1. law, govt and politics

Department of State Treasurer
Policy Manual for Local Governments
Section 30: Cash and Investments
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Contents
Executive Summary.................................................................................................................. 1
Part I – Cash Management and Bank Depositories ................................................................ 5
A. Introduction ................................................................................................................... 5
B. Cash Management Procedures ..................................................................................... 5
1. Role and Responsibilities of the Finance Officer .................................................... 5
2. Processing Cash Transactions................................................................................. 6
a. Cash Receipts..................................................................................................... 6
b. Cash Concentration Account or Central Depository ....................................... 14
c. Cash Disbursements ........................................................................................ 15
d. Daily Cash Management Procedures .............................................................. 26
e. Bank Reconciliations ....................................................................................... 26
C. Collateralization of Public Deposits............................................................................ 28
1. Requirement for and Methods of Collateralization of Public Deposits ................ 28
2. Form INV-91 – Notification of Public Deposit ...................................................... 29
3. Pooling Method Depository ................................................................................... 29
4. Monitoring Collateral at a Dedicated Method Depository ................................... 30
5. Resources ............................................................................................................... 31
Part II – Procurement of Banking Services ........................................................................... 33
A. Introduction ................................................................................................................. 33
B. Procurement Process ................................................................................................... 33
1. Banking Relationship Review ............................................................................... 33
2. Identify Current Service Needs............................................................................. 35
3. Preparation of Request for Proposals.................................................................... 35
4. Evaluation of Responses........................................................................................ 38
a. Mandatory Minimum Requirements............................................................... 38
b. Financial Criteria ............................................................................................ 39
c. Cost and Services Criteria ............................................................................... 40
5. Awarding the Contract and Transition................................................................. 40
6. Continuous Monitoring of Safety and Soundness of Financial Partners ............. 41
C. Additional Resources ................................................................................................... 41
Part III – Responsibility for Investment of Idle Funds ......................................................... 43
A. Introduction ................................................................................................................. 43
B. Supervision of Investment Activities .......................................................................... 43
1. Role and Responsibilities of the Finance Officer .................................................. 43
LGC
Page i of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Contents
2.
3.
4.
5.
6.
Developing Goals and Objectives .......................................................................... 43
Establishing Written Policies and Procedures ..................................................... 44
Preparing Cash Forecast and Investment Strategy ............................................. 45
Monitoring Financial Markets and Investment Alternatives .............................. 45
Reporting Results and Evaluating Performance of Investment Activities .......... 45
C. General Investment Guidelines .................................................................................. 46
D. Professional Investment Advice .................................................................................. 46
E. Selection of a Broker-Dealer ....................................................................................... 47
F. Custodial Arrangements ............................................................................................. 49
Part IV – Authorized Investments Pursuant to G.S. 159-30 ................................................. 51
A. Introduction ................................................................................................................. 51
B. Authorized investments .............................................................................................. 51
1. Certificates of Deposit ........................................................................................... 51
2. Obligations of the United States ........................................................................... 52
3. Obligations Whose Principal and Interest Are Fully Guaranteed by the
U.S. Government ................................................................................................... 53
4. Certain Direct Obligations of U.S. Government Agencies and
Instrumentalities................................................................................................... 54
5. Obligations of the State of North Carolina ........................................................... 54
6. Bonds and Notes of Any North Carolina Local Government or Public
Authority................................................................................................................ 55
7. Saving Certificates ................................................................................................ 55
8. Prime Quality Commercial Paper ......................................................................... 55
9. Bankers' Acceptances of a Commercial Bank ....................................................... 56
10. Mutual Fund for Local Governments Certified by the LGC ................................ 56
11. Commingled Investment Pools.............................................................................. 57
12. Treasury Instruments Which Have the Coupon Stripped from the
Security .................................................................................................................. 57
13. Repurchase Agreements ........................................................................................ 57
14. Bond Proceeds Subject to Arbitrage and Rebate Provisions ................................ 58
C. Other Post-Employment Benefits Fund ..................................................................... 59
D. Investment Policy Considerations .............................................................................. 59
E. Portfolio Diversification .............................................................................................. 59
F. Ineligible Investments................................................................................................. 60
G. Mutual Fund Investments .......................................................................................... 61
Part V – Accounting and Reporting Requirements................................................................ 63
LGC
Page ii of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Contents
A. Introduction ................................................................................................................. 63
B. Reporting on the Statement of Net Position or Balance Sheet .................................. 63
C. Reporting on the Statement of Activities or Statement of Changes in Fund
Balance or Net Position............................................................................................... 64
D. Note Disclosure Requirements for Investments ......................................................... 64
1. Basic Disclosures ................................................................................................... 64
2. Risks Related to Deposits and Investments Disclosures ........................................... 65
a. Interest Rate Risk ................................................................................................. 65
b. Credit Risk ............................................................................................................. 66
c. Custodial Credit Risk ............................................................................................ 66
d. Risks from Concentrations of Credit ..................................................................... 66
e. Foreign Currency Risk .......................................................................................... 67
Part VI – Review of Referenced Resources ............................................................................ 69
Part VII –Exhibits .................................................................................................................. 73
Exhibit A – Central Depository Accounting ..................................................................... 75
Exhibit B – Sample Cash Management – Daily Activity & Balance Report ................... 85
Exhibit C – Sample Request for Proposals for Procurement of Banking Services .......... 89
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial
Institution.................................................................................................................. 127
Exhibit E – Compensating Balance Estimation ............................................................. 145
Exhibit F – Sample Cash Management and Investment Policy .................................... 149
Exhibit G – Sample Resolution Adopting Cash Management and Investment
Policy ......................................................................................................................... 165
Exhibit H – Sample Broker-Dealer Questionnaire ........................................................ 169
Exhibit I – Sample Investment Report........................................................................... 179
Exhibit J – Sample Resolutions Designating an Official Depository – Dedicated
Method Bank ............................................................................................................. 183
Exhibit K – Sample Resolution Designating an Official Depository – Pooling
Method Bank ............................................................................................................. 189
Exhibit L – North Carolina Attorney General’s Memorandums ................................... 195
Exhibit M – Cash Flow Worksheet ................................................................................. 209
Table of Authorities .............................................................................................................. 213
Index ..................................................................................................................................... 215
LGC
Page iii of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Contents
This page intentionally left blank.
LGC
Page iv of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Revisions
Sections Revised and Revision Issued: September 2013:
Pages
Part I.B.1. –
Role and Responsibility of the Finance Officer ................................
5
Part II.A –
Introduction ......................................................................................
33
Part IV.B.1 –
Certificates of Deposit ...................................................................... 51-52
Part IV.B.5. – Obligations of the State of North Carolina and Bonds and
Notes of Any North Carolina Local Government or Public
Authority........................................................................................... 54-55
Sections Revised and Revision Issued: June 2014:
Part IV.B.5. – Obligations of the State of North Carolina ...................................... 54-55
Part IV.B.6. – Bonds and Notes of Any North Carolina Local Government or
Public Authority ...............................................................................
55
Part IV.B.7. – IV.B.14. – Renumbered
LGC
Page v of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Revisions
This page intentionally left blank.
LGC
Page vi of vi.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Executive Summary
Efficient cash management and effective investment activity are fundamental responsibilities
of governing bodies and a vital function of the finance officers in North Carolina. To navigate
in unpredictable and ever-changing waters, it is essential that all local governments have
carefully considered cash management and investment policies in place that provide a beacon
emphasizing the safety and liquidity of public funds. Earning higher rates of return should be
secondary to the safeguarding of public funds.
The deposit and investment activities of local governments and public authorities (the “units”)
are at the core of their financial operations and in North Carolina are governed by provisions
of the North Carolina General Statutes (hereafter “G.S.”), specifically Chapter 159, Article 3 –
The Local Government Budget and Fiscal Control Act (the “LGBFCA”), primarily by the
following provisions:
●
G.S. 159-30 – Investment of idle funds;
●
G.S. 159-31 – Selection of depository, deposits to be secured;
●
G.S. 159-32 – Daily deposits; and
●
G.S. 159-33 – Semiannual reports on status of deposits and investments.
It is important to remember that these statutes are modified or updated from time to time by
the General Assembly – be sure you and your investment advisors are using the most current
rules. Access to the General Statutes is available without charge at the website of the North
Carolina General Assembly, www.ncga.state.nc.us. When using the statutes at the website,
please read the caveats on the main NC Statutes page.
A written cash management and investment policy that is adopted by the governing board to
establish special guidelines for the efficient management of public funds is strongly
recommended. It is the principal document guiding the financial operations of the unit. The
primary objectives are safety and liquidity of principal, followed by the secondary objective of
obtaining a market rate return reasonable under the circumstances. It must also be
remembered that the safety, soundness and advisability of a given investment may change
with economic conditions; in other words, what was advisable yesterday may not be prudent
today.
This policy statement sets out matters to be considered by the governing board, the finance
officer and staff of the unit in the management of its cash and investments. The first two
sections (Part I and Part II) discuss bank deposits in operating accounts and selection of
banking institutions. Effective cash management programs must first identify sources of
receipts and include systems for the prompt billing and collection of receivables. Adequate
records for daily receipts and deposits are required. The disbursement system should allow
moneys to be invested for the maximum time possible, while ensuring the timely payments of
amounts due. Bank accounts must be promptly reconciled. Cash flow forecasts are used to
determine the timing and amount of cash collections and cash disbursements. From these
forecasts, the timing and amount of cash available for investment and the period of time over
which cash may be invested consistent with liquidity requirements can be determined.
LGC
Page 1 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Executive Summary
Strong banking relationships are achieved through the use of formal, written banking policies
and well-designed Request for Proposals (RFP) to establish banking relationships that provide
the most benefit to the unit. Evaluation of the soundness of financial institutions considered
during the bidding process is a key factor in the decision to award the deposit or investment
contract. After a contract is awarded, it is essential to continue monitoring the financial
soundness of the institutions selected. G.S. 159-31(b) requires that all funds on deposit must
be secured by deposit insurance, surety bonds, or authorized investment securities. Two
methods of collateralizing public deposits are available. Under the Dedicated Method,
responsibility for monitoring collateral rests with the finance officer of the unit. Under the
Pooling Method, monitoring is the responsibility of the State Treasurer. It is the responsibility
of the finance officer to notify the depository institution that funds deposited are public funds
that are required to be collateralized; to comply with the reporting requirements in
G.S. 159-33; and to complete the reporting requirements of the Financial Operations Division
of the Department of the State Treasurer described in the publication, “Collateralization of
Public Deposits in North Carolina”. Use of a central depository bank account may
maximize the amount of cash available for investment and increase the yield but requires
more complex accounting procedures for cash and interest revenue. A central depository bank
is recommended only when the accounting system is able to provide cash availability on a
daily basis and interest income is able to be allocated in accordance with G.S. 159-30(e).
The third and fourth sections (Part III and Part IV) present general investment principles, the
role of the finance officer in the investment of public funds, and the allowable investments
pursuant to the North Carolina General Statutes. Management responsibility for the
investment of idle funds is assigned to the finance officer by G.S. 159-25(a)(6) which states
that the finance officer “shall supervise the investment of idle funds of the local government or
public authority.” Additionally, G.S. 159-30(a) provides that “[t]he finance officer shall manage
investments subject to whatever restrictions and directions the governing board may impose
[and] … shall have the power to purchase, sell, and exchange securities on behalf of the
governing board.” It further directs that “[t]he investment program shall be so managed that
investments and deposits can be converted into cash when needed.” This provides clear
direction that the finance officer is responsible to supervise investment activities and has
authority to execute transactions, that the governing body can impose restrictions on
investment authority but cannot expand it, and that having cash available when needed is the
overriding goal.
The investment of funds of local governments and public authorities in North Carolina is
governed by G.S. 159-30 – Investment of idle funds. Although monies may be invested in any
investment authorized by G.S. 159-30(c), not all permitted investments are appropriate for
every local government. In many cases, it may be prudent for the investment policy of a unit to
be much more restrictive than G.S. 159-30. The primary objectives are safety and liquidity,
followed by the secondary objective of obtaining a market rate of return reasonable under the
circumstances. It must also be remembered that the safety, soundness and advisability of a
given investment may change with economic conditions; in other words, what was advisable in
the past may not be advisable today. Descriptions of the permitted investments as well as
diversification and other factors to consider when evaluating each are include in Part IV.
An investment policy adopted by the governing board is necessary to establish special
guidelines for the effective investment of public funds in light of the unique needs and the
LGC
Page 2 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Executive Summary
economic environment of the unit. All moneys should be covered under the investment policy.
The risks associated with the investment of public funds including interest rate risk, credit
risk, custodial credit risk and risks associated with concentrations of credit should be
addressed. It is the responsibility of the governing body to evaluate these risks in the
development of the investment policy. It is the responsibility of the finance officer to consider
and address these risks in the management of the investment portfolio.
Part V introduces the accounting and financial reporting standards for the deposits and
investments. The accounting and financial reporting requirements are established primarily
by the following Governmental Accounting Standards Board (“GASB”) pronouncements as
amended: GASBS No. 3 - Deposits with Financial Institutions, Investments (including
Repurchase Agreements), and Reverse Repurchase Agreements; GASBS No. 14 - The
Financial Reporting Entity; GASBS No. 31 - Accounting and Financial Reporting for Certain
Investments and for External Investment Pools; GASBS No. 34 - Basic Financial Statements
and Management's Discussion and Analysis for State and Local Governments; and GASBS
No. 40 - Deposit and Investment Risk Disclosures (an amendment of GASBS No. 3). GASB has
various projects being researched or deliberated which may amend or supersede current
standards. The risks associated with the investment of public funds are discussed in this
section
Additional resources are listed in Part VI and various exhibits are included in Part VII.
Exhibits include a sample Request for Proposals for procurement of banking services,
guidelines for evaluating the soundness of a financial institution, a sample Cash Management
and Investment Policy, sample resolutions adopting a cash management and investment
policy and designating an official depository, a sample broker-dealer questionnaire and other
information.
LGC
Page 3 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Executive Summary
This page intentionally left blank.
LGC
Page 4 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
A. Introduction
Effective cash management is a vital function and a fundamental responsibility of
governing bodies and finance officers in North Carolina. To navigate in unpredictable
waters, it is essential that all local governments have cash management and investment
policies in place that provide a beacon emphasizing the safety and liquidity of public funds.
Earning higher rates of return should be secondary to the safeguarding of public funds.
Establishing and following a plan can help to reduce the personal liability of government
officials making cash management related decisions
The discussion of deposits at interest in banks, savings and loans and trust companies in
North Carolina in the form of certificates of deposits and other forms of time deposits is
included in Part IV – Authorized Investments Pursuant to G.S. 159-30.
B. Cash Management Procedures
1. Role and Responsibilities of the Finance Officer
Management responsibility for the disbursement of public funds is assigned to the
finance officer by G.S. 159-25(a)(4) which states that the finance officer “shall disburse
all funds of the local government or public authority in strict compliance with this
Chapter, the budget ordinance, and each project ordinance and shall preaudit
obligations and disbursements as required by this Chapter.” Additionally,
G.S. 159-25(a)(6) directs that the finance officer “shall receive and deposit all monies
accruing to the local government or public authority, or supervise the receipt and
deposit of money by other duly authorized officers or employees.” G.S. 159-25(b)
requires that “all checks or drafts on an official depository shall be signed by the
finance officer or a properly designated deputy finance officer and countersigned by
another official….” These provisions provide clear indication that the finance officer is
responsible for the receipt, custody and disbursement of public funds. The Coates’
Canons NC Local Government Law Blog (canons.sog.unc.edu) posts offer highly
recommended readings on a variety of pertinent topics. The search feature allows one
to easily find any available articles.
For discussions of the preaudit process and requirement, see Kara Millonzi’s posts on
UNC School of Government Coates’ Canons: A New Interpretation of the Preaudit
Requirement, November 8, 2012; Court of Appeals Reaffirms New Interpretation of
Pre-audit Requirement, May 23, 2013; Preauditing Employee Salaries and Wages,
March 21, 2014; and Disbursing Public Funds, May 23, 2014. For discussions of
opening deposit accounts, the daily deposit of funds and the daily deposit requirement,
see Kara Millonzi’s posts: Internal Controls: Who Is Authorized to Open a Bank
Account and to Deposit and Disburse Public Funds?, July 26, 2012 and Daily Deposit
Requirement, January 14, 2013.
In addition to the requirement for daily deposit of all monies collected, G.S. 159-32
provides that “… The finance officer may at any time audit the accounts of any officer
or employee collecting or receiving taxes or other monies, and may prescribe the form
LGC
Page 5 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
and detail of these accounts. The accounts of such an officer or employee shall be
audited at least annually.”
Article V, Section 7(2) of the North Carolina State Constitution provides that “No
money shall be drawn from the treasury of any county, city or town, or other unit of
local government except by authority of law.” The Local Government Budget and Fiscal
Control Act establishes the requirements regarding disbursement of funds.
Disbursements are discussed in depth in the following sections.
2. Processing Cash Transactions
Local governments and public authorities receive cash from a wide variety of sources
and expend cash for a multitude of purposes. The first step in the effective
management of cash resources is identification and development of procedures to
manage these cash inflows and outflows.
a. Cash Receipts
The basic objectives regarding the cash management of receipts are to diligently
collect funds owed to the unit, to provide adequate internal control over cash and
cash equivalents, and to invest monies in interest-bearing accounts as expeditiously
as possible. The challenge is that units receive revenues and cash receipts from very
diverse sources and often at many locations. These revenues include ad valorem
taxes, state-administered taxes, state and federal taxes, utility fees and other user
charges, and various intergovernmental revenues. Additional information on
revenue sources is provided in the State Treasurer’s Policy Manual, Section 15 –
Revenue Sources.
(1) Internal Control Over Cash Receipts
The objectives of internal control over cash receipts include assuring that the
following occur:
●
All collections are identified properly and control is established at the
earliest possible point;
●
All collections are promptly deposited intact (G.S. 159-32 requires daily
deposits with limited exceptions that require governing board approval);
●
All transactions are accurately and properly classified and recorded in the
general ledger;
●
All accounts are reconciled on a timely basis;
●
Effective physical safeguards and custody arrangements are in place; and
●
Accurate, timely and detailed records are maintained and reports produced.
These internal controls are intended to reduce to an acceptable level the risks of:
LGC
●
Failing to record cash receipts, or of withholding or delaying the recording of
cash receipts;
●
Misappropriating cash or petty cash funds, diverting cash receipts,
unauthorized cash disbursements, and loss of funds;
Page 6 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
●
Covering unauthorized transactions by substituting unsupported credits or
fictitious expenditures to cover misappropriated collections, or by
misrepresenting cash or receivables balances; or
●
Misstating cash balances or concealing unauthorized transactions by
falsifying bank reconciliation.
Additional information on internal control is covered in the State Treasurer’s
Policy Manual, Section 80 – Internal Control.
As a result, collection procedures are an integral part of cash management. An
effective cash management program should identify all potential sources of
receipts, quantify the amount of expected cash receipts, include a system to
assure prompt billing and provide an appropriate level of internal control when
receiving monies due to the unit. Collecting amounts due at the earliest possible
time increases the amount of money available for investment; thereby assuring
a greater amount of interest revenue is earned. A significant proportion of the
revenues received by counties and larger cities may be collected outside the
finance department. Units with decentralized collection procedures should be
aware of the potential problems. Every effort should be made to carry out
prompt and efficient cash collection and mobilization in remote collection areas,
as well as the finance department. Expected cash receipts determined by
analysis of activity measures, e.g. number of permits issued, number of
attendees, etc., should be compared to actual cash receipts for reasonableness.
Not only is it important to ensure funds are completely and rapidly received, but
also invested quickly and wisely.
(2) Collection Process
The first step in instituting an effective collection process is to identify the
various types of collections. There are four general types of collections:
●
Collections for services provided,
●
Collections dictated by state or local law,
●
Federal or state grant receipts, and
●
Immediate and unpredictable collections.
Collections for services provided by the governmental unit include such items as
water and sewer service, electrical service, and solid waste collection. These
collections are for recurring services and would involve the generation of a bill
with a remittance advice to be returned with payment.
Receivables resulting from state or local law tend to involve larger dollar
amounts and may require considerable amounts of processing by staff due to the
number of items handled. Some of these revenues are collected on an annual
basis, such as property taxes, licenses and permits; while others are collected
quarterly, such as sales and excise taxes.
Cash receipts from federal and state grants are often predictable as to the time
of receipt and the amount. Some of these collections may be reimbursements of
expenditures made that originally were paid for by the unit. The unit must
LGC
Page 7 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
carefully comply with the terms and conditions of the grant, expend the cash
received for the approved purposes within the time required and, if required,
apply for reimbursement on a timely basis.
Finally, units of government receive cash for such items as traffic fines, parking
fines, court costs, parking meters, sales of surplus property, a variety of
registrations and permits, event receipts and miscellaneous other cash
collections. These collections usually involve small dollar amounts with
prediction of collection amounts and periods being more difficult.
(3) Methods of Collection
Efficient and effective collection procedures can speed up collection of funds and
increase cash available for investment. There are several methods of cash
collection that can be used.
One method of improving collection operations is by using cycle billing. Cycle
billing is designed to target certain geographic areas or groups of customer
accounts of the unit at specific times during the billing cycle. This creates both a
regular pattern of generating and processing bills making it easier to manage
the work load and staffing, and creates a more even pattern of cash inflows and
makes it easier to predict the available cash resources. Additional information
on cycle billing and other aspects of collecting user fees is provided in the State
Treasurer’s Policy Manual, Section 55 – User Fees.
Another method of improving collection operations would be to encourage the
use of electronic drafts as a means of payment for recurring charges to
customers. This method would lessen the staff time required for processing
receipts, reduce delinquent accounts and is relatively inexpensive to use. The
use of electronic drafts also makes it easier for cash managers to predict when
cash will be received. When using this method, it is encouraged to have the
collected amounts directly deposited to an interest bearing account, thus
increasing investment earnings by eliminating float time. Collection float time
can be defined as the time elapsed from the receipt of funds by the local
government until the moneys are available for investment. Collection float
includes mail time, internal processing time, and check clearing time.
Charging penalties and interest on late payments improves collection rates and
the timing of receipts. If this is already being done, the governmental unit may
consider increasing these charges as an incentive for timely payments. A system
should be implemented to immediately identify and aggressively follow-up on
delinquent accounts. However, it should be noted that such a system may
require more staff time and additional resources. In charging interest and
collecting amounts owed, the unit and its agents should carefully comply with
all applicable laws and regulations regarding consumer credit disclosures and
debt collection practices.
LGC
Page 8 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
(4) Types of Receipts
There are special considerations for several types of cash receipts which are
discussed in the following sections:
(a) Tax Receipts
Ad valorem taxes constitute a large revenue source for most units. It is vital
to the cash flow that these monies be billed and collected in a timely manner.
Tax billings should be mailed as soon as possible after the forthcoming
annual budget has been approved, usually during August. Prompt billings
ensure that taxpayers will have ample time to pay their bills and that
employees of the unit will not be under as much pressure to mail out bills at
the last minute.
Facilitating an orderly collection process is the next priority once the tax
billings have been mailed. Having an adequate staff is very important if tax
bills are to be received, processed and deposited in a timely manner. The
unit may wish to reorganize or reassign personnel in order to meet the
demands of the peak collection periods. Since this peak collection time falls
during the holiday season, management should carefully consider whether or
not extended vacations will be allowed during this period. Once staffing
requirements have been determined, the unit should evaluate alternative
methods for collecting tax revenue.
The billing and collection process as well as other important aspects of
property tax administration are thoroughly discussed in the State
Treasurer’s Policy Manual, Section 50 – Tax Assessment, Billing and
Collection.
The prompt collection of taxes aids the unit in several ways. First, more
monies are available for investment and the finance officer can have a
greater working cash flow margin. The tax collection rate will be a higher
percentage which will be very beneficial in preparing the upcoming annual
budget because a unit cannot use a higher tax collection rate in budgeting
for tax revenue than the tax collection rate for the previous year. [See:
G.S. 159-13(b)(6)] Additionally, there may be a positive effect on the credit
rating of the unit as prompt collection of amounts owed indicates strong
administrative and fiscal controls.
Local governments are authorized by G.S. 160A-461 to enter into joint
arrangements which include contracts with their respective county for the
billing and collection of property taxes. Units not currently using this system
are strongly urged to consider consolidation as a viable and more economical
means of tax billing and collection. The use of the consolidation system may
improve tax collection rates and lower the overall costs of billing and
collecting. Additional information on consolidating property tax functions is
provided in the State Treasurer’s Policy Manual, Section 50 – Tax
Assessment, Billing and Collection.
LGC
Page 9 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
(b) Utility Receipts
The units of local government may expend large sums of money providing
utility services; therefore it is important all charges for these services be
collected as quickly and efficiently as possible. Uncollected charges for
services deprive the unit of cash flow and reduce opportunities to maximize
investment earnings.
State Treasurer’s Policy Manual, Section 55 – User Fees addresses costing
and pricing user services, billing and collection procedures, deposits, late
fees, disconnection of services, and various accounting issues.
(c) Intergovernmental Receipts and Grants
Intergovernmental receipts are important sources of revenues for units.
Federal and state revenues generally require that the funds be directly
deposited into the unit’s bank account. The advantage of this system is that
the amount of monies and the deposit dates are known in advance, thus
allowing the finance officer to more precisely forecast cash flow. Direct
deposit of monies allows units to invest their funds sooner and also
eliminates the time spent making a deposit. Grant funds may be drawn in
various methods, but regardless of the method it is imperative proper
documentation be prepared so grant funds can be received as soon as
possible. It is also very important that the unit develop a system to promptly
notify the appropriate department of the receipt of the funds and generate
the required accounting entries.
(5) Processing Cash Receipts
Cash collections should be recorded in a manner that will disclose the source
and nature of each item and the fund to which it belongs, together with evidence
of its deposit in a financial institution.
(a) Cash Collection Procedures
Internal control must be established over incoming cash at the time of
receipt. A cash collection report should be prepared daily and used to record
all cash receipts. The cash collection report should be tailored to
accommodate the particular operations and accounts of the unit.
Whether manually created or computer generated, a cash collection report
should provide documentation of the general ledger entry including the
following information:
LGC
●
Necessary accounting information to properly record the transaction in
the general ledger,
●
Debit and credit amounts,
●
Reconciliation of the amount received to the amount expected for the
level of activity, and
●
Documentation of the dates and individuals responsible for preparation,
review and approval, and posting of the entry.
Page 10 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
Appropriate documentation in the daily collection report should provide
support for each item and may be the source document for the journal entry.
The cash receipts entry should be posted to the general ledger daily and the
postings verified to the bank statement.
The code numbers to be used should be determined from a review of the
budget, recent monthly operating statements, or trial balances. The
individual receiving cash receipts should be well-trained in the proper
internal controls and in the ability to correctly and accurately classify
receipts. Totals for each day should be verified to the cash balance report to
ensure all receipts have been posted and to the bank statement or other
bank activity report or screen to verify that all receipts have been deposited.
For internal control purposes, the posting date and the name of the person
performing the posting should be recorded on the report. Verification of the
deposit by a second person is an important internal control.
(b) Daily Deposits
Good practice requires that funds collected be deposited intact daily.
Deposited intact means that all amounts received will be deposited in the
form and amounts received, i.e. any cash received will not be used to
replenish petty cash funds, pay expenditures, or otherwise be netted against
the cash receipts amount. In addition, G.S. 159-32 requires daily deposits
unless board approval has been obtained to delay deposits until an amount
equal to $250 has been collected. The statute further requires that deposits
shall be made on the last day of the month regardless of amounts on hand.
The total on the bank deposit ticket must equal the amounts entered in the
daily cash collection report and the cash receipts journal as debits to “Cash
on Deposit”. Whether manually created or computer generated, a cash
receipts journal should provide documentation of the each general ledger
debit entry to cash and the appropriate credit entries. This will ensure that
all items recorded are included in the deposit and document compliance with
G.S. 159-32.
When possible, deposits should be made before the close of the business day
of the financial institution to ensure same-day credit. Cut-off times to receive
same-day credit vary by bank and often by method of deposit. Postponing the
deposit will cause the unit to lose interest for one day on the funds. The
deposits by bank account and fund should be entered on the cash balance
report.
(c) Daily Mail Collections
Reasonable internal controls should be established for the handling of funds
received by mail. Two staff members should be assigned to process incoming
mail. In order to adequately control receipts by mail, one person should open
all mail and remove any checks. The person opening the mail should not be
the person recording cash receipts or making daily deposits. Incoming checks
however received should be restrictively endorsed (“For Deposit Only to the
Credit of ‘Name of Unit’”) immediately upon receipt in order to prevent
LGC
Page 11 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
mishandling. Those mailing payments should be reminded not to include
cash as the form of payment.
The other person processing mail should record all checks received on the
daily mail collection report. The report should include detail as to the drawer
of the check, the amount of the check and the payee of the check, if different
from the unit. The checks should be totaled, with the total compared to the
daily mail collection report to identify any checks not logged. The checks and
the completed report should be forwarded to the person responsible for the
daily bank deposit.
(d) Techniques to Improve Handling Cash
Some techniques to consider for improving cash handling are summarized as
follows:
●
Request grant and other payments by wire transfer, when possible,
●
Use special post office boxes to facilitate processing large remittances,
●
Color-code return envelopes meeting postal specifications with
preprinted ZIP+4 postal codes and delivery point bar coding to expedite
postal processing and to identify remittances for expedited handling,
●
Use separate addresses to segregate remittances from other mail,
●
During high volume periods, evaluate the cost effectiveness of
reassigning staff or hiring temporary personnel,
●
Design billing schedules which are both efficient and lead to earlier
receipt of cash due to the unit,
●
Consider cost effectiveness of acquiring remittance processing equipment
or use of lockbox to expedite processing,
●
Design daily processing schedule to receive current day credit with the
depository for funds deposited, and
●
Investigate the types of accounts and online services available for the
bank periodically to be sure the unit is taking advantage of all
enhancements that improve cash processing.
(e) Endorsements
Effective September 1, 1988, the Federal Reserve Board issued Regulation C,
which defines endorsement standards. This regulation was issued as a result
of a federal law known as the “Expedited Funds Availability Act.”
This regulation designates areas for endorsements by the respective parties
on the back of checks. The law prohibits any printing or endorsement in the
area designated “depository bank.” The purpose of this ruling is to ensure
the readability of the endorsement in the event the item is dishonored and
must be returned. This law affects the endorsement on all checks written by
or received by a local government. The law stipulates that any dishonored
item which is not returned timely as the result of encroachment by the
endorsement by any party into the reserved area causing the endorsement to
LGC
Page 12 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
be unreadable may result in the financial liability being borne by the
encroacher.
All depositors should note two special areas of concern regarding this issue.
There should be no pre-printed information in the restricted area. Any
lengthy pre-printed information should be printed on the front of the check
due to the limited space allowed for the endorsement by the payee. Secondly,
all endorsements should be in the area designated for the payee.
Regulation C, Appendix D requires that endorsements only be in black ink.
All check or remittance processing equipment vendors should be aware of
this regulation. Most check printers even provide blocked areas on the back
of the checks to designate areas for endorsement by the respective parties.
However, to avoid liability, it is important to be aware of and adhere to the
endorsement requirements.
(f) Cash Receipts through Lockbox Service
Many banks offer lockbox services whereby payments are mailed to a
designated post office box, picked up, and processed by the bank. These
items are deposited into the account upon receipt of the unit. The
documentation is then forwarded to the finance officer so that the financial
records can be updated. Using such a service can allow finance personnel
more time to handle transactions presented in the office. However, the unit
should evaluate the costs of such a program before entering into a lockbox
processing agreement. Lockbox services often offer prices related to volumes
processed. Units may want to consider using interlocal agreements to
increase volume and obtain the most cost effective pricing arrangement with
the bank. There are several types of payments that could be collected
through a lockbox service, which include utility and property tax collections.
Pursuant to G.S. 105-321(e) – Disposition of tax records and receipts; order
of collection, local governments are authorized to contract with a bank or
other financial institution for the collection of taxes payable. It may be
advantageous to use these services during the peak time for collection of tax
payments. If a local government decides to utilize lockbox services, it should
negotiate a charge for these services based on the time the services will
actually be used.
(g) Funds Received Via Electronic Funds Transfer
Many units of government now receive payments from the State (i.e. Local
Government Sales & Use Tax Distribution) through the Automated Clearing
House (ACH) Network which is a nationwide batch-oriented electronic funds
transfer (“EFT”) system managed by the Federal Reserve Bank. The process
is administered by the State through the Office of State Controller.
Information on the Statewide Electronic Commerce Program is available at
www.ncosc.net/SECP/index.html. Units of government can also utilize this
system for making payments to the State (i.e. payments to DHHS, DPI,
DMA, etc.). Please use the E-Commerce Contacts link at the above
referenced website for more information.
LGC
Page 13 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
The EFT system allows each governmental unit to select either its account
at a local bank or at the North Carolina Capital Management Trust as the
account to be debited or credited for payments due to or from the State.
(h) Automatic Deposits
There may be instances where a unit receives funds via an automatic bank
deposit. The receipt of federal grants is often through the use of wire
transfer receipts, or other direct bank transactions. In these instances, the
advice from the bank will be treated as the receipt of cash by mail.
