recommended practices that state and local governments should undertake to receive effective banking services at reasonable costs.
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GFOA Recommended Practices
Periodically initiate competitive-bidding and negotiation processes
Have contracts that specify services, fees, etc.
Establish a relationship manager
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Continued on next slide
GFOA Recommended Practices
Evaluate the relative benefits and costs of paying for services through direct fees, compensating balances, etc.
Evaluate their needs against the costs and benefits of specific banking services
Perform a cash management review and comprehensive evaluation
50
26
Banking Service Categories
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Collection Services
Primary objective is to accelerate the availability of funds by reducing the time needed to receive, process and deposit payments. Time lag is known as the collection float.
• Wire transfers
• ACH collection
• Lockbox collection systems
• Concentration account
• Over the counter payments
Continued on next slide
52
27
Collection Services
Primary objective is to accelerate the availability of funds by reducing the time needed to receive, process and deposit payments. Time lag is known as the collection float.
• Credit and debit cards
• Coin processing
• Remote deposit capture
• Sweep accounts
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Disbursement Services
The goal is to pay bills when due—but not before—on a timely and accurate basis
• Wire transfers
• ACH payments
• Controlled disbursement accounts
• Zero balance accounts
• Positive pay services
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Continued on next slide
28
Disbursement Services
The goal is to pay bills when due—but not before—on a timely and accurate basis
Additional services
• Check retention services
• Account reconciliation services
• Disbursement float summary
• Online banking
• Balance reporting
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Investment Services
Primary goal is to maximize yield on idle funds subject to the priorities of safety, liquidity, and legality
• Certificates of deposits
• Money market instruments
• Repurchase agreements
• Reverse repurchase agreements
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29
Credit Services
Short-term services—standard product
Long-term services—solicited separately
• Lines and letters of credits
• Municipal commercial paper
• Short-term notes
• Bond purchasing
• Bond underwriting
• Bond transfer and registration services
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Competitive Bid Process
Advantages
• Additional interest earnings
• Resulting from improved yields if investments are separated from routine banking services
• Resulting from an overall increase in amounts available for investments through better use of a bank’s collection services
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Continued on next slide
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Competitive Bid Process
Advantages (cont.)
• Additional bank services
• Reduced bank service charges or compensating balances as a direct result of the competition
• An overall increase in efficiency of cash management operations
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Continued on next slide
Competitive Bid Process
Additional costs
• Costs related to the bidding process
• Costs incurred when changing established procedures
• Costs incurred when changing banks
Usually offset by the additional interest earnings and increased services
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The Process—Step 1
Review of the present system and determination of what bank services are desired and available
Request only services that are truly needed
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The Process—Step 2
Preparation of a request for proposal (RFP) and distribution to all banks in the area
Other government’s RFPs should be used ONLY as a helpful guide
RFPs must be impartial and reasonable
Continued on next slide
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Step 2
Generally, an RFP will contain several standard sections, identified as follows:
Section 1: Introduction
Section 2: Scope of Banking Services
Section 3: Bidding Instructions
Section 4: Bank Credit Evaluation
Section 5: Bidding Forms
Section 6: Bid Timeline
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The Process—Step 3
Pre-bid conference for all potential bidders to answer questions and to clarify the RFP
• Mandate attendance?
Minimize politicization by government officials having no other communication (in excess of normal operating discussions) with the banking community during the bidding process
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The Process—Step 4
• Preparation and submission of proposals by banks
• Thirty days is sufficient time for a bank to receive and respond to an RFP
• Banks should respond only on the standard forms provided
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Continued on next slide
The Process—Step 4
• Compensation to Bank
• Compensating balances
• Specific balances are maintained by the government in their bank account to help offset the cost of services
• Earnings credit rate
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Continued on next slide
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The Process—Step 4
• Compensation to Bank (cont.)• Direct payment method
• Allows the government to pay for banking services as it does for other services
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Direct Pay
The Process—Step 5
Evaluation of proposals
• Banks should know what criteria will be used in evaluating the banking services proposals
• Generally, the bank that submits the lowest overall cost or compensating balance requirement and meets the other criteria will be awarded the contract
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Continued on next slide
35
The Process—Step 5
Evaluation of proposals
• Abnormally low bids should be carefully evaluated to assure the bank could deliver the services promised
• The government should always reserve the right to refuse all bids and start the process over again, if necessary
69
The Process—Step 6
Recommendation of the best proposal to the legislative body
• List the acceptable bids starting with the lowest cost, since cost is the primary criterion
• Additional explanatory material should accompany the recommendation
• A bank not meeting all of the other criteria should be disqualified
70
36
The Process—Step 7
Award of a contract to the recommended bank
71
The Process—Step 8
Execution of a banking services contract
• Generally, the contract is signed immediately after the governing authority has voted
• Include the RFP document and the bank’s response in the contract as exhibits
72
37
The Process—Step 9
Implementation of the contract.
• A 30 – 180 day transition period
• Additional time granted if necessary
73
Compensation for Bank Services
Compensating Balances
Direct Payment
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Compensation for Bank Services
Compensating Balances� Require governments to maintain specific balances in
their bank accounts
� Offset the cost of services
� An earnings credit rate (ECR) is determined
� Government receives a reduction in interest income or earnings credit that offsets the bank services charges
� Amount available for the ECR is the average collected balance less any reserve requirements based on the Federal Reserve Bank regulations
Earnings Credit Calculation
The formula for the Earnings Credit Calculation is
Collected Balance x [1 – Reserve Requirement] x [Earnings Credit Rate x Days in Month/365]
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Earnings Credit Calculation
Average Collected Balance $4,000,000Reserve Requirement 10%Earnings Credit Rate 3%Days in Month 30
Based on the following information, calculate the earnings credit amount.
