CGFO Treasury

Part IV Investment of Local Government Surplus Funds (all)

Local government investment policies.

• Written Plan
• Scope
• Investment objectives

• SEC registered Money Markter Funds - AAA rated
• Authorized Investment Pools - SBA (State Board Adm.)
• CDs or Savings Accounts from QPDs
• Direct Obligations of the US Treasury
• Federal Agencies & Instrumentalities
• Israel Bonds
• Registered Investment Company or Trust
• Other

Qualified Public Depositors is a list of approved depositors.

• Authorized Investment Pools - SBA (State Board Adm.)
• SEC Registers Money Market Funds - AAA rated
• CDs or Savings Accounts from QPDs
• Direct Obligations of the US Treasury

Addresses comon deposit & investment risks disclosures related to credit risk (FICCC).

Accounting & Financial Reporting for Certain Investments & for External Investment Pools.

Local government investment authority.

Authorizes units of governmnet to deposit in the Trust fund.

Establishes procedures for accounts and deposits

• Definitions:
• CFO
• Current expenses
• Governing body
• Short Term
• Surplus funds
• Trust fund
• Unit of local government

• setting investment objectives
• identifying & managing
• investment assets
• staffing
• investment policy
• developing cash flow
• performing broker-dealer due diligence
• implementing internal controls
• selecting & purchasing investments
• recording & accounting for investments
• monitoring the portfolio
• evaluating & reporting results

A concise & clear statement of the objectives & parameters formulated by an investor or investment manager for a portfolio of investment securities.

• PEAA
• P - Pooling of Funds
• E - Exclusions
• A - Applicability
• A - Arbitrage

• SLY
• S - Safety - Credit & interest rate risks
• L - Liquidity - Static & Dynamic
• Y - Yield

Local considerations

• Prudence "Prudent Person"
• Ethics & conflict of interest
• Delegation of authority

• Risk of Loss due to failure of an issuer or backer.
• Diversification

• FICCC
• Foreign currency risk
• Interest rate risk
• Credit risk
• Custodial credit risk
• Concentration of credit risk

If invested in more than 5% must disclosure.

Very safe

Horizon investing is the investing the money in instruments that mature.

Systematic & regular purchase of t-bills that matures & buy another one.

Money markets & SBA

Buying when you need money.

Increase the porfolio by exceeding market average rate of return.

• Marketing timing
• money market arbitrage
• downgrade investment quality
• SWAPS
• Yield curve analysis

Static - Hold to maturity - Passive

Dynamic - Securities have active secondary market - Active

• Term to maturity
• Coupon rate
• Yield to maturity
• Measured in years
• Measure of the timing of cash flow

Risk that market value will fall due to changes in market interest rates.

QPD can be bought out by another bank

• FS 280
• Banks fail - notify treasury & fill out claim within 30 days . If you don't fill annually reports you won't get your money

• Authorized Financial Dealers & Institutions (QDPs)
• Delivery vs payment ensures securities are deposited in an eligible financial institution prior to release of funds- 3rd party custodian.
• Safekeeping
• Internal controls -control of collusion, separation of duties, custodial safekeeping, avoidance of physical delvier securities, clear delegatyion of authority, written confirmation of tranactions.

Diversification - limit investment sto avoid overconcentration in securitys from a specific issuer or business sector (excluding US Treasury securities)

Maximum Maturities - attempt to match its investments with anticipated cash flow requirements. Will not directly invest in securities maturing more than 5 years from date of purchase - following state & local guidelines. (disclosure is required).

• Methods - prepare an investment report at least quarterly, including a management summary that provdies an analysis of the status of the current investment portfolio & transactions made over the last quarter.
• Listing individual securities
• Realized & unrealized gains
• Average weighted yield to maturity comparted to applicable benchmarks.

Performance Standards

• Method
• Performance Standards
• Marking to Market

Investment portfolio will be managed in accordance with the parameters specified within the investment policy. Portfolio should obtain a market average rate of return during a market/economic environment of stable interest rates. Appropriated benchmarks shall be established for performance on a regular basis.

Market value of the portfolio shall be calculated at least quarterly and a statement of market value of the portfolio shall be issued at quarterly.

This will ensure that the review of the investment portfolio, in terms of value & price volatility, has been performed consistent with the GFOA Recommended Practices.

• Portfolio returns
• 1. Effective rate of return
• 2. Risk adjusted return
• 3. Total Return

• Investment returns
• Coupon yield, current yield, discount yield, horizon yield, option adjusted yield, yield to maturity, yield to call

Report investments at FAIR VALUE on the Balance Sheet

Report all investment income, including changes in FV, as revenue on the operating statement.