Therefore, any advices received should be attached to the mail collection
report upon receipt. The total of the advices should be added to the total
receipts for the day and entered on the daily collection report. Units should
consider establishing e-mail notification addresses that allow the finance
and other department officials to access notices of deposit e-mails provided
by some Federal and state agencies.
b. Cash Concentration Account or Central Depository
(1) The use of a cash concentration deposit account or central depository bank
account (the terms “cash concentration” and “central depository” will be used
interchangeably) refers to the practice of consolidating or commingling deposits
of monies belonging to several funds into a single bank account enabling
centralized control of excess balances. Units with appropriate accounting
systems and strong internal controls may find the use of a central depository
provides an opportunity to improve cash management. By consolidating deposits
from several funds, the amount of available monies for investment can be
maximized and investment income increased by reducing the amount of idle
balances. It may also improve the accuracy of cash forecasts and, through
economies of scale, reduce fees and costs associated with banking services.
While reducing the number of bank accounts being monitored and reconciled, it
can increase the accounting system complexity by requiring more complex
entries to track the ownership or equity of each fund investing in the
concentration account. Finance officers must evaluate the adequacy of their
accounting system to manage the added complexity of a central depository.
Central depository accounting is illustrated in Exhibit A.
To use a central depository effectively, the accounting system must provide the
finance officer not only the cash balance in the central depository, but also must
provide on a daily basis the cash balance available to each investing fund.
Because each fund may have different cash flow prospects, this information is
necessary to prevent a fund from inadvertently expending more cash than it has
available. It also helps assure that excess funds will be properly identified and
invested to meet the cash flow needs of each fund. If the accounting system does
not readily provide the required information, a central depository should not be
used. The use of a central depository is not recommended if a manual accounting
system is used or if any fund depositing monies into the central depository is
expected to have other than remote occurrences of a negative cash balance, i.e.
LGC
Page 14 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
“overdrafts”. Cash rich funds should not be allowed to inadvertently subsidize
funds with weak cash positions.
Use of a cash concentration account is authorized by G.S. 159-30(e) which
provides that “(c)ash of several funds may be combined for deposit or investment
if not otherwise prohibited by law….” Notwithstanding this language, certain
types of funds may not be appropriately combined in a central depository, e.g.
bond proceeds, grant proceeds and similar funds. In these areas, laws,
regulations and contractual agreements should be carefully reviewed with bond
counsel or the counsel for the unit. Where appropriate, units are encouraged to
structure contracts and agreements to permit but not require consolidation of
funds for investment purposes.
c. Cash Disbursements
Units expend cash for a great variety of purposes and often in substantial amounts.
The objective of managing disbursements is to make the maximum amount of funds
available for investment for the longest time possible while ensuring both the
accurate and timely payments of obligations. Invoices should be paid on the due
date. Early payment results in the loss of interest income on the funds used to pay
the bills. Late payment may result in interest charges or late fees on the amounts
owed, and in damage to the relationships with those who have in good faith
provided goods and services to the unit. This section on cash disbursements reviews
consideration regarding the purchase and payments for goods and services for nonsalary expense transactions. Special considerations for cash disbursement related to
payroll and payments to independent contractors are addressed in the State
Treasurer’s Policy Manual, Section 40 – Payroll. State Treasurer’s Policy Manual,
Section 35 – Purchasing and Section 45 – Travel should also be reviewed as both
relate in part to cash disbursements processes.
(1) Objectives of Internal Control Over Cash Disbursements
The objectives of internal control over cash disbursements include assuring that
the following occur:
LGC
●
All invoices processed for payment represent goods and services received and
are accurate as to terms, quantities, prices and extensions, and account
distributions are accurate and agree with established account classifications;
●
All checks are prepared on the basis of adequate and approved supporting
documentation, compared with underlying data and properly approved,
signed and mailed;
●
All disbursement, payables and encumbrance transactions are promptly and
accurately recorded as to payee and amount;
●
All entries to payables, encumbrances, assets and expenses and cash
disbursements are properly accumulated, classified and summarized in the
accounts; and
●
Accurate, timely and detailed records are maintained and reports produced.
Page 15 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
These internal controls are intended to reduce to an acceptable level the
following risks:
●
Disbursements reflect improper prices or terms;
●
Costs are inaccurately recorded in the accounting records;
●
Incorrect or duplicate disbursements;
●
Alteration or payment of altered checks.
●
Inadequate
or
improperly
approved
disbursements for materials or services;
●
Ineffective budgetary controls;
●
Inaccurate cash, accounts payable, encumbrance or other account balances;
and
●
Misstated internal or published financial statements.
documentation
supporting
Additional information on internal control is covered in the State Treasurer’s
Policy Manual, Section 80 – Internal Control.
(2) Processing Cash Disbursements
An effective disbursement system generally involves both an analysis of
disbursement patterns, and the efficient management of disbursements.
(a) Analyzing Disbursement Patterns
An analysis of disbursement patterns can help local governments identify
both opportunities for increased investment earnings and any disbursement
float. By reviewing types of payments and due dates, the cash manager can
create a record of due dates. This record can help in determining in-house
lead time needed to prepare a disbursement. It also will allow cash
managers to match large disbursements with investment maturities. By
doing this, funds can remain invested until the disbursement is to be made.
Changes in bank check-processing systems have greatly reduced the
opportunities to take advantage of disbursement float to earn more
investment earnings. An analysis of disbursement patterns can allow a unit
to use any remaining disbursement float to its advantage. Disbursement
float can be defined as the time that elapses from the moment the
governmental unit processes the check for payment until the time the check
clears the bank account of the unit. When considering disbursement float, it
is important to be conservative in estimating float times, thus reducing the
risk of overdrafts due to incorrect estimates.
(b) Managing the Disbursement of Funds
There are several methods that local governments may use to disburse
funds. The three most common are by commercial check, by electronic funds
transfer (“EFT”) including wire transfers and an automated clearing house
(“ACH”) payments, and by procurement cards.
LGC
Page 16 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
Payment by commercial bank check is a frequently used disbursement
method. A check is simply an order to pay money on demand to the payee
from the bank account of the drawer. Zero-balance account may be used
when making disbursements by check. Under this system, a concentration
account is set up to hold the available funds of the unit. Another account or
group of accounts containing zero balances is set up to handle
disbursements. Funds are transferred electronically from the concentration
account to the zero-balance account to cover checks presented for payment.
Excess funds remain in the concentration account and often serve as a
compensating balance to pay for bank services provided. Because of the
numerous transfers between accounts, zero-balance accounts often require
more time and effort to reconcile than other bank accounts.
Wire transfers move funds between banks electronically. Because wire
transfers are same-day transactions which allow collected funds to be moved
immediately, payments can be made at the last possible minute consistent
with bank and Federal Reserve cutoff rules. This may produce increased
investment earnings by allowing funds to remain invested for longer periods.
However, wire transfers are the most expensive payment method and are
not cost-effective for small transactions. When large amounts are owed, the
payee will often require payment be made by wire transfer. Wire transfers
are frequently used for debt service payments, funding payroll direct deposit,
paying for investment purchases and similar transactions. Wire transfers
are governed by Article 4A of the Uniform Commercial Code (Chapter 25
Article 4A of the North Carolina General Statutes).
While wire transfers create same-day transfers of funds, ACH transactions
generate next-day transfers of funds. The ACH network is the least
expensive method units can use to disburse funds when used to send a large
number of payments of any size through batch processing. Direct deposit of
payroll is the most common example although ACH credits may also be used
for payments to vendors. In this method, a data file is generated by the unit
and sent to the bank at least one day prior to disbursement date. On the
designated payment date, the bank will use the ACH system to move funds
from the account of the government to the accounts of the various recipients.
Once again, by knowing a specific payment date and leaving funds invested
until that date, investment earnings can be increased. Rules governing ACH
transactions include the Electronic Funds Transfer Act, Regulation E –
Electronic Funds Transfers issued by the Federal Reserve Board, National
Automated Clearing House Association (NACHA) rules, and bank
requirements. Effective September 18, 2009, the International ACH
Transaction (IAT) section of NACHA Operating Rules were revised to align
these rules with the requirements of the Office of Foreign Assets Control.
Additional information regarding the IAT rules is included in the Local
Government Commission (“LGC”) Memorandum No. 2010-13 (September 16,
2009) and from the Office of the State Controller.
LGC
Page 17 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
Procurement cards or purchasing cards may also be used for disbursement of
funds. They enable the unit to make small purchases more quickly and
efficiently and reduce the number of payments to vendors as the unit can
issue one check to the card issuer rather than making numerous payments
to many vendors. While similar to credit cards from the vendor’s point of
view, procurement cards typically offer many more opportunities for the unit
to customize and limit the transactions permitted by the holder of the card
than are available with credit cards. Issues to be addressed in adopting a
purchase card program and the procedures and internal controls to include
are discussed in depth in the State Treasurer’s Policy Manual, Section 35 –
Purchasing.
The Retirement Systems Division (“RSD”) of the Department of State
Treasurer uses a web-based system, Online Retirement Benefits through
Integrated Technology or ORBIT, to receive employer reports and payments
from governmental units for their retirement contributions. Employee and
employer contributions must be transmitted electronically to the RSD.
Additional information can be found on the RSD website at
www.nctreasurer.com. Please contact the ORBIT Employer Reporting Team
at [email protected] or 877-626-7248 (outside Raleigh) with questions
regarding employer obligations and reporting under the ORBIT system.
An important tool in managing disbursements is the adoption of an
appropriate purchasing policy designed to ensure the selection of the best
goods and services at the best price in accordance with Federal, state and
local regulations. The policy should address all procurement methods used
by the unit and describe the required authorizations and procedures so that
every disbursement is supported by the policy and approved documentation.
As required by G.S. 159-28 – Budgetary accounting for appropriations,
purchase orders must be preaudited before issuance and include the
required preaudit certificate, and be signed and approved by the finance
officer. This requirement can reduce unnecessary purchases. Because
payments are made after the goods or services are delivered, moneys can
remain invested longer and the unit has greater leverage in the settlement
of disputes. In addition, the preaudit ensures that there is an appropriation
authorizing the purchase. Purchase orders should be pre-numbered for
internal control purposes. All disbursements should be supported by a
preaudit certificate signed by the finance officer.
For discussions of the preaudit process and requirement, see Kara Millonzi’s
posts on UNC School of Government Coates’ Canons: A New Interpretation
of the Preaudit Requirement, November 8, 2012; Court of Appeals Reaffirms
New Interpretation of Pre-audit Requirement, May 23, 2013; The Perils of
Preauditing P-Cards (and Other Electronic Payment Methods), October 11,
2013; Preauditing Employee Salaries and Wages, March 21, 2014; and
Disbursing Public Funds, May 23, 2014.
LGC
Page 18 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
(c) Processing Vendor Invoices
When vendor invoices for goods or services are received, the following
procedures should be performed and documented:
●
The purchase order and the receiving report for goods or the
documentation evidencing the performance of services should be obtained
and compared to the invoice. The description, quantity, and price of each
item on the invoice should agree with the same information on both of
these reports. Any discrepancies must be resolved.
If a purchase order was not used, the preaudit procedures must be
performed by verifying the expenditure was appropriated, that there is
an unencumbered balance or an encumbrance previously created for the
amount, and that the amount is due and payable.
●
The invoice should be checked for mathematical accuracy.
●
The account code number of accounts to be charged on the invoice should
be entered.
●
Corresponding purchase orders, receiving reports, and invoices should be
filed in a manner that makes them easily accessible.
●
Cash discounts available for early payment should be taken unless the
loss of investment earnings due to early payment is greater than the cash
savings from the discount.
(d) Petty Cash Change Funds
Petty cash change funds should be maintained as an imprest fund. An
imprest fund is a fund that is periodically replenished in exactly the same
amount as expended from it. For example, if the amount of the petty cash
fund is established at $100, at all times the amount of cash plus, if allowed,
the amount expended and unreimbursed as evidenced by receipts and other
documentation should equal $100. However, for a further discussion, it is
highly recommended that one carefully review the response to question 3 in
the blog post Daily Deposit Requirement, January 14, 2013, by Kara
Millonzi.
Requests for petty cash reimbursements should be accompanied by petty
cash vouchers, supporting receipts, and a summary sheet indicating the
accounts and amounts to be charged to each account. Petty cash vouchers
should have authorized approvals and comply with all policy requirements.
Verify both the code numbers on larger items and the mathematical
accuracy by totaling the vouchers and comparing the total to the summary
sheet. The check to replenish the petty cash fund should be made payable in
the name of the custodian “as Petty Cashier” to distinguish it from
reimbursements for expenses or other payments to that individual.
(e) Other Disbursements
Other disbursements include those not usually supported by an invoice or
other formal request for payment from an outside source. As a result, it is
necessary to prepare a check request giving facts and reasons why the
LGC
Page 19 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
payment should be made. Any supporting documentation should be
attached. Examples of such payments with typical documentation and other
disbursements are as follows:
●
Miscellaneous Refunds
Cash has been received from an outside source in excess of the amount
owed to the unit. Documentation supporting should include the date and
number of cash receipt, date and number of the invoice or tax bill, and a
reference to the minutes of the governing board meeting when the refund
was authorized.
Check issued as replacement checks should be carefully documented.
Before a replacement check is issued, it must be determined that the
check to be replaced has not been paid by the bank. For each replacement
check issued, there must be clear documentation of its nature as a
replacement check. The replaced check should be voided with
documentation of the replacement to prevent it being escheated at a later
date. It also must be reported to the bank in the required manner such
that it will create an exception item if positive pay is utilized and the
replaced check is presented for payment.
LGC
●
Refunds of Utility Deposits
Documentation includes date and number of cash receipt of original
deposit, date and document number for cancellation of service, and
clearance from the accounts receivable and billing department that no
outstanding balance exist.
●
Payment of Payroll Taxes and Withheld Amounts
This includes FICA, withheld federal and State income taxes,
hospitalization or other insurance, garnishments, or other amounts
withheld from employee salaries. Documentation consists of dates and
reference numbers of payroll journals, tax or retirement reports, and
calculations of the amounts to be paid. Confirmation numbers of
electronic payments should be recorded. For additional information on
payment of payroll taxes and related items, see the State Treasurer’s
Policy Manual, Section 40 – Payroll.
●
Debt Service Payments
Documentation for payment of principal and interest includes notice of
payments due from the fiscal agent or LGC. The accuracy of the amount
due and due date should be verified by comparison to the loan
documentation and by recalculation. Any discrepancies should be
reported to the fiscal agent and the LGC. With debt service payments,
assurance of timely payment is of the utmost importance.
●
Purchase of Investments
Documentation includes notations regarding quotes received, brokerage
advices, invoices, and bank memoranda.
Page 20 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
●
Payments on Construction Contracts
This includes payments of progress billings and final invoices on large
contracts. Documentation includes requests from contractors; necessary
legal, architectural and engineering approvals; memoranda indicating
that any special provisions have been fulfilled; any necessary
calculations; and other related documentation.
(f) Preparation of Checks
All payments to be made on a particular date should be reviewed for proper
authorization, including the compliance with the preaudit requirement, the
existence of an appropriation and encumbered balance or an encumbrance
previously created for the amount, and verification that the amount is due
and payable. Amounts are due and payable if the services or materials have
been provided, the amount is properly determined, and the payment is due.
That the services have been provided or the materials received should be
clearly documented by one or, preferably, two individuals. Contracts of
independent audits should not be paid until the contract has been approved
by the LGC.
The total amount to be paid by bank account and, if a central depository is
used, total amount to be paid by investing fund must be determined. Next, it
should be determined that cash is available in each bank account and in
each fund, if a central depository is used.
The payment should be reviewed to verify that it was previously encumbered
or that a sufficient unencumbered balance remains so that a preaudit
certificate can be signed. A voucher check for each payee which includes such
information as the invoice number, amount, cash discount taken, and net
amount of each item paid should be prepared. If there is no invoice, a
description sufficient to explain the purpose of the payment should be
provided. Duplicate copies of the checks should be retained along with any
supporting documentation.
Original checks and supporting documentation should be submitted to the
person(s) authorized to sign checks. A final review and verification of the
preaudit certificate is highly recommended. Third copies of the checks can be
maintained in numerical order for quick reference.
(g) Manual or Emergency Checks
When an automated system is used to generate checks, the preparation of
manual or emergency checks should be strongly discouraged. Before
processing any emergency check, one should determine the nature of the
emergency and verify that the payment cannot be timely processed within a
regularly scheduled check processing. If it is determined that a manual
check must be prepared, all supporting documentation must be in hand. As
for any payment, proper authorization is required and includes compliance
with the preaudit requirement, the existence of an appropriation and
encumbered balance or an encumbrance previously created for the amount,
and verification that the amount is due and payable.
LGC
Page 21 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
In addition to increased cost to process, transactions that occur outside the
bounds of routine processing are often more prone to hasty authorization
leading to errors and are therefore more risky. If “positive pay” (see following
Part I - B.3.c.(3) – Protection Against Check Fraud) is used, the check
information must be communicated to the bank in a timely fashion to avoid
an exception for the manual check. The automated systems − payables,
general ledger, etc. − must be promptly updated, which is particularly
important if a significant amount is involved. If manual checks are
frequently requested, the reasons for this should be investigated. It may be
determined that the check processing should occur on a more frequent
schedule or that additional training is required.
(h) Cash Disbursements Journal
Whether computer generated or manually prepared, it is recommended that
the Cash Disbursements Journal be formatted to show at a minimum the
disbursement date, payee, check number, a credit column for each bank
account and a debit column for each fund. The Cash Disbursements Journal
should provide adequate documentation of each general ledger credit to cash
and the appropriate debit entries. An accurate cross-reference to the
supporting documentation should be included. If a central depository is used,
special care must be taken to assure that no fund is expending more than
the available cash balance for that particular fund without appropriate
approval and designation of the lending fund. The Cash Disbursements
Journal should be designed to generate complete journal entries for the
central depository. It is intended that all disbursement transactions will be
posted on a daily basis.
(i) Interfund Transfers
There are a number of common transactions between funds which must be
provided for in the accounting system. These may include contributions to
other funds, services provided by an enterprise fund to other funds, functions
of the local government unit, and charges between funds of the local unit.
Supporting documents should be reviewed and calculations should be
verified for all transfers. A journal entry should be prepared for each
transaction and posted to the general ledger. Each month after balancing,
each receivable should be checked against the equivalent payable. Any
differences should be reconciled and necessary journal entries prepared to
correct any errors.
All interfund transactions to be settled should be handled according to either
of the two following methods:
1. On or before the 10th of the following month, a check should be drawn on
the debtor fund in the exact amount of the interfund balance and
deposited to the account of the fund to be credited.
2. If the funds are in the central depository, a journal entry should be
prepared to transfer the payable balances through the central depository
to the fund to be credited. Many automated accounting systems automate
LGC
Page 22 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
the creation of central depository entries. Illustrated journal entries are
provided for a central depository in Exhibit A.
Amounts should be checked to verify that the interfund balances have
actually been liquidated in both funds.
(3) Protection Against Check Fraud
Some observers have called check fraud the new growth crime. With the advent
of high quality, inexpensive color copiers, scanners and desktop publishing
software, creation of counterfeit checks has the potential for explosive growth.
Fortunately, advances in banking services provide means to protect against
some, but not all, of the check fraud schemes.
A unit of government must have in place a comprehensive program for the
prevention of check fraud as well as wire transfer and ACH fraud. To minimize
exposure to check fraud losses, the unit should exercise “ordinary care” in its
check printing and disbursement operations. There are many actions that can
be taken to demonstrate responsibility and accountability and help ensure that
“ordinary care” is exercised. “Ordinary care” in the case of a business means the
observance of reasonable commercial standards prevailing in the area it is
located with respect to the activities in which it is engaged.
There are many and varied opportunities for compromise of a units fraud
prevention program. Examples include account statements and documentation
that show bank account numbers discarded without shredding, unsecured check
stock storage, computer security breach through password compromise, account
information inadvertently left on an employee’s desk in public view, and many
others.
A comprehensive program for the prevention of check fraud should include the
following:
●
Adoption of written policies and procedures and properly training employees,
●
Prompt reconciliation and review of bank accounts by properly trained and
supervised employees;
●
Proper segregation of duties creating, approving and releasing of payments,
including the custody and control of unissued checks;
●
Effective authorization, review and approval procedures;
●
Protection of facsimile machines, plates, stamps and similar devices as
required by G.S. 159-28.1 – Facsimile signatures;
●
Employment of positive pay and other security services offered by financial
institutions for both check and ACH payments,
●
Use of high-security check stock paper controlled with secure storage; and
●
Other appropriate internal controls.
Additionally, the unit should take advantages of services offered by banks to
protect against check fraud.
LGC
Page 23 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
(a) Positive Pay
“Positive Pay” is the generic term for the cash management service that is
becoming the leading method of check fraud deterrence today. The positive
pay process requires the transmission of a “checks issued” data file,
essentially an electronic check register, to the bank each time checks are
created. Each day, the bank will update the issuance information for checks
issued and paid. The bank will compare the updated issued check data to the
checks presented for payment. If a check serial number and dollar amount
match with the issued check data, the check is paid automatically. Units
should also investigate having positive pay services match ACH
transactions.
Checks the unit did not issue or checks where the amount has been altered
should be detected and reported as an exception item. The unit can
determine whether to honor (pay) or return the check based on the
information provided by the bank. If the unit takes no action by the banking
system deadline regarding an exception item, the bank will take action
according to a default rule or standard. The default rule can be either that
the bank will automatically pay the exception item, or that the bank will
automatically return and fail to pay (dishonor) the exception item.
Regardless of the default rule selected, the responsibility to promptly and
effectively review exceptions is most important.
Selecting a default rule of “Return” is the prudent and recommended option
for protecting the assets of the unit. Because reported exceptions may result
from encoding errors, from misreading the MICR line in the high speed
check processing environment, or from the failure of the unit to include
manual checks, timely review of reported exceptions is required to prevent
the return of properly issued checks. Failure to prevent erroneous return of
properly issued checks will negatively affect vendor or employee relations.
Proper segregation of duties must also be considered in assigning the review
of exceptions. On the other hand, selecting a default rule of “Pay” exposes
the unit to possible payment of fraudulent checks in the event of failure to
timely review exceptions.
In addition to timely review of exceptions, it is the responsibility of the unit
upon the adoption of positive pay to develop and document the following:
●
Timely, accurate and secure transmission processes for check issuance
data that minimize unnecessary exceptions,
●
Confirmation procedures to verify the successful receipt of each
transmission, and
●
Procedures regarding transactions processed outside the usual
disbursement system, including manually issued checks, voided checks,
stop payments and similar transactions.
Additionally, if the unit is closed on any day that is not also a bank holiday,
the best methods to review reported exceptions must be determined.
LGC
Page 24 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
While positive pay is a highly recommended tool for the prevention of check
fraud, it cannot protect against all fraud and does not eliminate the need for
strong internal controls and a comprehensive program to prevent check
fraud. If a check fraud is perpetrated with a serial number and amount that
match a valid check, for example where the payee is altered, the check would
be automatically paid. Some banks offer services where the payee name and
memorandum notations are verified.
(b) Reverse Positive Pay
Reverse positive pay is a similar process with the responsibilities reversed.
The unit is provided a file of checks presented for payment including account
numbers, serial numbers and dollar amounts by its banks. It is then the
responsibility of the unit for comparing that information to its internal
records, identifying any exceptions and notifying the bank on a timely basis
which items to pay or return. While positive pay is a more effective
deterrent, units that are unable to use positive pay should consider using
reverse positive pay.
(c) Electronic Payments
Check fraud may be reduced by moving to electronic payment formats from
paper-based payments. By reducing the distribution of checks, which contain
all the information (account number, ABA number, etc.) needed to create
fraudulent checks, the likelihood that this information will fall into the
wrong hands is reduced. Automated Clearing House (ACH) electronic
payments work very well for repetitive payee applications such as payments
to employees, for example payroll or travel expense reimbursements, and for
payments to vendors, for example accounts payable.
Implementing a policy with the bank to use Fed wires for large dollar
amount payments can also be an effective way to reduce exposure to check
fraud. Another good procedure is to use a separate account to handle only
incoming wire transfers. If wires are received as a form of payment,
especially if advance payment is required, bank account information can
easily fall into the hands of others. By restricting the account to only
incoming wires, and including an automatic transfer service and no check
writing authority, the unit can reduce its potential to check fraud while
maximizing its funds for investment. Wire transfers, ACH transactions and
other electronic receipt should be reconciled on a daily basis.
While electronic payments may help reduce check fraud, the unit must be
alert to wire transfer and ACH fraud, which is a growing concern. Wire
transfer fraud occurs when an unauthorized individual performs a wire
transfer to an account that is not intended as the recipient. ACH fraud
occurs when the unit’s account is accessed for unauthorized ACH payments
(debits). Working with the bank, the unit may be able to restrict ACH debit
activity on its accounts. Establishing proper internal controls reduce the
exposure to wire transfer fraud.
LGC
Page 25 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
(d) Other Security Features
Security features provided by banks and other financial institutions are
continually upgraded. The unit should be alert for improved security
features and service provided by the financial institution, such as other
blocking and filtering capabilities, reconciliation services, and similar
services. As with all operational alternatives, the board and finance officer
must weigh the risks and benefits versus the cost of each alternative. To
evaluate the alternatives regarding check fraud, the exposure to loss, the
policies of their banks and insurance carriers, and the rules in Uniform
Commercial Codes regarding issuer and bank responsibilities must be
understood and considered.
d. Daily Cash Management Procedures
On a daily basis, the finance officer or other designated official must review
beginning cash balances, analyze planned disbursements and expected cash
receipts, and determine the investment activities required to assure that adequate
cash is available to cover planned disbursements and that any excess cash is
appropriately invested. A sample Cash Management − Daily Activity & Balance
Report is attached as Exhibit B for units to modify to assist in this process.
The first step in this daily process would be to review the projected activity for the
prior day versus the actual activity. Any difference from expected activity should be
investigated and the current days beginning book balance updated as required.
Once satisfied that beginning balance is properly stated, cash receipts and
disbursements must be projected and the beginning balance adjusted to reflect the
proposed transactions and determine a preliminary closing balance. Once the
preliminary closing balance is determined, the cash manager can determine
whether it is necessary to transfer funds into the account to cover disbursements or
whether additional funds can be invested.
e. Bank Reconciliations
This section presents procedures to be used by local governments and public
authorities in performing monthly bank reconciliations. To reconcile is to compare
two different sets of data one to the other, to identify and investigate differences,
and to initiate corrective action, when necessary, to resolve differences. In this case,
the different sets of data are the bank data compared to the unit data for bank
transactions Banks and automated accounting software provide various services to
facilitate monthly, or more frequent, reconciliation of bank accounts. Regardless of
the accounting system or bank services used, certain fundamental processes and
controls are required. This section will describe in general terms these processes
and procedures.
Bank reconciliation is required because differences inevitably occur between the
balance in the general ledger, the “book balance”, and the account balance at the
bank. These differences between the book balance and bank statement balance may
be due to: checks issued by the unit but not yet paid by the bank (outstanding
checks); deposits recorded by the unit but not yet deposited at the bank (deposits in
transit); unrecorded bank charges and credits for fees, interest or similar items; or
recording errors by the unit or the bank. Units should reconcile the bank and book
LGC
Page 26 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
balances of all accounts to determine the reasons for any differences and to correct
any errors in the accounts.
Reconciliations should be prepared promptly after receiving the monthly statement
and formally documented and approved even if the online banking services provided
permit daily reconciliation.
(1) Essential Components
The essential components necessary for effective reconciliation of bank accounts
are as follows:
●
Proper segregation of duties – An employee not involved in receiving,
processing or recording receipts and disbursements must perform the
reconciliation;
●
Prompt reconciliation and review – Reconciliations should be completed
promptly, generally within five to seven business days of each month-end, to
safeguard assets and to verify the accuracy, completeness and reliability of
accounting data.
●
Resolution of differences – Differences must be identified, investigated and
resolved.
It is recognized that for units with a small staff achieving proper segregation of
duties is very difficult; however, the difficulty does not minimize its importance.
(2) Reconciliation Procedures
The procedures necessary to reconcile the bank statement are as follows:
(a) Bank statements must be received unopened directly by the employee
assigned to perform the reconciliation;
(b) The total of the returned checks should be compared to total charges on the
statements and the signatures and endorsements examined on a test basis;
(c) Deposits included on the bank statements should be compared to deposits in
transit on the prior reconciliation and to deposits made since the last
reconciliation. Deposits not recorded by the bank should be listed as deposits
in transit. On a test basis, the date the deposit was recorded in the cash book
should be compared to the date shown on the bank statement.
(d) Determine by review of returned checks or report provided by bank which
outstanding checks from the prior reconciliation and from the checks issued
this period remain unpaid by the bank, i.e. current outstanding checks;
(e) Determine all charges and credits by the bank that have not been recorded
by the unit; and
(e) To the balance from the bank statement add the total deposits in transit,
subtract the total outstanding checks, and add or subtract bank charges or
credits respectively, and the result should equal the general ledger cash
balance.
LGC
Page 27 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
The reconciliation is not complete until all differences have been identified,
investigated and resolved. Reconciling items may be categorized as either timing
differences that should clear with the passage of time or differences requiring
adjustments to record either by the bank or with an adjusting journal entry in
the financial records of the unit. If an unidentified bank debit is discovered, the
reconciler should immediately ascertain the reason for and correctness of the
unidentified charge. Where appropriate, it may be requested that the bank
reverse the charge or the unit may be required to prepare, properly approve and
post a journal entry to record the transaction. Reversals by the bank should be
verified on the next bank statement. Similarly, deposits in transit should be
investigated and the posting by the bank verified upon receipt of the next bank
statement.
The reconciliation should be documented in a format which clearly presents the
balances being reconciled, the nature and disposition of each reconciling item,
and the preparer and date the reconciliation was completed. When completed,
the reconciliation should be approved by management and the approval
documented.
(2) Post-reconciliation Procedures
The procedures necessary upon completion of the reconciliation of the bank
statement are as follows:
(a) The bank statements, the reconciliation and supporting documentation must
be retained for audit and other purposes.
(b) Appropriate action must be initiated to collect on and properly account for
any deposit items returned unpaid.
(c) Appropriate action must be initiated for unpaid checks outstanding longer
that one year and reportable to the Unclaimed Property Division in the
Department of State Treasurer.
Failure to promptly and accurately reconcile all bank accounts could result in
financial loss to the unit if irregularities are not detected promptly and reported
to the bank. It could also result in incorrect financial reports including reports
required by G.S. 159-33 – Semiannual reports on status of deposits and
investments and in internal control findings by internal and external auditors.
C. Collateralization of Public Deposits
1. Requirement for and Methods of Collateralization of Public Deposits
For local governments and public authorities, and for schools, G.S. 159-31(b) and
G.S. 115C-444(b) respectively require that all funds on deposit must be secured by
deposit insurance, surety bonds, letters of credit issued by a Federal Home Loan Bank
or authorized investment securities. The vast majority of banks use collateral to secure
public deposits, although there are a few who use one of the other methods. The NC
Administrative Code (20 NCAC 07) specifies what securities are eligible to be used for
collateral in Section .0200. These securities include Treasuries, agencies, State bonds,
local government bonds, GO bonds of other states, prime quality commercial paper
bearing the highest rating, and various other securities. When opening a new bank
LGC
Page 28 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
account or purchasing a certificate of deposit, the unit must notify the bank or
depository institution at the time the account is opened that the account is a public
deposit account subject to the collateralization requirements.
Before opening any account with a bank or other depository, the unit must determine
the method used to collateralize the public deposits. Two methods of securing or
“collateralizing” public deposits are available to banks and other depositories: the
“Pooling Method” and the “Dedicated Method”. The financial institution may select only
one method for use with all public deposits except for deposits of public housing
authorities (PHAs) which are required by regulations of the United States Department
of Housing and Urban Development (HUD) to use the Dedicated Method.
It is incumbent upon the finance officer to understand the difference between the
methods of collateralizing public deposits since significantly different responsibilities
are undertaken depending on the method used by the depository institution. Under the
Dedicated Method, responsibility for monitoring collateral is with the finance officer of
the unit. Under the Pooling Method, monitoring collateral is primarily the
responsibility of the State Treasurer. Except for PHAs, a unit may select depositories
that use either of these methods.
Assuming that adequate collateral has been pledged under the method selected, a local
government would be made whole in the event of a bank default. Procedures are in
place with the Financial Operations Division of the Department of State Treasurer to
provide for settlement of funds, although this process can take some time.
2. Form INV-91 – Notification of Public Deposit
As of June 30 each year, a “Notification of Public Deposit” (INV-91) must be filed with
each depository regardless of the method of collateralization used with a copy
submitted to the State Treasurer. A properly filed INV-91 serves two vital functions:
a. It informs the bank that the accounts listed are “public deposits” that must be
collateralized; and
b. It serves as an audit document for Banking Operations to verify the collateral for
those accounts.
3. Pooling Method Depository
Under the Pooling Method, which is a collateral pool, all uninsured deposits are
collateralized with securities held by the State Treasurer's agent in the name of the
State Treasurer. Since the State Treasurer is acting in a fiduciary capacity for the unit,
these deposits are considered held by an agent in the name of the unit. The Banking
Operations Section of the NC Department of State Treasurer monitors this process,
approving all banks that participate in this method, monitoring each bank’s financial
health, and monitoring each bank’s quarterly or monthly reporting of collateral to the
State Treasurer. The amount of the pledged collateral is based on an approved
averaging method for noninterest bearing deposits and the actual current balance for
interest-bearing deposits. Depositories using the Pooling Method report to the State
Treasurer the adequacy of their pooled collateral covering uninsured deposits.