Earnings Credit Calculation
Earnings Credit = $4,000,000 x [1-.10] x [.03 x 30/365]= $4,000,000 x .90 x .00246575= $8,876.71
Based on the above scenario, the total earnings credit for the month is $8,876.71 and will offset any bank service charges for the month.
40
Direct Payment
Direct payment method • Government pays for banking services• Prices for services are computed and billed monthly• Payment for bank services should be made only after the
billing has been analyzed and approved
Comparison of Methods
Important to evaluate direct payment compared to compensating balances
• Determine the most efficient use of the government’s funds
• Maximize the interest earnings of cash on hand• The lower the earnings credit rate, the higher the
compensating balance required to offset the bank fees• Compare the ECR with rate of return that the government
receives currently on investments.
42
Objectives
Recall the steps involved in preparing a cash flow forecast
Prepare a basic cash flow forecast
Define the moving average method forecasting technique
83
Introduction
Important to know how much, when and for how long cash is available
Proactive approach to forecasting can reap significant benefits
84
43
Cash Flow Forecast
A schedule of receipts and disbursements over a given time period
85
Benefits
Improved interest earnings
Borrowing at lower rates
Enhanced rating agency confidence
Can identify potential budget problems
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44
First Step
Identifying all the funds, departments and financial data in a government.
• Budget is best source for identifying all the funds and departments.
Governments account for revenues and expenditures at the fund level.
• Fund level is the most common cash forecasting level.
87
Types and Frequency of Forecasts
Depends upon several factors
• Predictable cash flows and sufficient cash reserves = simple monthly forecast
• Volatile cash position, erratic cash flows or changing demographics = more detailed and complex forecast
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45
Things to Consider
� Type of financial information available
� Time period to forecast
� Level of detail needed
89
Methodology and accuracy of a cash flow forecast will depend on the cooperation from other departments within the government entity and on the experience and expertise of the cash manager
90
46
Forecasting
Monthly financial statements going back two to three years
• Provide historical data on actual receipts and disbursements and help identify peaks and valleys of cash flows
Prior year’s bank statements
• Add insight on check float, disbursement float and periodic cash balances
91
Continued on next slide
Forecasting
Current year budget and estimated draw schedules for capital projects
• Supply information on future revenues and expenditures and help identify potential changes to previous cash flow patterns
Summary of investment maturities
• Detail the timing of expected cash flows from investments to match maturities to disbursement needs
92
47
Forecasting
Debt service schedule
� The schedule will provide the timing of the principal and interest payments for debt service obligations which typically have a significant impact on cash flows.
Annual payroll schedule
� Salaries and benefits are typically the largest expenditures of the government and have a significant impact on the cash flows. The annual payroll schedule provides the cash manager with the timing of the payroll and related cash requirements to incorporate in the forecast.
93
Revenues
� Should be limited to four or five major sources
� Additional revenues can be lumped together
� Use 15% rule of thumb
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48
Property Taxes and Charges for Services analyzed separately – 15% of total revenue
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Forecast Future Expected Receipts
Prepare a monthly schedule of prior receipts
Calculate a simple three
year average
Determine what percent of each revenue source contributes to the total
Adjust for any planned changes in timing or amount
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49
Class Discussion
Discuss reasons why we have to make adjustments to our
forecast?
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Expenditures
Prepared the same way as revenues.
• Categorized by major type.
Cash manager should prepare a monthly schedule of historical disbursements and calculate a three year average.
• Make adjustments for anticipated variations and trends.
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50
Equation
99
Continued on next slide
Equation
Doesn’t answer the “when” or “how long” question
A determination of the frequency of the cash flow must be made
• Most common is the monthly forecast
100
51
Georgia Fund I
Local Government Investment Pool (LGIP of Georgia) pays very competitive market rates in the short term (30 days and up).
The more frequent decision may not generate more interest earnings if you utilize the Georgia Fund 1 or an equivalent vehicle.
101
Moving Average Method
Most common forecasting method
Looks at past history (example: 3 months) and uses the average to project the next month
Each succeeding month, the earliest month is dropped and the newest month is added to use in the averaging technique
102
Continued on next slide
52
Moving Average Method
Should be used with very short-term and volatile funds such as Accounts Payable
Straight historical trends should be used with more predictable receipts and disbursements such as property taxes and salaries, respectively
103
Continued on next slide
Moving Average Method
Results must be analyzed for reasonableness
• Compare forecast numbers with historical numbers for the last 3 – 5 years to note any material differences
• Research these variances against the cash flow forecast as appropriate
104
54
Objectives
Recognize the types of collection methods available
Recall the types of collection strategies
Define float and identify methods to reduce float time on collections
107
Introduction
Major goal of any revenue collection system is to increase the amount of funds available for investment
Funds can’t be invested until deposits are presented to the bank from which they are drawn.
Until then, those deposits are considered deposit float.
108
55
Deposit Float
NOT available for cash.
NO opportunity for investment.
LOSS of interest.
109
Cash Mobilization
•The receipt of payments from citizens and businesses to the government
�First task of the cash manager
•Before funds can be invested and eventually disbursed, they must be:
�Received and secured
�Accounted for
�Deposited at a bank or similar financial institution
110
56
Types of Collections
First step in developing effective collection procedures is to identify the various types of collections
�Different types of collections place different demands on staff time and have differing administrative costs
111
Continued on next slide
Types of Collections
Most common collections are:
�Cash and checks
�Night deposits
�Lockbox
�Payment Consolidation Services
�Electronic fund transfers
�Payment (Debit and Credit) Cards
�Government websites
112
Continued on next slide
57
Types of Collections
� Collection options available influenced by trends in consumer payment methods
� Most governments now allow e-payments
113
Cash and Checks
Most common form of collections
Public can either mail in payments or pay in person
114
Continued on next slide
58
Cash and Checks
Very time consuming and expensive from a staffing standpoint
� Major reason most governments are moving away from this method to more advanced, technological methods
115
Continued on next slide
Cash and Checks
Most frequent revenues collected by this method:
�User fees
� License and permit fees
� Fines and forfeitures
� To some extent, property taxes (mostly car tags)
116
59
Night Deposits
�Convenient for the public to make payments after office hours.
