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Workshop Evaluations

Workshop evaluations forms can be found in the NACo conference app and online at

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Speakers Sofia Anastopoulos, CFA Public Funds Consulting, LLC Principal (312) 519-1637 sofia@pfundsconsulting.com www.pfundsconsulting.com Dawn Cragon, MBA Ashtabula County, OH Treasurer (440) 576-3727 treasurer@ashtabulacounty.us http://oh-ashtabulacounty.civicplus.com/ Cheryl Duke, CFA Mecklenburg County, NC Investment Officer (704) 336-2787 Cheryl.Duke@mecklenburgcountync.gov www.charmeck.org/mecklenburg/county/Pages/Home.aspx

Focus

Elected Officials Guide: Investing

GFOA EOG

GFOA Best Practices, Advisories, Resources

Treasury and Investment Management

Fiduciary Duty

What Is a Fiduciary?

An individual or institution

Special relationship of trust with another person or

group

Legally responsible for their assets

Fiduciary Decisions and Actions

Make decisions in the best interest of the beneficiary

Act prudently

Always put the beneficiaries’ interests before their own

By law a fiduciary must:

Examples of Fiduciaries

Treasurers

Finance directors

Investment personnel

Oversight boards

Investment advisers

Brokers historically were NOT ****

Compliance with Fiduciary Duty

Test of compliance is one of conduct, not performance

Measures for evaluating compliance

Establishment of formalized investment policy

Compliance with policy

Prudent investment decisions

Best price trade executions

Diversification of risk

Strict avoidance of conflicts of interest

Investment Policy

Governance of Public Funds

State statutes specify:

Investment types

Maximum maturity

Collateralization

Potential partners

Credit criteria

Reporting

Safekeeping

Your investment policy

Bond Indentures

Stay aware of / involved with legislative, lobbying process

Policy Components

Scope

Standards of Care

Objectives

Delegation of authority

Risk tolerance

Investments

Institutions

Safekeeping and custody

Internal control

Reporting

Performance evaluation

Investment Policy?

1. Examine state statutes

2. Examine collateral statutes

3. Review sample investment policies

4. Draft investment policy

5. Have right parties review

6. Adopt by formal action of governing body

7. Establish written investment procedures

8. Review annually

Share with your broker-dealers, investment advisers, financial institutions

Why an Investment Policy?

improves the quality of decisions

demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield.

signals to rating agencies, the capital markets and the public that a government entity is well managed and is earning interest income suitable to its situation and economic environment.

GFOA Best Practice (2010)

A written investment policy is the single most important element in a

public funds investment program.

Policy Components

Objectives

Safety

Liquidity

cash flow forecasts

Return

(related to risk)

– Comfort level of board/oversight committee

– Internal expertise

– Access to information/tools

– Size of portfolio

Policy Components

Safekeeping / Custody

Selection of Financial Institutions

Collateralization

Authorized Investments

Safekeeping

Using Safekeeping & Third Party Custody

GFOA Best Practice (2010)

In a third-party safekeeping agreement - a firm other than the party that

sold the investment provides transfer and safekeeping of the securities.

Financial firms should not serve as both broker-dealer and custodian.

Safekeeping represents a financial institution’s obligation to act on

behalf of the owner under the owner’s control.

Investments should be settled in a delivery-versus-payment (DVP)

basis.

Using Safekeeping & Third Party Custody

GFOA recommends:

Competitive selection

evidence their safekeeping or custodial relationship with a

signed, written security agreement that is reviewed by

counsel and establishes the firm as its agent

execute all investment transactions on D-V-P basis

designate a specific DDA (demand deposit account) clearing

account in conjunction with the safekeeping or custodial

account

Selection of Providers

Banks, Brokers, Advisers, Others

Selection of Financial Service Providers GFOA Best Practice

Competitively procure providers – including those of financial

services – in a timely manner and with a defined process.

“timely” can be mandated by government’s own procurement

rules or 3-5 years

Competition promotes “fairness”

Vendors more likely to participate, support government

Citizens and interested parties appreciate government’s

care of their monies

Promotes government’s knowledge of its options – both

technical and pricing

Selection of Financial Service Providers

Use defined internal process to select, qualify, renew,

or terminate

Determine scope of services required, salient

points to consider

Determine scoring methodology

• Characteristics and weights

Use a questionnaire, conduct interviews, check

references

Research and identify experienced, active

providers to invite

Score

Make decision

Procurement of Banking Services

GFOA Best Practice

Governments use a wide variety of banking services for the deposits,

disbursement, and safekeeping of public funds.

Prudent procurement practices require the reevaluation of

banking services on a periodic basis.

Continual technology changes, treasury management

practices, and banking industry structure offer public funds

managers opportunities to reevaluate banking services/costs

Recommendation:

Establish procurement process, assure periodic reviews of banking

services. Consider :

1. Periodic competitive procurement; use RFP; use independent

bank evaluation services to verify creditworthiness of firms prior to

award

Procurement of Banking Services

Recommendation (cont’d):

2. Have contracts

3. Identify primary relationship manager

4. Evaluate relative benefits and costs of paying for

services through direct fees, compensating balances, or

blended

5. Evaluate the government’s needs and do cost/benefit

analysis

6. A treasury management review and comprehensive

evaluation should be performed prior to the issuance of

an RFP

Broker-Dealers

Recommendation:

Due diligence on broker/dealers should include :

dealer’s experience and knowledge of public funds

investing;

all contact information for primary contact, backup

and operations staff;

manager and supervisor;

the financial strength of the firm;

areas of expertise and trading activity;

registration with FINRA and any citations;

References

Don’t select more than you can use

Competition

Electronic trading platforms, such as Bloomberg, MarketAxess,

Tradeweb, and eConnectDirect provide alternative for

competitive pricing. These platforms can provide improved

transparency over competitive bids and should be considered if

cost effective

eConnectDirect – collaboration of NACo & Multi Bank

Securities (MBS)

Promotes efficiency, transparency, competition

• fixed-income offerings from 100s of brokers

• Asset classes - CDs, agencies, Treasurys, corporate and

muni bonds

Dashboard

28

• Portfolio

Summary and

Maturity

Distribution

Graphic

• Track account activities and see action items

Investment Advisers

Exercise caution and prudence in their selection of investment

advisers. Because fiduciary responsibility for the safety and

liquidity of government funds cannot be delegated.

