2. Section 15 –The Public Funds Investment Act Basics of County Investments Course Linda T. Patterson Patterson & Associates, Austin

3. What is PFIA Designed to Do?
Provide guidelines for safety
Highest credit quality limits
Requires controls (maximum maturity, maximum WAM, DVP)
Provide for flexibility to match individual needs
Allow flexibility for entities to set their own parameters
Allow for adjustments to internal and external change
Apply to all entities

4. Prudence Prudent Person Standard
Investments shall be made with judgment and care under circumstances then prevailing that persons of prudence, discretion and intelligence exercise in the management of their own affairs not for speculation but for investment considering probable safety as well as probable income.
Addresses the cyclical nature of investing
Creates regular cycles for your compliance
Periodic reviews address ‘changes’

5. PFIA Changes over Time
1987
Splitting banking and investments to give entities access to markets
1989
Pools created and Public Funds Collateral Act enacted
1991
Limits on money market mutual funds added ($1 NAV)
1993
CMOs specifically added
1994
Orange County, CA lost $1.6 billion and Texpool had a run on pool

6. 1995 Legislative Reaction to Orange County
Adding controls and responsibility
- Certain extremely volatile CMO securities declared ‘unauthorized’
- Reverse repurchase limitation added on reinvestment to prevent leverage
- Designation of investment officers added
- Training requirement added but no set time requirements
- Broker/dealer certification process added
- Requirement for maximum maturity and maximum weighted average maturity limits
- Requirement for written quarterly reports to governing body
- Pools required to be rated AAA or equivalent
- Liquidation required on loss of credit rating
- Prudent liquidation required if security becomes unauthorized

7. 1995 Continuing Concerns
- Training defined as 10 hours in first 12 months and then 10 hours each 2 years
- Delivery versus payment required and required to be in policy
- Requirements for ethics disclosure by investment officers
- Requirement for an authorized broker/dealer list to be approved annually

8. And Still It Changes With Banks and Large cities taking the Lead 1999
- Israeli bonds and GICS added and cities can now hedge
2001
- Letters of credit added to be authorized for collateral use under PFCA
2003
- Securities lending added
2005
- CDARS added specifically under CDs
- Decommissioning trusts for nuclear plants access to the Trust Code
2007
- Hedging expanded for cities
2009
- Requirement to have procedure to monitor credit in policy
- Training period conforms to the entity’s fiscal year
- Pools may invest all their proceeds in money market funds by policy
- Substantial additions to pool reporting and yield calculations added

9. Changes Continue
2011
- FDIC/FICA securities authorized, DVP conflict on brokered CD added
2013
- No PFIA changes
- PFCA changes to require public entities to request a monthly report
2015
- City and school district training reduced in successive training
City officers have no continuous training but only if in bank deposits
2017
Broker certification removed – only pools and discretionary advisors
Interest bearing accounts recognized as investments (put in reporting)
Spread money market accounts added
MMMF must comply with SEC Rule 2a-7
MMMF need not be $1 NAV –opens to ultra short term bond funds

10. Changes Continue
2017
-ultra short term bond funds must be invest grade and no asset backeds
- Pools must state policy on cash & Board decides on breaking buck
-ISDs now can extend banking contract to 3 terms (six yrs) & negotiate
-Housing Authorities need only 5 hours of training but only if interest bearing accounts and CD only – no pools
Entities must divest from terrorist “scrutinized companies”
Higher Ed endowment go from $95 to $150mm before using Trust Code
Hedging by cities expanded for costs to be assigned as project cost
Jr colleges may use Trust Code for mineral rights funds

11. Lessons from History
Not all the legal changes made affect you or should affect you
Unique situations must be judged as such
Change must be evaluated and if necessary change with it
Not all the changes are necessarily good
Often result of reach for yield or outside influence
The devil is in the details
You have to understand why the change occurred

12. PFIA Outline Definitions and applicability Policy requirements
Training requirements
Authorized and unauthorized investments
Controls (DVP, brokers, rating monitoring, etc.)
Reporting
Special investment situations
Hedging
Mineral rights
Nuclear decommissioning funds

13. PFIA Required Standard of Care
Investments shall be made in accordance with Standard
Exercise the judgment and care under prevailing circumstances that a prudent person would exercise in the management of their own affairs
Investments are governed in order of priority by:
Preservation and safety of principal
Liquidity
Yield
Determination of prudence takes into consideration:
Investment of all funds – not a single investment
Whether the investment was consistent with the policy