�Locations should be very secure, conveniently located, well lit and accessible by both pedestrians and automobiles.
�Most common payments:
�Utility bills or user fees.
117
Lockbox
Banks or third party processors receive and deposit payments for a government
Usually, the processor can forward the payment data on to the government electronically
118
Continued on next slide
60
Lockbox
Benefits
• reduction in mail time
• reduction in government’s processing time
• funds are available sooner
• bank/third party records provide an audit trail
119
Continued on next slide
Lockbox
Compare cost of lockbox and in-house collections for cost effectiveness
Most common payments:
• High volume transactions such as utility billings and property taxes
120
61
Electronic Lockbox(Payment Consolidation Services)
Customer remit through their financial institution payments to government
No payment stub available
Consolidation providers match payment information to account information for ease of posting to government’s billing system
121
Sequence of Activities for Lockbox
122
Mail sent to PO Box
Courier picks up mail; delivers to lockbox facility
Mail sorted by bank staff
Data on checks captured using MICR scanners
Checks deposited at bank
Check clearing begins (bank process)
Remittance data captured using OCR scanners
Remittance data transferred to government
Posting to internal financial system (government process)
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Electronic Fund Transfers
�EFTs are automatic transfers of funds from specific banks to the government
�Encompass both ACH-based payments and wire transfers
�Funds are transferred from the payor to the government bank account electronically
123
Continued on next slide
Electronic Fund Transfers
Cost effective and efficient
� saves staff time and banking cost
� credits the funds on the same day or the next day
Most effective for large payments
�monthly sales tax checks
� large property tax (escrow) payments
� repetitive billings and federal and state grants
124
63
Wire Transfers�Transferred using the Federal Reserve Communications System (Fedwire) or Bankwire
�No mail float and funds are immediately available
�Can be transferred from one account to another in the same day
�Cost per transaction is greater than for ACH-based transactions and is therefore for larger-dollar transactions
�Bond proceeds, investment maturities, or grants.
�Higher the interest rate paid on bank balances, the lower the break-even point amount will be.
125
ACH
� Electronically clears and settles debits and credits between banks—uses network of Federal Reserve affiliated facilities
� Works well for recurrent transactions and receivables.
� The cost per transaction is lower than for wire transfers
� Cost-benefit analysis should always be performed
126
64
Payment Cards (Debit or Credit)
•More prevalent and acceptable for governments to use this as a method of payment
•Can be an efficient way for the public to pay for services and the government to collect fees
•Receipt of funds is guaranteed
•Biggest disadvantage
• Discounted amount (usually 1-3%) to cover processing fees
127
Payment Cards (Debit or Credit)
GFOA Best Practice
• Electronic Transfers for Collections
EMV
• Card Authentication
• Cardholder Verification Method (PIN)
• Transaction Authorization
128
65
Collection Strategies—Property Taxes
�Largest sources of revenue for most local governments is the property tax
�Collection involves two activities
• The collection of current taxes and
• the collection of delinquent taxes
• The more successful a government is at the first task, the less the need for the second
129
Continued on next slide
Collection Strategies—Property Taxes
� General rule of thumb is that local government should be able to collect 95 percent or more of the current tax levy in the current fiscal year
130
Continued on next slide
66
Collection Strategies–Property Taxes
�Well-designed tax statements� Clearly identifies the amount due,
� Basis for determining tax liability, and the penalties and interest charges for late payment.
� Return envelope should be enclosed with the statement.
� State law defines the information that must be provided on the statement, but within those guidelines, governments can exercise discretion in bringing taxpayer’s attention to the amount due and the due date.
131
132
67
Other Property Tax Collection Strategies
• Mail reminder notices two to three weeks before taxes are due.
• Keep taxpayer records current, especially mailing addresses.
• Build taxpayer goodwill through more convenient collection points and office hours.
• Apply penalties and interest rates that discourage delinquent payment.
133
Delinquent Taxes
�More difficult to collect.
�Collection begins with the preparation of a delinquent taxpayer roll.
� Some states require the tax collector to publish in a newspaper the names of delinquent taxpayers and the amount owed.
� Encourages taxpayer compliance.
134
68
Other Tips for Property Tax Collection
� Installments with One Billing
� The Tag Reader
� Use discretionary powers, such as placing liens on property.
� Contract out delinquent collections to a law firm or collection agency.
� Use small claims court for minor delinquency cases.
� Take advantage of services offered through agencies such as GMA.
� Attend CVIOG Revenue Administration class.
135
Other Major Revenue– Sales Tax
Can take the form of a:
• Special Purpose Local Option Sales Tax (SPLOST, ESPLOST or TSPLOST)
• Local Option Sales Tax (LOST)
• Homestead Option Sales Tax (HOST)
• Municipal Option Sales Tax (MOST)
• Metropolitan Atlanta Rapid Transit Authority (MARTA)
One way to increase sales tax revenue receipt is to work with the DOR to wire transfer the sales taxes to your government thereby reducing mail float
136
69
Float
Treasury managers seek to increase the speed of the deposit since interest does not begin to be earned until payment has been made by the bank.
The time lapse between the deposit of a check and the time it is paid by the bank is known as “check collection float.”
137
Continued on next slide
Float
There are three primary types of deposit float:
• Mail float
• Processing float
• Collection float
138
70
Mail Float
� The amount of time a payment remains in the mail system from the time sent to the government until the government has physical possession of the payment
139
Can be reduced by:
Assigning P.O. Box numbers.