Collateral for the pooling method is pledged at 110% of the average balances in excess
of FDIC coverage provided. The State Treasurer does not confirm this information with
the unit or the escrow agent. Because of the inability to measure the exact amounts of
LGC
Page 29 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
collateral pledged for public deposits collateralized under the Pooling Method, the
potential exists for under-collateralization, and this risk may increase in periods of
high cash flows.
Local governments can assist the State Treasurer in the monitoring of adequate
collateral for public deposits held in banks using the pooling method by submitting the
Form INV-91 on a timely basis. The NC Administrative Code (20 NCAC 07.0103)
requires that local governments file an INV-91 with the State Treasurer annually as of
June 30th for each financial institution used as a depository. Current procedures
require that the INV-91 forms be prepared in duplicate with one copy going to the
financial institution and the other coming to the Local Government Commission
(“LGC”) when the LGC 203 report is filed, typically in July. The INV-91 forms are
forwarded to the Banking Operations Section where they are matched to the reports
filed by the banks (INV-97). It is imperative that each local government accurately
prepare and promptly submit the Form INV-91 to their respective banks and to the
State Treasurer. Forms can be sent to the LGC and will be forwarded to Banking
Operations. Completion and filing of the INV-91 is not only a matter of compliance but
a matter of safety. Collateral can only protect local government funds if the accounts
are identified as “public deposits” and the collateral pledged is adequate.
The finance officer must stay informed of any change in collateralization methods as
the result of conversions to a different method or as the result of merger of depositories.
A memorandum listing banks using the Pooling Method is available on the website of
the State Treasurer and is updated semi-annually.
4. Monitoring Collateral at a Dedicated Method Depository
Under the Dedicated Method, all deposits that exceed the federal depository insurance
coverage level are collateralized with securities held in the name of the unit by an
agent for the unit. The responsibility for monitoring the adequacy of the collateral is
with the finance officer of the unit.
When an account is opened with a depository using the Dedicated Method, the finance
officer for the unit of local government undertakes to perform all of the following
procedures to monitor collateral:
a. Execute a “Security Agreement With Resolution” (INV-94A) and an “Escrow
Agent Agreement” (INV-94B or signature card of the Federal Reserve Bank) when
opening each account
b. Maintain a record of and track the securities pledged by each depository for
monitoring purposes after opening the account. If securities having periodic
principal pay downs are pledged, consideration should be given to record their
decline in “outstanding principal” balances
c. Periodically check the market values of the collateral pledged to verify that it
equals or exceeds 100% of the amount required. The frequency of checking the
market values would depend upon the amount of excess collateral pledged, the
types of collateral pledged and the volatility of market conditions. Particular
attention should be given to collateral levels during periods of property tax
collections and other times of heavy cash receipts which increase deposit balances
LGC
Page 30 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
and during periods of increasing interest rates which may reduce the market value
of existing collateral.
d. Execute “Request for Collateral Pledge/Release” forms (INV-95) if requested by
the depository authorizing the release or substitution of collateral after verifying
that sufficient collateral will remain pledged after the transaction is effected.
e. Report the amount of collateral pledged by each depository on the semi-annual
reports (LGC 203) filed with the Local Government Commission.
5. Resources
For a complete discussion of the collateralization of public deposits using either
method, the Federal regulations regarding FDIC insurance, and an in depth
presentation of the responsibilities of the unit, review the publication “Collateralization
of Public Deposits in North Carolina” which includes the N.C. Administrative Code
Title 20 – State Treasurer, Chapter 7 – Collateralization Of Deposits, “Banking
Operations Glossary”, and other publications, information and forms. It is available
at www.nctreasurer.com under “Divisions”, “Financial Operations” under
“Collateralization of Public Deposits”, or under “Divisions”, “State and Local
Government”, “Local Fiscal Management”, “Forms and Instructions” under “Deposit
and Investment Information”. The N.C. Administrative Code is also available at the
website of the North Carolina Office of Administrative Hearings, Rules Division,
www.oah.state.nc.us.
Resources from the Department of State Treasurer available for downloading at
www.nctreasurer.com include the Financial Operations Division publications
“Collateralization of Public Deposits in North Carolina”, and the current version
of LGC memorandum “Collateralization of Public Deposits and Pooling Bank
List”. These publications clarify the federal regulations regarding FDIC coverage and
discuss the two types of collateralization in detail.
LGC
Page 31 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part I – Cash Management and Bank Depositories
This page intentionally left blank.
LGC
Page 32 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
A. Introduction
In order for a local government or public authority to put a cash management program in
place, it must establish a banking relationship. G.S. 159-31(a) provides that “(t)he
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 or, with the written permission of the secretary, a national bank located in
another state…” It should be noted that credit unions are not eligible for designation as an
official depository.
The unit must understand that the financial services industry continues to experience
dramatic changes. Deregulation, which has blurred the distinction between financial
institutions, has enabled bank holding companies to offer a variety of services they could
not previously offer, such as insurance and brokerage services, and technological advances
have combined to make a wider array of financial services available at a more competitive
price. These factors have also caused financial institutions to offer market rates of interest
on various types of deposits, many of which formerly earned little or no interest, thereby
reducing the interest rate “spread” between loans and deposits. Because they are in
business to generate profits and their spread has been trimmed, institutions are
attempting to generate more income through “fee-based” pricing. Not only are they
charging fees on loans, but most now have methods to track a demand deposit or checking
account's monthly activity to see if there is a profit or loss on the account. If a loss is
observed, a fee may be assessed on that account to pay for the loss or the required average
collected balance will be increased.
The banking relationship is the central component of an effective cash management
program. It provides the place to deposit, transfer and safeguard funds. It often is the
provider of e-commerce access and investment services. It deserves the special attention of
the governing board and finance officer.
B. Procurement Process
1. Banking Relationship Review
The first step in the selection process is to review and reevaluate the current banking
relationships. The goal of this review is to identify changes in the banking environment
and changes in the needs of the unit as a borrower or depositor.
Changes in the banking environment may result from modifications in banking
technology or regulation making available new or enhanced services, from changes in
bank competitiveness resulting from providers entering or exiting the market, and from
variations in the economic or financial condition of the banking system.
The new service requirements of the unit as a borrower or depositor may change as a
result of modifications of its goals and objectives, increases in transaction item volumes
or dollar amounts, updates to its financial systems or internal controls, and the
addition of new programs or services.
LGC
Page 33 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
Maintaining an effective banking relationship requires teamwork. Do not wait until
there is a problem or the contract is ending to review the banking relationship. Annual
or semi-annual reviews are suggested. When conducting a review of the banking
relationship, identify and include all users of banking services.
At the conclusion of the banking relationship review, it should be clear whether the
banking relationship needs to be updated, and if so, why.
Units must also evaluate the total costs of changing banks, the length of time it will
take to implement any change, and the role that the costs to change will play in the
evaluation of bank proposals. Units may have important electronic interfaces with their
banks which were expensive in time and resources to develop and which may require
significant additional effort to modify to meet any new requirements. Examples of
electronic interfaces include lockboxes and systems providing cash management,
accounts receivable, automated bank reconciliation, investing or other services. The
costs to identify all providers of funds through electronic transactions and give
notification of the new routing transit numbers and account numbers will need to be
considered, as will the cost to retrain cash collectors and other users of bank services.
As the overhead costs to change banks increases, the length time of the bank services
contract generally increases to permit the costs to be recovered over a longer period of
time. Units should not minimize the costs and effort required to change banks.
If it is determined that the banking relationship needs to be updated, considerations
should be given to three alternatives depending on the reasons for updating the
relationships: negotiating with the current provider of banking services; issuing a
request for proposals (“RFP”); or uniting with another unit to issue a joint RFP. Each
alternative has pros and cons.
a. Negotiating with the Current Provider
The benefit of negotiating with the current bank is that more favorable pricing and
enhanced services may be obtained without the costs of preparing an RFP and
without the expense of changing banks. The disadvantage is that one may not
receive the lowest price and the most up-to-date services. It is not an alternative if
the current bank is not providing satisfactory services or is unable to meet current
service requirements.
b. Issuing an RFP
Competitive bidding has the advantage of providing the optimum match to the
services required at the best price. The down-side is the costs of preparing the RFP,
evaluating proposals and changing banks if a new bank is selected. A cost-benefit
analysis should be performed before issuing an RFP.
c. Uniting with Another Unit to Issue a Joint RFP
This provides an opportunity to take advantage of economies of scales and receive
the best possible price. Units of local governments with similar service needs can
consider preparing a joint RFP to gain greater negotiating power and possibly
reduce the cost of services by creating economies of scale for the provider. Some
units have been able to negotiate terms which resulted in saving to all of the units.
The difficulty is that the units need to have similar banking needs, financial
LGC
Page 34 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
systems, etc. It is also more difficult to manage a competitive bidding process when
more parties are involved.
2. Identify Current Service Needs
If it is determined that an RFP should be issued, the next step in the selection process
is to identify the current service needs of the unit. Identification of the required
services should take into consideration changes in the financial resources and
requirements of the unit as well as changes in financial services environment including
such factors as regulatory developments, technological advances, new entrants in the
market place and economic conditions.
The banking services currently provided and their costs must be identified and
reviewed. The account analysis statement, if provided by the current bank, can be the
starting point to identify services currently used. Once the services currently used are
identified, the next step is to determine what services to keep, add or delete.
To determine the required services, it is important to survey the users of banking
services, being careful to identify all users. The users surveyed may assist in
evaluating responses to the RFP and will be part of the conversion team, if a new bank
is selected. Having a broad representation of users involved at this early stage reduces
the potential for omissions and increases commitment to the process and successful
implementation of the RFP results. This survey should document the current and
expected levels of activity including transaction and dollar volumes, and identify new
or discontinued programs or activities. New technology and cash management
procedures, updated financial systems, improved internal controls and similar
advances either in use or anticipated must be recognized. The services provided can
then be compared to the services required and any new required services identified.
New services and technologies offered by financial institutions should be investigated.
Research this through discussions with the current bank, other banks and financial
institutions, your CPA and your colleagues in government and business. The internet
can provide valuable information.
3. Preparation of Request for Proposals
To meet the varied and complex cash management requirements of local governments,
public authorities and schools, a careful consideration of banking alternatives is
required. Therefore, while not required by North Carolina law, the selection process is
most effectively accomplished through use of a competitive bidding process. The
Recommended Practice for Procurement of Banking Services published by the
Government Finance Officers Association (“GFOA”) includes periodic competitivebidding as its first recommendation. It is the best way to assure that the unit will
receive the services required at the lowest cost.
Use of a competitive bidding process requires development and use of an RFP. An RFP
generally covers the following areas:
a. Introductory Section
The introductory section provides an overview of the basic selection process and
should begin with a general description of the reasons for issuing the RFP.
LGC
Page 35 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
b. Background Information
The background information should follow and include a detailed description of the
unit including its main office location and other locations requiring banking
services; bank account descriptions; the current banking services used with current
and estimated transaction activity levels for each service; the most recent annual
financial statements; and other pertinent information. When providing the
estimated activity levels, which will be used to evaluate the price of each proposal,
seasonal fluctuations, high and low ranges and any anticipated changes should be
indicated. Any unique service requirements or contract provisions should be
identified and highlighted.
c. Basic Requirements, Terms and Conditions
All mandatory minimum requirements and qualifications should be clearly stated.
These could include the following: an Federal Deposit Insurance Corporation's
(“FDIC”) Deposit Insurance Fund insured institution; online with the Federal
Reserve Bank system for funds and securities; a qualified depository for public
funds; the collateralization requirements; an Equal Opportunity Employer;
adequate experience serving governmental customers with similar activity and
complexity; branch location specifications; and any unique requirements. The RFP
should identify the legal requirements for providing banking services to units of
local government, public authorities or schools in North Carolina. Reference to the
publication “Collateralization of Public Deposits in North Carolina”, which
contains the complete regulations, procedures and the respective NC
Administrative Code, is recommended. This publication and the appropriate forms
are available on the website of the NC Department of State Treasurer,
www.nctreasurer.com, under Financial Operations. The Local Government
Commission also regularly updates its memorandum titled “Collateralization of
Public Deposits and Pooling Bank List”.
It should be indicated whether participants must bid to provide all services or if
bids to provide less than all of the services will be accepted. Terms of the
anticipated contract should be presented including the beginning date, duration and
renewals, service levels, cancellation provisions, jurisdiction, and other significant
provisions.
d. Pre-proposal Conference and Timeline
A pre-proposal conference is an essential component of the RFP process and
attendance should be mandatory for all financial institutions submitting proposals
(the “proposers”). All departments that have significant banking needs should be
represented, for example payroll, tax, utilities, information technology, and others.
Mandatory and unique requirements should be emphasized. Questions should be
allowed to clarify the RFP and reduce the possibility of errors and miscalculations.
Questions after the pre-proposal conference and before the last day for questions
should be required to be emailed and replies emailed to all potential proposers.
The timeline should include the following dates: publication date for notice of RFP,
distribution date of RFP, mandatory pre-proposal conference date, last date for
questions regarding the RFP, due date for responses, review and negotiation
timeframe, expected date of approval by governing body, implementation period,
LGC
Page 36 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
and contract start date. Publication of notice of the request for proposals helps to
assure that no responsible bidder is overlooked. Reasonable time should be allowed
for review of the RFP before the pre-proposal conference date and for response to
the RFP after the pre-proposal conference. Ample time should be allowed for review
and negotiation and for transition and implementation.
e. Request for Financial Information
The financial information required should be specified. It is recommended that the
following be required: audited financial statements and Form 10-K filed with the
Securities and Exchange Commission (“SEC”) for the most current year and the two
prior years; most current quarterly report and Form 10-Q; current ratings and
reports by the national recognized rating agencies, if rated; and the exact corporate
name of the institution, if a subsidiary.
f.
Detailed Description of Specific Services and Requirements
The RFP should also include identification and a detailed description of the banking
services required as this is what the proposers will be bidding to provide. The
question often arises: “Which is preferred, well-defined, ‘tight’ specifications or
broadly-defined ‘loose’ specifications?” In general, an RFP with “tight” specifications
requires more “front-end” thought and effort but provides a blueprint or detailed
plan for future cash management processes. Response by proposers to an RFP with
“tight” specifications is simpler and evaluation by the unit is much easier. An RFP
with “loose” specifications may be much more difficult to evaluate.
g. Bid Format and Instructions
Bid format and instructions must also be provided. One objective of these
instructions is to be certain that bids are comparable and complete and that the
unit can effectively calculate the cost of the services proposed. These instructions
should be very specific and cover all required information to be included with bids,
should indicate whether responses by facsimile or e-mail will be accepted, and
address other relevant information and requirements. Standard definitions of terms
and a required bid response form to standardize responses, perhaps on an Excel®
worksheet, are strongly recommended. A common framework to provide and
highlight alternatives and exceptions should be included. These can greatly
facilitate evaluation of bids.
h. Evaluation and Selection Process Description
The RFP should provide a discussion of the criteria for awarding the contract and
how bids will be evaluated. The selection criteria can include both quantitative and
qualitative factors. The quantitative factors include the cost of services, the
financial soundness of the proposer and the cost of switching providers. The
qualitative factors include branch locations; the ability to meet specifications;
customer service and product support staff knowledge; experience serving
government entities; the ability to customize or create new services and meet future
needs; adequacy of internal controls, backups and disaster recovery plans; the
willingness to provide credit on flexible terms; and similar considerations. Any
weights assigned to specific services or factors should be described. Separating core
services from optional or enhanced services should be considered.
LGC
Page 37 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
i.
Transition and Conversion Matters
Describe the support anticipated and require the cost to be included. Address
compensating balance considerations including the date by which the expected level
of compensating balances must be achieved and if the contract is cancelled, the date
upon which compensating balances will be returned. Also, require information on
the payment of fees during transition.
j.
Reference Materials
Finally, the RFP should include reference materials including the relevant statutes,
rules and regulations, the cash and investment policies of the unit, locations of
unit’s facilities requiring bank services, and other materials and information
considered essential to understanding the needs and requirements of the unit.
In general, it is a good idea to solicit comments before distribution, and to distribute
both paper and electronic copies of the RFP. Care should be used to use generic names
for bank services and to avoid designing the RFP to favor the current service provider
or any potential bidder. Some qualifications to include are that the estimated activity
levels are not guaranteed, that all costs of responding are the responsibility of the
proposer, and that all proposals become property of the unit and are public records
upon delivery. Reserve the right to reject all proposals, to waive non-material
irregularities, to request clarification of proposals, to be the sole judge of suitability of
services for intended use, and to make the award in the best interest of the unit.
With these factors in mind, a sample RFP for banking services has been developed for
units to adapt to their specific needs and submit to financial institutions with whom
they wish to do business and is presented as Exhibit C – Sample Request for Proposals
for Procurement of Banking Services.
4. Evaluation of Responses
The evaluation of responses should carefully follow the process described in the RFP.
The evaluation may be by an individual, by a committee or by a combination of the two
methods. It may involve a one-step process, or a two or more step process with an
initial screening and selection of two or three candidates for further review and
negotiation. If a committee is used, careful deliberation should be given to the
membership of the committee. Consider looking outside your unit for assistance.
Members should be selected based on their ability to understand the banking services
and cost thereof; but care should be exercised to be sure the committee not only is, but
also appears, independent of any of the proposers. Staff members involved in the design
of the RFP and representatives of significant users should be included in the review
process. Allow ample time for the review, evaluation and negotiation process. The
responses must be evaluated based on the financial qualifications, the costs and the
services criteria established including both quantitative and qualitative factors.
a. Mandatory Minimum Requirements
The initial screening should review the response for completeness, proper format
and comparability. Determine that each financial institution meets the mandatory
minimum requirements established by the unit to receive the funds for deposit or
investment:
LGC
Page 38 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
 Insurance
Public funds shall be deposited only if the financial institution is insured by the
FDIC's Deposit Insurance Fund.
 Collateral
The amount of deposits or investments not insured by an agency of the federal
government shall be collateralized by eligible securities, surety bonds, letters of
credit issued by a Federal Home Loan Bank or authorized investment securities.
The NC Administrative Code (20 NCAC 07) specifies what securities are eligible
to be used for collateral in Section .0200. These securities include Treasuries,
agencies, State bonds, local government bonds, GO bonds of other states, prime
quality commercial paper bearing the highest rating, and various other
securities. The market value of the pledged securities must equal at least 100%
of the uninsured amount.
 Disclosure
Each financial institution shall furnish local authorities a copy of all statements
of assets and liabilities which it is required to furnish to its stockholders, the
State Banking Commission, the Comptroller of the Currency, or the Office of
Thrift Supervision.
 Equal Opportunity Employer
 Other Requirements
Financial institutions must be able to meet any other mandatory minimum
requirements and fulfill the current and anticipated banking and financial
service needs of the unit in an efficient and effective manner. Units should
consider whether to require a minimum rating by a national rating service.
b. Financial Criteria
Periodically, concern is raised by units of government concerning the financial
soundness of banks and savings institutions. This concern may arise because of
changes in economic conditions or from unsound banking practices. It is important
that the units assess the financial strength of the institutions with which they
regularly transact business.
To that end, the staff of the Department of State Treasurer has outlined various
methods of analysis to help units obtain a better understanding of the financial
position of banks and savings institutions. The areas that will be covered are
merely guidelines and do not represent an all-inclusive analysis of a particular
institution. These are presented in Exhibit D – Guidelines for Evaluation of the
Soundness of a Financial Institution.
One may ask why a financial institution should be analyzed if the local government
is properly insured or collateralized with respect to its deposits and investments.
The staff of the Department of State Treasurer strongly urges units to place the
soundness of a financial institution ahead of collateralization or insurance. Even
when deposits of a unit are adequately protected by insurance or collateralization, a
significant amount of time may be required before public funds are completely
recovered; consequently, a unit may have liquidity problems if it needs immediate
access to funds. This means that first level of protection for having funds available
LGC
Page 39 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
when needed is to place public funds only with financially-sound institutions. A unit
is making a loan to a financial institution when it deposits funds and should ensure
that all financial institutions utilized are financially sound.
c. Cost and Services Criteria
Once it is determined that the financial institution meets the minimum mandatory
requirements and the financial criteria to provide services, its proposal must be
evaluated on the cost, quality and availability of the required services. The cost of
each proposal must be calculated based on expected activity levels and compared. If
weights are assigned to components, these must be considered. A carefully prepared
and well-designed electronic response form provided to proposers can dramatically
reduce the data entry requirements and simplify the cost computations.
Not only must the cost of services be considered, but the method of compensating
the bank must be determined. There are two basic methods to compensate banks for
services: compensating balances (“soft dollars”) and direct fees (“hard dollars”).
Compensating balances require maintenance of a non-interest-bearing account with
sufficient collected funds to provide an earnings credit amount adequate to cover
the cost of services. Depository contracts that require compensating balances define
an earnings credit rate to establish the earnings credit amount available to offset
banking fees. It is important to understand how the earnings credit rate is
established and if excess earnings credit amounts carryover to offset fees in future
months. The earnings credit rate is variable. While there is no budgeted
expenditure, a low earnings credit rate can be a hidden cost. In contrast, direct fees
require a monthly payment to the bank for the services provided and the unit
invests all excess cash. With direct fees, the fees per item are fixed. The cost is
obvious – a direct expenditure – and must be included in the budget. To compare
these different approaches, the unit must calculate the amount of costs that will be
paid by the compensating balance to the interest that can be earned through
investment of the excess cash. Because of the limited investment options and the
easier processing, governments often use compensating balances to pay for bank
services. The RFP should require proposers to present compensating balance terms
and conditions to permit comparison of the methods of payment for services. The
formula for estimating the required compensating balance amount is presented as
Exhibit E – Compensating Balance Estimation.
5. Awarding the Contract and Transition
After a comprehensive review and preparation of complete documentation of the
process, the governing body will be presented with a recommendation for consideration.
The governing body will evaluate the recommendation, announce the results of the
process and award the contract.
If the contact is awarded to a new bank, a conversion team will need to be created to
manage the transition process of receiving services from and transferring balances to
the new service provider. The conversion team will include the finance department,
information technology, and major users of financial services. The transition goal is a
seamless change to the new from the old provider of banking services. A comprehensive
plan and checklist must be developed and followed. The conversion team must be sure
all users and business partners are aware of the change and its timing. Business
LGC
Page 40 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
partners must be defined broadly to include anyone sending electronic debits or credits.
Be sure the transition process includes providing all internal users the necessary
documents and supplies and the transfer of securities to the new safekeeping account.
Because checks will continue to clear for a period of time, prior accounts must be
maintained for the appropriate period of time. Careful review of prior accounts will
disclose items – electronic payments, drafts, etc. – that may have been overlooked in
the transition. After a period of time, stale dated checks will be returned and old
outstanding checks will be escheated.
6. Continuous Monitoring of Safety and Soundness of Financial Partners
After a bank is selected, the contract awarded and transition completed, it is important
to continue to monitor both performance under the terms of the contract and the safety
and soundness of banks and other financial institutions transacting business with the
unit. An evaluation of the financial condition should be performed no less frequently
than annually and quarterly evaluation is encouraged.
C. Additional Resources
Additional sources of information on the use and procurement of banking services can be
found in Banking Services: A Guide for Governments published by and available from the
GFOA; the various recommended practices of the GFOA on cash management is available
for downloading at www.gfoa.org; from the School of Government at the University of
North Carolina (www.sog.unc.edu); from the units professional associations(www.ncacc.org
or www.nclm.org); from the Association of Treasury Professionals; from your CPA and
investment advisors; and from contact with your colleagues in local governments, public
authorities and schools. The School of Government sponsors various e-mail lists hosting
discussions and broadcasts related to various topics of interest to local governments.
Additionally, the School of Government has a “documents warehouse” at nclgdocs.unc.edu
with examples of documents developed by North Carolina local governments. While the
documents included are not represented as models or best practices and while they have
not been reviewed by the School of Government faculty, they may be useful to local
governments.
Additional resources from the Department of State Treasurer available for downloading at
www.nctreasurer.com include various Financial Operations publications including
“Collateralization of Public Deposits in North Carolina” and “Banking Operations
Glossary”, and several LGC memorandums including “Collateralization of Public
Deposits and Pooling Bank List”.
LGC
Page 41 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part II – Procurement of Banking Services
This page intentionally left blank.
LGC
Page 42 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
A. Introduction
Effective investment activities are a fundamental responsibility of governing bodies and
finance officers in North Carolina.
The discussion of deposits at interest in banks, savings and loans and trust companies in
North Carolina in the form of certificates of deposits and other forms of time deposits is
included in Part IV – Authorized Investments Pursuant to G.S. 159-30.
B. Supervision of Investment Activities
1. Role and Responsibilities of the Finance Officer
Management responsibility for the investment of idle funds is assigned to the finance
officer by G.S. 159-25(a)(6) which states that the finance officer “shall supervise the
investment of idle funds of the local government or public authority.” Additionally,
G.S. 159-30(a) provides that “[t]he finance officer shall manage investments subject to
whatever restrictions and directions the governing board may impose [and] … shall
have the power to purchase, sell, and exchange securities on behalf of the governing
board.” Finance officers are not free to contract away their responsibilities under the
law. Therefore, use of an outside investment management advisor requires special
legislative action. It further directs that “[t]he investment program shall be so managed
that investments and deposits can be converted into cash when needed.” This provides
clear direction that the finance officer is responsible to supervise investment activities
and has authority to execute transactions, that the governing body can impose
restrictions on investment authority but cannot expand it, and that having cash
available when needed is the overriding goal.
The supervision of investment activities includes: developing goals and objectives;
establishing written policies and procedures for the operation of the investment
program; preparing cash forecasts and an investment strategy; monitoring the
financial markets and comparing competing investment alternatives; regularly
evaluating the investment portfolio both for compliance with laws and policies as well
as for financial performance; and reporting the financial condition of the investment
portfolio and results of investment activities to the governing body.
2. Developing Goals and Objectives
The first step in the supervision of investment activities is the development of
investment goals and objectives consistent with the applicable laws and regulations
and with the operating and economic condition of the unit. The primary objectives are
safety and liquidity of principal, followed by the secondary objective of obtaining a
market rate return reasonable under the circumstances. It must be remembered that
the safety, soundness and advisability of a given investment or mix of investments may
change with economic conditions or other factors having an effect on the unit; in other
words, what was advisable in the past may not be advisable today or in the future.
LGC
Page 43 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
3. Establishing Written Policies and Procedures
Once goals and objectives are developed, written policies and procedures can be
drafted. The purpose of an investment policy is to establish specific guidelines that are
consistent with the goals and objectives of the unit and that provide for the efficient
management of its funds considering its unique needs. All moneys should be covered
under the investment policy. Investments should be made with the judgment and care
that persons of prudence, discretion, and intelligence would apply in the management
of their own affairs. There are many sources for model investment policies including
the one developed by the GFOA which is the basis for the sample investment policy
included as Exhibit F – Sample Cash Management and Investment Policy. Careful
consideration should be given to crafting a policy that reflects the unique circumstances
and requirements of the unit. While the objectives of safety and liquidity of principal
are fundamental and constant, the policies and procedures to achieve these objectives
are more fluid.
Investment procedures should provide for appropriate internal controls with the
objectives of providing reasonable assurance that:
a. All investment transactions are initiated by authorized individuals, comply with
investment laws, policies and objectives, and are properly documented and
approved;
b. All documents evidencing ownership or other rights are subject to legally required
custodial arrangements and proper physical safeguards;
c. All investment transactions are promptly and accurately recorded in adequate
detail and complete and accurate reports are issued on a timely basis; and
d. All transactions are properly accumulated, classified and summarized in the
accounting records.
Additional information on internal controls can be found in LGC Memorandum No. 568
and No. 569 at www.nctreasurer.com under “Divisions”, “State and Local Government”
at “Local Fiscal Management” and also on the website of the North Carolina State
Controller at the following:
www.ncosc.net/forms_policies/internal_controls_forms.html, click on “Boards and
Commissions” and scroll down for the “Investment Cycle”.
Investment procedures should include explicit duties for personnel responsible for
investment transactions and investment records. No one should engage in an
investment transaction except as provided under the terms of the policy adopted by the
governing body and the procedures established by the finance officer. The finance
officer is responsible for all transactions undertaken and should establish a system of
internal controls to regulate the activities of subordinate officials.
The policies and procedures should be reassessed on a regular basis to determine that
they remain appropriate in light of the current economic outlook and financial
condition of the unit.
LGC
Page 44 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
4. Preparing Cash Forecast and Investment Strategy
The requirement of G.S. 159-30(a) that “[t]he investment program shall be so managed
that investments and deposits can be converted into cash when needed” dictates that a
cash forecast be developed. Without a forecast of cash receipts and disbursements, it is
impossible to structure the investment portfolio in such a way that cash can be
available when needed without investing in almost immediately available instruments.
An Excel® Cash Flow Analysis Worksheet providing a format for cash flow projections
is available at www.nctreasurer.com under “Divisions”, “State and Local Government”,
“Local Fiscal Management”, “Forms and Instructions” under “Interim Financial
Reporting and Instructions”. A sample of this worksheet is provided as Exhibit M.
While safety of principal and liquidity should always be the primary goal, such a shortterm investment strategy would unnecessarily reduce investment income. Therefore, it
is incumbent on the finance officer to develop a projection of cash inflows and outflows
and to devise an investment strategy consistent with the projected cash flows including
an appropriate level of short-term investments as a contingency fund.
5. Monitoring Financial Markets and Investment Alternatives
While the finance officer is not expected to become an investment expert, it is
important to regularly monitor the investment portfolio, financial markets and
investment alternatives. Especially when interest rates are low or if the financial
requirements of the unit or market conditions are changing, the finance officer should
carefully consider investment alternatives, and not just allow short-term investments
to automatically renew. The finance officer must strive to manage the portfolio to
generate an appropriate level of income within the constraints imposed by liquidity
requirements considering cash flow projections and by the safety of principal as the
priority. This requires that the portfolio be regularly reviewed and realigned as
required either to take advantage of new investment opportunities or to adjust for
variations in expected cash flows or both. Without an awareness of financial market
conditions and outlook, it is impossible to identify opportunities and perils. This
awareness is even more important if a professional advisor has been hired.
Some of the many websites that may provide helpful information to the finance officer
in monitoring the financial markets and investment alternatives include the following:
●
www.bloomberg.com/markets/,
●
www.bondsonline.com,
●
www.research.stlouisfed.org/fred2/,
●
www.ficalc.com, and
●
www.marketwatch.com/markets.
6. Reporting Results and Evaluating Performance of Investment Activities
Adequate internal control requires the regular communication of the results of
investment activities and the periodic evaluation of investment performance. Such
reports should include the maturities, yields, income earned, and the current market
values with changes from the prior report organized both by type of investment and for
the portfolio as a whole. Such reporting and performance evaluation enhances
accountability, reduces decision-making time, and provides an opportunity for any
LGC
Page 45 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
necessary corrections or adjustments on a regular basis. The standard for the
evaluation of investment performance should be one that reflects the investment
horizon and the fundamental nature of investing where the safety of principal and
appropriate liquidity are the primary objectives, not maximization of investment
returns.
C. General Investment Guidelines
In an effort to enhance revenues through increased investment income, units may turn to
investment vehicles with higher yields; however these higher-yielding investments come
with greater risks and may require longer maturities. Public officials should never take
unnecessary risks with public moneys in order to earn a few extra basis points.
Furthermore, finance officers should never invest in a security that they do not fully
understand.
In summary, the finance officer should select investments on the following basis:
1. The institution offering the investment must meet all the criteria as stated in the
“Selection of Financial Institutions”. A relationship with an individual broker-dealer
who understands the legal investment authority and policy of the unit and who is
trustworthy are equally important.
2. The maturity of each investment should coincide with the short-term and long-term
cash flow requirements of the unit.
3. Each investment must be permitted under the North Carolina general statutes and the
investment policy of the unit, and must be in compliance with any other applicable
laws, regulations and agreements. The authorized investments are discussed in depth
in Section VI.B.
4. Remembering that the first priorities are safety and liquidity, the rate of interest on
the investment is at least equivalent to the average rate of return available in the
market place for the appropriate investment horizon.
5. The local unit uses a bidding format that enables it to maximize investment earnings
and avoid any appearance of impropriety. All institutions allowed to bid for funds of the
unit meet the criteria found in the section on “Procurement of Banking Services.”
6. The finance officer must fully understand every investment purchased, its terms and
conditions, and its potential risks and rewards. The justification for any investment
should be documented at the time of its authorization.
D. Professional Investment Advice
Local governments and public authorities in North Carolina may consider the engagement
of outside professionals to assist and support the administration of the investment
function. However, without specific authorizing legislation, an outside professional
investment advisor role must be limited to assistance and support. The finance officer
cannot delegate the duty “…to supervise the investment of idle funds …” to another party.
If an investment advisor is consulted, procedures must be developed to assure that the
advisor’s role is limited to assistance and support and that the finance officer approves all
transactions prior to their execution. It must be remembered that receiving professional
LGC
Page 46 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
advice does not reduce the level of responsibility the finance officer has for the
appropriateness and legality of investments.
There are advantages associated with such arrangements; however, certain disadvantages
exist as well. Although an investment advisor may be able to improve the rate of return as
a result of professional expertise, there are costs associated with this service. Finance
officers must evaluate the use of investment professionals by examining the return to the
unit after deduction of all fees and costs. In many cases, the fees may be large enough for
the unit to hire in-house investment personnel. In addition, because of the legal
restrictions on the investments that local governments and public authorities can make,
the incremental return can be exceeded by the additional advisory fees and costs thereby
reducing the return to the unit.