14. PFIA Policy Specific Requirements
Write and adopt a policy annually which must: ( )
Must be adopted by resolution
The resolution must show any changes made
Be written
Primarily emphasize safety and liquidity
State the maximum stated maturity authorized
Address diversification, yield, maturity & capability of officers
List authorized investments
Include a procedure to monitor credit rating changes
Set a maximum weighted average maturity (WAM)
Method to monitor market prices
Require delivery versus payment (DVP)
Policy may ‘un-authorize’ any type investment

15. PFIA Strategy Specific Requirement
Write and adopt a strategy ( )
Governing body must review and adopt the strategy annually
Strategy must be approved by resolution
Resolution adopting policy can also adopt strategy
Resolution must note the changes made
To include the maximum weighted average maturity (WAM)
The objectives of the portfolio must address in priority order:
Suitability of the investments to the entity’s financial requirements
Preservation and safety of principal invested
Liquidity
Marketability if need arises to liquidate
Diversification of the portfolio
Yield

16. PFIA Investment Officers
Governing Body Designates Investment Officer(s)
Designation by rule, order ordinance or resolution ( )
Governing body may choose anyone as IO
IO is responsible for investment consistent with policy
A contracted adviser/entity can also be an IO
Effective until rescinded or terminated from employment
IO must follow Prudent Person Rule
No person can deposit, withdraw, transfer or manager unless authorized by law
Council has the option to chose officers (no necessary set position)
Regional Planning Commission can only serve Commission as IO
Governing body retains ultimate fiduciary responsibility

17. The Investment Officer
IO for County must be a local designated officer (Treasurer if office exists)
Must act in accordance with Standard of Care
Must disclose personal/business relationships by officer
Refers to personal business relationships
IO must file a statement disclosing the relationship
If IO relationship is within two levels of blood or marriage
Filed with the Texas Ethics Commission
If IO owns >10% of voting stock/shares or >$5,000 in fair market value of firm
If IO received >10% of IO’s prior year income from the firm
If IO received >$2,500 in investments in prior year for his personal account
Specific income limits are set but full disclosure is safer/easier

18. PFIA Required Officer Training
Applicable to Treasurer and investment officer(s)
and CFO (if Treasurer is not the CFO)
Must use an independent source approved by governing body or investment committee
This is not an annual designation
All officers take 10 hours within 12 months of taking position
All officers take 10 hours each successive two fiscal years
Fiscal year begins on first day of fiscal year
City and ISD only: 8 hours each successive fiscal year
Training must include:
IO responsibilities, controls, security risks, strategy risks, market risks, diversification and compliance to Act

19. Training Exceptions (2256.008)
No continued training for municipalities if:
It does not “invest” municipal funds
only investing in certificates of deposit
Toll Roads and Conservation and Reclamation Districts
If using an RIA and has < 5 employees
Officer of the governing body attends one-time 4 hours training
Designated investment officers must attend the training with the full provisions
Housing Authorities
Initial 10 hours in first 12 months
Continuing training is 5 hours each two years – or none if only CD and bank – i.e. no pools
Emergency Service Districts (Health & Safety Code Ch. 775)
Training is not required for the district BUT
Without training investment only in US Obligations, CDs, pools
Water Districts (Water Code Ch. 36)
Training of at least 6 hours in first year
Training of at least 4 hours each two years

20. PFIA Governing Body Requirements
At least annually
Court must review and adopt policy
Court must review and adopt strategy
Court must review and adopt broker/dealer list
Court must receive quarterly reporting
Court must designate investment officers by resolution
Court must provide for IO training

21. PFIA Policy Certification Requirement
Policy certification now required only from pools and discretionary advisers
The certificate must be received before any transaction takes place
Certificate language must be acceptable to both parties – not set by PFIA
Nothing relieves entity of responsibility to monitor investments
You chose whether to get certificates before or after firm is approved
Get it first.
Warning Note : “Discretionary advisers” means you have no say on trades or portfolio
Not reasonable for public entities which must protect the cash flow needs

22. PFIA Specific for Brokers
Court must adopt list of broker/dealers at least annually
The list of broker/dealers must be approved annually by Court or
Court designated Investment Committee
List only broker/dealers – not banks or pools
Although no certification is required – send it as a best practice
Good idea to get basic information
Contacts and backup staff
SEC registration (CRD #)