Multiple pick-ups throughout the day that bring items into the processing stream faster.
Processing Float
�The amount of time necessary to process the payment
�Under the control of the government
140
Can be minimized through:
Use of technology, such as machines that can read scanned documents such as remote deposit capture, and trained personnel
71
Collection Float
� The amount of time necessary to credit a government’s bank account after the payment has been received
� The time necessary for a government to receive good funds on a payment
141
Continued on next slide
Collection Float
� Request a copy of their bank’s availability schedule that states how long it takes to convert ledger balances into collected balances
� Responsibility of the government’s treasurer to assure that the government has the best possible availability from the bank selected
142
72
Reduce Float Time on Collections
Over the counter
�Banks can accept payments for the government, and directly deposit the funds in the government’s account.
�Most common payments received in this manner are tax and utility payments.
� Convenient to residents, expedites funds into the government account and may be more cost effective for small payments than a lock box system.
143
Continued on next slide
Reduce Float Time on Collections
�Account consolidation
�Can reduce the cost of monitoring cash availability and result in a larger common pool of balances available for investment purposes.
�Can simplify the investment process by making it easier to space investment maturities to meet overall cash needs.
�Permits the treasury manager to lengthen maturities which usually means higher interest rates.
144
Continued on next slide
73
Reduce Float Time on Collections
�Concentration accounts
� Gain the benefit of consolidation without sacrificing the control of separate disbursement accounts with a concentration account.
145
Continued on next slide
Concentration Account Structure
146
Investments
LGIP
Concentration
Account
Daily Investments
(REPOS)
Special
Programs
ZBA
Accounts
Payable
ZBA
Payroll
ZBA
74
Reduce Float Time on Collections
�Wire transfers
147
Sales tax checks, large grants, and other large dollar revenue should be investigated as to the feasibility of usage of the wire transfer.
Reduce Float Time on Collections
148
CHAPTER 4EXERCISE
75
Chapter 5Disbursements
149
Objectives
� Recall the major goal of a disbursement system and the goal of the treasury manager in the disbursement area
� Differentiate between centralized and decentralized disbursements
� Identify the types and characteristics of disbursements
� List the components of disbursement float
� Recognize how the use of electronic banking services optimizes disbursements
150
76
Introduction
Disbursements should be timed so that they remove cash from the local government’s treasury only at the last possible moment
• Slow the payment of funds so that the maximum amount is available for investment
Vendors and suppliers should be paid on the due date –not before
• There may be times when the investment of funds will earn more interest than what is saved by taking the discount
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Continued on next slide
Introduction
Take discounts when available
• Immediate savings
• Strive to pay vendors and suppliers on a timely basis
Manual and computerized
• Basic disbursements are substantially the same and include payroll, accounts payable, capital outlay and debt service
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Centralization
Preferred over decentralization
� Helps streamline the number of accounts that must be maintained
� Reduces the number of transactions
� Limits the amount of oversight needed to monitor account activity and related transaction
153
Truth or Myth?
Some studies have determined that generating a single payment can cost as much as $50 to $125
154
78
Brainstorming exercise
List all the steps and people involved with processing an invoice.
To begin, think about how you receive the invoice.
The last step will probably involve account reconciliation.
After you have everything listed, discuss the costs associated with each of the steps.
Did your initial answer change regarding the statement being a truth or myth?
155
Types of Disbursements
Payroll
� Typically handled through a computerized program and disbursed on a weekly, bi-weekly, semi-monthly or monthly basis
� Computerized accounting files are created
� Normally, one payment is made to cover the total disbursement
� Typically paid through ACH or direct deposit
156
79
Types of Disbursements
Accounts Payable
Covers the day to day operating and maintenance expenditures
Two forms, “batch” processing and “just in time” processing
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Types of Disbursements
Accounts Payable
Batch processing is usually payable weekly, bi-weekly, semi-monthly or monthly. Bills are received and matched with purchase orders and receiver documents. Payment is scheduled for the next cycle.
Just in time processing schedules payments according to aging schedules built into a computerized program and produces a
steady flow of disbursements.
158
80
Types of Disbursements
Capital Outlay
� Larger in nature and not as easily scheduled. Working with purchasing schedules and construction engineers can assist in projecting these types of payments.
159
Types of Disbursements
Debt Service
• Very predictable and usually occur two times a year
• Should be wired on the due date
160
81
Electronic Banking Services to Optimize Disbursements
Important goal of treasury manager in the area of disbursements is to increase float.
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Electronic Banking Services to Optimize Disbursements
Disbursement float has three components:
1. Delivery - the time it takes to deliver payment to payee
2. Processing - the time it takes for the payee to process the payment that the government has sent
3. Collection float - the time it takes for the payment to clear the banking system
• Most clearing arrangements now take only one business day
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82
Methods to IncreaseDisbursement Float
�Payment date
� Should correspond to due dates from vendors
� Do not pay early, but do not pay late
� Consider the time it takes for the payment to be received by the vendor
163
Methods to IncreaseDisbursement Float
�Electronic funds transfer
� Excellent way to remit larger sums immediately.
� Wire at the last possible moment.
� Should not be used for small transactions.
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83
Methods to IncreaseDisbursement Float
�Electronic banking services relevant to the management of disbursements include:
� Wire transfers - most expensive way to move funds but also the fastest. There are repetitive and non-repetitive wires.
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165
Methods to IncreaseDisbursement Float
�Electronic banking services relevant to the management of disbursements include:
� Automated clearinghouse payments (ACH) –the most frequently used means to disburse funds electronically and takes approximately one to two days to process. The most common ACH transfer is direct deposit payroll to place funds into employees’ accounts.
� Preauthorized debits for recurring transactions
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84
Methods to IncreaseDisbursement Float
�Purchasing cards
� Help minimize the use of purchase orders and checks.
