June 14, Auditing Local Government Deposits & Investments AGENDA

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1 Auditing Local Government Deposits & Investments North Carolina Department of State Treasurer Staff of State and Local Government Finance Division Becky Dzingeleski Senior Accounting & Financial Management Advisor June 14, 2016 AGENDA Semi-Annual Deposit & Investment reports LGC-203 Authorized depositories for public funds Collateralization requirements Types of legally authorized deposits for NC Units of Government Types of legally authorized investments for NC Units of Government Endowments When there are statutory violations of NC law Disclosure Requirements Local Government Deposit and Investment Reports: LGC-203 Evaluation of Compliance with applicable laws & regulations G.S. 159 The Local Government Budget and Fiscal Control Act and G.S. 115C Elementary and Secondary Education 1

2 LGC-203 Deposits & Investments Semi-annual Report Statutorily required G.S for Local Governments & Public Authorities G.S. 115C-446 for Public Schools Report of Unit s Deposits and Investments as of June 30 th and Dec 31 st every year 203 reports not statutorily required for Charter Schools ABC Boards send 203 reports directly to ABC Commission. LGC-203 Supplemental Documents required Supplemental schedules (Investments) documentation with supporting detail Collateral statements (Dedicated method of collateralization) Finistar, CDARs, ICS - statements as of the LGC-203 report date June 30 December 31 Evaluation of whether depositories are authorized G.S (a) The governing board of each local government and public authority shall designate as its official depositories one or more banks, savings and loan associations, or trust companies in this State An acceptable official depository is chosen by the governing Board and must have a presence in the state, be open for business to the general public, agree to meet NC collateral requirements. 2

3 Collateralization / Security of Public Deposits G.S (b) The amount of funds on deposit in an official depository.. shall be secured by deposit insurance, surety bonds, letters of credit issued by a Federal Home Loan Bank, or investment securities of such nature, in a sufficient amount to protect the local government or public authority on account of deposit of funds made therein, and in such manner, as may be prescribed by rule or regulation of the Local Government Commission. Charter School public funds are NOT Statutorily subject to Collateralization. Collateralization Of Public Deposits In North Carolina includes listing of the statutory references used to determine whether a particular entity s deposits may be collateralized. Collateralization / Security of Public Deposits Two methods of Collateralization are described in 20 N.C. Admin. Code Pooling method State Treasurer monitors collateral - NC Pooling bank List Dedicated method Banks that are NOT on the Pooling List OR All Banks used by Housing Authorities Finance Officer is responsible to maintain a record of all securities pledged at all times Example - INV 98 detailed listing of collateral securities pledged Collateralization Dedicated Method Collateralization Of Public Deposits In North Carolina Dedicated method of collateralization bank agreements INV-94A Security agreement INV-94B Escrow agreement Adequate collateral must be pledges at all times. Based on grand total of actual account balances (all types in total) at that bank securities pledged current market value is at a minimum 100 % of the amount required to be collateralized FDIC coverage is Standard maximum deposit insurance amount (SMDPI) of $250,000 Up to the SMDPI in the aggregate for all time and savings deposits Up to the SMDPI in the aggregate for all demand deposits 3

4 Legally authorized Deposits : Certificates of Deposit GS (b) Moneys may be deposited at interest in any bank, savings and loan association, or trust company in this State in the form of certificates of deposit or such other forms of time deposit as the Commission may approve. Deposits in the form of CDs allowed under the law are those where the Unit of Government deposits the funds in a bank in this State, subject to & covered by collateral rules. NON-Compliance - Negotiable or brokered CD s are considered investments, not protected by collateral or allowable under Legally authorized Deposits Money Market Deposit accounts are allowable under NC Statute G.S (b) and are required to be FDIC Insured and collateralized NON-Compliance Examples Money Market Investment Accounts Not deposits, not insured by FDIC nor protected by collateralization Credit Unions are not specified as allowable depositories under G.S (b) Annuities NC Capital Management Trust is the only Mutual fund Investment account certified by the Local Government Commission per G.S (c)(8) Legally authorized Deposits Variation FDIC pass-through protection CDARs, Insured Cash Sweep (ICS) G.S (b1) for CDARs & ICS CDARs Certificates of Deposit each less than $250,000 ICS Money Market Deposit Accounts each less than $250,000 Finistar G.S (a) for Finistar Interest Bearing checking accounts collateralized by both Pooling and Dedicated method of collateralization. Each account less than $250,000 4

5 Legally authorized investments G.S (c) Moneys may be invested in the following classes of securities, and no others. Applies to almost all Local Governments & Public Authorities Review Unit s formal Investment Policy - including investment guidelines concentration limits maturity limits Investment policy tied to cash flow of unit Legally authorized investments - Exceptions Exceptions Hospitals who operate under G.S. Chapter 131E: Health Care Facilities and Services Local Governments with expanded investment authority legally granted by the NC General Assembly Restrictions may apply Examples might be Employee benefit funds, risk reserve, Sinking funds, trust funds, fiduciary funds etc.. Public Schools Endowment funds Charter Schools Government Security G.S (c)(1) Obligations of the United States or obligations fully guaranteed both as to principal and interest by the United States. Description of Security Issuer amount Market Value Yield T Note 1 10/31/2016 T Note 1.5 1/31/2019 Treasury $15,106 $15,114 11/10/ /31/ Treasury $19,986 $20,183 2/26/2014 1/31/ ** Custodian required to be listed on the LGC 203 report itself 5