If it is determined that consultation with an investment professional is appropriate for the
unit, a written agreement should be executed outlining permissible investments,
safekeeping arrangements, diversification requirements, maturity limitations, the liability
to be assumed by each party, and the fees for the services provided. A copy of the
investment policy for the unit and the relevant statutes should also be provided. It is
important to remember that this does not relieve the finance officer of the responsibility for
the safety of public funds. Therefore, a contract should not be entered into unless the firm
or individual can be trusted completely, is adequately capitalized, is familiar with the laws
applicable to the investment of public funds in North Carolina, and is adequately insured
or bonded. In selecting an outside investment advisor, consideration should be given to
factors and criteria similar to those used in the selection of a broker-dealer (see the
following discussion at Part III.E).
The portfolio recommendations provided by the investment advisor should be reviewed for
appropriateness and compliance with both G.S. 159-30 and the investment policy before
implementation. It is especially important for a unit to ensure that an investment advisor
is not trying to increase earnings by recommending securities with higher risk levels or
longer maturities or both than the unit is willing to accept.
E. Selection of a Broker-Dealer
Local units may wish to purchase eligible investments from a government securities
dealer. Section V of the sample cash management and investment policy, titled
“Authorized Financial Institutions, Depositories, and Broker-Dealers” (see Exhibit F) sets
forth policy considerations and factors to consider in selection of a broker-dealer. A sample
“Broker-Dealer Questionnaire” is attached as Exhibit H. The following are general
guidelines that may facilitate the selection process:
1. Research the broker-dealer.
a. Very few firms have been in existence for over 50 years. However, the fact that a
broker-dealer has survived many business and economic cycles should be considered
a positive factor.
b. Determine who monitors and regulates the broker-dealer. Primary dealers, those
selected as trading counterparties for the Federal Reserve Bank in its execution of
market operations, are monitored and regulated by the Federal Reserve Bank of
New York to ensure integrity in the execution of monetary policy. A list of primary
LGC
Page 47 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
dealers is available at the website of the Federal Reserve Bank of New York,
www.ny.frb.org/markets/primarydealers.html.
●
Broker-dealers may also be regulated by the SEC, the Financial Industry
Regulatory Authority (“FINRA”) created in July 2007 through the consolidation
of National Association of Securities Dealers and the member regulation,
enforcement and arbitration functions of the New York Stock Exchange, and
various state agencies, in North Carolina the Secretary of State, Securities
Division.
●
Broker-dealers that are not financial institutions, are not SEC registered, or do
not report to the Federal Reserve Bank of New York may not be required to
meet the capital adequacy standards.
c. The website for FINRA, www.finra.org, provides information about the professional
background, registration/license status and disciplinary history of registered firms
and the brokers. Additional information may also be available from the North
Carolina Secretary of State.
d. Obtain and review the financial statements of the broker-dealer for capital
adequacy and financial stability.
e. Determine whether other local units invest with the broker-dealer. Request
references and contact them to review their experience with the candidate.
2. Know the law - G.S. 159-30.
a. Understand thoroughly the law, your investment policy and the instrument in
which you are investing.
b. Do not rely solely on the broker-dealer to determine the eligibility of investment
vehicles or that other units in North Carolina are purported to have invested in it.
Before investing public funds in a particular type of security, obtain the prospectus
for the security and review it carefully.
c. Determine that the broker-dealer is familiar with North Carolina laws concerning
local government investments. Provide the broker-dealer with copies of G.S. 159-30,
your investment policy and investment goals. Document that these items have been
provided. Clear communication with the broker-dealer is of the utmost importance.
d. Determine whether the broker-dealer offers investments that are eligible for local
units in North Carolina.
e. Make sure that custodial arrangements will be in compliance
G.S. 159-30(c)(12) for repurchase agreements and G.S. 159-30(d) generally.
f.
with
Contact the LGC with any questions or when in doubt regarding the eligibility of a
proposed investment.
It is advisable to develop and institute a written agreement to be signed by a broker-dealer
prior to the transaction of business. The agreement should reference G.S. 159-30 and your
investment policy. Units should not enter into agreements with broker-dealers that require
use of arbitration to settle disputes that may arise. While no agreement can relieve the
finance officer of responsibility, any agreement should remind the broker of their
LGC
Page 48 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
responsibility to provide only investments that are legal investments for the unit and in
compliance with its investment policy. The FINRA requires that a broker-dealer have “a
clear understanding of each customer's financial condition” and “a clear understanding of
the customer's investment objectives”. This agreement should discourage any
unscrupulous brokers from dealing with the local government. A refusal to sign the
agreement should raise concern. The agreement may be especially useful in deterring
overly aggressive out-of-state broker-dealers trying to sell certain securities. A finance
officer should never yield to high-pressure sales tactics as it is the responsibility of the
finance officer to determine the legality and propriety of a particular investment. Brokerdealers have a fiduciary obligation to all of their investors; however, this does not relieve
the public investor of the duty to protect public funds.
F. Custodial Arrangements
Before purchasing an investment, the finance officer must have proper custodial
arrangements in place. G.S. 159-30(d) requires securities and deposit certificates to be in
the custody of the finance officer, who is responsible for their safekeeping. There are two
types of custody, physical possession and book-entry. To achieve physical possession of
certificated securities, the securities must be registered in the name of the unit and be in
its possession. However, there are certain costs and risks associated with physical
possession. The costs include the provision of appropriate storage facilities and proper
insurance coverage and the risks include the potential for theft, loss or counterfeiting of
the security.
However, it is not possible to take physical possession of most eligible investment
securities permitted under G.S. 159-30 because they do not exist in physical form. For
instance, treasury securities are issued only in book-entry form, which means they are
transferred on the basis of computerized records instead of by endorsement and delivery of
a physical certificate. In fact, the only securities permitted for investment by units that do
not require a custodial arrangement, i.e. where physical possession is possible, are some
certificates of deposit and savings certificates. The book-entry system simplifies transfer
and redemption of securities.
In the commercial book-entry system, securities are held in the custodial accounts of
participating depository institutions at a Federal Reserve Bank. The participating
depository institutions maintain records of the ownership positions of their customers in
the securities held in these accounts. For securities held in the commercial book-entry
system, neither the Treasury nor the Federal Reserve Banks maintain ownership records
for individual investors and individual investors have no direct recourse against the U.S.
Department of the Treasury or the Federal Reserve Bank. Settlement will occur and any
disputes will be resolved between the investor and the participating depository institution
maintaining the account of the investor. Therefore, as in any financial transaction, care
should be exercised in selecting a book-entry custodian.
Local governments in North Carolina are not turning assets over to a trustee for
management purposes; they are delivering assets for “safekeeping” with a legally binding
trust agreement. The custodian for the unit, not the custodian for the seller of the security,
must be the safekeeping agent and hold the securities in the name of and for the benefit of
the unit. The strongest internal control measure is to have “third-party safekeeping”
LGC
Page 49 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part III – Responsibility for Investment of Idle Funds
separating the provider of the security from the custodian. In a book-entry transaction, the
custodian for the unit must have an account with a Federal Reserve Bank and must be
authorized to conduct trust business in North Carolina. The custodial relationship should
be evidenced by a written contract between the custodian and the unit of government.
If a unit enters into a repurchase agreement, the custodial requirements of
G.S. 159-30(c)(12) must be followed. This means that the financial institution serving as
trustee for the local government cannot be the provider of the repurchase agreement. The
trust department of a financial institution that sold a security to a unit of government may
serve as custodial agent for the investments that were sold except in the case of repurchase
agreements. For certificated securities, the law requires that the securities be in the
custody of the finance officer or the custodial agent of the unit.
The public investor should always seek to obtain the highest level of ownership and
custody available, preferably with third-party safekeeping in the trust department of a
bank authorized to do trust business in North Carolina. It is strongly recommended that
the attorney for the unit review all custodial arrangements for compliance with
G.S. 159-30(d) and G.S. 159-30(c)(12). Memorandum No. 2013-03 discusses custody and
proper safekeeping of local government investments.
LGC
Page 50 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
A. Introduction
The investment of funds of local governments and public authorities in North Carolina is
governed by G.S. 159-30 – Investment of idle funds. Access to the General Statutes is
available without charge at the website of the North Carolina General Assembly at
www.ncga.state.nc.us. It is important to remember that G.S. 159-30 is modified or updated
from time to time by the General Assembly – be sure you and your investment advisors are
using the most current rules.
Although monies may be invested in any investment authorized by G.S. 159-30(c), not all
permitted investments are appropriate for every local government. In many cases, it may
be prudent for the investment policy of a unit to be much more restrictive than
G.S. 159-30. The primary objectives are safety and liquidity, followed by the secondary
objective of obtaining a market rate of return reasonable under the circumstances. It must
also be remembered that the safety, soundness and advisability of a given investment may
change with economic conditions; in other words, what was advisable in the past may not
be advisable today.
Under certain circumstances, other rules may apply additional limitations to authorized
investments. In addition to the investment policy, governmental accounting standards may
necessitate additional investment considerations. For example, GASBS No. 7 - Advance
Refundings Resulting in Defeasance of Debt has specific requirements for investments that
are appropriate when debt is considered to be defeased for accounting and financial
reporting purposes. In this circumstance, the assets to be placed in trust must include “…
only monetary assets that are essentially risk-free as to amount, timing and collection of
interest and principal.” (GASBS No. 7, Paragraph 4) This essentially limits investments
for this purpose to direct obligations of the U.S. Government, obligations guaranteed by
the U.S. Government and securities backed by U.S. Government obligations as collateral
that provide cash flows timed to approximately coincide with scheduled interest and
principal payments.
It should be noted that the investments of local education authorities are governed by
G.S. 115C-443 – Investment of idle cash. Additionally, the investments of public housing
authorities are controlled by G.S. 159-42(i) which provides for investment of cash balances
“pursuant to U.S. Department of Housing and Urban Development regulations.”
B. Authorized investments
1. Certificates of Deposit
G.S. 159-30(b) authorizes investment in certificates of deposits of any bank, savings
and loan association, or trust company in this State provided that such deposits shall
be secured in accordance with G.S. 159-31(b). Certificates of deposits with credit unions
are not eligible investments for local governments and public authorities. The yield on
certificates should be compared to the yield alternative investments of comparable
maturity and risk. Certificates of deposit may be structured with maturities that meet
LGC
Page 51 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
specific need of local governments; however, care must be taken because of the
illiquidity of certificates of deposit.
In addition, G.S. 159-30(b1) authorizes investment in certain deposit accounts meeting
all of the following conditions:
a. The funds are initially deposited through a bank or savings and loan association
that is an official depository and that is selected by the finance officer.
b. The selected bank or savings and loan association arranges for the redeposit of
funds in deposit accounts of the local government or public authority in one or more
federally insured banks or savings and loan associations wherever located, provided
that no funds shall be deposited in a bank or savings and loan association that at
the time holds other deposits from the local government or public authority.
c. The full amount of principal and any accrued interest of each deposit account are
covered by federal deposit insurance.
d. The selected bank or savings and loan association acts as custodian for the local
government or public authority with respect to the deposit in the local government's
or public authority's account.
e. On the same day that the local government or public authority funds are
redeposited, the selected bank or savings and loan association receives an amount
of federally insured deposits from customers of other financial institutions wherever
located equal to or greater than the amount of the funds invested by the local
government or public authority through the selected bank or savings and loan
association.
It is ultimately the responsibility of the finance officer to assure that the funds
deposited meet the requirements of G.S. 159-30(b1). This would (1) require that the
finance officer verify that no other funds of the unit are deposited in the institution
that is the ultimate recipient of the funds and (2) require that the finance officer
consider the interest rate and frequency of compounding or payment to assure that all
accrued interest payments, as well as the principal, are insured deposits since
collateral is not required.
For financial statement presentation, certificates of deposits are considered to be and
must comply with the disclosures required for other bank deposits. Parts I and II of
this policy statement have discussed bank deposits other than certificates of deposits
and the procurement of banking services.
2. Obligations of the United States
Obligations of the United States or U.S. Treasury securities are authorized by
G.S. 159-30(c)(1) and are safe, marketable investments. Due to the creditworthiness of
the U.S. Government, they are considered virtually default-risk free. However, it is
imperative to consider liquidity needs, when determining appropriate maturities,
because the market value fluctuates with changing interest rates. In other words,
maturities should coincide with disbursement dates. If fund balance available is low in
relation to general fund expenditures, cash flow needs may force the early liquidation
of an investment, possibly resulting in a loss of principal.
LGC
Page 52 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
U.S. Treasury securities include Treasury bills, Treasury notes, Treasury bonds, and
Treasury Inflation-Protected Securities. Treasury bills, or T-bills, are sold in terms
ranging from a few days to 26 weeks. Bills are sold at a discount from their face value.
Treasury notes, sometimes called T-Notes, earn a fixed rate of interest every six
months until maturity. Notes are issued in terms of 2, 3, 5, and 10 years. The U.S.
Treasury resumed issuance of Treasury bonds with a 30-year bond auctioned in
February 2006.
Treasury Inflation-Protected Securities (TIPS) are marketable securities whose
principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in
the index), the principal increases. With a deflation (a drop in the index), the principal
decreases. The relationship between TIPS and the Consumer Price Index affects both
the sum paid when the TIPS matures and the amount of interest that a TIPS pays
every six months. TIPS pay interest at a fixed rate. Because the rate is applied to the
adjusted principal, however, interest payments can vary in amount from one period to
the next. If inflation occurs, the interest payment increases. In the event of deflation,
the interest payment decreases. At the maturity of a TIPS, the investor receives the
adjusted principal or the original principal, whichever is greater. This provision
protects against deflation.
Additional information regarding U.S. Treasury securities is available at
www.treasurydirect.gov, the website of the U.S. Department of the Treasury Bureau of
the Public Debt.
3. Obligations Whose Principal and Interest Are Fully Guaranteed by the U.S.
Government
These securities are also authorized by G.S. 159-30(c)(1) and include securities such as
obligations of the Government National Mortgage Association (GNMA or Ginnie Mae)
which have little credit risk associated with them. The most widely-used asset-backed
security permitted as investments are certain securities offered by Ginnie Mae that are
fully guaranteed by the United States Government. Even securities issued by Ginnie
Mae have prepayment and other risks regarding the timing of repayment that must be
well understood by the finance officer. Changes in market interest rates not only affect
the value of the security but may also affect the speed at which the underlying
mortgages are repaid and the related payments of interest and principal to the
investor. Because of this the investor might receive return of principal earlier than
expected and have to reinvest at lower return or have principal returned later than
anticipated causing cash flow problems. Remember, finance officers should never invest
in anything they don't fully understand. That is why it is important to carefully review
the prospectus of a security before investing in the security.
GNMAs are backed by underlying FHA and VA loans and are considered to be very
complex instruments. The holder of GNMA certificates receives monthly checks
consisting of both principal and interest payments from the underlying mortgages.
Unless the local unit has a sophisticated accounting system, the tracking and recording
of principal reductions and interest payments can be very difficult.
Investing in GNMAs and other fixed income securities for the purpose of obtaining
gains from increases in prices of these securities (assuming declining interest rates)
LGC
Page 53 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
should be pursued with extreme caution. Homeowners will refinance and repay
mortgages when interest rates are declining, thereby forcing the unit to reinvest
accelerated principal payments at par into investments with much lower rates of
return. Therefore, GNMAs carry high reinvestment risks. Conversely, when interest
rates rise, homeowners are less likely to prepay mortgages and the maturities of
GMNAs may lengthen from the expected maturity.
Because of the longer maturities, investment in GNMAs may jeopardize liquidity.
Before investing in a GNMA (or any instrument with an extended maturity), finance
officers should be certain that they will be able to hold the security until it matures.
Also, GNMAs are less liquid than Treasury Bonds; therefore transaction costs will be
higher if they are sold before maturity.
The face value of and interest on obligations of the Small Business Administration
(SBA) also are guaranteed by the U.S. Government; however, these securities still may
cause problems for the investor. For instance, SBA loans are normally extended to
individuals or companies that cannot obtain conventional bank financing, thereby
signaling an increased credit risk. Owners may find themselves holding these securities
while defaulted loans are being “worked out.” Therefore, these instruments are not as
liquid as other government securities and should be avoided.
4. Certain Direct Obligations of U.S. Government Agencies and Instrumentalities
Please refer to G.S. 159-30(c)(2) for the complete listing of these agencies. The most
common are the Federal Farm Credit Bank, the Federal Home Loan Banks, the
Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal National
Mortgage Association (“Fannie Mae”), Government National Mortgage Association
(“Ginnie Mae”) and the Farmers Home Administration. There is an increased degree of
credit risk and market risk associated with these instruments since there is usually no
express federal guarantee; however there may be benefits as well. Therefore, these
obligations deserve careful analysis and research. It should be remembered that the
longer maturities are subject to interest rate risk. It should be noted that the term
“direct obligations” refers to the direct debt of the agency, such as notes and
debentures, which are reported as liabilities in the financial statements of the agency.
Certain mortgage-backed securities may be issued and guaranteed by the agency, but
are contingent liabilities, not direct obligations of the agency, and are therefore usually
not eligible investments. The only asset-backed securities issued by these agencies and
permitted as investments are those securities that are direct obligations of the named
agency.
5. Obligations of the State of North Carolina
Obligations of the State of North Carolina are authorized under the G.S. 159-30(c)(3).
Official statements must be carefully reviewed to determine that the bonds are direct
obligations of the State, not of its component units or only supported by project
revenues. As with all investments, the local government should fully understand the
terms and conditions of the investment. When eligible, such investments may not
always be a practical investment alternative. When tax-exempt, the issuer can often
pay a lower rate of return than may be available on taxable investments of similar
risks and maturity. Because local governments receive no benefit from the tax
LGC
Page 54 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
exemption, tax-exempt investments should be carefully compared to other available
investment opportunities.
6. Bonds and Notes of Any North Carolina Local Government or Public Authority
Bonds and notes of North Carolina local governments and public authorities are
authorized under the G.S. 159-30(c)(4), but may not always be a practical investment
alternative. When tax-exempt, the issuer can often pay a lower rate of return than may
be available on taxable investments of similar risk and maturity. Because local
governments receive no benefit from the tax exemption, such investments should be
carefully compared to other available investment opportunities.
Certificates of participation (known as “COPs”) of North Carolina local governments
are not eligible investments because they are not “bonds and notes” as required by the
statute and because they are not issued by the local government or public authority but
are issued by a nonprofit corporation. Limited obligations bonds (known as “LOBs”),
while meeting the definition of “bonds and notes” as required by the statute, may be
structured similarly to COPs where the local government or public authority is not the
issuer and therefore may not be eligible investments. Prior to investing in LOBs, an
opinion of counsel should be obtained specifically indicating that the particular LOBs
are structured in a manner such that they are permitted investments under
G.S. 159-30(c)(4). As with all investments, the local government should fully
understand the terms and conditions of the obligation evidenced by LOBs.
7. Saving Certificates
G.S. 159-30(c)(5) permits savings certificates issued by any savings and loan
association organized under the laws of the State of North Carolina or by any federal
savings and loan association having its principal office in North Carolina. The principal
amount must be insured and any amount in excess of the insured amount must be fully
collateralized.
8. Prime Quality Commercial Paper
Under the provisions of G.S. 159-30(c)(6) units may invest in prime quality domestic
commercial paper meeting certain standards. It must have the highest rating of at
least one nationally recognized rating service such as Fitch Ratings Ltd.
(www.fitchratings.com), Moody’s Investors Service (www.moodys.com), or Standard &
Poor’s (www.standardandpoors.com) and must not bear a rating below the highest by
any such service.
Commercial paper is a short-term, unsecured promissory note with a maturity of no
more than 270 days. It should be considered an illiquid investment. Even top-rated
commercial paper must be closely monitored to ensure that the underlying credit
quality has not weakened. Monitoring should include regular reviews of ratings, rating
outlooks, rating actions, and industry and market changes. It is important to achieve
diversity in the types of commercial paper purchased, limiting the percentage of funds
in a single issuer or industry. By establishing and following these policies and limiting
the portion of the investment portfolio in commercial paper to a reasonable amount, the
unit will reduce its credit risk in regard to commercial paper. The GFOA has issued a
Recommended Practice on commercial paper that is available at their website,
www.gfoa.org.
LGC
Page 55 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
9. Bankers' Acceptances of a Commercial Bank
These are eligible if, and provided that, the bank or its holding company is either
incorporated in North Carolina or has the highest long-term debt rating of at least one
nationally recognized rating service and does not bear a rating below the highest by
any such service as provided by G.S. 159-30(c)(7).
A bankers’ acceptance is a time draft often arising in international trade that is drawn
by a commercial firm on a bank. When “accepted” by the bank, the accepting bank is
irrevocably guaranteeing the availability of funds at its maturity. Bankers’
acceptances, or BAs, are generally issued in large denominations, typically mature in
30 to 180 days, and are priced on a discount basis similar to Treasury bills.
10. Mutual Fund for Local Governments Certified by the LGC
The only mutual fund certified by the Local Government Commission and authorized
under G.S. 159-30(c)(8) is the North Carolina Capital Management Trust (the
“NCCMT”). The NCCMT is offered exclusively to the following entities of the state of
North Carolina: local governments and public authorities (as defined in G.S. 159-7);
school administrative units; local ABC boards; community colleges; and public
hospitals. The NCCMT is registered with and regulated by the SEC and has been rated
AAAm by Standard & Poor’s for many years. It should be remembered that amounts
placed in the fund are investments in the form of shares of the NCCMT; they are not
deposits, are not insured and are not subject to the collateralization requirements. The
NCCMT offers units two professionally managed portfolios, the Cash Portfolio and the
Term Portfolio. These two portfolios provide local governments with safe, liquid,
convenient, and diversified investment alternatives with competitive yields. They are
briefly described below.
Before investing with the NCCMT, the finance officer should carefully review the
current prospectus for each fund, its annual report and the statement of additional
information which more fully describes the investment objective, principal investment
strategies, principal investment risks, fund performance, funds investments at the
report date, investment policies and limitations, and other important information.
a. Cash Portfolio
The investment objective of the cash portfolio is to obtain as high a level of current
income as is consistent with the preservation of capital and liquidity, and to
maintain a constant net asset value of $1.00 per share. The portfolio is designed to
provide units with a liquid cash option and to accommodate frequent trading. Its
investment strategies include investing in money market instruments permitted
under G.S. 159-30; investing in money market securities of domestic issuers rated
in the highest category by a nationally recognized rating service, U.S. Government
securities, and repurchase agreements; and generally maintaining a dollarweighted average maturity of 60 days or less. The mix of investments in the
portfolio will vary from time to time and will reflect the fund managers’ current
assessment of market and economic conditions.
b. Term Portfolio
The investment objective of the term portfolio is to obtain as high a level of current
income as is consistent with the preservation of capital. Its investment strategies
LGC
Page 56 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
include investing in obligations of the U.S. Government, its agencies or
instrumentalities, obligations fully guaranteed by the U.S. Government, obligations
of the State of North Carolina, bonds and notes of any North Carolina local
government or public authority, and high grade money market instruments
permitted under G.S § 159-30; investing in securities rated in the three highest
categories by at least one nationally recognized rating service, or if unrated,
determined to be of equivalent quality; and managing the fund so it generally reacts
to changes in interest rates similar to government bonds. Although maturities may
extend to seven years, the average maturity of the fund is usually less than one
year. Longer maturities may produce higher yields but also greater price volatility.
The Term Portfolio is not designed for and is not suitable for short-term investment.
11. Commingled Investment Pools
As authorized by G.S. 159-30(c)(9) and G.S. 159-30(c)(10) and to the extent permitted
by regulations issued by the State Treasurer, units can invest in a commingled
investment pool established and administered by the State Treasurer pursuant to
G.S. 147-69.3, and one established by interlocal agreement by two or more units of local
government pursuant to G.S. 160A-460 through G.S. 160A-464, if the investments of
the pool are limited to those qualifying for investment under G.S. 159-30(c). It should
be noted that GASBS No. 31 has specific requirements for reporting for external
investment pools, i.e. investment pools in which other legally separate entities may
invest.
12. Treasury Instruments Which Have the Coupon Stripped from the Security
G.S. 159-30(c)(11) authorized investment in these securities, which are known as
STRIPS (Separate Trading of Registered Interest and Principal of Securities) and are
offered at a deep discount to the purchaser. Market participants create zero coupon
bonds (or “zeros”) by separating the interest and principal components of a Treasury
note, bond, or TIPS. Short-term zeros are essentially similar to Treasury bills, although
they are not as marketable, and usually trade at prices inferior to other discount
securities. While STRIPS or zeros remove reinvestment risk, the most important aspect
is that they are extremely volatile and therefore carry a high degree of market risk.
13. Repurchase Agreements
Repurchase agreements (or “Repos”) are transactions in which a local unit (buyer)
transfers cash to a broker-dealer or financial institution (seller); the seller transfers
securities to the trustee for the unit and promises later to repay the cash plus interest
in exchange for the same securities.
Repos are specifically authorized by G.S. 159-30(c)(12), which requires the following:
a. Repurchase agreements are limited to either direct obligations of the United States
or obligations whose principal and interest are guaranteed by the United States.
b. The agreement must be with a broker or dealer recognized by the Federal Reserve
Bank as a primary dealer or with a commercial bank, trust company or national
banking association the deposits of which are insured by the FDIC.
c. The obligations that are subject to the repurchase agreement must be delivered to
the local government or to a financial institution acting as trustee for the local
government. The financial institution serving as trustee must be a third party. In
LGC
Page 57 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
other words, the provider of the repurchase agreement cannot be the custodian of
the underlying securities. For example, a public investor and a dealer (Bank D)
agree to execute a repurchase agreement. The investor instructs the custodian for
the local government (Bank C) to receive the securities against simultaneous
payment (Delivery versus Payment). Once Bank C receives the securities, the funds
are wired to Bank D. Bank C confirms the receipt of the securities with the
investor. If this were a book-entry transaction, records of Bank C now would show
the securities in the name of the investor. The Federal Reserve Bank, of which both
banks are members, would make an entry to record the transfer from Bank D to
Bank C. The records of the U.S. Treasury would reflect the total amount of an issue
of securities outstanding and the amount held by each Federal Reserve Bank. It
should be noted that the custodian bank holds the securities of the investor
separately from its own securities at the Federal Reserve Bank.
d. The current market value of the underlying obligations must be calculated at least
daily and cannot fall below 100% of the repurchase price.
e. Purchasing a fractional interest in certain securities or buying into a pool of
securities is not allowed by the General Statutes. The local government must have a
valid and perfected first security interest in the obligations which are underlying
the repurchase agreement. Specific identifiable securities must be used as collateral
to ensure ownership.
When investing in repurchase agreements, it is important to consider the effect of the
cost of custody arrangements and delivery fees on their yields.
14. Bond Proceeds Subject to Arbitrage and Rebate Provisions
Subject to the opinion of bond counsel, G.S. 159-30(c)(13) may allow bond proceeds and
other funds subject to the arbitrage and rebate provisions of the Internal Revenue Code
that are held by or on behalf of a local government or public authority to be invested in
the following:
a. Participating shares in tax-exempt mutual funds to the extent such participation is
not subject to the rebate provisions; and
b. Taxable mutual funds to the extent such fund provides services in connection with
the calculation of the arbitrage rebate requirements under federal income tax law.
In addition, the investments of the mutual funds must be limited to those bearing one
of the two highest ratings of at least one nationally recognized rating service and not
bearing a rating below that rating by any nationally recognized rating service that
rates the fund, i.e. there can be no split ratings of securities held by the fund. Arbitrage
is a portion of the amount earned by a local government from reinvesting its taxexempt debt proceeds in higher-yielding securities. For further discussion, see the State
Treasurer’s Policy Manual, Section 95 – Arbitrage.
Investments of bond proceeds should be reviewed with bond counsel for compliance
with the investment provisions of the bond indenture which can be more restrictive
than G.S. 159-30. It should be noted that the investment provision of the bond order or
indenture, which often recite the investments acceptable to the bond rating agencies to
LGC
Page 58 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
provide flexibility, cannot expand the investment authority of the unit beyond the
authority provide by G.S. 159-30.
C. Other Post-Employment Benefits Fund
Session Law 2007-384 established The Local Government Other Post-Employment
Benefits Fund (“OPEB Trust Fund”) under the management of the State Treasurer and
permitted the State Treasurer to make equity investments in the OPEB Trust Fund to the
same extent allowed for certain investments for the state retirement system.
G.S. 159-30(g) allows units to make contributions to this fund. Participation is voluntary
and establishes an irrevocable trust. Amounts deposited to the trust can only be used to
fund other post-employment benefits. While units may establish their own irrevocable
trust other than the OPEB Trust Fund established by the State Treasurer, these trusts are
limited in their investment authority to only the investments authorized by G.S. 159-30.
For additional information, see Other Post Employment Benefits (OPEB) Resources
available on the website of the State Treasurer.
D. Investment Policy Considerations
An investment policy is adopted by the governing board to establish special guidelines for
the effective investment of public funds in light of the unique needs and the economic
environment of the unit. All moneys should be covered under the investment policy. It is at
the core of the financial operations of the unit. In many cases, it may be prudent for the
investment policy of a unit to be much more restrictive than the G.S. 159-30.
The risks associated with the investment of public funds include interest rate risk, credit
risk, custodial credit risk and risks associated with concentrations of credit. It is the
responsibility of the governing body to understand these risks in the development of the
investment policy of the unit and the responsibility of the finance officer to consider and
address these risks in the management of the investment portfolio. Each of these risks is
more fully described in Part V – Accounting and Reporting Requirements.
E. Portfolio Diversification
The diversification of the investment portfolio is extremely important to units. If a unit has
invested heavily in a particular investment vehicle, a single financial institution, or a
particular maturity, adverse market conditions affecting any one of these areas could
severely damage the investment portfolio. For example, commercial paper is an unsecured
promissory note that carries no guarantee of repayment. It is important to avoid investing
a large percentage of the portfolio in commercial paper, especially in a single issue, a single
issuer or a particular industry. Also investments that have long maturities and are not
fully guaranteed by the U.S. Government will be subject to both interest rate and credit
risks; therefore, it is essential to avoid having too much of a portfolio invested in these
instruments.
A local unit should avoid dealing exclusively with one financial institution. If the only
financial institution serving a unit suddenly experienced difficulties, the liquidity of
deposits and other investments could be jeopardized. A unit may have only one institution
located in its area, thereby causing the unit to place all of its funds with that bank or
savings institution. However, to diversify the portfolio, the unit should seriously consider
LGC
Page 59 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
opening an account with another bank or with the North Carolina Cash Management
Trust.
Finally, the finance officer will want to avoid investing too heavily in a specific maturity.
For example, while securities with long-term yields may be tempting, these issues are
subject to market fluctuations. If cash flow problems arise and these securities must be
liquidated at a time when interest rate conditions are adverse, the local government may
suffer a loss. Also, if interest rates rise, the value of the portfolio will decline which will
affect investment income because of the GASBS No. 31 mark-to-market requirements. On
the other hand, many units simply roll over 90-day CDs as a matter of convenience and
forfeit opportunities to earn higher rates of return by extending maturities when market
conditions and cash flow requirements permit.
Various programs to invest the excess funds of the unit into a higher yielding vehicle are
available. For example, many units are using higher-yielding money market demand
accounts as an overnight investment vehicle. Money market demand accounts are bank
deposits with FDIC insurance and subject to collateralization and must not be confused
with money market investments, which are uninsured investments that must be eligible
investments under one of the sections of G.S. 159-30. (See Part IV – Section G following.)
An alternative to investing in higher risk instruments would be to maintain a balance in
an interest bearing checking account (NOW account), the interest from which would offset
bank service charges. Any remaining moneys could be placed in a combination of
certificates of deposit, the NCCMT, or other authorized investments which the finance
officer has a good understanding and which meet the requirements of safety and liquidity.
F. Ineligible Investments
Absent local legislation adopted by the General Assembly, units of local government and
public authorities can only invest in the items specifically included in G.S. 159-30. While
authority to invest may be further restricted by the governing board in adopting an
investment policy or by other action, it cannot be expanded by ordinance, resolution or
other action of the governing board.
G.S. 159-33 provides that if any funds are not properly deposited or secured, or are
invested in securities not eligible for investment, the unit shall comply with the law or
regulations within 30 days of notification by the Secretary of the LGC, except as to the sale
of securities not eligible for investment which shall be sold within nine months. The LGC
may extend the time for sale of ineligible securities, but no one extension may cover a
period of more than one year. This provision may not relieve the finance officer or other
responsible official of personal liability.
Equity securities including common stock and corporate bonds are not eligible investments
for local governments pursuant to G.S. 159-30. Although it is appropriate to accept a gift of
common stock or corporate bonds, it is inappropriate to hold such investments. It is
recommended that the unit take the necessary action to ensure that there is no liability for
any loss resulting from holding such an investment. The best insurance would be to follow
the procedures of G.S. 159-33 and liquidate the investment so that the money can be
invested pursuant to G.S. 159-30. Even in situations where the common stock or corporate
bonds are received with a condition that they be held without sale, it may be possible to get
LGC
Page 60 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
a court determination modifying the conditions of the gift. It is suggested that whenever it
appears that this can be done successfully, the unit should work with its attorney to do so.