� Assigned certain limitations, such as dollar value of credit, allowable items, and daily purchasing limits.
� Eliminate procedures related to purchasing requisitions, invoices, checks, receipts and expense reimbursements.
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Methods to IncreaseDisbursement Float
�Purchasing cards cont.
� Procurement costs fall from $90 per purchase to $20.
� Benefits include:
� rebates to the entity using the card,
� detailed information used for monitoring procurement activity that can be easily obtained through the Internet
� more leverage in negotiating discounts
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85
Methods to IncreaseDisbursement Float
�Purchasing cards cont.
� Caution is required and solid internal controls must be in place.
� Educate card users about card policies and procedures and continually audit the card program.
169
OCGA 36-80-24New Law
1/1/16
Elected officials using purchasing card
• Governing body adopt a policy that meets requirements of new law
• Publicly vote to authorize elected official to use the card
• Enter into user agreement with each authorized elected official
Sample Resolution
• http://www.accg.org/content.asp?contentid=2359
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Methods to IncreaseDisbursement Float
Payroll cards
� Appealing if you have an employee that has no bank account or when an employee does not elect to participate in your direct deposit program.
� Type of debit card that can have funds placed on the card through an ACH transfer initiated by the government.
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Methods to IncreaseDisbursement Float
Payroll cards cont.
�Can be used at an ATM machine to obtain cash and can also be used to make purchases where credit cards are accepted.
�Can be easily replaced and is usually less expensive than issuing a stop payment on a check and then going through the reissue process.
� Note: There are start-up costs involved with using payroll cards, and they are still more costly than direct deposit.
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Disbursements and Zero Balance Accounts
173
Government sets up a central bank account –usually a zero-balance (ZBA) and
concentration account.
Accounts are intended to carry a zero balance.
Deposits and disbursements are centralized into one or more ZBA accounts.
Established for the purpose of handling disbursements such as payroll, accounts
payable, etc.
Disbursements and Zero Balance Accounts
174
Checks are written from the ZBAs which create a daylight or intraday overdraft in that account.
At the end of the business day, the bank automatically transfers funds from the concentration account to the ZBA to cover the overdraft and bring the balance back
up to zero.
Balance in the concentration account that is not needed to cover overdrafts in the ZBA accounts is kept invested to earn a return for the government.
88
Conclusion
Governments should design and develop a disbursement system that works for them.
Efficient and effective by providing the information needed to meet timing and internal control requirements.
Governments should utilize these methods to increase the disbursement float as much as is feasible.
Strive to disburse the cash at the last possible moment (while still paying on time) so the funds are working to earn interest as long as possible.
175
176
CHAPTER 5EXERCISE
89
Chapter 6Investments
177
Objectives
•Differentiate between treasury management law and policy
•Recall various sections of Georgia law related to investments
•Recognize various types of investment instruments
178
90
Introduction
Once the process begins, investments become one of the most important responsibilities of the treasury manager’s job
More demanding, difficult and risky
• Explosion of investment management products and services
• Technological advances
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Introduction
Benefits
• Public dollar being stretched much further
The loss of public funds have increased the need for more training, education and information in the field of public fund investing
180
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Law
Before a policy is developed, applicable laws and regulations governing investments must be reviewed. Determining the legal constraints and issues sets the framework for determining which types and duration of investments are appropriate.
181
Law versus Policy
182
Spells out the objectives and constraints for approved investments
Spells out how to proceed with those instruments
92
Georgia Law
Treasury managers will want to focus on the following sections of Georgia Law
183
Title Chapter Subject
O.C.G.A. 36-82-7 Investment of Bond Proceeds
O.C.G.A. 36-83 Local Government Investment Pool (LGIP)
O.C.G.A. 45-8 Accounting for Public Funds
LGIP OCGA 36-83
Local Government Investment Pool
• Georgia Fund 1 and Georgia Extended Asset Pool
• State-administered pools for investment of local public funds
• State treasurer develops policies for efficient administration of the pool
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LGIP OCGA 36-83
• Requires local government ordinance or resolution authorizing investment in the LGIP
• Local government must indicate who is authorized to deposit and withdraw funds from the state pool
185
Accounting for Public FundsOCGA 45-8
Bond required for all officers who collect and hold public funds
All depositories must give security for deposits of public funds
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Accounting for Public FundsOCGA 45-8
A depository may pledge as security the following obligations
• Obligations of the US or its subsidiaries
• Obligations of counties or municipalities of Georgia
• Bonds of public authorities or industrial development authorities
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Accounting for Public FundsOCGA 45-8
Deposits may be secured by a combination of surety bond, deposit insurance, or pledge of securities
188
95
Examining an Investment Policy
Policy can be defined as a set of guiding principles that determine a course of action
Sound cash management policies improve consistency, create accountability, help ensure that laws and ordinances are followed, and create goals by which to measure performance
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Examining an Investment Policy
Local governments should have a written investment policy adopted by its governing authority to provide guidance for making investment and treasury management decisions
190
96
GFOA “Creating an Investment Policy”
Review state public funds investment and collateral laws
Review investment policies for similarly sized jurisdictions
Draft the policy
Review the policy by appropriate parties
Adopt the policy by governing authority
Establish procedures
Annually review policy
191
Investment Practices
Investing funds should be carried out within the parameters as set out by the investment policies adopted by the government.
The GFOA recommends a step by step approach in their Investing Public Fundsmanual. These steps provide the framework for prudent and effective investment of public funds.
