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The Task of Keeping Public Funds Safe Presented by: Catherine A. Provencher

The Task of Keeping Public Funds Safe Presented by: Catherine A. Provencher New Hampshire State Treasurer New Hampshire Government Finance Officers Association 25 th Annual Meeting & Seminar May 6 & 7, 2010. State Statutory References.

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The Task of Keeping Public Funds Safe Presented by: Catherine A. Provencher

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  1. The Task of Keeping Public Funds Safe Presented by: Catherine A. Provencher New Hampshire State Treasurer New Hampshire Government Finance Officers Association 25th Annual Meeting & Seminar May 6 & 7, 2010

  2. State Statutory References •   “Treasurer shall have custody of all moneys belonging to the county/ town/ city/ school district….” • County Treasurers RSA 29:1 – 29:3 • Town Treasurers RSA 41:26 – 41:29-a •   City Treasurers RSA 48:16 • School Treasurers RSA 197:23-a – 197:24-a

  3. Current Statutory Requirements: Deposits • Treasurer shall deposit ……  • Participation units in the Public Deposit Investment Pool or,  • Federally insured banks chartered:  • Under laws of New Hampshire or • The federal government with • A branch within the state.  • Banks chartered outside the State, if collateralized (Collateral not required if utilizing In-State Banks) • (Town RSA 41:29, II. + City RSA 48:16, I. + County 29:1, I + Schools RSA197:23-a I.)

  4. Collateral Requirements – Out-of-State Bank Deposits • Non-NH state chartered banks to pledge & deliver collateral security to:   • Third-party custodial bank; or • Regional Federal Reserve Bank (e.g. Boston Fed) •   Securities of following types allowed for collateral: • U.S. Government Obligations (Direct) • U.S. Government Agency Obligations • State of NH Obligations • (Town RSA 41:29, II. + City RSA 48:16, I. + County RSA 29:1, I + School RSA 197:23-a I)

  5. Current Statutory Requirements: Investments • Participation Units in the Public Deposit Investment Pool • In deposits of federally insured banks chartered: • Under the laws of New Hampshire or • By the federal government with a branch within the state • Obligations fully guaranteed as to principal and interest by the U.S. Government • (Town RSA 41:29, IV. + City RSA 48:16, III. + County RSA 29:1,IV + School RSA 197:23-a IV.)

  6. Investments at Banks • Investments at Banks Include: • Money Market Accounts • Certificates of Deposits • Repurchase Agreements • All Other Interest Bearing Accounts • (Town RSA 41:29, IV + City RSA 48:16, III + County RSA 29:1, IV + School RSA 197:23-a, IV)

  7. Investment in Fully Guaranteed U.S. Obligations • Obligations fully guaranteed as to principal and interest by the U.S. government : • Held directly (e.g. Treasury bills, notes, bonds), or in the • Form of securities of or other interests in:  • Open-ended or closed-end management-type investment company (mutual funds) or • Investment trust (registered under 15 U.S.C. section 80a-1 et seq) • Portfolio is limited to such obligations and repurchase agreements and • Secured by collateral (Town RSA 41:29, IV + City RSA 48:16, III + County RSA 29:1, IV + School RSA 197:23-a)

  8. Additional Deposit & Investment Requirements • Prior to accepting deposits or investments, banks shall make available:  • Option to have funds secured by collateral with • Value at least equal to amount of funds and • Segregated for the exclusive benefit of town/city/district. • Eligible collateral – only securities defined by Bank Commissioner in Administrative Rules (Ban 1450) pursuant to RSA 386:57. (Town RSA 41:29, V + City RSA 48:16, V + County 29:, IV + School RSA 197:23-a IV.)

  9. Minimize Risk of Loss (Custodial Risk) • FDIC Insurance – Currently $250,000, through 12-31-2013, total by deposit type, custodian and bank (not separate branches) . If in-state deposits: • Time/savings deposits (interest bearing) are added together and insured to $250,000 • Demand deposits are added together and insured to $250,000 • Account totals based on municipal owner & custodian (e.g. Treasurer, Trustees) – custodian is considered the “insured” rather than municipal owner of funds. • Excess over $250,000 total are at risk • (Out-of- State deposits are added together by custodian) • For excess funds, consider collateral agreements

  10. Collateral For Public Funds • Allowable collateral securities established in Administrative Rules (Ban 1450) by Banking Commissioner (RSA 386:57) • Pledged securities to equal or exceed amount of funds, net of FDIC insurance • Pledged securities valued at “market” • Must be “Perfected” per FDIC (or wait in line)

  11. Allowable Collateral (Ban 1450) • Types of Allowable Collateral are: • Public U.S. Obligations (RSA 387:6 I, II, III, IV) • Obligations of Canada (bonds or notes) if in 3 highest ratings of rating services (RSA 387:6 V) • Corporate Obligations (bonds and notes) assuming (RSA 387:6-a): • Issued, assumed or guaranteed by U. S. companies • If in 3 highest ratings of rating services • (Convertible bonds of lesser rating if stock would qualify)