23. Two PFIA Required Audits
Audit by independent auditor ( d)
Required if investing in more than bank products, MMMF, and pools
Audit consists of review of the quarterly reports
Result of review is to be reported to the Court
Internal compliance audits required ( m)
Entity must annually complete an annual compliance audit
In conjunction with annual financial audit
Compliance with management controls
Compliance with County’s established investment policy

24. PFIA Specific Reporting
Quarterly Reporting must: ( )
prepared for all funds under PFIA (including bank accounts)
be prepared jointly and signed by each investment officers
state compliance with Policy and PFIA
be presented to Court and chief executive (Judge) quarterly
on a timely basis within a reasonable time
contain summary information on the total portfolio
beginning and ending market value
fully accrued interest (i.e. net earnings) including amortization/accretion
contain in detail the investment positions of the County
detail each position by book/market, maturity date, fund

25. PFIA Required Controls
Delivery versus payment ( b.4.e)
Not required to liquidate an investment if authorized at time of purchase ( )
A loss of required credit rating requires liquidation of security in prudent manner ( )
Requires policy procedure to monitor credit ratings ( b)
Requires policy procedure to monitor market prices ( )
Requires market prices from independent source ( )
Policy must address safety, liquidity and yield ( )

26. PFIA Specific Investment Requirements
No maximum maturities are set by PFIA
YOU set them but within PFIA limitations
State and Local Obligations are authorized if:
Rated A, or its equivalent, or better
Interest bearing deposits at banks and credit unions must:
Must be insured or collateralized
Insurance through the FDIC
Insurance through the National Credit Union Insurance Fund (NCUIF)
Must be a Texas bank (or through Texas broker)**
Includes ICS (Insured Cash Sweep)

27. PFIA Specific Investments
Certificates of deposit are authorized if:
Collateral must be 100% of principal value
Collateral can not include PFIA unauthorized MBS
Can include CDARS
Repurchase and Reverse Agreements are authorized if:
Has a defined termination date
Secured by authorized investments or cash
Securities are bought and sold DVP
Placed through a primary dealer
Funds invested from the reverse mature before end of the reverse

28. PFIA Specific Investment Requirements
Securities lending is authorized if:
100% collateralized or secured consistent with PFIA
Allow for termination at any time
Securities are pledged and held in entity’s name
Placed through a primary dealer
Have a term of one year or less
Bankers acceptances are authorized if:
It has a maturity < 270 days
Is eligible as Fed collateral
Accepted by US bank with short term rating at least A1/P1

29. PFIA Specific Investment
Commercial paper is authorized if:
It has a maturity less than 270 days
Is rated A1/P1 or equivalent by two NRCRA
Is rated A1/P1 by one NRCRA with also a US bank LOC
Money market mutual funds are authorized if:
Comply with SEC Rule 2a-7
Mutual fund is authorized if:
Registered with the SEC and a duration < one year, WAM >2 years
Duration < one year, investment grade securities and no asset backs
Investment is less than 15% of operating fund average
No bond proceeds are invested in the mutual fund
No investment can exceed 10% of the fund itself

30. PFIA Specific Investment
Guaranteed Investment Contracts (GIC) must:
Have a defined termination
Be fully collateralized to 100%
Be pledged to the entity
Be no longer than five years
Be specifically authorized by governing body, bid, highest yield and have reasonable admin costs

31. PFIA Specific Investment Requirements
Investment Pools have many restrictions
Contents, reporting, NAV, rating, website contents
Must state its policy on holding cash
Must provide its information statement and monthly reporting
Investor restrictions include that:
The governing body authorizes particular pool as participant
Pool stays continuously rated AAA or AAA-m or equivalent
Policy should designate different types of pools if applicable

32. PFIA Specific Investment Requirements
Higher Education investments include:
Cash mgmt and fixed income funds if Tax Code 501(f) eligible
Negotiable CDs with banks having a CD rating of 1
Corporate bonds and debentures in two highest long-term ratings
Mineral rights money invested under the Trust Code

33. PFIA Specific Investment Requirements
Schools Districts are authorized to buy corporate notes if:
It is rated no less that “AA-”
It is not convertible to stock and is secured
The District has an average of over 50,000 students
Hedging is authorized in several instances if:
It complies with CFTC
It is segregated and accounted for separately
It is an “eligible entity” and uses for “eligible projects”

34. A Checklist for PFIA Compliance

35. Linda Patterson Patterson & Associates, Austin linda@patterson.net
Check Your Compliance Ratio Establish the Controls Build in Reasonable Flexibility Make that Money Work
Linda Patterson
Patterson & Associates, Austin