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97
11 Steps to Prudent Investing by GFOA
1. Identify the entity’s objectives, constraints, preferences and capabilities.
2. Develop investment policies.
3. Develop administrative systems and internal controls.
4. Prepare a cash flow forecast.
5. Determine the investment horizon.
6. Establish an investment outlook and strategy.
7. Analyze the yield curve.
8. Select optimizing instruments.
9. Monitor the markets and investment results.
10. Report results.
11. Adjust and rebalance the portfolio accordingly.
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Investment Instruments
U.S. Treasury obligations
U.S. Agency obligations
Certificates of deposit
Repurchase agreements
Georgia LGIP
194
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U.S. Treasury Obligations
Most commonly purchased by Georgia local governments are Treasury bills, Treasury notes and Treasury bonds.
195
All carry an explicit guarantee backed by the full faith and credit of the U.S. Government and are considered the safest securities in which to invest.
Continued on next slide
U.S. Treasury Obligations
Treasury Bills
• Short-term (less than one year) obligations of the Federal government
• Issued in 3 month, 6 month and 1 year maturities in denominations from $10,000 to $1,000,000
• Issued at a discount mature at par and are not coupon bearing
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99
U.S. Treasury Obligations
Treasury Notes and Bonds
• Pay interest every six months
• Notes and bonds are virtually identical in their investment features, except that the term on notes is ten years or less, while bond maturities are longer than ten years
197
U.S. Agency Obligations
NOT backed by the full faith and credit of the U.S. government but do have an implied “moral obligation” of the Congress to protect investors
Lack of an explicit guarantee compels investors to seek higher yields in return for the perceived higher risk
198
Continued on next slide
100
U.S. Agency Obligations
Popular securities of this type among local government investors
• Fannie Mae
• Federal Home Loan Bank
• Federal Home Loan Mortgage Corporation
• Federal Farm Credit Bank
199
Certificates of Deposit
�Backbone of most local government investment programs for many years
�Governments now investing in other securities, but very few are abandoning altogether their local financial institutions and the CDs they offer
200
101
Certificates of Deposit
�Negotiable CD – bought and sold on a secondary market
• Issuing bank sets face amount and interest to be paid
• Maturity, holder receives face amount and accrued interest
�Non-negotiable CD – cannot be transferred by holder and penalizes for return of principal before maturity
201
Repurchase Agreements
Characterized as the sale of securities with a simultaneous agreement to repurchase them on an agreed upon date in the future
The purchase price paid is a loan of cash that is collateralized by the securities
202
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102
Repurchase Agreements
When the securities are repurchased
• the loaned cash is returned plus an amount constituting interest, which is the repurchase price paid in exchange for the securities
Longer term repurchase agreements are called term repos
203
Repurchase Agreements
Parties to the trade are referred to as counterparties
It is important to continually assess and understand your counterparty risk exposure
204
103
LGIP
State of Georgia’s Local Government Investment Pools are Georgia Fund 1 and the Georgia Extended Asset Pool (GEAP)
Allows local governments to consolidate and invest idle funds so earnings on such investments would reduce the need for additional taxes and other public revenues
Objective in managing the Pools is to preserve capital contributions; maximizing investment income is of secondary importance
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LGIP
By state statue, allowable investments in the Pools include all instruments that can be purchased directly by local governments
• Obligations issued by the federal government (Treasury bills and notes), obligations fully insured or guaranteed by the federal government or a federal government agency, federal government corporation obligations, banker’s acceptances, repurchase agreements, obligations of political subdivisions in Georgia and obligations of any state in the United States, commercial paper and negotiated investment deposits.
206
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104
LGIP
Each local government will receive a higher rate of return on instruments of larger denominations than could be possible if investing on an individual basis
Funds are not locked into longer maturities so all participants have maximum flexibility in withdrawing and depositing funds without losing the advantage of higher investment yields
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Continued on next slide
LGIP
Investment policies are established by the State Depository Board.
Deposits are NOT guaranteed or insured
208
105
GEAP
Georgia Extended Asset Pool
Created in 2000 to allow for longer investment duration than Georgia Fund 1
Requires minimum investment of $1,000,000 for periods of one year or longer
209
Conclusion
Governments must be committed to seeking out all the opportunities open to them under a formally adopted investment policy
All actions must consider that public funds safety and liquidity always come before yield
210
107
Objectives
�Recognize the importance of developing policies and procedures that include strong internal controls
�Apply the basic concepts of good internal controls related to treasury management.
213
Introduction
•Internal control is the plan of organization under which
• assets are protected
• accuracy and reliability of records are assured
• compliance with policies and procedures is maintained
• the efficiency of operations is promoted
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Continued on next slide
108
Introduction
It is the duty of the professional cash manager to be a good steward of the portfolio
� Protecting cash and investments against loss, misuse, and inefficiency
Top management must be involved and committed to ensuring that internal controls are a high priority
215
Concepts of Internal Controls
Authorizations
• Should be documented in the financial procedures manual for employees.
• Lines of authority should be well defined and clear.
• Special controls should be designed for telephone orders, wire transfers and securities safekeeping.
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109
Concepts of Internal Controls
Authorizations (cont.)
• Appropriate level of authority should authorize each transaction.
• Example: Disbursements over a certain dollar amount may require approvals from the Director and a supervisor could approve the smaller dollar items.
217
Concepts of Internal Controls
Communications
• First step is preparing, maintaining, and using well written investment procedures that spell out each step of the investment process.
• Should be clearly documented and communicated to all employees.
• Examples of documents used to authorize transactions could be included in the procedures manual.
218
110
Concepts of Internal Controls
Segregation of Duties
• one person performing all aspects of an investment transaction increases the government’s exposure to fraud as well as inaccurate reporting
Any segregation is better than no segregation
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Continued on next slide
Concepts of Internal Controls
Without adequate segregation of duties, internal control management becomes virtually impossible
Use other department personnel if necessary to achieve the proper segregation of duties
220
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111
Concepts of Internal Controls
Some guidelines are:
• Separate operational responsibility from financial recordkeeping responsibility
• Separate custody of assets from accounting
• Separate authorization of transactions from the custody of the related assets
• Separate duties within the accounting function
221
Concepts of Internal Controls
•Compliance Monitoring
� Compare actual results to the budget and look for unusual deviations over or under budget expectations. Once variances are discovered, explanations must be given
� Assess competence and trustworthiness of the individuals in the particular department
222
Continued on next slide
112
Concepts of Internal Controls
Compliance Monitoring (cont.)