  12. Public U.S. Obligations (RSA 387:6) to include: • Direct U.S. Government obligations – Treasury notes, bills, bonds (“explicit” full faith and credit) • Obligations of federal agencies, federal corporations and other entities (“explicit” full faith and credit”) • Obligations of government-sponsored enterprises (“implied” full faith and credit) • Obligations of State of New Hampshire and New Hampshire municipalities (bonds and notes) • Obligations of other States or municipalities assuming: • Backed by ability to levy taxes for repayment or • Backed by revenues and are in • 3 highest ratings of rating services

  13. Obligations of federal agencies, et al (full faith & credit) • Federal Agencies, federal corporations and other entities include: • Export-Import Bank of U.S. • General Services Administration • Maritime Administration of U.S. Dept. Of Transportation • Small Business Administration • Dept. of Housing & Urban Development • Federal Housing Administration • Government National Mortgage Assn. (Ginnie Mae’s) • Community development • Public housing notes and bonds

  14. Obligations of Government-Sponsored Enterprises • GSE’s have “implied” full faith and credit and include: • Federal Farm Credit Banks, including: • Banks for Cooperatives • Federal Intermediate Credit Banks • Federal Land Banks • Federal Home Loan Banks, including irrevocable standby letters of credit – highest rating by rating service • Federal Home Loan Mortgage Corp.( Freddie Mac) • Federal National Fortgage Association (Fannie Mae) • Tennessee Valley Association

  15. Perfection of Collateral – Requirements • FDIC recognition of collateral pledged to a municipality requires all three following requirements (“perfect collateral”): • Collateral agreement must be in writing • Written authorization by board of directors (board meeting minutes) or written delegation of authority to particular bank officer in a corporate resolution • Continuously an official record of the depository institution from time of collateral agreement execution • CAUTION: Failure to “perfect” collateral may result in FDIC voiding full security interest leaving only right to share pro rata in the distribution of remaining assets of failed institution, once determined – could be a long wait.

  16. Bank Fails! Now What? • FDIC acts in several roles when bank is unable to meet obligations to depositors and others (failure): • Preferred and most common role is to arrange sale to healthy bank. If not, then: • Insurer of bank deposits- pays insured depositors up to insurance level of $250,000 • Federal law requires insurance payments “ASAP” • Normal practice – 2 working days • Fiduciary & trust accounts take longer – more complex • Receiver of failed bank – selling/ collecting assets of failed bank and settling debts, including claims for deposits in excess of insured limit

  17. FDIC as “Receiver” • FDIC “receiver” role is to sell assets and settle debts including deposits in excess of FDIC insurance cap • Depositor to receive “receivers certificate” as claim against uninsured deposit balance • Depositor to receive payments as assets are sold. Amounts depend on proceeds from liquidated assets: • Uninsured excess deposits paid first • Then general creditors, and • Last are stockholders • (May take years to recover)

  18. State Treasury Collateral Practices • Safety and security of funds is top priority • Utilizes only federally insured banks with NH or federal charter with “bricks and mortar” presence in State • Currently collateralizes all deposits • All collateral agreements are in writing and insure FDIC perfection requirements are continually met. • Receives and reviews collateral coverage reports from banks • Utilizes two types of collateral agreements.

  19. State Treasury Collateral Agreements Treasury collateral agreements of two types: • Pledged securities provided by bank: • Held by 3rd party custodian • 102% of total deposits in excess of FDIC insurance • Valued at market daily by custodian • Immediately due and payable upon bank failure (no waiting) • Irrevocable standby letter of credit issued by Federal Home Loan Bank • Maximum coverage of $200 million • Due and payable same or next business day (no waiting)

  20. Public Funds Security Recommendations - Recap • Summary recommendations for security of public funds: • Ask bank to confirm FDIC insurance requirements, if multiple accounts, and determine excess risk level or • Use https://www2.fdic.gov/edie/index.htmlto calculate yourself • Periodically review collateral requirements. • Read and understand collateral agreements before signing. (Some are rather complicated and may require legal review) • Insure that all pledged collateral securities meet legal requirements (State statutes and Administrative Rules) • Insure collateral is “perfected” • Monitor banking partner’s financial health

  21. New Public Funds Investment Option - CDARS • Senate Bill 314 permits use of CDARS program for investment of public funds (passed Senate and House and effective 60 days after Governor signature) • Allows investments of public funds in certificates of deposit in excess of FDIC insurance limit without collateral • Local banking partner will “spread” investment to other federally insured banks (including out-of-state banks) to keep each bank balance and interest under FDIC insurance cap • Local banking partner remains custodian of total investment. • Banking partner receives equivalent deposits from other CDARS participants to use in the community • Inquire at your bank, if interested. Many banks already participate

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