G. Mutual Fund Investments
There are only two provisions that provide a basis for a local government or public
authority subject to the provisions of G.S. 159-30 to invest public funds in a mutual fund:
1. Under G.S. 159-30(c)(8) which reads “Participating shares in a mutual fund for local
government investment; provided that the investments of the fund are limited to those
qualifying for investment under this subsection (c) and that said fund is certified by the
Local Government Commission. The Local Government Commission shall have the
authority to issue rules and regulations concerning the establishment and
qualifications of any mutual fund for local government investment.”
The only mutual funds certified by the LGC are those offered by The North Carolina
Capital Management Trust.
2. Under G.S. 159-30(c)(13) which provides that “In connection with funds held by or on
behalf of a local government or public authority, which funds are subject to the
arbitrage and rebate provisions of the Internal Revenue Code of 1986, as amended,
participating shares in tax-exempt mutual funds, to the extent such participation, in
whole or in part, is not subject to such rebate provisions, and taxable mutual funds, to
the extent such fund provides services in connection with the calculation of arbitrage
rebate requirements under federal income tax law; provided, the investments of any
such fund are limited to those bearing one of the two highest ratings of at least one
nationally recognized rating service and not bearing a rating below one of the two
highest ratings by any nationally recognized rating service which rates the particular
fund.”
This section only applies when debt proceeds subject to the arbitrage and rebate
provisions of the IRC are invested. It is strongly recommended that the opinion of bond
counsel be obtained prior to investing debt proceeds under this provision.
“Money market accounts” (which are deposits and eligible for deposits of public funds)
offered by banks that are insured by the FDIC and subject to the collateralization
requirements of G.S. 159-31(b) must not be confused with “money market accounts”
(which are mutual funds and investments that are not eligible for deposit of public funds
unless qualifying under G.1 or G.2 above ) also offered through banks and other financial
institutions that are not insured by the FDIC, not subject to the collateralization
requirements and are subject to market value fluctuation although they strive to maintain
the redemption value at $1 per share.
The key question to ask is: “Is this money market account a deposit account insured by
the FDIC?”
In addition, investments must comply with the investment policy of the unit and the terms
of any grants or similar documents as well as be appropriate considering the nature of the
funds invested and the purpose for which they are intended.
LGC
Page 61 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part IV – Authorized Investments Pursuant to G.S. 159-30
This page intentionally left blank.
LGC
Page 62 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
A. Introduction
This part introduces the accounting and financial reporting standards for the deposits and
investments. The accounting and financial reporting requirements are established
primarily by the following pronouncements as amended: GASBS No. 3 - Deposits with
Financial Institutions, Investments (including Repurchase Agreements), and Reverse
Repurchase Agreements; GASBS No. 14 - The Financial Reporting Entity; GASBS
No. 31 - Accounting and Financial Reporting for Certain Investments and for External
Investment Pools; GASBS No. 34 - Basic Financial Statements and Management's
Discussion and Analysis for State and Local Governments; and GASBS No. 40 - Deposit
and Investment Risk Disclosures (an amendment of GASBS No. 3). Examples of the
required disclosures are included in the Illustrative Financial Statements or Memos
available at www.nctreasurer.com under “Divisions”, “State and Local Government” at
“Local Fiscal Management”.
The Governmental Accounting Standards Board (“GASB”) has various projects being
researched or deliberated which may amend or supersede current standards. The projects
include the 2010-2011 Edition, Comprehensive Implementation Guide Update currently
being developed; the Fair Value Measurement project presently being researched; and the
Financial Instruments Omnibus Exposure Draft which considers significant issues
identified in practice and may include revisions to existing standards regarding
investment reporting and disclosure requirements. The status of GASB projects can be
followed on their website, www.gasb.org.
B. Reporting on the Statement of Net Position or Balance Sheet
As required by GASBS No. 31, most investments are reported at fair value in the financial
statements. Fair value is defined as the amount a willing buyer and a willing seller,
neither being under any pressure to buy or sell, would exchange for the financial
instrument. Where an active market is available, the fair value should equal the quoted
market price. When an active market is not available, the fair market value should be
estimated. The GASBS No. 31, Implementation Guide, includes a discussion of the other
valuation techniques that may be considered. When other valuation techniques are used,
confirmation of the resulting value from independent sources is encouraged.
Exceptions to the requirement to report at fair value are provided for money market
investments, i.e. short-term highly liquid debt instruments which have a remaining
maturity of one year or less at the time of purchase. Money market investments include
commercial paper, banker's acceptances, and U.S. Treasury and agency obligations, but
exclude asset-backed securities, derivatives and structured notes. When not recorded at
fair value, these instruments are recorded at amortized cost. However, even for money
market instruments recorded at amortized cost, if the fair value is significantly impaired
by adverse factors such as a decline in the credit rating of the issuer, the value should be
reduced to the fair value. Certificates of deposit and nonnegotiable repurchase agreements
are recorded at cost.
LGC
Page 63 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
Money market funds, such as the NCCMT, registered under the Investment Company Act
of 1940 and subject to Rule 2a-7 are permitted to use the “amortized cost method” of asset
valuation. Money market funds are open-end management investment companies that
differ from other open-end management investment companies in that they seek to
maintain a stable price per share. The exception currently applies to external investment
pools that although unregistered have agreed to operate in the manner required by
Rule 2a-7, known as “2a7-like” external investment pools.
C. Reporting on the Statement of Activities or Statement of Changes in Fund
Balance or Net Position
For investments reported at fair value, investment income recognized as revenue includes
the changes in the fair value of investments. If the change in fair value of investments is
separately presented, it should be titled “net increase (decrease) in the fair value of
investments”. GASBS No. 31 defines the change in fair value of investments as “The
difference between the fair value of investments at the beginning of the year and at the
end of the year, taking into consideration investment purchases, sales, and redemptions.”
Realized gains and losses should not be displayed separately and presented as a financial
statement item, however a unit may disclose realized gains and losses in the notes to the
financial statements. Realized gains and losses are computed as the difference between the
proceeds of the sale and the original cost of the investments sold. For investments reported
at fair value, the amortization of premium and discount is inappropriate and interest
income should be recorded at the contract rate.
D. Note Disclosure Requirements for Investments
Investment disclosures should be organized by investment type. Do not combine dissimilar
investments. These disclosures should be made for the primary government and its
blended component units as well as to its discretely presented component units. Data for
discretely presented components should not be combined with that of the primary
government. Note disclosures should include the following items as appropriate.
1. Basic Disclosures
a. Description of the types of authorized investments by legal and contractual
provisions. If authorized investments or investment activities differ materially for
different funds than for the unit, this should be disclosed. While unable to expand
investment authority beyond that authorized by G.S. 159-30, contractual provisions
in bond orders or the Internal Revenue Code may further limit the investment
authority of a unit with regard to bond proceeds.
b. Significant violations of legal or contractual provisions, e.g. uninsured or
uncollateralized deposits, unauthorized investments, or improper custodial
arrangements, must be disclosed as a stewardship violation. A corrective action
plan should also be included for the violation.
c. Collateralization and insurance requirements and coverage for deposits.
d. Losses recognized during the fiscal year and, if not separately displayed on the
operating statement, amounts recovered from prior-period losses.
LGC
Page 64 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
e. If fair value is based on other than quoted market prices, the notes to the financial
statements should explain the methods and any significant assumptions used to
determine the fair value of investments.
f.
The policy for determining which investments, if any, are reported at amortized cost
g. For any investments in external investment pools that are not SEC-registered, a
brief description of any regulatory oversight for the pool and whether the fair value
of the position in the pool is the same as the value of the pool shares.
2. Risks Related to Deposits and Investments Disclosures
Effective with the implementation of GASBS No. 40, units of government have to
disclose all risks related to deposits and investments of the unit and its blended
component units as well as its discretely presented component units held as of the
statement date. These risks include interest rate risk, credit risk, custodial credit risk,
and concentration risk. Foreign currency risk, although discussed in the statement, is
not an issue for local governments in North Carolina, since investments exposed to
foreign currency risk are not allowable under G.S. 159-30. If the risks are significantly
greater than those faced by the unit, risk disclosures should also be made for
governmental and business-type activities and by fund. In addition to the risk
disclosures, the local government also must disclose any policy formally adopted by the
governing board to mitigate each specific risk or include a statement specifying that
there is no board-adopted policy. If there is no exposure to a particular risk then the
policy disclosure is not required.
a. Interest Rate Risk
Interest rate risk is the risk that fair value of an investment will fluctuate because
of changes in interest rates. The longer the time to maturity, the greater this risk
will be. This risk may be disclosed by showing the amount of investments that will
mature by time segment, by listing all investment maturity dates, by disclosing the
weighted average maturity of investments or by disclosing the duration of
investments. Units may also disclose what the anticipated impact of various
interest rate changes would have been upon the value of its investments. The
disclosures should be made in the manner most consistent with how the unit
actually manages interest rate risk. The interest rate risk disclosure is not required
for cash deposits in financial institutions.
Investments in external pools other than Rule 2a-7, the SEC rule under the
Investment Company Act of 1940 governing money market funds, or a 2a7-like
external investment pool must be disclosed. Money market funds are open-end
management investment companies that seek to maintain a stable price per share,
usually $1.00. Rule 2a-7 exempts money market funds from the valuation
requirements of the Act and permits them to use the “amortized cost method” of
asset valuation. Therefore, the NCCMT Cash Portfolio is exempt from these
disclosures as a 2a-7 investment pool. The NCCMT Term Portfolio and the State
Treasurer’s STIF account will require interest rate risk disclosures. U.S.
Government securities will be included in this disclosure.
Investments highly sensitive to interest rate changes must be disclosed either
separately or as part of the method chosen for interest rate risk disclosure. This
LGC
Page 65 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
means that any unique terms or conditions that potentially increase an
investment’s sensitivity to interest rate risk, such as coupon multipliers,
benchmark indices, and embedded options, should be disclosed. These complex
terms and additional requirements will not apply to most investments since
investments of this complexity are rarely held in the portfolio of units. If the specific
identification method is used for reporting interest rate risk, the statement does
require that any “call” provisions be disclosed. The other methods are considered to
adequately disclose the effect of call provisions without a separate disclosure.
b. Credit Risk
Credit risk or the risk that the issuer or other counterparty to an investment will
not fulfill its obligations must be disclosed for investments. Credit ratings must be
disclosed for all debt securities except debt securities of the United States
Government and those explicitly guaranteed by the U.S. Government, such as
GNMA securities. Most government agencies are not explicitly guaranteed and
would require a credit risk disclosure. The ratings of debt securities held through
external investment pools and mutual funds also should be disclosed including the
NCCMT Cash Portfolio which has an AAAm rating. A statement to the effect that
the pool is unrated is required for the NCCMT Term Portfolio and the STIF
account. Aggregate amounts may be presented by rating categories set by national
ratings agencies such as Fitch, Moody’s or Standard & Poor’s. If the ratings of some
investments are not available, this also should be disclosed.
c. Custodial Credit Risk
Specific disclosures are required for deposits and investments held at the end of the
period that are exposed to custodial credit risk. Custodial credit risk is the risk that
in the event of failure of another party to the transaction (the “counterparty”)
having possession of the securities or collateral, the unit may not be able to obtain
possession of the securities or recover the value of the investments held by the
counterparty. Investment securities are exposed to custodial credit risk when the
securities are uninsured, are not registered in the name of the unit, and are held by
the counterparty, its agent or its trust department. The financial statement
disclosures for investments subject to custodial credit risk include the type of
investment, the reported amount and a description of how the investment is held.
These deposits and investments are subject to substantial custodial credit risk as
defined by GASBS No. 40. Securities that the existence thereof is not evidenced by
physical existence or by book-entry form are not exposed to custodial credit risk.
Therefore, an investment, such as a mutual fund not subject to collateralization,
will not require custodial credit risk disclosure. It should be remembered that
G.S. 159-30(d) provides that the finance officer shall have custody of and be
responsible for the safekeeping of securities.
d. Risks from Concentrations of Credit
This is the risk arising from lack of adequate diversification in the portfolio. If a
unit has five percent or more of its investments in securities of a single debt issuer,
this must be disclosed in the notes. This determination is made based upon the
issuer of the debt. Concentration risk for an investment pool or mutual fund, such
as the NCCMT Cash Portfolio, the NCCMT Term Portfolio and a STIF account, will
LGC
Page 66 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
not be reported. Debt securities of the United States Government and those
explicitly guaranteed by the U.S. Government will not be subject to this disclosure
requirement. The concentration of credit risk disclosure is not required for cash
deposits in financial institutions.
e. Foreign Currency Risk
This is risk disclosure in not generally applicable in North Carolina as investments
denominated in foreign currencies are not permitted investments under
G.S. 159-30.
Additional disclosures may be required to fairly present the nature and characteristics of
and potential for future losses in the portfolio depending on the specific investments held
by the unit.
LGC
Page 67 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part V – Accounting and Reporting Requirements
This page intentionally left blank.
LGC
Page 68 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VI – Review of Referenced Resources
Additional Resources
The following is a review of the additional resources referenced in this policy and available to
the finance officer.
Access to the General Statutes is available without charge at the website of the North
Carolina General Assembly, www.ncga.state.nc.us. When using the statutes at the website,
please read the caveats on the main NC Statutes page.
Additional resources from the Department of State Treasurer available for downloading at
www.nctreasurer.com under “Divisions”, “State and Local Government”, “Local Fiscal
Management” at “Forms and Instructions” which includes a section on “Deposit and
Investment Information”. It includes links to various forms, memoranda and reports. Also
included under the “Local Fiscal Management” are links to outstanding memorandum, the
illustrative financial statements, etc.
Current LGC memorandums and other resources related to deposits and investments include
the following:
No. 2014-22 Instructions for LGC-203 FORMs: LGC-203EZ & Standard LGC-203 and
INV 91’s due to us by July 25, 2014
No. 2014-23 Collateralization of Public Deposits and Pooling Bank List (Updated SemiAnnually)
No. 2013-03 Custody and Proper Safekeeping of Local Government Investments
No. 2010-13 International ACH Transactions (IAT) Rules Advisory
No. 1113
Public Deposits
No. 1109
Current Issues in Deposits and Investments for North Carolina Local
Governments
Other Post Employment Benefits (OPEB) Resources
At the State Treasurer’s website under the heading “Financial Operations”, publications
available include “Collateralization Of Public Deposits in North Carolina”, “Banking
Operations Glossary”, and others.
Additional sources of information, which are available from the School of Government at the
University of North Carolina include a wide variety of courses, periodicals and publications
addressing topics of particular concern to North Carolina local governments and public
authorities. The website of the School of Government is www.sog.unc.edu. The School of
Government sponsors various e-mail lists hosting discussions and broadcasts related to
various topics of interest to local governments. The School of Government also has a “NC Local
Government Warehouse” with examples of documents developed by North Carolina local
governments. While the documents included are not represented as models or best practices
and while they have not been reviewed by the School of Government faculty, they may be
useful to local governments.
LGC
Page 69 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VI – Review of Referenced Resources
Posts on the UNC School of Government NC Local Government Law Blog, Coates' Canons,
disseminates information about a broad range of legal issues affecting local governments and
public agencies. The posts are searchable. Some posts related to deposits and investments
include the following:
Local Government Budgeting Options when Revenue Streams are Uncertain, June 15,
2013, Kara Millonzi.
A New Interpretation of the Preaudit Requirement, November 8, 2012, Kara Millonzi.
Court of Appeals Reaffirms New Interpretation of Pre-audit Requirement, May 23, 2013,
Kara Millonzi.
Preauditing Employee Salaries and Wages, March 21, 2014, Kara Millonzi.
Disbursing Public Funds, May 23, 2014, Kara Millonzi.
Internal Controls: Who Is Authorized to Open a Bank Account and to Deposit and Disburse
Public Funds?, July 26, 2012, Kara Millonzi.
Daily Deposit Requirement, January 14, 2013, Kara Millonzi.
The Perils of Preauditing P-Cards (and Other Electronic Payment Methods), October 11,
2013, Kara Millonzi.
Local Governments Now Allowed to Charge Fees for Accepting Credit and Charge Card
Payments, February 8, 2013, Kara Millonzi.
Also, the GFOA publishes recommended practices on various topics available at www.gfoa.org
and makes publications available for purchase including: Banking Services: A Guide for
Governments; Investing Public Funds; and others. Information is also available from the
various professional associations (www.nclm.org or www.ncacc.org) for local units; from the
Association of Treasury Professionals; from CPA firms, financial institutions and investment
advisors; and from contacts with your colleagues in local governments and industry.
Websites for the various agencies with regulatory authority over financial institutions include
the following:
●
Securities and Exchange Commission (SEC) – www.sec.gov (For publicly-traded SEC
registered companies);
●
Comptroller of the Currency (OCC) – website: www.occ.treas.gov (For national banks
and federal savings associations);
●
Federal Deposit Insurance Corporation (FDIC) – website: www.fdic.gov;
●
Federal Reserve Bank of Richmond – website: www.richmondfed.org;
●
NC Commissioner of Banks – website: www.nccob.org, (For state-chartered banks);
●
Federal Financial Institutions Examination Council (FFIEC) – website: www.ffiec.gov
[provider of the Uniform Bank Performance Report (UBPR)]; and
●
Financial Industry Regulatory Authority (FINRA) – website: www.finra.org (provides
information about the professional background, registration/license status and
disciplinary history of registered firms and the brokers).
LGC
Page 70 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VI – Review of Referenced Resources
Some of the many websites that may provide helpful information to the finance officer in
monitoring the financial markets and investment alternatives include the following:
●
www.bloomberg.com/markets/,
●
www.bondsonline.com,
●
www.research.stlouisfed.org/fred2/,
●
www.ficalc.com, and
●
www.marketwatch.com/markets.
LGC
Page 71 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VI – Review of Referenced Resources
This page intentionally left blank.
LGC
Page 72 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
Exhibit B – Sample Cash Management – Daily Activity & Balance Report
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Exhibit D –Guidelines for Evaluation of the Soundness of a Financial Institution
Exhibit E – Compensating Balance Estimation
Exhibit F – Sample Cash Management and Investment Policy
Exhibit G – Sample Resolution Adopting Cash Management and Investment Policy
Exhibit H – Sample Broker-Dealer Questionnaire
Exhibit I – Sample Investment Report
Exhibit J – Sample Resolution Designating an Official Depository – Dedicated
Method Bank
Exhibit K – Sample Resolution Designating an Official Depository – Pooling Method
Bank
Exhibit L – North Carolina Attorney General’s Memorandums
Exhibit M – Cash Flow Worksheet
Note: To facilitate modification and use of Exhibits C, F, G, H, J and K, they
are posted as a Word® or Excel® Documents on the website of the State
Treasurer, www.nctreasurer.com, following this Policy Manual section.
Instructions to make updating and revising easier are included.
LGC
Page 73 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
This page intentionally left blank.
LGC
Page 74 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
LGC
Page 75 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
This page intentionally left blank.
LGC
Page 76 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
A. Introduction
When using a central depository, the finance officer must be able to know not only the cash
balance in the central depository, but also must be able to determine on a daily basis the
cash balance available to each investing fund. If the accounting system does not readily
provide the required information, a central depository should not be used. Because each
fund may have a different cash flow prospect, this information is necessary to prevent a
fund from inadvertently expending more cash than it has available. It also helps assure
that excess funds will be properly identified and invested to meet the cash flow needs of
each fund.
Use of a cash concentration bank account normally requires a separate fund, often titled
“Central Depository Fund”. Within that fund there should be an asset account often titled
“Cash in Bank – Central Depository” for the cash balance and activity in the cash
concentration bank account and a separate liability accounts or “Due to” accounts
representing the ownership interest of each fund with monies deposited to and expenses or
expenditures paid from the cash concentration account. At all times, the balance in the
asset account “Cash in Bank – Central Depository” should equal the sum of the “Due to”
liability accounts for the funds depositing into the central depository account. The “Central
Depository Fund” should always have a zero fund balance. Revenues and expenses or
expenditures are not recorded in the Central Depository Fund.
Each fund depositing monies into the central depository should have an asset account
titled “Cash in Central Depository”, essentially a “Due from” account. The balance in this
account represents the ownership interest or equity of the investing fund in the balance in
the central depository account (i.e. the cash balance available to the fund) and must always
equal the “Due to” account for the investing fund in the “Central Depository Fund”.
B. Illustrated Journal Entries
The following illustrates the journal entries for a unit using a central depository with the
bank account at the 6th Dogwood Bank into which the following three funds invest: the
General Fund, the Special Revenue Fund and the Water Fund. For purposes of examples
(a) and (b), please assume that there are no beginning cash balances. The remaining
entries are based on facts stated in the illustration. With the use of a central depository, it
is particularly important that all entries be prepared and posted on a daily basis so that
both the “Cash in Bank – Central Depository” account in the Central Depository Fund and
“Cash in Central Depository” accounts in the investing funds are up-to-date and properly
stated.
LGC
Page 77 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
1. Journal Entries – Deposit to Central Depository
The General Fund, Special Revenue Fund and the Water Fund deposit into the central
depository bank account $23,000, $33,000 and $41,000, respectively.
Central Depository Fund
Cash in Bank – 6th Dogwood Bank
Due to General Fund
Due to Special Revenue Fund
Due to Water Fund
Debit
$ 97,000
General Fund
Cash in Central Depository
Various Revenue Accounts, etc. 1
Debit
$ 23,000
Special Revenue Fund
Cash in Central Depository
Various Financing Sources, etc. 1
$ 33,000
Water Fund
Cash in Central Depository
Various Revenue Accounts, etc. 1
$ 41,000
1
Credit
$ 23,000
$ 33,000
$ 41,000
Credit
$ 23,000
$ 33,000
$ 41,000
These accounts would be those required to record the offsetting credit entries
to properly summarize the amounts deposited by each fund.
After these entries, the balance in the asset account “Cash in Bank – 6th Dogwood
Bank” equals the sum of the “Due to” liability accounts for the funds depositing into the
cash concentration account and the “Central Depository Fund” has a zero fund balance.
Furthermore, the balance in the “Cash in Central Depository” accounts in each fund
equals the “Due to” liability account balance in the “Central Depository Fund” and
represents the cash available to that fund (the ownership interest of the fund in the
balance in the central depository account). From this information, the finance officer
can readily determine not only the total cash available but also the cash available to
each fund.
2. Journal Entries – Payments from Central Depository
The General Fund, Special Revenue Fund and the Water Fund make the following
payments from funds in the central depository bank account $3,000, $11,000 and
$4,000, respectively.
Central Depository Fund
Due to General Fund
Due to Special Revenue Fund
Due to Water Fund
Cash in Bank – 6th Dogwood Bank
General Fund
Various Expenditure Accounts, etc. 2
Cash in Central Depository
LGC
Page 78 of 216.
Debit
$ 3,000
$ 11,000
$ 4,000
$ 3,000
Credit
$ 18,000
$ 3,000
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
Special Revenue Fund
Various Expenditure Accounts, etc. 2
Cash in Central Depository
Water Fund
Various Expense Accounts, etc. 2
Cash in Central Depository
2
$ 11,000
$ 4,000
$ 11,000
$ 4,000
These accounts would be those required to record the offsetting debit entries
to properly summarize the payment of expenditures or expenses in each
fund.
After these entries, the balance in the asset account “Cash in Bank – 6th Dogwood
Bank” of $79,000 equals the sum of the “Due to” liability accounts for the General
Fund, Special Revenue Fund and Water Fund of $20,000, $22,000 and $37,000,
respectively, and represents the cash available to that fund. The “Central Depository
Fund” has a zero fund balance. From this information, the finance officer can readily
determine not only the total cash available but also the cash available to each fund.
3. Journal Entries – Prorate Interest Earned
The 6th Dogwood Bank credits the bank account with interest earned of $2,500 for the
period. Assume of these entries that while the General Fund, Special Revenue Fund
and the Water Fund have ending balances in the “Cash in Central Depository” of
$20,000, $22,000 and $37,000, respectively; the average balances “Cash in Central
Depository” account during the period have equaled $42,700, $20,800 and $52,500,
respectively. The required computations reflect the average balance in the account
during the period and are illustrated in following Section C – Procedure to Prorate
Interest Earned in Central Depository.
Central Depository Fund
Cash in Bank – 6th Dogwood Bank
Due to General Fund
Due to Special Revenue Fund
Due to Water Fund
Debit
$ 2,500
General Fund
Cash in Central Depository
Interest Revenue
$ 921
Special Revenue Fund
Cash in Central Depository
Interest Revenue
$ 448
Water Fund
Cash in Central Depository
Interest Revenue
$ 1,131
Credit
$ 921
$ 448
$ 1,131
$ 921
$ 448
$ 1,131
After these entries to prorate interest revenue, the balance in the asset account “Cash
in Bank – 6th Dogwood Bank” of $81,500 equals the sum of the “Due to” liability
LGC
Page 79 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
accounts for the General Fund, Special Revenue Fund and Water Fund of $20,921,
$22,448 and $38,131, respectively, and represents the cash available to each fund.
G.S. 159-30(e) provides that “(i)nterest earned on deposits and investments shall be
credited to the fund whose cash is deposited or invested (and) when … joint deposits or
investments are made, interest earned shall be prorated and credited to the various
funds on the basis of the amounts thereof invested, figured according to an average
periodic balance or some other sound accounting principle….” In performing this
computation, use of the average of the daily balances provides the most accurate
results. However, other methods to calculate the average balance may be used provided
that the finance officer makes sure that the average balance calculated reasonably
represents the principal amount on deposit for each investing fund during the period
for which interest is prorated.
While G.S. 159-30(e) does not mention the prorating of costs and fees associated with
use of a central depository, it is recommended that such costs and fees be prorated to
the investing funds based on the volume of activity or other appropriate basis. The
entries to allocate costs and fees are not illustrated here but would be similar to the
preceding entries to allocate interest earned.
4. Journal Entries – Payments Exceeding Cash Available in Water Fund
The Water Fund makes the following payments from funds in the central depository
bank account $45,000. At the time of this payment, the “Cash in Bank – 6th Dogwood
Bank” equals $81,500 and the cash available to the Water Fund is only $38,110.
The payments in part represent interfund activity that is either a loan, if repayment is
expected within a reasonable time, or a transfer of resources, if repayment is not
expected within a reasonable time. It must be determined whether this is a loan or a
transfer and whether it is from the General Fund or the Special Revenue Fund (not the
Central Depository Fund) to the Water Fund. These determinations must be made
prior to making the payments.
For purposes of the following entries, we will assume the governing body of the unit has
determined that the interfund activity represents a loan from the General Fund to the
Water Fund.
Central Depository Fund
Due to General Fund
Due to Water Fund
Cash in Bank – 6th Dogwood Bank
General Fund
Due from Water Fund 4
Cash in Central Depository
$ 6,890
Water Fund
Various Expense Accounts, etc. 3
Due to General Fund 4
Cash in Central Depository
LGC
Debit
$ 6,890
$ 38,110
Page 80 of 216.
$ 45,000
Credit
$ 45,000
$ 6,890
$ 6,890
$ 38,110
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
3
4
These accounts would be those required to record the offsetting debit entries
to properly summarize the payment of expenditures or expenses in each
fund.
If repayment was not expected within a reasonable time and the interfund
activity is to be recorded as a transfer, the account would be “Transfer to
Water Fund” or “Transfer from General Fund” for the transferor and
transferee, respectively.
After these entries, the balance in the asset account “Cash in Bank – 6th Dogwood
Bank” of $36,500 equals the sum of the “Due to” liability accounts for the General
Fund, Special Revenue Fund and Water Fund of $13,720, $22,780 and $0, respectively,
and represents the cash available to each fund. In addition to the cash balance, the
General Fund has a “Due from” account balance for the loan to the Water Fund of
$6,890.
5. Journal Entries – Central Depository Invest Commingled Funds
The cash manager may determine that monies available in the central depository
account would be more effectively invested in some other vehicle and the funds to be
invested are associated with a specific fund, that fund should record the investment
and reduce the “Cash in Central Depository” account. For example, if the Water Fund
had $5,000 that it anticipated it would be available for investment with the North
Carolina Cash Management Trust (NCCMT) and not required to meet its daily cash
needs, it would record the investment as follows:
Central Depository Fund
Due to Water Fund
Cash in Bank – 6th Dogwood Bank
Water Fund
Investment in NCCMT – Term Portfolio
Cash in Central Depository
Debit
$ 5,000
$ 5,000
Credit
$ 5,000
$ 5,000
This is essentially a withdrawal from the Central Depository Fund and a return of the
monies to the Water Fund which then invests the monies with NCCMT. In this case,
income from the NCCMT – Term Portfolio is posted directly to the Water Fund.
On the other hand, the cash manager may determine that monies available in the
central depository account would be more effectively invested in some other vehicle and
the funds to be invested are not associated with a specific fund. The following
illustrates the entry required if $10,000 is invested with the Cash Portfolio of the North
Carolina Capital Management Trust.
Central Depository Fund
Investment in NCCMT – Cash Portfolio
Cash in Bank – 6th Dogwood Bank
Debit
$ 10,000
Credit
$ 10,000
Note that in the latter case, entries are not required in the investing funds for the
commingled funds. In this case, the balance in the asset account “Cash in Bank –
Central Depository” plus the balance in the asset account “Investment in NCCMT –
LGC
Page 81 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
Cash Portfolio” should equal the sum of the “Due to” liability accounts for the funds
depositing into the central depository account. The “Central Depository Fund” should
always have a zero fund balance. Investment income for the NCCMT – Cash Portfolio
would be prorated with other investment income and credited to the various funds
whose cash is deposited or invested.
C. Procedure to Prorate Interest Earned in Central Depository
This example assumes that the daily cash balances determined for the Central Depository
Fund from the account “Cash in Bank – 6th Dogwood Bank” and the balances in each
investing fund determine for each fund from the account “Cash in Central Depository” are
as shown in Step 1. It also assumes that interest earnings of $2,500 have been credited to
the account by the bank. The steps required to prorate the interest earnings in accordance
with the G.S. 159-30(e) requirement that “(i)nterest earned on deposits and investments
shall be credited to the fund whose cash is deposited or invested (and) when … joint
deposits or investments are made, interest earned shall be prorated and credited to the
various funds on the basis of the amounts thereof invested, figured according to an average
periodic balance or some other sound accounting principle….”
Step 1 – Determine Daily Cash Balance from General Ledger:
Central
Investing Funds
Date
Depository
General
Special
Revenue
Feb 1, 20xx
$ 97,000
$ 23,000
$ 33,000
Feb 2, 20xx
$ 133,000
$ 46,000
$ 23,000
Feb 3, 20xx
$ 153,000
$ 59,000
$ 18,000
Feb 4, 20xx
$ 113,000
$ 56,000
$ 19,000
Feb 5, 20xx
$ 103,000
$ 54,000
$ 16,000
Feb 6, 20xx
$ 115,000
$ 39,000
$ 20,000
Feb 7, 20xx
$ 115,000
$ 39,000
$ 20,000
Feb 8, 20xx
$ 143,000
$ 52,000
$ 18,000
Feb 9, 20xx
$ 109,000
$ 39,000
$ 19,000
Feb 10, 20xx
$ 79,000
$ 20,000
$ 22,000
Step 2 – Calculate Daily Average Balance for Period:
Sum of Daily
$1,160,000
$ 427,000
Balances
10 Days
10 Days
÷ Number of Days
= Daily Average 1
$ 116,000
$ 42,700
Water
$ 41,000
$ 64,000
$ 76,000
$ 38,000
$ 33,000
$ 56,000
$ 56,000
$ 73,000
$ 51,000
$ 37,000
$ 208,000
$ 525,000
10 Days
$ 20,800
10 Days
$ 52,500
Step 3 – Calculate Ratio of Fund Daily Average to Central Depository Average:
Fund Daily Average
$42,700
$20,800
$52,500
Total Average
$116,000
$116,000
$116,000
Ratio 1
100.00 %
36.81 %
17.93 %
45.26 %
LGC
Page 82 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
Step 4 – Prorate Interest Earnings:
Total Interest Earnings
Ratio
Fund Share of Interest Earnings
1
1
$ 2,500
36.81 %
$ 2,500
17.93 %
$ 2,500
45.26 %
$ 921
$ 448
$ 1,131
These sum of the daily average amounts calculated in Step 2 for each investing fund
should equal the daily average amount for the central depository, the sum of the ratios
calculated in Step 3 should equal 100%, and the sum of the prorate interest earned
should equal the total interest credited to the account.
The final step is to prepare and post the required journal entries illustrated in preceding
Section B.3. – Journal Entries – Prorate Interest Earned
LGC
Page 83 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit A – Central Depository Accounting
This page intentionally left blank.
LGC
Page 84 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit B – Sample Cash Management – Daily Activity & Balance Report
LGC
Page 85 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit B – Sample Cash Management – Daily Activity & Balance Report
This page intentionally left blank.
LGC
Page 86 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit B – Sample Cash Management – Daily Activity & Balance Report
Report Date
1. Previous Day - Closing Balance
2. Increases to Bank Balance
a. Amounts Deposited
Central Depository
$
---
b. Amounts from Incoming Wires
c. Amounts from ACH Credits
d. Investment Maturities
e. Amounts Transferred In
f. Other Increases
Total - Increases to Cash Balance
3. Subtotal
4. Decreased to Bank Balance
a. Amount of Checks Issued
b. Amounts for Outgoing Wires
c. Amounts for ACH Debits
d. Amounts Transferred Out
e. Other Decreases
Total - Decreases to Cash Balance
Other Fund 1
$
---
Other Fund 2
$
---
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
---------
---------
---------
---------
---
---
---
---
-----
-----
-----
-----
-----------
-----
-----
-----
-----
-----
-----
-------
-------
-------
-------
5. Preliminary - Closing Balance
Amounts Invested
$
---
6. Current Day - Closing Balance
$
-------
Report Prepared by:
LGC
General Fund
$
---
$
---
$
-------
$
---
$
-------
$
---
$
-------
Reviewed by:
Page 87 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit B – Sample Cash Management – Daily Activity & Balance Report
This page intentionally left blank.