A passive portfolio that represents the expected returns & expected risks that corresponds to the investment objectives.

• Maturity structure
• Investment quality
• Market exposure

• T-bills discounts mature on Thursdays less than 1 year.
• T-notes coupons sold at par, above or below

• DAP
• 218.403 Definitions
• 218.407 Local govt investment authority
• 218.415 Local govt investment policies

Investment types is a list of authorized investments.

GFOA recommends full collateralization of Bank Accounts. FL Statutes allow for QPD.

Covariance is a measure of the degree to which returns on 2 securities move in tandem.

• Positive - returns move together
• Negative - returns vary inversely

Establishment of federal reserve banks, to furnish an elastic currency.

• 7 members
• Nominated by the President
• Confirmed by the Senate
• 14 year terms

• 12 members
• 7 members of Board of Governors
• Pres. of the NY Federal Reserve Bank
• 4 rotating members from the remaining 11 Fed. Res. Banks each serving a one-year term

Foster the long-run objectives of price stability and sustainable economic growth through monetary policy.

• Bank Reserve Requirements
• Discount Rate - rate on loans by fed res. banks to member banks.
• Open Market Operations - Buy & Sell US Treasuries

• Issued at discount
• Mature less than 1 yr.
• Interest paid at maturity
• Credit/Default risk free
• Highly liquid
• Issued and Mature on Thursday
• Carry lowest rates of return, normally
• Backed by full faith & credit of the US Govt.

• Coupon Bearing
• Mature 2 - 30 yrs
• Interest paid semi-annually
• Credit risk free
• Very liquid
• Carry incrementally higher rates of return than T-Bills, normally
• Backed by full faith & credit fo the US Govt.

No

Is the stated price for which the derivative may be purchased (embedded call).

Only Credit Risk

Measure the timing of cash flows from a fixed-income security and useful indicator of price volatiltiy.

Measured in years.

Increases

To identify the amount and timing of surplus funds available for investment.

Speed up collections and increases collection float.

Bring in money quicker and make payments out slower.

This is used in calculating bank fees and overnight earnings.

The excess balance available to indirectly pay bank service charges.

An account whose funds are periodically transferred to zero-balance accounts to pay obligations.

Generally carry the funds to cover outstanding checks and a reconciled zero-dollar balance. A/P P/R.

Transfer excess balances from a deposit account to an investment account - usually overnight.

File to bank and they match and pay.

Call Govt up and ask to pay checks. Prevents fraud.

Scan and deposit copy of check

• Small Bus. Adm.
• Export/Import Bank
• GNMA
• higher interest than Treasuries
• full faith & credit of US Govt
• L-T
• Subject to liquidity & market risks

• Fed Farm Cr. Bank
• Fed Home Loan Bank
• Freddie Mac
• Fannie Mae
• Govt sponsored enterprised
• Establish to implement fed. lending programs
• Implied backing of Fed Govt.
• Higher interest rates & risk than Treasuries
• S-T & L-T instruments

Should be designed to prevent losses of funds which might arise from fraud, employee error, misrepresentation by 3rd parties, or imprudent actions by employees of the unit of local govt.

Less than 100 shares of stock pooled together & sold.

• Put option to sell
• Call option to buy

There is no interest stated on the security purchased at a discount. Interest is paid at maturity.

T-Bills

E-payables & Food Stamps

In finance, Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return.

Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskiness of the asset. After all, riskier assets will have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha. In the context of CAPM, calculating alpha requires the following inputs: the realized return (on the portfolio),the market return,the risk-free rate of return, andthe beta of the portfolio.

The investment policy shall require all approved institutions and dealers transacting repurchase agreements to execute and perform as stated in the agreement.

Any Govt entity within the state not part of the state govt. and shall include, but not be limited to, the following and the officers thereof: any county, municipality, school district, special district, clerk of the circuit court, sheriff, property appraiser, tax collector, supervisor of elections, authority, board, public corporations, or any other political subdivision of the state.

The relation between the interest rate and the time to maturity.

Yield is the overall rate of return available on the investment.

What is custodial credit risk?

Mutual funds and external investment pool.

Overall credit risk.

Loss of investment value or income.

Interest rate risk

Yield benchmarks

GASB Stmt 40

Foriegn currency risk.

Concentration of credit risk

Preparing, maintaining and using well written investment procedures.

Prevention & detection controls

Involves the sale/purchase of newly issued securities by investment bankers to investors.

US Agency Obligation

Repos

US Treasury Obligations

Treasury Bills

Liquidity

• Over the counter collections - banks can accept pymts for govts.
• Account consolidation -
• Concentration accounts

Night deposit

Wire Transfers