� Establish physical control
� Checks and Balances
� Prevention Controls
� Detection Controls
223
Conclusion
Written investment procedures are an important step towards safeguarding public assets.
224
Once established, these procedures should be updated at least annually and periodic surprise audits should be conducted.
114
Objectives
Recognize the importance of proper staffing and supervision in treasury management
Recall the job of the cash manager and the different areas of responsibility
227
Introduction
Proper staffing and supervision is the single most important internal control a government entity can put in place.
Cutbacks and savings in this area should be made only when carefully considering the safety of the government’s cash and investments.
• A dollar saved today is no consolation if millions are lost tomorrow.
228
115
Who is Responsible?
Individuals range from appointed clerks, accountants, professional cash managers and CPAs, to elected Tax Commissioners
•Vast majority are appointed employees who may work on cash management as a full-time or part-time basis depending on the size and structure of the government entity
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Continued on next slide
Who is Responsible?
Function should be carried out with the following in mind:
• safeguard the cash and investments of the government from loss
• maintain the cash and investments to meet the cash flow needs of the government’s operation
• and maximize the yield on “idle” cash all within the state and federal laws and local policies and procedures
230
Continued on next slide
116
Who is Responsible?
Investment/cash management policy
• Should cover who is responsible for carrying out a government’s cash management and investment duties
• Not just how those duties should be carried out
231
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Who is Responsible?
�The smaller the government, the more likely that one person will be performing the cash management
�Larger governments will probably have the Chief Financial Officer responsible, but with staff positions doing the daily work
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117
Who is Responsible?
�All individuals dealing with the management of the government’s cash must be educated and trained
�They must be monitored and measured on an ongoing basis against the standards set for them
�Ultimately, the top elected or appointed officials are responsible
233
The Cash Manager’s Job
Most cash managers are responsible for one or more of the following areas or functions:
234
Revenue Collection
Disbursements
Bank Accounts for Operating Funds
Bank Cash Management Products and Services
Banking Relations
Liquidity Forecasting and Management
118
The Cash Manager’s Job
Most cash managers
are responsible for one or more of the following areas or
functions:
235
Continued on next slide
The Cash Manager’s Job
Most cash managers are responsible for one or more of the following areas or functions:
• Accounting and controls for bank accounts and investments, and possibly for all the entity’s budgets and financial forecasts
• Policies covering liquidity, funds management, and investment
236
Continued on next slide
119
The Cash Manager’s Job
• Reporting and oversight for bank accounts and investments, and possibly for all the entity’s financial transactions and related management information
• Compliance with applicable regulations
• Management of debt
237
Supervision of the Cash Manager
Because of the specialized education and training required, officials that are ultimately responsible for the function may lack the experience and knowledge necessary to oversee the cash management function
238
Continued on next slide
120
Supervision of the Cash Manager
Best cash managers understand that sound oversight policies and procedures are implemented to protect both the assets of the government and the cash manager himself
Supervisors should expect a cash manager to report on liquidity, investments, policy compliance, and legal compliance
• There should also be a report that shows that the portfolio’s risk is maintained within policy limits
239
Conclusion
�All governments should be structured to assign cash management responsibility to specific individual(s)
240
Continued on next slide
121
Conclusion
�Important to:
� Hire the right individuals
� Properly training those individuals
� Appropriately supervise their work
�In the end, it is the employees who make the day-to-day decisions about cash management, both internal and external, that can potentially place a government in a precarious and/or embarrassing situation
241
242
CHAPTER 8EXERCISE
122
Chapter 9Accounting & Reporting
243
Objectives
Define risk terms
Recall depositor risk disclosure requirements
Recognize the different types of risks associated with investments
244
123
Introduction
There must be an accounting of all transactions and the reporting of the results
Accounting records should reflect GAAP as related to governmental accounting per GASB
Reports should be prepared directly from the accounting records and reflect the financial and operating status of the treasury management function
245
Continued on next slide
Introduction
Operating reports are the best tool for monitoring
the daily activity in the treasury management area
Financial reports reflect the status of cash and
investments activity at a certain point in time
246
Continued on next slide
124
Introduction
Operating Report Examples
• Budgeted interest/actual interest income
• Projected cash balances/actual cash balances
• Projected yield/actual yield
• Projected investment mix/actual mix
Yield benchmarks should be set for comparison purposes against standard marks
247
Deposits & Investments: Information in the Notes
Cash deposits and investments can be quite significant relative to other assets and a source of substantial revenue
The investment of a government’s available cash to generate more resources comes with a variety of risks
248
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125
Deposits & Investments: Information in the Notes
A body of accounting and reporting standards has developed around deposits and investments in order to give the public information about the risks that accompany them
249
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Deposits & Investments: Information in the Notes
GASBS 3, Deposits with Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements (as amended by GASBS 40 and GASBS72)
250
Continued on next slide
126
Deposits & Investments: Information in the Notes
GASBS 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (as amended by GASBS 72)
GASBS 40,Deposit and Investment Risk Disclosures.
251
Continued on next slide
Deposits & Investments: Information in the Notes
252
• GASBS 53, Accounting and Financial Reporting for Derivative Instruments (as amended by GASBS 72)
• GASBS 59, Financial Instruments Omnibus
• GASBS 72, Fair Value Measurement and Application
127
Investor & Depositor Risk
State statutes require some level of collateral for deposits when the deposits exceed depository insurance (uninsured deposits).