LGC
Page 88 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Note: To facilitate modification and use of this Sample Request for Proposals
for Procurement of Banking Services, it is posted as a Word® and Excel®
Documents on the website of the State Treasurer, www.nctreasurer.com,
following this Policy Manual section. Instructions to make updating and
revising easier are included.
LGC
Page 89 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
This page intentionally left blank.
LGC
Page 90 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
[Unit Full Name]
North Carolina
*****
Notice of
Request for Proposals
For Candidates to Provide
Banking and Related Services
*****
Proposals Due Date: [Date and Time]
LGC
Page 91 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
This page intentionally left blank.
LGC
Page 92 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
REQUEST FOR PROPOSALS
[Unit Full Name]
TABLE OF CONTENTS
Individual Request for Proposals (RFPs) have been developed for each of the services listed
below. Separate responses are required for core banking services, retail lockbox services and
purchase card services; however institutions are not required to respond to all RFPs.
Page Numbers
Description
I.
Section I – Page 1
Section I – Page 1
Section I – Page 1
Section I – Page 2
Section I – Page 2
Section I – Page 3
Section I – Page 3
Section I – Page 3
General Information
Objective
Background Information
Evaluation and Selection Process
Terms and Conditions
Mandatory Minimum Requirements
Timeline
Mandatory Pre-Proposal Conference
Instructions
II. Request for Proposals Sections
Section II – Page 1
Section II – RFP 1 – Page 1
Section II – RFP 2 – Page 1
Section II – RFP 3 – Page 1
Required Financial Information
(Required From All Candidates For
All RFPs)
Core Banking Services
Retail Lockbox Service
Purchase Card Services
III. Attachments
Section III – Attachment 1 – Page 1
Section III – Attachment 2 – Page 1
Section III – Attachment 3 – Page 1
Section III – Attachment 4 – Page 1
LGC
Cost Forms (Provides both estimated
activity volumes and the template
for cost proposal response)
[Insert filename.xls]
Locations Using Banking Services
[Insert filename.doc]
Current Service Providers
Technical Specifications
[Include only if Technical Specifications
are included.]
Page 93 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
This page intentionally left blank.
LGC
Page 94 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section I – General Information
The Finance Departments from the [Unit Full Name] (the “[Unit Type]”) requests that
qualified and interested banking institutions who will be operating within the legal
jurisdiction of the [Unit Type] on [RFP date], submit proposals for providing certain banking
services. Each proposal submitted shall be expected to respond to each consideration set forth
in this Request for Proposal (the “RFP”).
OBJECTIVE
The [Unit Type] desires to select a reputable financial institution to manage its deposits,
provide core banking services and make available certain other related financial services to
the [Unit Type] for its benefit and the benefit of the citizens it serves.
This RFP is organized into several separate sections. This first section gives a general
overview of basic selection process, terms and conditions and basic requirements. Each of the
RFP sections is separate and responses for each are separate. All candidates must provide the
Required Financial Information as well as the information required by each RFP section. Each
section may have more specific terms and additional conditions and mandatory requirements.
BACKGROUND INFORMATION
[Briefly describe entity – location, population, etc.] Average or estimated volumes are included
in Attachments 1 – Cost Form, which also serves as a price response form for requested
services (see instructions below).
EVALUATION AND SELECTION PROCESS
The selection process will be based on the responses to this RFP. A committee, comprised of
members from the finance department of the [Unit Type], will evaluate responses and will
select the top two responsible proposals, subject to further negotiations.
Responses from each of the RFP sections will be evaluated separately, however, efficient and
cost effective integration of any of these services will be considered. The following will be the
basic criteria for evaluating all responses. Additional criteria are listed in each of the separate
RFP sections.
The full cost of implementation will be considered which includes software installation, data
transmission file setup and other initial one-time implementation fees. See Attachment 3 for
current service providers. See Attachment 5 for documentation on technical specifications, file
formats, etc. [Include only if Attachment 5 in included.]
Basic Selection Criteria:
1. Ensure all proposal requirements, conditions and instructions are met as set forth in
this RFP for each service (Required Financial Information and RFP sections 1-3).
2. Ensure financial stability by reviewing financial statistics and other financial
information provided by the institutions.
3. Review references, verifying exemplary service levels for similar banking and financial
services and evaluate experience with governmental entities or private companies of
similar complexity. Prior experiences with the [Unit Type] will be strongly considered.
LGC
Page 95 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section I – General Information
4. Ensure institution is equipped to best address the technological needs of the [Unit
Type].
5. Ensure institution best addresses the overall goals, objectives and mandatory service
requirements as set forth in this document.
6. Ensure institution provides service in an effective and efficient manner, which includes
designating a specific Account Executive for the [Unit Type].
7. Ensure that the overall banking services are the most cost advantageous. The full cost
of implementation will be considered during the selection process.
The [Unit Type] reserves the right to reject any or all proposals, to waive any non-material
irregularities or informalities in any proposal, to request additional clarification of proposals,
to be the sole judge of suitability of the services for its intended use and further, specifically
reserves the right to make the award in its best interests.
Questions about the RFP will not be entertained before the pre-proposal conference.
TERMS AND CONDITIONS
The contractual period to be approved by the [Governing Body] with the chosen firm(s) will be
for a [number of years]-year term beginning approximately [begin date.]. Up to [number of
times] extension periods may be granted at the sole discretion of the [Unit Type] at the prices
proposed by or negotiated with the successful firm. A formal contract will be used and shall
control subject to specifications, requirements, and conditions contained herein.
There may be several contracts based on the separate bank selection from each of the RFP
sections. These terms and conditions are the same for all RFP sections.
The [Unit Type] shall retain the right to cancel the contract at any time for cause. Such
cancellation will generally result by the failure of the contracted institution to complete or
provide the specified services, or by a violation of the Mandatory Requirements (listed below).
The [Unit Type] shall retain the right to cancel the contract at any time without cause with
90 days notice.
The [Unit Type] does not guarantee that activity levels and services indicated in Attachment 1
of this RFP will continue at the same level during the contract period.
Any and all costs associated with the preparation of a response to this RFP are the
responsibility of the candidate and are not to be passed on to the [Unit Type].
All cost proposals must be included on an Attachment 1 for each of the applicable RFP
sections. Bids will NOT be accepted unless cost proposals are included on the
attached Cost Form and a Microsoft Excel [version] diskette. Since terminology may
vary, institutions are required to conform to this template. For a list of definitions see
Attachment 4. Exceptions to the proposal specifications should be listed separately and
defined, or they will be invalid.
The specific details shown herein shall be considered minimum unless otherwise indicated.
The specifications, terms and conditions included with this RFP shall govern in any resulting
contract(s) unless approved otherwise in writing individually by the [Unit Type]. Candidates
LGC
Page 96 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section I – General Information
must consent to personal jurisdiction and venue in a state court of competent jurisdiction in
[county], North Carolina.
MANDATORY MINIMUM REQUIREMENTS
There are certain minimal requirements for the institutions involved in providing any
financial services referred to herein. Specific reference to each must be provided in the general
response section as detailed in the instructions below. It is expected that the chosen firm will
exceed these qualifications. Firms shall:
1.
2.
3.
4.
5.
Be a Federal Deposit Insurance Corporation (FDIC) insured institution;
Be online with the Federal Reserve Bank for funds and securities;
Have experience with large volume customers of similar complexity;
Be an Equal Opportunity Employer;
Comply with mandatory requirements according to type of service specified in each
applicable RFP section; and
6. Comply with all other requirements specified in this RFP.
TIMELINE
The following timeline is provided for informational purposes. Contact [contact name] at
[contact phone number and e-mail address] to confirm dates, times and locations.
Publication of Notice of Request for
Proposals
[publication date]
Distribution of RFPs
[distribution date]
Mandatory Pre-proposal Conference at
[time]
[pre-proposal conference date]
Sealed proposals due before [time]
[proposal due date]
Committee Review & Negotiation
[estimated time frame]
Approval by [Governing Body]
[expected approval date]
Implementation period
[implementation time frame]
Contract start date
To be negotiated.
RFP response(s) and the related cost forms (Attachment 1) must be completed and returned by
[exact time] p.m. on [date] to the [Unit Type] at [specify exact location]. E-mailed and
faxed responses will not be accepted.
MANDATORY PRE-PROPOSAL CONFERENCE
A pre-proposal conference will be held to answer any questions arising from this document.
Attendance is MANDATORY for those interested in submitting a proposal and will be held
[specify exact location] at [time] on [date]. Questions arising after the pre-proposal conference
and before [last date for questions] may be directed to [contact name.] via e-mail at [contact
LGC
Page 97 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section I – General Information
e-mail address.]. All replies will be issued via e-mail to all who attended the pre-bid
conference. The [Unit Type] will be unable to answer questions after [last date for questions].
INSTRUCTIONS
The cost proposal portion (“Cost Form”) of the bid response must be inserted in the template
form provided in Attachment 1. Enclosed is a disk with this attachment in a Microsoft Excel
[version.] file. An electronic file of this form must be included in the bid packet along with the
printed paper form. Generic terms are used where possible and banks are responsible for
fitting their specific services to these terms. Any additions must be highlighted in yellow on
paper and within in the Excel file. This is a REQUIRED form. Bids will not be accepted unless
cost proposals for the applicable services are included on this form. The cost form for each RFP
section should be sealed in a separate envelope (printed copy and Excel file on disk). Save the
file using the proposing bank name. Example: ProposingBank.xls. The same file should be
used if you are responding to several of the RFP Sections. Each bank should have only one cost
form which includes all sections’ bid. Unsealed cost forms will invalidate the bid.
Other important information and requirements:
●
Responses to each RFP should be organized as outlined in each RFP section. Other
than the cost proposal, responses need to be on paper only. There should be a separate
response to the general requirements listed above and then responses for each of the
RFP sections as instructed therein.
●
All services should be priced on a per unit basis of one unless otherwise indicated.
●
[Insert number copies required] copies of each proposal are required. All proposals will
become the property of the [Unit Type] and will not be returned. Proposals become
public record upon delivery to the [Unit Type].
●
This RFP was prepared by [name of preparer]. No questions will be taken before pre-bid
conference.
In summary, the response package should be organized as follows:
1. Response to general requirements
2. Required financial information
3. For each RFP Section:
 Response to RFP requirements in order as listed
 Requested bank information in order as listed
 Additional information that may be helpful
4. Cost Form in sealed envelope (paper and Excel file)
LGC
Page 98 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section II − Required Financial Information
The following is required financial information to be provided by all candidates responding to
any section of the RFP.
●
Provide the current ratings for the candidate from each of the following agencies if
rating the institution: Fitch Ratings Ltd., Moody’s Investors Service and Standards &
Poor’s.
●
Provide one copy of its most current audited annual report and Form 10-K filed with
the SEC. The annual report should contain at least three years of comparative financial
data.
●
Provide one copy of its most current quarterly report and Form 10-Q filed with the
SEC.
●
If a subsidiary, please indicate the exact legal corporate name of each entity providing
any of the services requested in this RFP.
●
The candidate must include with their response, copies of all agreements needed in
accordance with the provision of services to the [Unit Type]. These will be reviewed and
approved by the [Unit Type] legal counsel.
●
To ensure compliance with the Financial Reform, Recovery and Enforcement Act
(FIRREA), the bank will need to formally approve the banking contract.
●
List references including any governmental units and other companies that have
similar volume and complexity.
●
State the method of collateralization (“Dedicated Method” or “Pooling Method”) used for
public deposits. [Revise language if only a Dedicated Method or only a Pooling Method
of collateralization is required or acceptable to the unit. See General Requirements.]
●
Clearly describe any services that are provided by third parties, identifying the parties
providing the service.
LGC
Page 99 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
Section II − Required Financial Information
This page intentionally left blank.
LGC
Page 100 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
REQUEST FOR PROPOSALS
LGC
Page 101 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
This page intentionally left blank.
LGC
Page 102 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
MANDATORY INSTITUTION AND SERVICE REQUIREMENTS
The [Unit Full Name] desires to select a reputable financial institution to manage
its deposits and provide core banking services. In addition to providing the
Required Financial Information previously described, please respond to each of the
following items.
GENERAL REQUIREMENTS
1. Be a FDIC insured institution
2. Be online with the Federal Reserve Bank for funds and securities
3. Have a full service branch of the institution within the vicinity of the main
administrative location. Bank branches must be located within the vicinity of other
locations. See Attachment 2 for a list of locations using banking services.
4. Be a qualified depository for public funds in accordance with North Carolina General
Statutes (hereafter “G.S.”) specifically Chapter 159, Article 3 – The Local Government
Budget and Fiscal Control Act (the “LGBFCA”), primarily G.S. 159-31 – Selection of
Depository; Deposits to be Secured and the North Carolina Administrative Code
Title 20 – State Treasurer, Chapter 7 – Collateralization Of Deposits under either the
“Dedicated Method” (formerly option 1) of collateralization or the “Pooling Method” of
collateralization (formerly option 2). [Revise language if only a Dedicated Method or
only a Pooling Method of collateralization is required or acceptable to the unit.] The
publication “Collateralization of Public Deposits in North Carolina” is available
at www.nctreasurer.com under “Divisions”, “Financial Operations”.
5. All funds deposited shall earn interest. Balances remaining at the end of each day in
the main operating account shall be invested overnight at a competitive rate in an
interest-bearing checking account.
6. Provide separate accounts as needed. Number of accounts is detailed in Attachment 1.
There may be activities that need to be maintained separately. There need to be options
for separate interest bearing and zero balance accounts. Examples are [describe need
for any separate accounts].
7. Be able to handle, process and clear through separate zero-balance accounts
8. All account balances shall be available for investment by the [Unit Type] at all times.
Review all of the following sections carefully and delete any sections that are
not relevant to the service needs and requirements of the unit. Adjust as
required to reflect the specific needs of the entity.
LGC
Page 103 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
DEPOSITS
9. Monies deposited in the bank by 2:00 p.m. shall be processed and credited for same day
credit. Exception items can be delivered to the bank’s designated operation center by
6:00pm. (The [Unit Type] will require same day credit for exception items collected
during peak tax collection periods of December and January).
Other monies, such as maturing investments shall be given immediate credit and
availability. Collected funds credit shall be given to checks drawn on the United States
Treasury, Federal Reserve and the State of North Carolina. The bank shall provide
collected funds credit for checks drawn on the United States Treasury, Federal Reserve
and State of North Carolina.
10. Receive, sort, count and deposit coins from parking meter collections. Provide a
validated deposit slip on the following business day. Identify each deposit in accordance
with the identification tag placed on each coin container by the coin collector. [Include
only if parking meters, or other source of coins, are in use.]
11. Redeposit all returned deposit items for insufficient funds, waiting a minimum of 24
hours, before debiting the account. Forward returned items to an authorized
representative of the [Unit Type]. Provide a return item report via on-line banking,
which includes ACH and traditional check returns.
12. Provide daily courier services for deposits from the main administrative location of the
[Unit Type].
ONLINE SERVICES [Include only if online banking services are utilized.]
13. Provide on-line banking services package. Bank shall provide all software required to
provide these services and to access all required reports. Detailed requirements are
listed below. In the event that on-line services are down, provide an acceptable backup
method via telephone or fax for each on-line requirement listed herein. All on-line
services and options must be accessible 7 a.m. – 6 p.m., seven days per week.
In RFP response, note whether these on-line services and reports are provided through
dial-up (modem) or internet access. Include details of how updates and maintenance
are handled.
14. Provide the following report types on-line.
a. Detailed transaction and balance reports – Report should show previous day
detailed transactions, which include listings of all debits and credits impacting the
accounts. Report should have ability for user to establish a minimum threshold for
viewing either debits or credits or both and may have separate thresholds for
electronic and paper entries. Reports should be accessible for six prior business
days.
b. Intra-day position report – Report must provide up-to-the-minute recap of available
account balances. It should be updated continuously throughout the day and reflect
LGC
Page 104 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
beginning balances, incoming and outgoing Fed wire transfers, ACH activity
effective that day, maturing investments and disbursing debits. Please list types of
transactions that update the Intra-day report and those that do not update the
Intra-day report.
c. Return report – Report should list all check and ACH return items for the previous
day. Report should be by account.
d. Positive pay exception reports – Reports should list all checks or ACH items that
are not included in the positive pay data transmission and should be interactive.
Authorized officials from the [Unit Type] should be able to accept or deny these
items on-line. Exceptions should be available by 10 a.m. each day from the previous
day’s activity.
e. Please state in RFP response whether you offer imaged copies of the checks in
addition to the report.
15. Provide stop payment services on-line from authorized officials of the [Unit Type].
Verbal requests from authorized officials will be accepted and processed on the same
day with documentation to follow. As a part of this service authorized officials would be
able to inquire on-line to determine if a specific check had previously been presented for
payment prior to initiating a stop payment.
16. Access imaged copy of checks on-line. This would be for current items not included on
previous bank statements. If image is not available due to timing of check clearing, also
accept request for check copies via telephone.
17. Provide ability to enter wire, ACH and book transfer on-line as outlined below. On-line
system should offer ability to template repetitive transactions. System should also have
ability to structure an approval hierarchy.
18. Provide ability to transfer funds on-line between two or more accounts maintained with
the bank.
WIRE TRANSFERS, ACH TRANSACTIONS AND OTHER TRANSFERS
19. Furnish direct deposit of employees’ checks (credit entries) to their designated checking
or savings account according the Automated Clearing House (ACH) rules and
regulations. Bank must be able to receive a direct transmission with all payroll
information according to format outlined in Attachment 5.[Include only if Attachment 5
in included.] Transmission will be delivered by [exact time] p.m. two business days
prior to payday. If needed, bank shall furnish pass-through software to aid in the ACH
payroll file creation at no cost to the [Unit Type]. Please discuss any assistance you can
provide to the [Unit Type] and its employees who are not using direct deposit, in order
to facilitate payment – i.e., for those employees who do not have a bank account or who
do not use direct deposit.
20. Transmit debit entries initiated by the [Unit Type] under ACH rules. The bank shall
provide software or another means to allow [Unit Type] to change and adjust ACH
LGC
Page 105 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
information prior to transmission to the bank. Bank must be able to receive
information through direct transmission in required format as outlined in
Attachment 5.[Include only if Attachment 5 in included.] Upon proper notification by
the [Unit Type], bank shall manually adjust or stop payment or other adjusting entries.
The bank shall be responsible for any loss limited to the liability for its own negligence
or willful misconduct.
21. Process incoming and outgoing wire transfers verbally (via telephone) and on-line in
real time as requested by duly authorized official(s) if instructions are received by the
bank by the official deadline established by the Federal Reserve System. All incoming
wires processed are expected to result in same day credit to the account. The bank is
expected to assume responsibility for all losses or costs incurred by the [Unit Type] as a
result of the bank’s failure to transfer wires as instructed.
22. Provide ability to create templates for repetitive wires and ACH transactions with the
ability to restrict amount and access for different users. Each individual template
should have ability to permanently establish different sections of the template. For
example, for some repetitive wires, the same amount is wired each time. Each
individual template should also have the ability to restrict use for designated
authorized officials. Different templates would then be able to have different users.
Changes to these templates shall only be made according to a written request to the
bank from an authorized official.
SUPPLIES
23. Provide sufficient pre-numbered and pre-encoded deposit slips per deposit site in
triplicate at no charge for the [Unit Type] to process daily deposits.
SAFEKEEPING SERVICES
24. The bank will be responsible for acquiring and setting up a third party safekeeping
agreement outside of the bank’s corporate structure on behalf of the [Unit Type]. Under
no circumstances shall investments be held by cash management or investment
management areas, or be commingled with other assets of the bank. The [Unit Type]
will be able to obtain this safekeeping account solely in the name of the [Unit Type]. It
is required that all book-entry securities of the [Unit Type] held in the safekeeping
account be provided the highest level of custody for book-entry securities, which
requires signed custodial agreement with a trust department that is both authorized to
conduct business in North Carolina and a member of the Federal Reserve System.
25. The bank shall be responsible for ensuring that the third party provider adheres to all
of the mandatory requirements.
26. Custodial services must include:
a. Physical custody and safekeeping of assets.
b. Collection and remittance of income.
LGC
Page 106 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
c.
d.
e.
f.
Request for Proposals
Notification of securities called for redemption, or defaults of payment.
Collection of called or maturity principal.
Buying, selling, receiving or delivering securities on specific instruction.
Primary contact person.
27. On-line access to confirmation reports of investments held shall be provided. Reports
shall contain par, book and market value information for each investment. Coupon
amounts and payment dates are also valuable information to have on-line. Note
whether access is through internet or modem driven software. The bank or third party
shall provide any required software. Include in response whether report is available
daily or monthly. Note the number of days the reports are warehoused. Also include in
your response information on the source for market values.
28. The third party shall accept delivery and wiring instructions until 11 o’clock each
business day.
29. Safekeeping receipts shall be sent for each activity either by e-mail, fax or traditional
mail within two (2) business days of the activity.
30. The third party shall designate a primary contact person in order to coordinate all
wires and other activity.
OTHER SERVICES
31. Provide account reconciliation for all disbursement accounts and have the capability to
send daily and monthly transmissions of account activity to the unit. Transmissions in
required format as noted in Attachment 5. [Include only if Attachment 5 in included.]
32. Provide positive pay option (both checks and ACH) for all disbursement accounts.
Banks must have capability of receiving an electronic transmission. Exception
reporting and communication must be provided through on-line banking services.
In RFP response, include the following information regarding positive pay:
a. Include an overall description of your positive pay service including file layout and
transmission process.
b. Is the service same-day or next day?
c. Is it applied at the teller line?
d. Explain how a manually issued check is added to the positive pay file in detail.
e. Explain how voided checks are handled in reference to the positive pay file.
f. Indicate any limit on the volume of positive pay exceptions that your system can
handle.
g. State your default disposition of exception items in the event that the bank does not
receive the decision from the [Unit Type] to pay or not to pay.
LGC
Page 107 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
h. State whether a dollar threshold can be applied to the default disposition (e.g.,
return all checks over $10,000).
i. Do you offer positive pay with payee names or customer reference field (e.g., policy
number, claim number) or both? If no, do you plan to make this service available?
33. Forward bank generated debit or credit items to the [Unit Type] the next business day
with detail support describing the nature of the transaction. Detail support should
include images of checks, adding tapes and deposit slips. Bank generated transactions
without sufficient detail will not be accepted.
34. Provide research assistance on transactions (lost checks, lost deposit slips, mutilated
checks, and bank generated transactions) by providing sufficient details within 72
hours of request.
35. Provide a large safe deposit box if need arises.
36. Provide sufficient night depository services including optional provision of bags with
keys. The [Unit Type] has the right to purchase these bags from a third party vendor.
These bags would display the name of the [Unit Type] and no bank name.
37. Provide change as needed for various activities and events.
STATEMENTS AND PAYMENT OF FEES
38. Allow payment of service fees by direct payment or certificate of deposit (compensating
balance).
39. Provide a detailed itemized statement for each account for the previous month which
shows each deposit, credit or debit memo, along with the check number and amount of
each transaction processed within 10 working days of the subsequent month.
40. Provide all cleared check images (front and back) on CD-ROM for each account, as well
as providing the software and database that allows for efficient inquiry.
41. Furnish monthly detailed account analysis for each account enumerating the account
activity by type of service and activity volume within each service. If compensating
balance is utilized, provide analysis of fees compared to earnings allowance. Include
average balances, net monthly earnings, total costs and any gain or loss by the bank. In
the event costs exceed earnings allowance for a given month, the [Unit Type] may be
billed or have the right to negotiate a new compensating balance. In the event the
earnings allowance exceeds fees, net against next months charges.
GENERAL INFORMATION TO BE PROVIDED BY INSTITUTION
42. Provide information outlined below.
a. Describe your internal controls and procedures to protect account information. If
you have experienced any unauthorized access to account numbers and account
LGC
Page 108 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
information, please describe the circumstances and any resulting changes in
controls and procedures.
b. Provide clear instructions on the earnings allowance calculation. Include definition
of the benchmark rate that will be used in the calculation (Example: 6-month
Treasury Bill).
c. Provide a list of nationwide routing and transit numbers.
d. Provide a list of your firm’s local direct exchange banks.
e. List bank branch addresses nearest to each location noted in Attachment 2. Save as
a Word [version] file the using the proposing bank name. Example:
ProposingBank.doc.
ORGANIZATION OF RESPONSE
Information related to the above listed requirements should be organized and presented in
the same order as listed above. Any additional information regarding institution specific
enhancements or other services that may benefit the [Unit Type] can follow.
INFORMATION ABOUT THE [Unit TYPE]: [Review section carefully. Edit as required.]
Average volumes are listed in Attachment 1.
Parking meter coin deposits are usually made semi-monthly and are to be counted and
deposited as received.
Certain utility customers have elected to pay their utility bills by direct draft. For volume
details, see Attachment 1.
The [Unit Type] offers payroll direct deposit to its employees. [size and frequency of the
various payrolls] For volume details see Attachment 1. Specific payroll calendars will be
provided to the chosen institution.
The [Unit Type] currently utilizes the positive pay service on its [identify accounts].
If the [Unit Type] develops a need for additional accounts, or services during the term of
this agreement, services will be provided with the same conditions as apply to existing
accounts at the time. If the Federal Reserve or other regulatory bodies provide for
regulations, which are favorable to the [Unit Type], the institution shall make these new
services available to it.
See The General Information (Pages 1 - 4) For Information On The
Evaluation Process, Terms And Conditions, Other Mandatory
Requirements And Instructions.
LGC
Page 109 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 1 – Core Banking Services
Request for Proposals
This page intentionally left blank.
LGC
Page 110 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 2 – Retail Lockbox Services
Request for Proposals
MANDATORY INSTITUTION AND SERVICE REQUIREMENTS
INTRODUCTION
The [Unit Full Name] is seeking a qualified service provider to provide retail lockbox
processing of mail-in water and sewer utility bill payments, property tax payments and
possibly other similar payments it handles.
A comprehensive turn-key solution to its processing needs is sought. Candidates should be
experienced at this type and level of processing and offer efficient, cost-effective alternatives.
In addition to providing the Required Financial Information previously described, please
respond to each of the following items.
GENERAL REQUIREMENTS
●
Mail Pick Up – The service provider will pick up all mail on a daily basis.
●
Payment Processing – The service provider shall process all payments for standard and
nonstandard items the same day they are received from the post office. All such items
shall be processed in such a way that the required payment information can be same
day transmitted (by 2:00 pm) to the [Unit Type] in an acceptable format, all checks
properly endorsed, and all checks properly MICR encoded for the correct amount.
●
Same Day Deposit – All payment credit will be transmitted to the [Unit Type]’s bank
depository on a daily basis in time to ensure full deposit credit the same day as mail
was originally received.
●
Security – The service provider shall post data in a secure and confidential manner.
●
Backup – The service provider shall provide the [Unit Type] with a backup or
contingency plan to ensure continued service in case of disaster or equipment failure.
(Note: It is assumed the backup facility is at a different location but in the same
general area, since the mail would continue to come to the same postal location.)
●
Storage and Safekeeping – The service provider will provide adequate safekeeping and
storage of all transaction items in electronic format for the [Unit Type]
●
Hard Copy and Electronic Copy Service – The service provider can provide same day
hard copy and electronic copy transaction retrieval and transmission of requested items
to the [Unit Type] as part of this proposal. If there is an additional fee for such special
same day request, it should be specified in the proposal. The service provider should
also specify what is considered the normal retrieval and transmission period for such
research items and what additional fee (if any) would be associated with the type of
request.
●
Daily Reports – The service provider will provide routine daily, weekly, monthly and
yearly reports as needed to the [Unit Type] via an agreed upon methodology (e.g. fax, email, hard copy, electronic files, etc.)
LGC
Page 111 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 2 – Retail Lockbox Services
Request for Proposals
●
The [Unit Type] has provided the expected file layouts in Attachment 5. The bank is
expected to be able to send a file in this format or make whatever modifications are
necessary so that the [Unit Type] can process the remittance information.[Include only
if Attachment 5 in included.]
GENERAL INFORMATION TO BE PROVIDED BY INSTITUTION
1. Firm name and business address of lock-box processing center.
2. Provide names, titles and current resumes for contact personnel.
3. Provide names, phone numbers and e-mail addresses of three to five references,
preferably in North Carolina local governments or with comparable processing needs
currently using your retail lockbox service. Select a mix of long-standing and recent
customers and indicate how long they have been customers.
4. List your schedule for post office pickups of retail lockbox mail for weekdays, weekends
and holidays. List holiday calendar when processing will not take place.
5. Provide a detailed step-by-step review of your operations that provide a turn-key
solution for the [Unit Type]’s processing needs for utility bills and property tax
payments.
6. Do you have a unique five-digit zip code assigned exclusively for receipt of retail
lockbox items? If you have a unique zip code, is it included in the post office’s first
sorting pass? If you do not have a unique zip code, do you have a zip plus 4 and is it
included on the first sorting pass?
7. Who performs the fine sort per box number, you or the post office? If you sort lockbox
mail, describe the mail sorting operation. Include manual and automated handling,
ability to read bar codes, peak volume and contingency plans. Do you sort by mail
delivery or group of deliveries?
8. List all of the equipment types, their capacity and numbers of staff involved by shift in
the mail sorting and pre-extraction areas for each lockbox.
9. What controls do you have in place to ensure accurate processing in accordance with
customer specifications? What controls are in place to ensure all payments received are
processed the same day received?
10. Have you experienced any unauthorized access to account numbers and account
information? If so, please describe. Describe your internal controls and procedures to
protect account information.
11. What are the deposit times for the customer’s lockbox and how are they determined?
12. Can you combine multiple deposits to a single daily ledger credit for statement
purposes?
LGC
Page 112 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 2 – Retail Lockbox Services
Request for Proposals
13. What is the ledger cut-off time for retail lockbox deposits for the bank of first deposit?
Include weekends and holidays. What is the latest mail pickup to be included in the
last deposit? Will you process and deposit all of the customer’s payments on the same
ledger day as received? If not, when are these items deposited?
14. When are your peak processing periods and what arrangements are made to handle the
increased volume? Do you staff for peak or average volume processing? Describe how
the [Unit Type] would be affected during those peak times in terms of meeting
standard daily processing deadlines.
15. In the case of an automated equipment or system failure, what back up arrangements
are in place for lockbox processing?
16. Do you use a third-party processor, including couriers, for any part of this service? If so,
explain completely including identification of the third-party processor.
17. Outline lockbox and customer procedures for out-of-balance conditions at the
transaction level, batch level, deposit level and end-of-day level.
18. Define and illustrate what would be considered standard items, non-standard items
and exception items and your processing capabilities for each type.
19. How do you handle correspondence, returned items and any other items that may be
received in the lockbox? How do you communicate this type of information to the
customer?
20. Describe any technology used to retrieve customer information and post returned
checks through the use of previously captured MICR information or other means.
21. How long do you maintain coupons and other payment documents? How do you dispose
of these documents?
22. Supply any historical error rates for the lockbox. Examples are:
●
●
●
●
●
●
●
●
Item Processing Error Rate
Deposit Error Rate
Procedural Error Rate
Distribution Error Rate
Deposit Reporting Error Rate
Failed Late Deposit Reporting Rate
Detail Reporting Error Rate
Failed or Late Detail Reporting Rate
23. Indicate specifically how you propose to handle foreign checks or any other nonstandard check or drafts that might be received.
24. Specify any services that you believe will enhance or set your proposal apart from
others as well as the additional cost (if any) to receive such enhancement in service.
LGC
Page 113 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 2 – Retail Lockbox Services
Request for Proposals
25. Specify any requirements the bank has for the [Unit Type] in being able to process
payments under its proposal.
26. Indicate how quickly you could be ready to take on this work if selected.
27. Include a breakdown of all fees or costs, including item charges for standard, nonstandard processing on the Cost Form (See Attachment 1) in sealed envelope – paper
and file on disk.
ORGANIZATION OF RESPONSE
Information related to the above listed requirements should be organized and presented in
the same order as listed above. Any additional information regarding institution specific
enhancements or other services that may benefit the [Unit Type] can follow.
INFORMATION ABOUT THE [Unit Type]
Average volumes for the [Unit Type] are in Attachment 1. Currently no electronic
payments are being received and EDI is not being currently used by the [Unit Type].
See The General Information (Pages 1 – 4) For Information On The
Evaluation Process, Terms And Conditions, Other Mandatory
Requirements and Instructions. Also see the Required Financial
Information.
LGC
Page 114 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
MANDATORY INSTITUTION AND SERVICE REQUIREMENTS
GENERAL
The [Unit Full Name] does not currently use purchasing cards.
[Or describe current purchase card utilization. An example follows.]
The [Unit Full Name] currently uses purchase cards. It receives all purchase card statements
and reports in paper format from the service provider. A master bill is sent to the Finance
Department and individual statements are sent to individual cardholders. Individual
cardholders review their statements, attach their receipts, obtain departmental approval and
send to the Finance Department. Information is then manually keyed into the general ledger
system. The goal is to convert to a more electronic process, utilizing the service provider’s
software and some internal software. Current services are received without charge.
