NCLGIA 2019 Summer Conference Investment Options & Strategies Lee Carter John Frye NCCMT

General Requirements (G.S. 159) Finance Officer manages investments Subject to governing board restrictions These are usually in investment policies Managed so that cash is available when needed

Basic Guidelines Safety Liquidity Yield Governments should evaluate: Eligibility under G.S. 159-30(c) Appropriateness

U. S. Treasuries & U.S. Government-Guaranteed U.S. Treasuries – bills, notes, and bonds U.S Government Guaranteed GNMA REFCORP (from S&L bailout) FDIC-guaranteed corporate notes (from 2008) Other securities possible Must be specifically guaranteed as to principal and interest

Government Agencies and Instrumentalities Agency must be specifically listed in G.S. 159-30 “Direct” obligations or direct debt only – not agency-guaranteed Fannie Mae & Freddie Mac under U.S. conservatorship – form may change

State and Local Obligations State of North Carolina and NC local governments and public authorities only Bonds and notes only – not COPs Notes being rolled into bonds or notes are eligible, notes being rolled into COPs – NOT eligible

Commercial Paper Unsecured short-term promissory note A1 / P1 / F1 only No split ratings “+” ratings for S&P

Bankers Acceptances Short-term corporate note No specific rating on the security Issuer must be either of the following: Long-term rating is “AAA” Bank or holding company headquartered in NC

NCCMT SEC-registered funds (both Government and Term Portfolios) Certified by LGC Government Portfolio 2a7 Fund Investments limited to US Treasuries and US government agencies Stable principal Maturity 60 days or less Term Portfolio Investments limited to G.S. 159-30 Ultra-short bond fund – principal can fluctuate 90 - 120-day target duration

Other Investments Repurchase agreements Third-party safekeeping Collateral must be Treasuries or U.S. government guaranteed Counterparty must be a primary dealer or bank Marked to market daily (at least 100% of value) Other mutual funds Bond proceeds only – subject to arbitrage provisions Fundamental investment limitations limited to G.S. 159-30 Ratings, arbitrage tracking – check with bond attorney Local special investment legislation

AGPIP FUND Authorized under G.S. 159-30.1(b) and 30.2(b) Government must establish irrevocable trust by local resolution Investment options: BIF EIF STIF Forms available on State Treasurer’s website

Not Authorized Corporate notes Brokered CDs Foreign securities – only domestic subsidiaries are allowed Bonds and notes from other states “Retail” repos Annuities

Investment Strategy Development Investment Statutes (G.S. 159-30) What is allowed under law in NC? Investment Policy What are the governing body’s investment directives? Which investments are available to me at the local level? Investment Strategy Within the parameters of state statute and policy, how should I invest based on current conditions? Investment Program How will I implement my strategy and evaluate it? Lee will review what is allowed under N.C. General Statutes This is the basic continuum in a well developed investment program. Law-Policy-Strategy-Program We will spend the majority of our time discussing investment Strategy Development Will not be giving you a specific strategy. That will vary widely based on market and local conditions and factors.

Investment Strategy Development NC Statutes Policy Strategy Investment strategy development starts with NC General Statutes 159-30 Next, local policies add additional restrictions, guidance, and procedures Finally, an investment strategy is developed within these parameters based on market, financial, and other local conditions.

Investment Statutes N.C. General Statute 159-30 contains everything that is available to local governments for investing public funds. NC Statutes The statutes spell out all of the options available to us for investing public funds under law. However, the fact that an investment option is allowable under law, does not mean it is appropriate for your situation

Investment Policy “An investment policy describes the parameters for investing government funds and identifies the investment objectives, preferences or tolerance for risk, constraints on the investment portfolio, and how the investment program will be managed and monitored.” GFOA Best Practices

Investment Policy Local investment restrictions and guidance beyond what is provided under general statutes Provides governing body’s general investing philosophy and expectations Allows Finance Officer some latitude to respond to market and financial conditions Policy

Investment Policy Investment Policy Considerations: Investment objectives Governing body preferences Risk tolerance guidance Allowed investments Maximum investment term or target duration Diversification requirements or portfolio mix targets Authorized financial institutions and broker dealers Reporting requirements Investment custody and internal controls

Policy vs. Strategy Policy Strategy All allowable investments Maximum concentration by issuer Maximum maturities Strategy Best choices among available investments Best allocation based on current market conditions Duration matched to current liquidity needs May be more restrictive than state statute Greater diversification that the required minimum may better serve the unit Just because a 5-year maturity is allowed in your policy does not mean it is prudent

Investment Strategy Investment Strategy Development Process Review Investment Program Review Investment Risk Profiles Review Market Conditions Review Portfolio Considerations Review Local Issues Strategy

Investment Strategy Review Investment Program Review policy goals and objectives Consider other board and management expectations Assess current liquidity needs “Within the parameters of what is allowed under law and our investment policy, how should I be investing based on current liquidity needs and market conditions?”