253
Depositor risk
Most folks do not worry about the safety of the cash they have on deposit at the local bank because of FDIC or FSLIC coverage.
What if you had $1 Million?
Current FDIC Coverage
254
128
Investor & Depositor Risk
�Depository risk involving cash:
�There is the risk the bank could fail.
�For a government that requires the bank to collateralize deposits, the name the collateral is in and who is actually holding the collateral become real issues. This is a major point in bankruptcy law, because if it isn’t set up correctly – you lose!
�What about the risk associated with the quality of the collateral; it may have been worth as much as the deposit yesterday, but what about today?
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Continued on next slide
Investor & Depositor Risk
�Investor risk - Suppose you had a million dollars to invest, how would you invest it? Consider the following list of questions:
�Do you want to invest it in debt or equity securities (bonds or stocks)?
256
Continued on next slide
129
Investor & Depositor Risk
�Are you going to put it all in one investment, a variety of investments all of the same type, or do you want to diversify?
�How much risk are you willing to accept? Are you willing to play the field of derivatives?
�Are you going to take physical possession of the investments or place them in a depository?
257
Investment Risk
Credit risk
• the risk that an issuer or other counterparty to an investment will not fulfill its obligations
Custodial credit risk
• the risk that a government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party if the counterparty to the transaction fails
258
Continued on next slide
130
Investment Risk
Concentration of credit risk
• the risk of loss attributed to the magnitude of a government’s investment in a single issuer
259
Continued on next slide
Investment Risk
Interest rate risk
• the risk that changes in interest rates will adversely affect the fair value of an investment
Foreign currency risk
• the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit
260
131
Deposit Risk Disclosure
Deposits with financial institutions that are fully insured or collateralized by securities held by the governmental entity or its agent in the governmental entity’s name
• the only disclosure necessary is a statement that deposits with financial institutions are fully insured or collateralized by securities held in the government’s name
261
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Deposit Risk Disclosure
Deposits not fully insured or collateralized, the governmental entity is exposed to custodial credit risk to the extent
• Uninsured portion of a deposit is not collateralized
• Uninsured portion of a deposit is collateralized, but the collateral is held by the pledging financial institution itself
• Uninsured portion is collateralized and the collateral
262
Continued on next slide
132
Deposit Risk Disclosure
Deposits not fully insured or collateralized, the governmental entity is exposed to custodial credit risk to the extent
• Uninsured portion is collateralized and the collateral is held by either the financial institution’s trust department or agent, but the collateral is not held in the name of the depositor government
263
Continued on next slide
Custodial Risk Disclosure
Year end disclosures should include
1) the amount of the bank balance
2) a statement that the balance is uninsured
3) the nature of the custodial credit risk for each uninsured deposit (category 1, 2, or 3)
264
133
Sample Disclosure
265
Investment Risk Disclosure
Investments at fair value in the financial statements
Changes in their fair value reported as investment income
266
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134
Investment Risk Disclosure
The types of investments that the government is legally or contractually allowed to purchase, if there were any violations of those legal or contractual provisions, and actions the government took to address the violations
If fair value amounts are based on anything other than quoted market prices, a government discloses its methodology and assumptions for estimating fair value
267
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Investment Risk Disclosure
Governments should briefly describe their investment policies that are related to investment risks defined in the previous section. If no policy exists, that fact should also be disclosed.
268
Continued on next slide
135
External Investment Pool Disclosure
The regulatory oversight, if any, for a pool that is not registered with the Securities and Exchange Commission and whether there is a difference between the fair value of the investments and the value of the government’s shares in the pool
269
Continued on next slide
External Investment Pool
Whether involvement in the external investment pool is involuntary (for example, state law might require that if a government invests, it do so through a specific pool).
The methods and assumptions made to estimate fair value if a government cannot obtain from the pool the information needed to determine fair value.
270
136
Debt Investments
Classify debt investments as of the entity’s balance sheet date by debt type and by credit quality ratings assigned by nationally recognized rating agencies
271
Credit Risk Disclosure
272
137
Concentration of Credit Risk Disclosures
Disclose, by amount and issuer, investments in any single issuer that represent more than 5 percent of the total investments in the column they are reported in
No disclosure required if concentrations in investments of or guaranteed by the U.S. government or investments in mutual funds, external investment pools, or other pooled investments
273
Custodial Credit Risk Disclosures
Investments that are uninsured, unregistered, and are held by either (1) the counterparty or (2) the counterparty’s trust department or agent, but not in the government’s name
Disclose
• Type of investment
• The reported amount
• How the investments are held
274
138
Interest Rate Risk Disclosures
Changes in interest rates that will reduce the fair value of a government’s investments is called interest rate risk
The longer the period until an investment matures, the greater the negative impact that changes in interest rates can have on fair value
275
Foreign Currency Risk Disclosures
Chance that changes in exchange rates will adversely affect the fair value of a government’s investments and deposits
Disclose the amounts, in U.S. dollars, of deposits and investments exposed to foreign currency risk, organized by currency denomination and investment type
276
139
Other Basic Reporting
� At a minimum, annual reviews should be done to ensure the reports accurately evaluate the cash management objectives
� Reports should always be sent to senior management as well as elected officials for analysis of results to determine that standards established are being met
� Auditors should be directed to monitor internal and external policies and procedures in order to ensure compliance
277
Conclusion
� Good sound accounting and reporting complete the professional cash manager’s responsibilities as a steward of the public’s money
� Establishes trust and credibility with both the elected officials and the public
278
Continued on next slide
140
Conclusion
� Allows the professional cash manager to demonstrate that the cash and investments operations are strong profit centers and in a positive way to keeping taxes lower and service levels higher
279
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CHAPTER 9EXERCISE