MANDATORY REQUIREMENTS
In addition to providing the Required Financial Information previously described, please
respond to each of the following items.
●
The program must provide the option to customize the card with the government’s logo.
●
The program must allow for the storage of account number from [Unit Type].
●
The program must provide for downloading card information electronically within five
(5) calendar days of month end.
●
The program must provide cardholders online access to transactions.
●
The program must allow for the following card controls and usage restrictions:
 company level restrictions
 Cardholder level restrictions
 Department level restrictions
 Merchant Category Code or Standard Industry Classification (MCC or SIC)
restrictions
 Cash advance restrictions
 Dollar limits
●
The issuer must reproduce lost charge slips. Is there a charge for reproduction? What is
the typical turn around time for the issuer to provide copies of charge slips?
GENERAL INFORMATION TO BE PROVIDED BY CANDIDATE
1. Provide names, titles and current resumes for issuer contact personnel.
2. Will one primary contact be assigned to the [Unit Type]’s accounts?
LGC
Page 115 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
3. How long has the issuer offered purchase card services?
4. Specify the number of government customers using this service? Provide names, phone
numbers and e-mail addresses of three to five references.
5. How many of your current customers are doing electronic downloads of information?
How is information accessed?
6. What differentiates your service from that of other providers?
7. What new services or features does the issuer plan to offer and within what time
frame?
8. Are enhancements under the direct control of the issuer?
9. If the government were to request enhancements, describe the prioritization process for
responding to such requests.
10. What card platform(s) does your program employ (e.g., MasterCard, Visa, Amex or
other)? Why? If more than one is used, which would you recommend for our program
and why?
11. What third-party processor, if any, is used for authorizations and transaction posting?
12. Do any third-party partners perform other functions, such as systems support or
customer service? If so, explain.
13. Discuss settlement terms.
●
●
●
●
●
What billing cycles are available?
How will we receive billing statements?
How will we receive electronic information?
What are payment terms from statement date?
What options are available for the [Unit Type] to make payment (e.g., EDI, ACH,
check)?
14. Describe the card issuer’s merchant support function. Is a third-party alliance
established? If so, describe the nature of the alliance.
15. Describe the card controls and usage restrictions supported by the card issuer’s
program:
●
●
●
●
●
LGC
Government level restrictions
Cardholder level restrictions
Department level restrictions
Merchant Category Code or Standard Industry Classification (MCC or SIC)
restrictions
Cash advance restrictions
Page 116 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
●
Dollar limits or transaction limits
16. What are the liabilities of the [Unit Type] and its employees in the event of fraud,
abuse or loss of a card? Does the issuer provide fraud insurance? If so, what are the
stipulations and fees associated with the insurance?
17. Does your program screen transaction activity for fraud patterns? If yes, explain. If no,
is this capability planned for future implementation and if so, when? Provide statistics
on fraud associated with your purchasing card program. What is your procedure for
contacting the [Unit Type]?
18. Have you experienced any unauthorized access to account numbers and account
information? If so, please describe. Describe your internal controls and procedures to
protect account information.
19. Describe the issuer’s card management process, average time it takes to perform
function and how the function is handled (e.g. phone, change form faxed or mailed, email) for the following:
●
●
●
●
●
●
New card issuance
Deletion of cards
Removal of invalid cards
Handling of lost or stolen cards
Replacing cards (including emergency situations)
Modifying a cardholder’s profile (must be within minutes)
… Response time on certain of the above items will be critical to the evaluation
process.
20. Describe any software packages that your institution provides to either run, manage, or
enhance the procurement card system.
●
●
●
List all installation requirements
E-mail capabilities
Technical support
21. What support do you provide for recreating files that may have been corrupted, lost or
destroyed?
22. Do you have a disaster recovery plan? If so, provide a description of the plan, including
the time required to become fully operational after a disaster.
23. Describe how the issuer receives and processes Level II and III information. What
information can you provide to us?
24. How quickly after a transaction has been conducted is information available?
LGC
Page 117 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
25. Can travel and entertainment (T&E) and fleet expenses incurred with your card
product be tracked and reported separately?
26. Can your system provide reports regarding Form 1099 and minority-owned vendors?
How complete is the information in these reports?
27. What reports are available regarding sales and use taxes?
28. For transactions that are reported without separate sales tax, Form 1099 status or
minority-owned business status detail, how do you suggest we meet our tracking and
reporting needs relative to such information?
29. What reports are available through the reporting packages? Provide samples of
available reports.
●
●
●
●
●
●
How frequently can reports be generated?
Can reports be generated for various levels of our organizational structure? List
options for report distribution to managers, functional staff personnel and
cardholders.
Can reports be generated for various time frames or accounting periods?
Is historical information available? If so, how far back is the information available?
What are the inquiry and ad hoc reporting capabilities of your reporting package?
Can you produce customized reports and statements? If so, are there additional
costs for customized report programming?
30. Provide a complete description of your implementation process, including a sample
time line and description of various implementation tasks for both the issuer and the
customer. How long does it take to get a program under way?
31. [Include only if a purchase card program currently in use.] How do you propose to
convert our existing card program to your program?
32. Describe the support provided during implementation, including technical assistance,
user manuals, instructional and educational materials, on-site visits, or other
assistance.
33. Describe your customer service capabilities, including the following:
●
●
●
●
●
●
LGC
Hours of coverage
Toll-free number access
Dedicated representative for our account
Cardholder account management
Cardholder complaints
Quality measures for response time
Page 118 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
34. Will a specific customer service representative be assigned to handle this business?
Describe the responsibilities of customer service personnel, including the chain of
command for problem resolution.
●
●
●
How are inquiries requiring research handled by the issuer?
Are there established turn-around times for responses? If so, specify.
What is the issuer’s record on meeting established response times?
35. Define the dispute-resolution process including time frame and responsibilities of the
parties involved. Are disputed items removed from the invoice while under
investigation?
36. Provide any additional information that you believe is relevant to this RFP and your
capability to provide the services requested (e.g., product brochures and articles in
trade journals).
ORGANIZATION OF RESPONSE
Information related to the above listed requirements should be organized and presented in
the same order as listed above. Any additional information regarding institution specific
enhancements or other services that may benefit the [Unit Type] can follow.
INFORMATION ABOUT THE [Unit TYPE]
Provide additional information regarding entity expectations.]
See The General Information (Pages 1 – 4) For Information On The
Evaluation Process, Terms And Conditions, Other Mandatory
Requirements and Instructions. Also see the Required Financial
Information.
LGC
Page 119 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample – Request for Proposals – Banking Services
RFP 3 – Purchase Card Services
Request for Proposals
This page intentionally left blank.
LGC
Page 120 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Core Banking Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Core Banking Service
FICO/FDIC CHARGE
ACCOUNT MAINTENANCE
FINANCIAL MANAGEMENT ACCOUNT (SWEEP)
ZERO-BALANCE ACCOUNTS
DEPOSITS, RETURNS, COIN & CURRENCY
COIN/CURRENCY DEPOSITED-BRANCH-NC
COIN/CURRENCY DEPOSITED-VAULT-NC
DEPOSITS PAPER
DEPOSITS-EFT
CURRENCY PROVIDED
ROLLED COIN PROVIDED
NIGHT DEPOSIT BAGS-CANVAS
NIGHT DEPOSIT BAGS-PLASTIC
PAPER RETURNED ITEMS
PAPER REDEPOSITED ITEMS
DEPOSITS CORRECTIONS
SAFEKEEPING-OVERNIGHT
COURIER SERVICE-DAILY
ARMORED CAR SERVICE
UNENCODED-NOT ON BANK
UNENCODED - ON US-NC
UNENCODED-BANK NETWORK-NC
UNENCODED - LOCAL CH-NC
UNENCODED - LOCAL RCPC-NC
PREENCODED-ON US-NC
REENCODED-BANK NETWORK-NC
PREENCODED-LOCAL CH-NC
PREENCODED-LOCAL RCPC-NC
REENCODED-LOCAL FED-NC
REENCODED-NATIONAL-NC
DISBURSEMENTS & RECONCILIATION ITEMS
PAID ITEMS - PAPER
PAID ITEMS - EFT
PAP FIXED FEE
MONTHLY RECONCILIATION - FIXED
PAID ITEMS-TAPE - FIXED
PAID ITEMS-TAPE - PER ITEM
TAPES NOT RETURNED
LGC
Average or Estimated
Monthly Volume
[Entity]
Insert Name of Proposer
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-------------
-----------------------------------------------------
---------------
Page 121 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Core Banking Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Core Banking Service
PAID ITEMS-TRANSMISSION-SETUP
PAID ITEMS-TRANSMISSION-FIXED (replaces tape)
PAID ITEMS-TRANSMISSION-PER ITEM
ISSUED ITEMS-TRANSMISSION-FIXED
DEBIT RECONCILIATION - FULL
DEBIT RECONCILIATION - PAID LIST
OVERNIGHT
STOP PAYMENTS-VERBAL
PHOTOCOPIES
CONTROLLED DISBURSEMENT
POSITIVE PAY-FIXED
POSITIVE PAY-PER ITEM
POSITIVE PAY-EXCEPTIONS PER ITEM
CHECK IMAGE CAPTURE-PER ITEM
CHECK IMAGE CD - PER ITEM
CHECK IMAGE MANAGEMENT SOFTWARE *
ON-LINE SERVICES & REPORTS
ON-LINE SOFTWARE *
ON-LINE SOFTWARE MAINT FEE
STOP PAYMENT ON-LINE
CHECK INQUIRY ON-LINE
IMAGE RETRIEVAL ON-LINE
IMAGE RETRIEVAL - VERBAL
CHECK COPY REQUEST
RETURN REPORT ON-LINE - FIXED
RETURN REPORT ON-LINE - PER ITEM
ISSUES/CANCELS-PER ITEM
PREVIOUS DAY DEBIT-FIXED
PREVIOUS DAY DEBIT-ITEM
PREVIOUS DAY CREDIT-FIXED
PREVIOUS DAY CREDIT-ITEM
PREVIOUS DAY BALANCE & DETAIL REPORT - 1ST
PREVIOUS DAY BALANCE & DETAIL REPORT - PER
ITEM
PREVIOUS DAY QUICK BALANCE REPORT - 1ST
PREVIOUS DAY ADDITIONAL REPORTS
INTRA DAY INQUIRY REPORT - 1ST
INTRA DAY ADDITIONAL REPORTS
CURRENT DAY-EXTRA REPORT
LGC
Average or Estimated
Monthly Volume
[Entity]
Insert Name of Proposer
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-------------------------------------
---------------------------------------------
Page 122 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Core Banking Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Core Banking Service
ACH TRANSACTIONS
ACH PPD DEBIT
ACH PPD CREDIT
DIRECT DEPOSIT FEE
ACH NOTIFICATION OF CHANGE
ACH RETURNED ITEMS
ACH DATA TRANSMISSION
ACH ON-LINE
ACH ADD/DELETE
ACH REVERSAL
ACH IMPLEMENTATION/CUSTOM *
ACH POSITIVE PAY - FIXED
ACH POSITIVE PAY - PER ITEM
ACH POSITIVE PAY - MANUAL ISSUE
ACH POSITIVE PAY CALL
ACH SOFTWARE MONTHLY MAINTENANCE *
ACH RETURN NOTIFICATION - PHONE
ACH RETURN ON-LINE/PAPER REPORT
ACH RETURN ITEM - PHONE/FAX
WIRE TRANSFERS
WIRE-IN NONCONFIRMED
ON-LINE REPETITIVE WIRE
ON-LINE NONREPETITIVE WIRE
MANUAL NONREPETITIVE WIRE
BOOK TRANSFER IN-NONCONFIRMED
REPETITIVE BOOK TRANSFER
ON-LINE REPETITIVE BOOK TRANSFER
NONREPETITIVE BOOK TRANSFER
ON LINE NONREPETITIVE BOOK TRANSFER
MTI1 BOOK REPETITIVE
MTI1 BOOK NON-REPETITIVE
WIRE & ACH TEMPLATE SETUP *
WIRE TEMPLATE CHANGE
LGC
Average or Estimated
Monthly Volume
[Entity]
Insert Name of Proposer
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-------------------------------------------
-----------------------------
Page 123 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Core Banking Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Core Banking Service
ACH TRANSACTIONS
ACH PPD DEBIT
ACH PPD CREDIT
DIRECT DEPOSIT FEE
ACH NOTIFICATION OF CHANGE
ACH RETURNED ITEMS
ACH DATA TRANSMISSION
ACH ON-LINE
ACH ADD/DELETE
ACH REVERSAL
ACH IMPLEMENTATION/CUSTOM *
ACH POSITIVE PAY - FIXED
ACH POSITIVE PAY - PER ITEM
ACH POSITIVE PAY - MANUAL ISSUE
ACH POSITIVE PAY CALL
ACH SOFTWARE MONTHLY MAINTENANCE *
ACH RETURN NOTIFICATION - PHONE
ACH RETURN ON-LINE/PAPER REPORT
ACH RETURN ITEM - PHONE/FAX
WIRE TRANSFERS
WIRE-IN NONCONFIRMED
ON-LINE REPETITIVE WIRE
ON-LINE NONREPETITIVE WIRE
MANUAL NONREPETITIVE WIRE
BOOK TRANSFER IN-NONCONFIRMED
REPETITIVE BOOK TRANSFER
ON-LINE REPETITIVE BOOK TRANSFER
NONREPETITIVE BOOK TRANSFER
ON LINE NONREPETITIVE BOOK TRANSFER
MTI1 BOOK REPETITIVE
MTI1 BOOK NON-REPETITIVE
WIRE & ACH TEMPLATE SETUP *
WIRE TEMPLATE CHANGE
LGC
Average or Estimated
Monthly Volume
[Entity]
Insert Name of Proposer
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-------------------------------------------
-----------------------------
Page 124 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Retail Lockbox Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Insert Name of Proposer
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Retail Lockbox Service
AVERAGE NEGATIVE COLLECTED
DEPOSITS
DEPOSITED ITEMS-CHARGE BACK TO ACCOUNT
REDEPOSITED ITEMS
RETURNS SPECIAL INSTRUCTION-COMPLEX
MUTIPLE STATEMENTS
RESEARCH REQUEST
ACCOUNT MAINTENANCE
RETAIL LOCKBOX - MONTHLY
MAINTENANCE
UNPROCESSABLE ITEMS
DIRECT TRANSMISSION
DISKETTE
SCAN REJECTS
INFO DELIVERY MANUAL - FAX
MANUAL INTER -BRANCH
FULL PAYMENTS
PARTIAL PAYMENTS
MULTIPLE PAYMENTS
STANDING TRANSFER ORDER
RESEARCH ITEMS
DEPOSITED ITEMS
Average or Estimated
Monthly Volume
[Entity]
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-------------------------------------------------
*** Clearly indicate whether the Bank Bid Amount is per item, per month, or some other basis
LGC
Page 125 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit C – Sample Request for Proposals for Procurement of Banking Services
Cost Form - Purchase Card Services
PROPOSERS MUST HIGHLIGHT ALL NEW LINE ITEMS IN YELLOW.
Volumes were averaged or estimated from the bank analysis statements and other information. Certain volumes may not be represented since many
services are offered in packages. Unlisted or zero volume may not indicate transactions did not occur.
All volumes are monthly except those one-time implementation & setup fees which are denoted by
an " * ". Some services will not have volumes.
Insert Name of Proposer
Proposer Name:
>> VOLUMES ARE SUBJECT TO CHANGE <<
Purchase Card Service
IMPLEMENTATION FEE *
LOGO DESIGN *
ACCOUNT CHARGE - PER ACCT
GHOST ACCOUNT CHARGE - PER ACCT
CARD FEE - PER CARD HOLDER
AVERAGE MONTHLY TRANSACTIONS DOLLARS
AVERAGE MONTHLY TRANSACTIONS - ITEMS
SOFTWARE PACKAGE *
MONTHLY ELECTRONIC DATA DOWNLOAD
GENERAL LEDGER INTERFACE - FIXED/SETUP *
GENERAL LEDGER INTERFACE - MONTHLY FEE
Average or Estimated
Monthly Volume
[Entity]
FOR BANK USE ONLY
Bank Bid Amount ***
Bank Comments
-----------------------------------
*** Clearly indicate whether the Bank Bid Amount is per item, per month, or some other basis
LGC
Page 126 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 127 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
This page intentionally left blank.
LGC
Page 128 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
A. Introduction
While these evaluation procedures are discussed in the context of initial selection of a
financial institution, once a financial institution is selected, its financial soundness should
be monitored on at least an annual basis. These tools can be applied to an annual review
as well as the initial selection.
B. Sources of Financial Information
The first step in evaluating the financial strength of a bank or savings institution is to
obtain the current financial reports of that institution. This information should be required
to be provided with the response to the RFP. Evaluation of the financial soundness of one’s
financial institution should be an ongoing process, not just performed when an RFP is
issued. With that in mind, financial services providers should be required to provide
updated financial information on a quarterly basis. This information can normally be
found at the local office of the bank or savings institution. Should the local office not be
able to provide the unit an annual and quarterly report, they may be obtained from the
corporate headquarters of the financial institution or the following organizations may be
contacted for that information:
1. Securities and Exchange Commission (SEC) – 100 F Street, NE, Washington, DC
20549, Telephone: 202-942-8088; or Atlanta Regional Office, 3475 Lenox Road, N.E.,
Suite 1000, Atlanta GA 30326-1232, Telephone: 404-842-7600, TTY 404-842-7676, email: [email protected], website: www.sec.gov (For publicly-traded SEC registered
companies);
2. Comptroller of the Currency (OCC) – Washington, DC 20219-0001, Telephone:
202-874-5000, TDD 202-927-3275; or Carolinas Field Office, 212 South Tryon Street,
Suite 700, Charlotte NC 28281, Telephone: 704-350-8300, Fax: 704-350-8337, website:
www.occ.treas.gov (For national banks);
3. Federal Deposit Insurance Corporation (FDIC) – Atlanta Regional Offices, 10 Tenth
Street, N.E., Suite 800, Atlanta GA 30309-3906, Toll-free: 800-765-3342, or Charlotte
Field Office, 550 South Caldwell Street, Suite 1850, Charlotte NC 28202, Telephone:
704-333-3132, website: www.fdic.gov;
4. Federal Reserve Bank of Richmond – 701 East Byrd Street, Richmond VA 23219,
Telephone: 804-697-8000; or Charlotte Office, 530 East Trade Street, Charlotte NC
28202, Telephone: 704-358-2100; website: www.richmondfed.org;
5. NC Commissioner of Banks – 316 West Edenton Street, Raleigh, NC 27603 or by mail
to 4309 Mail Service Center, Raleigh, NC 27699-4309, Telephone: 919-733-3016, Fax:
919-733-6918, website: www.nccob.org, (For state-chartered banks); or
6. Any brokerage house.
Also, the resources available on the internet as it may provide more updated as well as
considerably more detailed information. Many public companies provide access to their
annual reports and other financial information at an investor relations or a corporation
information link from their websites.
LGC
Page 129 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
Additionally, each State-chartered bank is required to publish quarterly a report of
condition and income in a newspaper circulated in the area in which the bank's home office
is located.
It should be noted that if the local unit encounters difficulty with a bank or savings
institution concerning the delivery of an annual report, a red flag should go up concerning
the financial stability of that institution. As a large customer of the institution, the local
unit is entitled to receive a copy of the organization's annual report.
C. Objectives of Evaluation
Once the financial statements of the institution have been obtained, the analyst should be
looking for answers to the following questions:
●
Is the capital base (shareholders’ equity) adequate to absorb any unforeseen or large
losses without undue strain? Has the capital adequacy been maintained, improved or
declined in recent years? If it has declined, what are the consequences of and the
reasons for the decline?
●
Have the earnings continued on a positive trend? If not, what are the reasons for the
decline in earnings? What is the quality of earnings?
●
What is the financial institution's problem loan experience? What is the relationship of
the provision for loan losses (expense) and the allowance for loan losses (reserve) to
outstanding loans and leases? Have they remained stable, improved or deteriorated?
●
How liquid are the institution's assets? How dependent is the institution on large
denomination deposits?
To answer these questions, the local unit should utilize both trend analysis and ratio
analysis.
D. Trend Analysis
Trend analysis involves reviewing financial information for several years. Most annual
financial reports will contain two to five years of comparative data, making trend analysis
very easy. Listed below are several measures that will make trend analysis useful. Your
auditor should be able to assist you with these analyses.
Trend analysis should consider the following areas:
●
Growth in Equity - Since financial institutions are highly leveraged entities, it is
extremely important for equity to grow. Continued profitability will cause equity to
increase and, decreased profitability and loan losses will cause equity to decrease.
●
Earnings Growth - Look at net income before taxes to see if the bank or savings
association is earning the same amount of money, or more, as in previous years. Be
sure to look at net income before taxes since financial institutions legitimately can use
security losses to reduce their income tax liability. If declining profits are observed, ask
the banker for an explanation. It could be the result of declining interest margins or
large loan losses.
●
Growth in Problem Loans - Most financial statements will contain a disclosure in the
notes to their financial statements concerning the amount of loans 90 days or more past
LGC
Page 130 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
due. Study this trend to see if this category is growing. Substantial growth in problem
loans could eventually result in large loan losses that could greatly reduce or eliminate
the firm's capital base. If growth is observed in this area, ask the banker about the
financial institution's lending philosophy.
●
Asset Growth -- Look at the total assets of the financial institution to see whether the
entity is growing. Be concerned with rapid growth and ask the banker to explain any
extraordinary growth and possibly the financial institution's growth philosophy.
E. Ratio Analysis
After a general trend analysis has been performed, the analyst should perform a ratio
analysis. Ratios should be calculated for at least the three most recent fiscal years, using
audited financial reports if possible. Quarterly reports issued since the last year-end report
should be reviewed as well. Any unusual trends in these ratios should be noted and
investigated. For example, capital ratios should remain stable or should increase.
Decreasing capital ratios should be a red flag to the analyst. Profitability ratios should be
increasing from one year to the next. Again, the analyst should interpret decreasing ratios
in this area as a warning sign. Liquidity ratios should generally remain stable or may
increase. However, the analyst should take care to evaluate the institution as a whole. A
deviation from the standard on one ratio does not necessarily mean an institution is not
financially stable. All ratios should be studied and evaluated.
One of the best sources for financial analysis of banks is The Federal Financial Institutions
Examination Council’s Uniform Bank Performance Report. It provides current and
historical financial information and ratio analysis with comparisons to a peer group. The
Uniform Bank Performance Report may be accessed at no charge for any bank from the
FFIEC website, www.ffiec.gov by following the quick link. Hints for using the reports and
complete documentation are also available at the website. A brief overview of the Federal
Financial Institutions Examination Council (FFIEC) and the Uniform Bank Performance
Report (UBPR) is followed by a discussion of some key financial ratios to consider in
evaluating the safety and soundness of a financial institution.
1. Uniform Bank Performance Report
The FFIEC is the formal interagency body empowered to prescribe uniform principles,
standards, and report forms for the federal examination of financial institutions by the
Board of Governors of the Federal Reserve System (FRB), the Federal Deposit
Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the
Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision
(OTS) and to make recommendations to promote uniformity in the supervision of
financial institutions.
The FFIEC provides an Internet Reporting System, which produces the following
reports:
● Institution Specific Reports: Uniform Bank Performance Report (UBPR), Call
Report, and Thrift Financial Report.
● Aggregate Reports: Peer Group Report, Peer Group Distribution Report, State
Average Report, and State Average Distribution Report.
LGC
Page 131 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
These Uniform Bank Performance Report (UBPR) and related reports are very useful
in analyzing the soundness of financial institutions and are described as follows:
“The “Uniform Bank Performance Report” (UBPR) is an analytical tool created
for bank supervisory, examination, and management purposes. In a concise format,
it shows the impact of management decisions and economic conditions on a bank's
performance and balance sheet composition. The performance and composition data
contained in the report can be used as an aid in evaluating the adequacy of
earnings, liquidity, capital, asset and liability management, and growth
management. Individuals can use this report to further their understanding of a
bank's financial condition.
A UBPR is produced for each commercial bank in the United States that is
supervised by the Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, or the Office of the Comptroller of the Currency.
UBPRs are produced for FDIC insured savings banks also. The report is computer
generated from a data base derived from public sources. It contains data for several
years, which are updated quarterly. Those data are presented in the form of ratios,
percentages, and dollar amounts computed mainly from Reports of Condition and
Income submitted by the bank. Each UBPR also contains corresponding average
data for the bank's peer group and percentile rankings for most ratios. The UBPR
therefore permits evaluation of a bank's current condition, trends in its financial
performance, and comparisons with the performance of its peer group.
In addition to the individual bank report, the following is also available:
●
A Peer Group report, which presents all peer averages
●
A State Average Report, which presents ratio averages within States
●
A Distribution report is also produced using the peer groupings in the state
average and peer group average reports. Selected percentile values are
displayed for individual ratios to provide additional insight into the range of
bank performance that comprises an average.”
●
“FFIEC
UBPR
Complete
User
Guide”,
https://cdr.ffiec.gov/public/DownloadUBPRUserGuide.aspx
April 1,
2014,
2. Suggested Ratios
There are four main areas of ratio analysis that should be reviewed: capital adequacy,
profitability, asset quality and liquidity.
a. Capital Adequacy
As in other businesses, bank capital or shareholders’ equity serves the purpose of
protecting the bank and its creditors against unexpected losses and allowing it to
withstand unfavorable economic conditions. Because banks are highly leveraged,
i.e. they have less capital relative to assets than non-financial businesses,
evaluation of the level of capital takes on a special importance.
LGC
Page 132 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
To protect depositors, bank regulators use standard definitions of capital and have
established minimum standards for capital based on perceived risk of the assets of
the bank – the risk-based standards.
Four key capital adequacy ratios to review from the UBPR are as follows:
1) Tier One Risk-Based Capital to Risk-Weighted Assets
This ratio is found on the Capital Analysis section (page 11A) under the heading
“Risk-Based Capital” (shown on the report as “Tier One RBC to Risk-Wgt
Assets”). Tier one capital or core capital is similar to capital or stockholders’
equity reported on financial statements reported according to generally accepted
accounting principles with certain regulatory adjustments. It consists primarily
of common stock and retained earnings. Average assets in this calculation are
adjusted to reflect a risk-based weighting.
Regulatory guidelines require that, to be considered adequately capitalized, this
ratio must equal or exceed 4% and, to be considered well-capitalized, this ratio
must equal or exceed 6%.
2) Total Risk-Based Capital to Risk-Weighted Assets
This ratio is found on the Capital Analysis section (page 11A) under the heading
“Risk-Based Capital” (shown on the report as “Total RBC to Risk-Weight
Assets”). Total risk-based capital is a broader measure of capital. It includes tier
one capital and certain regulatory-permitted supplementary items, such as
certain debt that is subordinated to depositors’ claims.
Regulatory guidelines require that, to be considered adequately capitalized, this
ratio must equal or exceed 8% and, to be considered well-capitalized, this ratio
must equal or exceed 10%.
3) Tier One Leverage Capital
This ratio is found on the Capital Analysis section (page 11A) under the heading
“Risk-Based Capital” and also in the Summary Ratios section (page 1) under the
heading “Capitalization” at page 1 of the UBPR. It is calculated by dividing tier
one capital by average assets. Tier one capital is similar to capital or
stockholders’ equity reported on financial statements reported according to
generally accepted accounting principles with certain regulatory adjustments. It
consists primarily of common stock and retained earnings. Average assets in
this calculation are adjusted to reflect a risk-based weighting.
Regulatory guidelines require that, to be considered adequately capitalized, this
ratio must equal or exceed 4% and, to be considered well-capitalized, this ratio
must equal or exceed 5%.
4) Cash Dividends to Net Income
This ratio is found in the Summary Ratios section under the heading
“Capitalization” at page 1 of the UBPR. It is calculated by dividing tier cash
dividends by net income. This ratio is often called the “Dividend Payout Ratio”.
When this ratio is high, it indicates that a smaller amount of net income is
LGC
Page 133 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
retained to increase the capital of the bank. A high dividend payout ratio would
be a concern for a bank experiencing rapid growth.
To be considered well capitalized, a bank must meet or exceed all three guidelines –
Tier One Risk-Based Capital to Risk-Weighted Assets, Total Risk-Based Capital to
Risk-Weighted Assets and Tier One Leverage Capital.
In evaluating the adequacy of a bank’s capital, the asset growth rate should also be
compared to the capital growth rate. If assets growth rate exceeds the capital
growth rate and that trend is expected to continue, the future capital ratios of the
bank will decline unless additional capital is acquired. The growth rates for assets
and tier one capital can be found in the Summary Ratios section under the heading
“Growth Rates” at page 1 of the UBPR.
b. Profitability
One source of bank capital is internally generated capital through the retention of
earnings. For this reason, an evaluation of profitability is important. Profitability of
a bank is best measured in relation to assets employed during the period – average
assets. In relation to interest revenue, it is best measured on a tax-equivalent basis
adjusting for the tax benefit of non-taxable interest-earning assets. This facilitates
comparison between banks because there is no distortion when comparing banks
with different investment strategies as reflected in the mix of taxable and nontaxable assets
Three key profitability ratios to review from the UBPR are as follows:
1) Net Interest Margin as Percent of Average Assets
This ratio is found on the Summary Ratios section (page 1) under the heading
“Earnings and Profitability” (shown on the report as “Net Interest Income
(TE)”). It is the Interest Revenue on a tax-equivalent basis less interest expense
divided by average assets and expresses an annual percentage. It is a very
important measure because small changes in the interest margin can be
magnified when reflected in changes in net income.
2) Net Operating Income as Percent of Average Assets
This ratio is found on the Summary Ratios section (page 1) under the heading
“Earnings and Profitability”. It is the operating income including securities
gains or losses divided by average assets. It excludes extraordinary gains and
losses. It is also known as return on assets and measures the ability of
management to utilize the assets of the institution to generate profits. Banks
are generally expected to earn about 1% on average assets.
3) Earning Assets as Percent of Average Assets
This ratio is found on the Summary Ratios section (page 1) under the heading
“Margin Analysis”. It is average earning assets, primarily loan, investments and
federal funds sold, divided by average assets. Generally, this ratio should exceed
90%.
LGC
Page 134 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
c. Asset and Earnings Quality
Because of the importance of the loan and lease portfolio to financial institutions,
the evaluation of both asset quality and earnings quality is centered on an
evaluation of the loan portfolio. These ratios are highly dependent on the particular
bank’s loan losses experience and evaluation of the risks in its loan portfolio as well
as both general and local economic conditions.
Three key asset and earnings quality metrics to review from the UBPR are as
follows:
1) Non-current Loans to Total Loans
This ratio is found on the Summary Ratios section (page 1) under the heading
“Loan & Lease Analysis” (shown on the report as “Non-Cur Ln&Ls to Gross
Ln&Ls”). It is the sum of loan and lease receivables past due at least 90 days
and loans and leases receivables in non-accrual status divided by total loan and
lease receivables outstanding. Banks cannot record interest on loans in nonaccrual status. Non-current loans have a high potential of charge-off. Given
these characteristic, trends in this ratio will influence evaluation about both the
quality of assets and the quality of earnings. This ratio has been averaging
about .5%
2) Provision for Loan Losses as Percent of Average Assets
“Profitability” (shown on the report as “Provision: Loan&Lease Losses”). It is the
provision for or expense of loan and lease losses divided by average assets. This
ratio has been averaging slightly less than .5%.
3) Allowance for Loan Losses as Percent of Total Loans
This ratio is found on the Summary Ratios section (page 1) under the heading
“Loan & Lease Analysis” (shown on the report as “Ln&Ls Allowance to Total
Ln&Ls”). It is the ending balance in the allowance for loan losses divided by the
total loans at the end of the period. This ratio generally averages from 1.25% to
1.5%.
A decline in this ratio implies that the loan and lease portfolio has
proportionately fewer problem loans then the prior period. A failure to replenish
the allowance for loan losses by recording an adequate provision (expense) for
loan losses will result in overstated earnings. Reviewing closely this ratio and
the ratio of provision for loan losses as percent of average assets, one can get
additional insight into quality of earning and assets.
d. Liquidity
Liquidity refers to the ability of the bank to generate at a reasonable cost the funds
required to meet its cash needs. Measures of liquidity focus on the asset’s ability to
be converted to cash and the ability to fund assets with stable liabilities at a
reasonable cost.
LGC
Page 135 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
Two key liquidity measures to review from the UBPR are as follows:
1) Net Non-Core Fund Dependence
This ratio is found on the Summary Ratios section (page 1) under the heading
“Liquidity”. It is the non-core liabilities less short-term investments divided by
long-term assets. Non-liabilities include time deposits of $100,000 or more,
foreign office deposits, brokered deposits, securities sold under agreements to
repurchase, federal funds purchased and other borrowed money. Long-term
assets include held to maturity and available for sale securities with maturities
over one year, net loans and leases, and other real estate owned. Generally, this
ratio is about 25%, with higher ratios signifying greater reliance on non-core
deposits.
2) Net Loans and Leases to Assets
This ratio is found on the Summary Ratios section (page 1) under the heading
“Liquidity”. It is the loans and lease-financing receivables net of unearned
income and the allowance for possible loan and lease losses divided by total
assets. Since these are assets that are not easily converted to cash, the higher
the ratio the less liquid the bank. The industry average varies between 70% and
75% with the ratio for larger banks higher than the ratio for smaller banks. A
bank's ratio should not exceed 80%. Higher ratios than average suggest that the
institution is emphasizing earnings at the expense of liquidity.