Define and control the procurement process and assure periodic

reviews of investment advisory services.

Defined due diligence and proper controls help achieve

objectives, protect funds and reduce reputational risk

and frequency of such review

Due Diligence on Bank, Treasury

Management Providers

GFOA Best Practice

As part of a due diligence program, governments should review

quarterly and annual financial reports of key counterparty banks

and summary reports from regulator.

Credit Rating Agencies publish a rating in alpha and/or numeric

form, and may rank bank debt instruments as indicators of a

bank’s ability to satisfy obligations

Other methods of determining the credit and soundness of

counterparty are the CAMELS (Capital, Asset Quality,

Management Quality, Assets, Liquidity, Sensitivity to Marker Risk)

ratings and the Probability of Default

Due Diligence on Bank, Treasury

Management Providers

Recommendation:

As part of the ongoing due diligence, governments

should evaluate their key bank(s) and issue an internal

Bank Review Summary on quarterly basis

Operating relationship with bank or non-bank processor

of cash and near cash assets needs to be managed

pro-actively

A. Relationship Management

B. Bank Review Summary

C. Monitoring Financial Conditions

Collateralizing Public Deposits

GFOA Best Practice (October 2007)

Collateralization of public deposits through the pledging of

appropriate securities or other instruments (i.e. surety bonds or

letters of credit) by depositories is an important safeguard for such

deposits.

Federal law imposes rules in order to secure government deposits.

Otherwise, FDIC may void an otherwise perfected security

interest and leave the governmental depositor with only the

right to share with other creditors in the pro rata distribution of

the assets of a failed institution for the amount of deposits that

exceed the FDIC coverage.

Collateralizing Public Deposits

Recommendation:

Use written agreement with pledging requirements as

protection for state or local government's deposits.

GFOA encourages governmental entities to establish

adequate and efficient administrative systems to

monitor such pledged collateral:

1. Implement programs of prudent risk control, such as

formal depository risk policy, credit analysis, and use of

fully secured investments

Collateralizing Public Deposits

Recommendation (cont’d):

2. Ensure compliance with all laws to ensure security

interests in collateral pledged to secure deposits are

enforceable against the receiver of a failed financial

institution. Federal law provides that a depositor’s

security agreement, which tends to diminish or defeat

FDIC interest; agreement:

is in writing;

was approved by the board of directors of the

depository or its loan committee

has been, continuously, from the time of its

execution, an official record of the depository

institution

Collateralizing Public Deposits

Recommendation (cont’d):

3. Pledged collateral should be:

held at independent 3rd party

evidenced by written agreement - UCC req’t control

marked-to-market at least monthly

Substitutions of collateral should meet the

requirements of agreement, be approved, by the

entity in writing prior to release, and the collateral

should not be released until the replacement

collateral has been received.

The public entity should require reporting directly

from custodian

Cash Flow Forecasting

Cash Flow Forecasting

Purpose

Ensure sufficient liquidity

Optimize use of funds

Creating a forecast

Determine sources and uses of cash

Use historical data- bank reports, financial reports

Incorporate future spending needs – budget,

capital projects

Include current investment maturities

Structure Investments

Determine needed cash cushion

Structure maturities to cover large disbursements

Identify maximum maturities

Cash Flow Forecasting

GFOA Best Practices – Cash Flow Forecasting:

• Consult with operating departments when developing

expectations for planned expenditures.

• Create a spreadsheet using historical data and future

expectations to anticipate disbursements and receipts.

• Receipts should include expected inflows and investment

maturities.

• Disbursements should include regular and non-repetitive

expenditures.

• Optimize cash management techniques to collect receipts as soon

as possible and manage disbursements judiciously.

• Forecasts should be made conservatively. Allow a cushion for

unexpected fluctuations in disbursements and receipts.

• Update the forecast regularly. Daily monitoring and recording of

actual revenues and expenditures can be very beneficial.

Investments

Investments

Certificates of Deposit

CDARs, other placement services

Treasuries

Agencies

Municipal Bonds

Corporate Bonds

Local Government Investment Pools (LGIPs)

Money Market Mutual Funds

Others

Diversify

Generally, greater risk increases opportunity for higher

returns, along with increased volatility of returns

Useful strategy for managing risk in portfolio is through

diversification.

Diversification of investments in a portfolio is based on

the different types of risk – primarily interest rate or

market risk, liquidity risk and credit risk. Diversification

is achieved by investing in variety of securities with

dissimilar risk characteristics that respond differently to

changes in the market.

Diversification of Investments in a portfolio

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Diversification of Investments in a portfolio

43

Take-aways

Have an investment policy

Use third-party safekeeping

Know who you’re doing business with

Know what you’re buying

If it sounds too good to be true, it is too good to

be true IT IS NOT REAL!!!!!!!!

Ask why are you doing different - better - than your peers,

your benchmarks

Questions and Answers

If you would like to ask a question, please go to the nearest microphone.

Evaluations

NACo values all feedback.

Evaluation forms can be found in the NACo Conference app and online at

www.naco.org/workshopevals.

Please visit iTunes or Google Play to download the 2015 NACo Annual Conference App!