6 Government Agency (c)(2) Obligations of the Federal Financing Bank, the Federal Farm Credit Bank, the Bank for Cooperatives, the Federal Intermediate Credit Bank, the Federal Land Banks, the Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, Fannie Mae, the Government National Mortgage Association, the Federal Housing Administration, the Farmers Home Administration, the United States Postal Service. Custodian WELLS FARGO BANK OF NEW YORK Name of Specific Agency FEDERAL FARM CREDIT BANK amount Value Yield 2,053,357 2,175,042 01/31/08 12/15/ % FHLMC 1,703,000 1,873,657 01/30/08 11/17/ % Obligations of the State of NC - G.S (c)(3) Non-Compliance examples: NC ST HSG FIN AGY Homeownership not a municipal corporation, local government agency, or guaranteed by the State of North Carolina. University Revenue Bonds evaluate on a case by case basis these Revenue Bonds are often backed by Dorm fee revenue, normally not obligations backed by the State of NC. Certificates of Participation (COPs) - of NC local governments are not bonds and notes as required by the statute. Not issued by the local government or public authority but by a nonprofit corporation. NC Med Care Commission Bonds - agency of the State of NC, their bonds are not obligations of the State of NC as required under (c)(3). Bonds & Notes of any NC Local Government or public authority G.S (c)(4) Description of Bond Custodian ** amount Market Value Yield Union County NC Rfdg Ser A Wells Fargo $104,292 $102,764 12/2/2015 3/1/ % Mecklenburg Co NC Sch Ser A First Citizens $127,249 $127,316 12/2/2015 4/1/ % 6

7 Commercial Paper G.S.159 (c)(6) Prime quality commercial paper bearing the highest rating of at least one nationally recognized rating service and not bearing a rating below the highest by any nationally recognized rating service which rates the particular obligation. Custodian Name of CP CP Rating at WELLS FARGO BARCLAYS US A1 / F1 amount Value Yield 2,992, ,000, /17/14 07/13/ % WELLS FARGO WELLS FARGO CREDIT AGRICOLE A1 / F1 DCAT LLC A1 / P1 1,996, ,000, /14/15 07/14/ % 4,996, ,000, /21/15 07/15/ % Custody and Safekeeping G.S (d). Securities and deposit certificates shall be in the custody of the finance officer who shall be responsible for their safekeeping and for keeping accurate investment accounts and records. Custody has to do with the physical safety of the securities but in the book-entry system there are no physical documents so investment securities must be held by custodians in safekeeping or trust accounts. Request & review custodial agreement and Safekeeping account statement Are investment earnings going directly into a legally allowable depository? Local Government Endowments Carefully read & understand the endowment documents Does the Unit have complete discretion to invest? NC Local Governments are bound by regarding authority to invest, this includes endowments *Some Public Schools have different endowment investment authority 7

8 Public Schools Endowment Fund creation Session Law Section 77 re-writes 115C-490 Creation of endowment funds; administration o Any local board of education is hereby authorized and empowered upon the passage of a resolution to create and establish a permanent endowment fund which shall be financed by gifts, donations, devises, or other forms of voluntary contributions. o Any endowment fund established under the provisions of this Article shall be administered by the members of such board of education known as "The Board of Trustees of the Endowment Fund. The board of trustees so established shall determine its own organization and methods of procedure." Public Schools endowment fund Investment authority Session Law Section 78 re-writes 115C-491 Board of Trustees public corporations; powers & authority generally; investments...board of trustees created and organized under this Article shall be a body politic, public corporation and instrumentality of government and as such may sue and be sued in matters relating to the endowment fund and shall have the power and authority to acquire, hold, purchase and invest in o all forms of property, both real and personal, including, but not by way of limitation, all types of stocks, bonds, securities, mortgages and all types, kinds and subjects of investments of any nature and description. o may receive pledges, gifts, donations, devises and bequests, devises, and may in its discretion retain such in the form in which they are made, and may use the same as a permanent endowment fund. o The board of trustees shall be responsible for the prudent investment of any funds or moneys monies belonging to the endowment fund in the exercise of all forms of property, both real and personal Statutory Violations of NC Law Investment Violations at any point in the fiscal year should be disclosed by the Unit to the Auditor Confirm significant violations of legal provisions, examples - Insufficient collateral on depository accounts Non-compliance with G.S Unauthorized use of investment types Use of unauthorized depositories 8

9 Statutory Violations of NC Law Inquire with management, obtain an understanding of the violation, how & why it occurred, what action the Unit has taken to address the violation, evaluation of the possible effects on the financial statements Communicate the non-compliance with those charged with governance Audit report disclosure of statutory violation If appropriate, consult with Unit s legal counsel on any questions of deposit / investment law Audit report Disclosures Unit s deposit & investment policies - All NC Units of Government who invest their funds should have a formal investment policy Significant Violations for deposits or investments and actions taken to address the violations GASBS 40 required disclosures - Deposit and Investment Risk Disclosures credit risk for investments custodial credit risk concentrations of credit risk interest rate risk, and foreign currency risk GASBS 72 Fair Value Measurements - Investments Memo Resources Guide to Audits of Local Governments Practitioners Publishing Company (PPC) DST Policy Manual : Section 30: Cash & Investments NC General Assembly - General Statutes GASB Pronouncements / Guidance FDIC Rules for Accounts held by government depositors. LGC Contacts for Cash & Investment Questions Becky Dzingeleski Becky.Dzingeleski@nctreasurer.com Paru Patel Paru.Patel@nctreasurer.com 9

10 ANNOUNCEMENTS / REMINDERS How does the LGC make announcements or send reminders? LGC_News Best way to stay informed is through LGC_News listserv: Register multiple people on your staff in case you are out of the office. Provide a business card or send an request to be registered. 10