Investment Strategy Review Risk Profile of Various Investments Credit risk Liquidity risk Interest rate risk Reinvestment risk In order of Safety, Liquidity, and Yield Review each of the investment vehicles available to you and assess the risk profile of each Consider if the risks of a particular investment can be mitigated through diversification

Investment Strategy Commercial Paper - Risk Profile Example Credit risk Medium-relies on a single corporate entity for repayment that is highly rated Liquidity risk Low-currently there is an active market for CP Interest rate risk Medium-the investment’s value may fluctuate with interest rate changes Reinvestment risk Low-short term, non-callable investment Here is an example risk profile using commercial paper These are my thoughts on this. You may place more or less value on a specific risk Once risks are evaluated, compare the yield differences to see if an investment is worth the additional risk to you

Investment Strategy Review Market Conditions Are we most likely in a rising or falling interest rate environment? Where do economists say we are in the economic cycle? Has an investment option changed over time?

Investment Strategy Has an investment option changed over time? U. S. Treasuries inverted yield curve; fed policy changes U. S. Agencies credit quality; public acceptance; availability; investment feature changes/calls Money Market Funds fund composition changes; rising market or falling rates Commercial Paper credit risk; economic forecast for corporate profits; availability Bank CDs rate changes over time; bank appetite for collateralized deposits; CD size limitations The one thing that remains constant is CHANGE Each of these investment options have changed over time Review how each investment has changed since the recession

Investment Strategy Review Portfolio Considerations Establishing portfolio liquidity allocations Operating funds Intermediate reserve funds Longer-term investments Duration targets Consider tolerance for price volatility Consider effect calls have on duration How into which “liquidity buckets” should you allocate the funds you have on hand? What investments fit with your cash requirements profile? May or may not be specifically spelled out in the Investment Policy. How far out should I go under current conditions? Longer maturity investments have more price volatility. Gains and losses have to hit interest earnings revenues as well as the balance sheet. This caused some units issues at June 30, 2018 when rates were rising and longer term investments had valuation markdowns at June 30. In some cases, it completely wiped out their investment earnings for the year.

Investment Strategy Review Local Issues Upcoming liquidity requirements Fund balance policy considerations Changes in fund balance levels Governing body or management changes Assessing staff resources for investing All of these issues can affect your investment strategy. Are there upcoming liquidity requirements? Where are you in your fund balance target range? Minimum, maximum, middle? Over target or under the target? Is fund balance rising or falling? Has the governing body or management changed in regard to financial management? What staffing resources do I have to commit to investing activities? This has a bearing on how robust the investment program can be.

Investment Strategy How will the investment strategy be implemented? How will I make sure strategy is being adhered to? Are policy, statute, and strategy being followed? Are funds fully invested at all times? What outcome metrics will be used to measure performance? Caution should be exercised with these May encourage yield chasing If you are able to stick to your investment strategy, it will not be by accident! How will I evaluate that I or my staff is adhering to the strategy? Remember you could be doing everything right and miss an outcome metric. Markets change!

Investment Strategy Development Local governments have a duty to the public to appropriately invest the funds that have been entrusted to them. Each unit must develop an investment program that is right for them. This will vary widely from unit to unit. What is appropriate for one unit may not be for another. “Everything Starts with Why” book. Why? - We have a duty to invest the funds entrusted to us. You must develop a strategy and program that is right for your unit. This will vary widely based on many factors and conditions.

Investment Strategy Development Strategy must be developed, implemented and reviewed over time Plan – developing policy and strategy Do – putting your plans into action Review – evaluating your policy and strategy over time What specific actions do you need to take to elevate your investment program to the next level? Thank you!

What specific actions do you need to take to elevate your investment program to the next level? Thank you!