E. Rating Agency Reports
In addition to ratio analysis, the finance officer may examine reports from credit rating
agencies, such as Fitch Ratings Ltd. (www.fitchratings.com), Moody’s Investors Service
(www.moodys.com), or Standard & Poor’s (www.standardandpoors.com). While these
agencies do not rate all financial institutions, if a financial institution under consideration
is rated that rating should be taken into consideration by the finance officer.
LGC
Page 136 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
Attached are sample pages 1 and 11A, and the related instructions from “A User’s Guide to
the Uniform Bank Performance Report”, March 2006, from the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency. The user’s guide was prepared by the Federal Financial
Institutions Examination Council and is available in its entirety at the website,
www.ffiec.gov/ubprguide.htm.
UBPR, Sample Page 1
LGC
Page 137 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 138 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 139 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
UBPR, Sample Page 11A
LGC
Page 140 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 141 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 142 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 143 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit D – Guidelines for Evaluation of the Soundness of a Financial Institution
LGC
Page 144 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit E – Compensating Balance Estimation
LGC
Page 145 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit E – Compensating Balance Estimation
This page intentionally left blank.
LGC
Page 146 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit E – Compensating Balance Estimation
Compensating Balance Estimation
The required compensating balance amount in dollars is estimated as follows (where the bank
uses an actual/365 day base):
Monthly Service Charge
Earnings Credit Rate * Days in Month
(
)
365
Required Compensating Balance =
1 - Reserve Requirement
Where:
Monthly Service Charge
=
Expected monthly service charge for all bank
services covered by the compensating balance
agreement
Earnings Credit Rate
=
Projected earnings rate or credit to be applied to the
compensating balance expressed as an annual rate
Days in Month
=
Actual number of days in month
Reserve Requirement
=
Amount of funds that a the bank must hold in
reserve against specified deposit liabilities as
determined by the Federal Reserve Bank
(Regulation D) expressed as a percentage
Example:
Where the monthly service charge is estimated from the expected transaction volume to equal
$5,326 for the month of April, the anticipated earnings rate is expected to equal 5 % and the
reserve requirement is 10 %, the required compensating balance in collected funds would
equal $1,439,993 calculated as follows:
Required Compensating Balance =
$ 5,326
0.050 * 30 Days
(
)
365 Days
1 - 0.10
The calculation may require adjustment, for example if the bank computes the earnings credit
based on a 30/360 day base.
LGC
Page 147 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit E – Compensating Balance Estimation
This page intentionally left blank.
LGC
Page 148 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
Note: To facilitate use of this Sample Cash Management and Investment
Policy, it is posted as a Word® Document on the website of the State
Treasurer, www.nctreasurer.com, following this Policy Manual section.
Instructions to make updating and revising easier are included.
LGC
Page 149 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
This page intentionally left blank.
LGC
Page 150 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
The purpose of this sample investment policy is to aid units of local government and public
authorities in North Carolina in the preparation of an investment policy. This sample policy is
based on the GFOA Sample Policy (used with GFOA permission) as revised for North Carolina
laws and regulations. This sample policy is not intended to supplant an existing policy; rather,
it is presented as a model to help investing entities develop a customized policy to fit their
particular needs, constraints and capabilities. In order to accommodate the varying needs of
government entities and in order to stimulate conversation at the local level, certain sections of
the attached policy include examples of alternative language. These alternative examples may
be used in place of, or in addition to, the first paragraph presented for that section, depending
on the goals and objectives of the particular investing entity. The GFOA sample investment
policy may be found at http://www.gfoa.org/about-gfoa/certification-program-cpfo/cpfo-readingmaterials.
For additional information, please read Chapter Three of Investing Public Funds, second
edition, a text authored by Girard Miller, with M. Corinne Larson and W. Paul Zorn, and
published by the Government Finance Officers Association of the United States and Canada.
You are also invited to contact current staff of the Local Government Commission – Fiscal
Management Section at the NC Department of State Treasurer or the School of Government at
UNC-Chapel Hill for assistance in modifying and/or writing your government’s investment
policy. Governments should obtain counsel to ensure compliance with state and local laws,
regulations, and other policies concerning the investment of public funds.
Following the sample investment policy as Exhibit G is a form of resolution that may be
considered by the governing body for the approval and adoption of an investment policy.
LGC
Page 151 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
This page intentionally left blank
LGC
Page 152 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
[Unit Full Name]
Cash Management and Investment Policy
I.
Governing Authority
Legality
The cash management and investment programs of the [Unit Full Name] (hereafter the
“[Unit Type]”) shall be operated in conformance with federal, North Carolina, and other
legal requirements, including provisions of the North Carolina General Statutes
(hereafter “G.S.”) , specifically The Local Government Budget and Fiscal Control Act
(the “LGBFCA”), primarily G.S. 159-30 – Investment of idle funds; G.S. 159-31 –
Selection of depository, deposits to be secured; and G.S. 159-32 – Daily deposits; and
the related statutes.
II.
Scope
This policy applies to the management of cash and investment of all funds, excluding
petty cash accounts and the investment of [certain specified] funds. Proceeds from
certain bond issues are covered by a separate policy. [This section should be modified to
specify which assets or funds, if any, are excluded from this policy. If no funds are
excluded, delete the language if the first sentenced after petty cash accounts.]
Additional provision – sample language:
1. Pooling of Funds
Except for cash in [certain specified restricted and special] funds, the [Unit Type]
will consolidate cash and reserve balances from all funds to maximize investment
earnings and to increase efficiencies with regard to investment pricing, safekeeping
and administration. Investment income will be allocated to the various funds based
on their respective participation and in accordance with generally accepted
accounting principles and G.S. 159-30(e).
[Pooling of funds is recommended only for those units that have an adequate
accounting system, i.e. one that (1) continuously identifies the funds available by
investing funds and (2) properly and promptly allocates the income to the investing
funds.
This paragraph refers to the pooling of funds within a single governmental entity
and implies no reference to local government investment pools.]
LGC
Page 153 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
III.
General Objectives
The primary objectives, in priority order, of investment activities shall be safety,
liquidity, and yield:
1. Safety
Safety of principal is the foremost objective of the investment program. Investments
shall be undertaken in a manner that seeks to ensure the preservation of capital in
the overall portfolio. The objective will be to mitigate credit risk and interest rate
risk.
a. Credit Risk
The [Unit Type] will minimize credit risk, which is the risk of loss due to the
failure of the security issuer or backer, by:
●
●
●
Limiting investments to the types of securities listed in Section VII of this
Investment Policy,
Pre-qualifying the financial institutions, broker-dealers, intermediaries, and
advisers with which the [Unit Type] will do business in accordance with
Section V, and
Diversifying the investment portfolio so that the impact of potential losses
from any one type of security or from any one individual issuer will be
minimized.
b. Interest Rate Risk
The [Unit Type] will minimize interest rate risk, which is the risk that the
market value of securities in the portfolio will fall due to changes in market
interest rates, by:
●
●
Structuring the investment portfolio so that securities mature to meet cash
requirements for ongoing operations, thereby avoiding the need to sell
securities on the open market prior to maturity, and
Investing operating funds primarily in shorter-term securities and deposits
or The North Carolina Capital Management Trust and limiting the average
maturity of the portfolio in accordance with this policy (see section VIII).
2. Liquidity
The investment portfolio shall remain sufficiently liquid to meet all operating
requirements that may be reasonably anticipated. This is accomplished by
structuring the portfolio so that securities mature concurrent with cash needs to
meet anticipated demands (static liquidity). Furthermore, since all possible cash
demands cannot be anticipated, the portfolio should consist largely of securities
with active secondary or resale markets (dynamic liquidity). Alternatively, a portion
of the portfolio may be placed in a mutual fund for local government investment
approved in accordance with G.S. 159-30(c)(8).
3. Yield
The investment portfolio shall be designed with the objective of attaining a market
rate of return throughout budgetary and economic cycles, taking into account the
LGC
Page 154 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
investment risk constraints and liquidity needs. Return on investment is of
secondary importance compared to the safety and liquidity objectives described
above. The core investments are limited to relatively low risk securities in
anticipation of earning a fair return relative to the risk being assumed.
Securities shall generally be held until maturity with the following exceptions:
●
●
A security with declining credit may be sold early to minimize loss of principal.
Liquidity needs of the portfolio require that the security be sold.
Alternative sample language:
3. Yield
The cash management portfolio of the [Unit Type] shall be designed with the
objective of regularly meeting or exceeding a performance benchmark, which could
be the average return on three-month U.S. Treasury bills, The North Carolina
Capital Management Trust, or the average rate on Fed funds, whichever is higher.
These indices are considered benchmarks for lower risk investment transactions
and therefore comprise a minimum standard for the portfolio's rate of return. The
investment program shall seek to augment returns above this threshold, consistent
with risk limitations identified herein and prudent investment principles. [See
Section IX on performance standards and selecting a benchmark.]
The primary objectives, in priority order, of the cash management activities shall be
safety, liquidity, and yield:
1. Safety
Safety of principal is the foremost objective of the cash management program and,
accordingly, the activities shall be undertaken in a manner that seeks to ensure the
safety of funds on deposit and the preservation of capital.
2. Liquidity
The finance officer shall prepare adequate forecasts of anticipated cash receipts and
disbursements to permit the identification of the liquidity needs of the [Unit Type].
3. Yield
The cash management activities shall support the investment activities by
maximizing the funds available for investment by assuring that amounts due to the
[Unit Type] are promptly collected, that funds received are properly accounted for
and deposited daily in an official depository, and that disbursements are properly
controlled.
IV.
Standards of Care
1. Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain from
personal business activity that could conflict with the proper execution and
management of the investment program, or that could impair their ability to make
impartial decisions. Employees and investment officials shall disclose any material
interests in financial institutions with which they conduct business. They shall
LGC
Page 155 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
further disclose any personal financial and investment positions that could be
related to the performance of the investment portfolio. Employees and officers shall
refrain from undertaking personal investment transactions with the same
individual with whom business is conducted on behalf of the [Unit Type].
2. Delegation of Authority
Authority to manage cash and the investment program is granted to the finance
officer and derived from G.S. 159-30. The finance officer shall act in accordance with
established written procedures and internal controls for the management of cash
and the operation of the investment program consistent with this investment policy.
Procedures should include references to: safekeeping, delivery versus payment,
investment accounting, repurchase agreements, wire transfer agreements, and
collateral and depository agreements. No person may engage in an investment
transaction except as provided under the terms of this policy and the procedures
established by the finance officer. The finance officer shall be responsible for all
transactions undertaken and shall establish a system of controls to regulate the
activities of subordinate officials.
V.
Authorized Financial Institutions, Depositories, and Broker-Dealers
1. Authorized Financial Institutions, Depositories, and Broker-Dealers
A list will be maintained of financial institutions and depositories authorized by
resolution of the [Governing Body] pursuant to G.S. 159-31 to act as its official
depositories and to provide banking services. In addition, a list will be maintained
of security broker-dealers authorized by resolution of the [Governing Body] to
provide investment services and selected by creditworthiness (e.g., a minimum
capital requirement of $10,000,000 and at least five years of operation). These may
include “primary” dealers or regional dealers that qualify under Securities and
Exchange Commission (SEC) Rule 15c3-1 (uniform net capital rule).
All financial institutions, depositories and broker-dealers who desire to become
qualified for investment transactions must supply the following as appropriate:
●
●
●
●
●
●
Audited financial statements demonstrating compliance with state and federal
capital adequacy guidelines,
Proof of National Association of Securities Dealers (NASD) certification (not
applicable to Certificate of Deposit counterparties),
Proof of state registration,
Completed broker-dealer questionnaire (not applicable to Certificate of Deposit
counterparties),
Certification of having read and understood and agreeing to comply with this
investment policy of the [Unit Type], and
Evidence of adequate insurance coverage.
An annual review of the financial condition and registration of all qualified
financial institutions, depositories and broker-dealers will be conducted by the
finance officer.
LGC
Page 156 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
VI.
Safekeeping and Custody
1. Delivery Versus Payment
All trades of marketable securities will be executed by delivery versus payment
(“DVP”) to ensure that securities are deposited in an eligible financial institution
prior to the release of funds.
2. Safekeeping
To reduce custodial credit risk or the risk that in the event of failure of a
counterparty the unit will not be able to recover the value of collateral securities or
then collateral securities in possession of a third party, securities will be held by an
independent third-party custodian selected by the [Unit Type] as evidenced by
safekeeping receipts in the name of and for the benefit of the [Unit Type]. The
custodian shall be a trust department with an account with a Federal Reserve Bank
and authorized to act as trustee in North Carolina. The safekeeping institution
shall annually provide a copy of their most recent report on internal controls
(Statement of Auditing Standards (SAS) No. 70 – Service Organizations).
Certificated securities are to be avoided where possible. Any certificated securities
shall be registered in the name of the [Unit Type] and held in the custody of the
finance officer.
3. Internal Controls
The finance officer is responsible for establishing and maintaining an internal
control structure designed to ensure that the assets of the [Unit Type] are protected
from loss, theft or misuse. Details of the internal controls system shall be
documented in a cash management procedures manual and in an investment
procedures manual and shall be reviewed and updated annually. The internal
control structure shall be designed to provide reasonable assurance that these
objectives are met. The concept of reasonable assurance recognizes that (1) the cost
of a control should not exceed the benefits likely to be derived and (2) the evaluation
of costs and benefits requires estimates and judgments by management.
The internal controls structure shall address the following points:
●
●
●
●
●
●
●
●
●
●
LGC
Control of collusion,
Separation of transaction authority from accounting and recordkeeping,
Prompt reconciliation of accounts,
Custodial safekeeping requirements,
Avoidance of physical delivery securities,
Clear delegation of authority to subordinate staff members,
Proper training and supervision of subordinate staff members,
Written confirmation of transactions for investments and wire transfers,
Dual authorizations of wire transfers, and
Development of a wire transfer agreement with the lead bank and third-party
custodian.
Page 157 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
Accordingly, the finance officer shall establish a process for an annual independent
review by an external auditor to assure compliance with policies and procedures or
alternatively, compliance should be assured through the annual independent audit
of the [Unit Type].
Alternative sample language:
3. Internal Controls
The finance officer shall establish a system of internal controls, which shall be
documented in writing. The internal controls shall be reviewed by the investment
committee, where present, and with the independent auditor. The controls shall be
designed to prevent the loss of public funds arising from fraud, employee error,
misrepresentation by third parties, unanticipated changes in financial markets, or
imprudent actions by employees and officers of the [entity.]
4. Deposit and Investment Risk
In establishing internal controls, consideration should be given to the risk and
disclosure requirements of Governmental Accounting Standards Board (GASB)
Statement No. 40 – “Deposit and Investment Risk Disclosures”.
VII.
Suitable and Authorized Investments
1. Investment Types
Only the investments authorized by G.S. 159-30 will be permitted by this policy.
2. Collateralization
As required by G.S. 159-31(b) - Selection of depository; deposits to be secured, full
collateralization will be required on all funds on deposit or deposited at interest.
The finance officer is to notify the depository at the time a new deposit account is
opened or a certificate of deposit is purchased that the account is a public deposit
account subject to the collateralization requirements.
3. Repurchase Agreements
Repurchase agreements shall be consistent with G.S. 159-30(c)(12).
4. Prohibited Investments
Investment in the following instruments, even if permitted under G.S. 159-30, is
expressly prohibited: [Insert description of prohibited investments, or delete this
section.].
VIII.
Investment Parameters
1. Diversification
To reduce credit risk, the investments shall be diversified by:
●
●
Limiting investments to avoid over-concentration in securities from a specific
issuer or business sector (excluding U.S. Treasury securities), and
Limiting investment in securities that have higher credit risks.
To reduce interest rate risk, the investments shall be diversified by:
LGC
Page 158 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
●
●
Investing in securities with varying maturities, and
Continuously investing a portion of the portfolio in readily available funds such
as a mutual fund for local government investment certified by the Local
Government Commission pursuant to G.S. 159-30(c)(8), currently The North
Carolina Capital Management Trust.
Alternative sample language:
1. Diversification
To reduce interest rate risk and credit risk, it is the policy of the [Unit Type] to
diversify its investment portfolios. To eliminate risk of loss resulting from the overconcentration of assets in a specific maturity, issuer, or class of securities, all cash
and cash equivalent assets in all [Unit Type] funds shall be diversified by maturity,
issuer, and class of security. Diversification strategies shall be determined and
revised periodically by the investment committee/investment officer for all funds
except for the employee retirement fund.
In establishing specific diversification strategies, the following general policies and
constraints shall apply: Portfolio maturities shall be staggered to avoid undue
concentration of assets in a specific maturity sector. Maturities selected shall
provide for stability of income and reasonable liquidity.
For cash management funds:
●
●
●
●
●
Liquidity shall be assured through practices ensuring that the next
disbursement date and payroll date are covered through maturing investments
or marketable U.S. Treasury bills.
Continuously investing a portion of the portfolio in readily available funds such
as a mutual fund for local government investment certified by the Local
Government Commission pursuant to G.S. 159-30(c)(8), currently The North
Carolina Capital Management Trust.
Positions in securities having potential default risk (e.g., commercial paper)
shall be limited in size so that in case of default, the portfolio’s annual
investment income will exceed a loss on a single issuer’s securities.
Risks of market price volatility shall be controlled through maturity
diversification such that aggregate price losses on instruments with maturities
exceeding one year shall not be greater than coupon interest and investment
income received from the balance of the portfolio.
The investment committee and finance officer shall establish strategies and
guidelines for the percentage of the total portfolio that may be invested in
securities other than repurchase agreements, Treasury bills or collateralized
certificates of deposit. The investment committee shall conduct a quarterly
review of these guidelines and evaluate the probability of market and default
risk in various investment sectors as part of its considerations.
AND / OR
LGC
Page 159 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
The following diversification limitations shall be imposed on the portfolio:
●
Maturity - No more than [xx] percent of the portfolio may be invested beyond 12
months, and the weighted average maturity of the portfolio shall never exceed
one year.
●
Default risk - No more than [xx] percent of the overall portfolio may be invested
in the securities of a single issuer, except for securities of the U.S. Treasury. No
more than [xx] percent of the portfolio may be invested in each of the following
categories of securities:
a) Commercial paper,
b) Non-negotiable certificates of deposit,
c) Bankers’ acceptances,
d) Any other obligation that does not bear the full faith and credit of the United
States Government or which is not fully collateralized or insured, and
e) No more than [xx] percent of the total portfolio may be invested in the
foregoing instruments at any time.
●
Liquidity risk - At least [xx] percent of the portfolio shall be invested in
overnight instruments or in marketable securities which can be sold to raise
cash in one day’s notice.
2. Maximum Maturities
To the extent possible, the [Unit Type] shall attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the
[Unit Type] will not directly invest in securities maturing more than five (5) years
from the date of purchase or in accordance with state and local statutes and
ordinances. The [Unit Type] shall adopt weighted average maturity limitations
(which often range from 90 days to 3 years), consistent with the investment
objectives.
Reserve funds and other funds with longer-term investment horizons may be
invested in securities exceeding five (5) years if the maturities of such investments
are made to coincide as nearly as practicable with the expected use of funds. The
intent to invest in securities with longer maturities shall be disclosed in writing to
the [Governing Body] prior to the investment.
Because of inherent difficulties in accurately forecasting cash flow requirements, a
portion of the portfolio should be continuously invested in readily available funds
such as The North Carolina Capital Management Trust or FDIC insured money
market deposit accounts to ensure that appropriate liquidity is maintained to meet
ongoing obligations.
3. Competitive Bids
The finance officer shall obtain competitive bids from at least three brokers or
financial institutions on all purchases of investment instruments purchased on the
secondary market.
LGC
Page 160 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
IX.
Reporting
1. Methods
The finance officer shall prepare an investment report monthly, including a
management summary that provides an analysis of the status of the current
investment portfolio and the individual transactions executed over the month. This
management summary will be prepared in a manner which will allow the [Unit
Type] to ascertain whether investment activities during the reporting period have
conformed to the investment policy. The report should be provided to the chief
administrative officer, the [Governing Body], and the investment committee of the
[Unit Type].
The report may include the following:
●
●
●
●
●
Listing of individual securities held at the end of the reporting period,
Realized and unrealized gains or losses resulting from appreciation or
depreciation by listing the cost and market value of securities,
Average weighted yield to maturity of portfolio on investments as compared to
applicable benchmarks,
Listing of investment by maturity date, and
Percentage of the total portfolio which each type of investment represents.
2. Statutorily Required Reports
The finance officer shall prepare and timely file the following reports:
●
A “Notification of Public Deposit” on Form INV-91 with each depository and
provide a copy to the State Treasurer as of June 30 of each year;
●
The semi-annual reports on Form LGC 203 required to be filed with the Local
Government Commission pursuant to G.S. 159-33 – Semiannual report on
status of deposits and investments;
●
The Annual Financial Information Report (“AFIR”) required to be filed with the
Local Government Commission pursuant to G.S. 159-33.1 – Semiannual report
of financial information; and
●
Such other report as may, from time to time, be required.
Alternative sample language:
1. Methods
The finance officer shall submit quarterly an investment report that summarizes
recent market conditions, economic developments and anticipated investment
conditions. The report shall summarize the investment strategies employed in the
most recent quarter, and describe the portfolio in terms of investment securities,
maturities, risk characteristics and other features. The report shall explain the
quarter’s total investment return and compare the return with budgetary
expectations. The report shall include an appendix that discloses all transactions
during the past quarter: The report shall be in compliance with state law and shall
LGC
Page 161 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
be distributed to the investment committee and others as required by law.
Each quarterly report shall indicate any areas of policy concern and suggested or
planned revision of investment strategies. Copies shall be transmitted to the
independent auditor.
Within 40 days of the end of the fiscal year, the finance officer shall present a
comprehensive annual report on the investment program and investment activity.
The annual report shall include 12-month and separate quarterly comparisons of
return and shall suggest policies and improvements that might be made in the
investment program.
The finance officer shall submit to the Local Government Commission the
semiannual reports on the status of deposits and investments and reports of
financial information in accordance with the requirements of G.S. 159-33 –
Semiannual report on status of deposits and investments and G.S. 159-33.1 –
Semiannual report of financial information.
2. Performance Standards
The investment portfolio will be managed in accordance with the parameters
specified within this policy. The portfolio should obtain a market average rate of
return during a market/economic environment of stable interest rates. A series of
appropriate benchmarks shall be established against which portfolio performance
shall be compared on a regular basis. The benchmarks shall be reflective of the
actual securities being purchased, the risks undertaken, and the benchmarks shall
have a similar weighted average maturity as the portfolio.
Alternative sample language:
2. Performance Standards
The cash management portfolio of the [Unit Type] shall be designed with the
objective of regularly meeting or exceeding a selected performance benchmark,
selected from the average return on three-month U.S. Treasury bills, The North
Carolina Capital Management Trust or the average rate of Fed funds. These indices
are considered benchmarks for lower risk investment transactions and therefore
comprise a minimum standard for the portfolio’s rate of return.
3. Marking to Market
The market value of the portfolio shall be obtained from an independent source
monthly and a statement of the market value of the portfolio shall be issued
monthly. This will ensure that review of the investment portfolio, in terms of value
and price volatility, has been performed.
In defining market value, consideration should be given to the requirements of
Governmental Accounting Standards Board (GASB) Statement No. 31 –
“Accounting and Financial Reporting for Certain Investments and for
External Investment Pools” as amended.
LGC
Page 162 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
X.
Policy Considerations
1. Exemption
Any investment not in compliance with G.S. 159-30 shall be sold in accordance with
the provisions of G.S. 159-33.
Any investment at the time of adoption of this policy or currently held that does not
meet the guidelines of this policy shall be temporarily exempted from the
requirements of this policy. Investments must come in conformance with the policy
within nine months of the policy’s adoption or the [Governing Body] must be
presented with a plan through which investments will come into conformance.
Alternative sample language:
1. Exemption
Any investment not in compliance with G.S. 159-30 shall be sold in accordance with
the provisions of G.S. 159-33.
Any investment currently held that does not meet the guidelines of this policy shall
be exempted from the requirements of this policy. At maturity or liquidation, such
monies shall be reinvested only as provided by this policy.
2. Annual Review
This policy shall be reviewed on an annual basis. Any changes must be approved by
the finance officer and any other appropriate authority, as well as the individuals
charged with maintaining internal controls.
XI.
Approval and Amendment of Cash Management and Investment Policy
The cash management and investment policy and any amendments shall be formally
approved and adopted by resolution of the [Governing Body] of the [Unit Type] and
reviewed annually.
XII.
List of Attachments
The following documents are attached to this policy:
●
●
●
●
●
●
XIII.
Listing of authorized personnel,
G.S. 159-30 – Investment of idle funds,
G.S. 159-31 – Selection of depository; deposits to be secured,
G.S. 159-33 – Semiannual report on status of deposits and investments,
G.S. 159-33.1 – Semiannual report of financial information,
Listing of authorized financial institutions, depositories and broker-dealers,
Other Documentation [Include or delete as appropriate to policy as adopted.]
The following documents are attached to this policy:
●
LGC
Master Repurchase Agreement, other repurchase agreements and tri-party
agreements,
Page 163 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit F – Sample Cash Management and Investment Policy
●
Broker-Dealer Questionnaire,
●
Safekeeping agreements,
●
Wire transfer agreements,
●
Sample investment reports,
Current versions of the following documents shall be maintained and available for
inspection and reference:
●
Credit studies and prospectuses for securities purchased,
●
NC Department of State Treasurer - Financial Operations Division publication,
“Collateralization of Public Deposits in North Carolina”
●
NC Department of State Treasurer, Policy Statement 30 – Cash and Investments,
Policy adopted [amended] by resolution dated: [Date]
LGC
Page 164 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit G – Sample Resolution Adopting Cash Management and Investment Policy
Note: To facilitate use of this Sample Resolution Adopting Cash Management
and Investment Policy, it is posted as a Word® Document on the website
of the State Treasurer, www.nctreasurer.com, following this Policy
Manual section. Instructions to make updating and revising easier are
included.
LGC
Page 165 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit G – Sample Resolution Adopting Investment Policy
This page intentionally left blank.
LGC
Page 166 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit G – Sample Resolution Adopting Cash
Management and Investment Policy
[Unit Full Name]
Resolution on the Review,
Approval and Adoption of Cash
Management and Investment
Policy
WHEREAS, it is the desire of the [Governing Body] to use all of public funds of the
[Unit Full Name] (hereafter the “[Unit Type]”) in a most efficient and effective manner;
WHEREAS, it is the responsibility of the finance officer, who is appointed by and
serves at the pleasure of the [Governing Body], to supervise the investment of idle funds of the
[Unit Type];
WHEREAS, The finance officer has prepared and presented to the [Governing Body] an
Investment Report dated as of [date] that provides an analysis of the status of the investments
of all funds, excluding the investment of [certain specified] funds;
WHEREAS, the Investment Report dated as of [date] shows that all investments are
authorized by North Carolina General Statutes 159-30 – Investment of idle funds and
permitted under the proposed Cash Management and Investment Policy;
OR
WHEREAS, the Investment Report dated as of [date] shows that the following
investments are exceptions to the proposed Cash Management and Investment Policy: [Insert
list of all investments that are exceptions to the policy and reason for the exception.];
WHEREAS, [List financial institutions, depositories and broker-dealers] are currently
authorized and approved to provide and do provide investment services to the [Unit Type];
WHEREAS, the [Governing Body] has found and determined that the first and
foremost objective in the investment of public funds is the safety and preservation of principal;
that the second important objective is the maintenance of sufficiently liquid investments to
meet all operating requirements that may be reasonably anticipated; and the final objective is
obtaining a market rate of return throughout budgetary and economic cycles, taking into
account the investment risk constraints and liquidity requirements; and
WHEREAS, the [Governing Body] has found and determined that the aforesaid
objectives and the sound, efficient and professional investment of public funds can be best
achieved by the adoption of a written policy statement;
NOW, THEREFORE, BE IT RESOLVED, by the [Governing Body] of [Unit Type] that:
Section 1.
The Investment Report dated as of [date], a copy of which is attached and
made apart hereof, is hereby accepted and approved.
Section 2.
The Cash Management and Investment Policy, attached and made apart
hereof, is hereby approved and adopted.
Section 3.
The investments that are exceptions to the permitted investments are
temporarily exempted from the requirements of the Investment Policy as authorized by
LGC
Page 167 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit G – Sample Resolution Adopting Cash
Management and Investment Policy
Section X. The finance officer is hereby authorized and directed to prepare a plan through
which exceptions will come into conformance with the Investment Policy. [Include if exceptions
to policy.]
Section 4.
The finance officer is hereby authorized and directed to review the
qualifications of all financial institutions, depositories and broker-dealers providing
investment services to the [Unit Type] to determine compliance with the requirements of the
Investment Policy.
Section 5.
All employees of the [Unit Type] are hereby directed to implement the
Investment Policy as adopted and the provisions of this resolution, and the willful or
continued failure to do so is sufficient cause for immediate dismissal from employment with
the [Unit Type].
Section 6.
This resolution shall take effect immediately upon its passage.
Upon motion of __________________, and seconded by ______________________, the
foregoing Resolution was passed by the following vote:
Ayes:
Nays:
___________________________
___________________________
___________________________
None
Abstentions: None
***************
I, ____________________, Clerk of the [Governing Body] of the [Unit Full Name], do
hereby certify that the foregoing “Resolution on Review, Approval and Adoption of an
Investment Policy” was duly adopted by the [Governing Body] of the [Unit Type] at a regular
meeting thereof, a quorum being present.
WITNESS my hand at __________ this _____ day of ________, 20__.
____________________________
Clerk
LGC
Page 168 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
Note: To facilitate use of this Sample Broker-Dealer Questionnaire, it is posted
as a Word® Document on the website of the State Treasurer,
www.nctreasurer.com, following this Policy Manual section. Instructions
to make updating and revising easier are included.
LGC
Page 169 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
This page intentionally left blank.
LGC
Page 170 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
[Unit Full Name]
North Carolina
*****
Broker-Dealer Questionnaire
For Candidates to Provide
Investment Services
*****
Applicant: __________________________________
LGC
Page 171 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
This page intentionally left blank.
LGC
Page 172 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
[Unit Full Name]
Broker-Dealer Questionnaire
Section I: - Introductory Statement and General Requirements.
The [Unit Full Name] (the “[Unit Type]”) operates under the laws of the State of North
Carolina and manages an operational portfolio ranging in size from $[Insert amount.] to
$[Insert amount.], which is comprised mainly of [Briefly describe current investment types.].
The [Unit Type] has adopted a written Investment Policy that regulates the standards and
procedures used in its cash management activities. A copy of G.S. 159-30, the Investment
policy of the [Unit Type] and [Describe other attachments.] are provided with this
questionnaire.
The [Unit Type] maintains relationships with qualified members of the broker-dealer
community who, in its opinion, understands its needs, constraints, and goals.
Broker-dealers will be notified of their approval in writing. No transactions will be conducted
with an approved broker-dealer until all documentation required by both parties has been
executed. The [Unit Type] solicits competitive bids and offers on the majority of its
transactions. All securities will be delivered against payment to the third-party custodian
named by the [Unit Type]. All information and references requested in the document will be
reviewed and substantiated; therefore, please answer all questions as thoroughly as possible.
Section II: - Request for Information from Broker-Dealer Candidate.
1.
Full Exact Legal Name of Firm:
2.
Address:
3.
Phone No.:
4.
Primary Representative:
Name:
LGC
Facsimile No.:
5.
Manager:
Name:
Title:
Title:
Phone No.:
Phone No.:
E-mail:
E-mail:
CRD No.:
CRD No.:
Page 173 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Broker-Dealer Questionnaire
6.
Applicant: ___________________________
Identify all other personnel who will be offering/bidding and/or quoting securities.
Name:
Title:
Phone No.:
CRD No.:
Please attach resumes for all personnel listed above.
7. Is your firm a primary dealer in U.S. Government Securities?
a. If yes, for how long has the firm been a primary dealer?
b. If no, does your firm meet the minimum Net Capital
Requirements of SEC Rule 15c3-1?
[__] Yes
[__] No
Years
[__] Yes
[__] No
8. What instruments are offered regularly by your firm?
[ ] Treasury Bills
[ ] NC Governments
[ ] Treasury Notes and Bonds
[ ] Commercial Paper
[ ] Government Agencies
[ ] BA’s (Domestic)
[ ] FFCB
[ ] BA’s (Foreign)
[ ] FNMA
Mortgage Backed Securities
[ ] FHLB
(Specify):
Others (Specify):
[ ]
[ ]
[ ]
[ ]
[ ]
9. Please provide the following information regarding at least four comparable clients
with whom any of the representatives listed in items 4 - 6 has an established
relationship. Public-sector clients in our geographical area are preferred, if possible.
Client:
Contact:
Length of Relationship:
Years Phone No.:
LGC
Client:
Length of Relationship:
Years
Contact:
Phone No.:
Client:
Length of Relationship:
Years
Contact:
Phone No.:
Client:
Length of Relationship:
Years
Contact:
Phone No.:
Page 174 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Broker-Dealer Questionnaire
Applicant: ___________________________
10. Have any of your public-sector clients ever sustained or
claimed a loss on a securities transaction or loss of principal
arising from a misunderstanding or misrepresentation of the
risk characteristics of a recommended instrument purchased
through your firm?
● If yes, please explain on an attached sheet.
11.
Does your firm have any pending litigation with public-sector
clients, or have you been subject to any within the last five
years?
● If yes, please explain on an attached sheet.
[__] Yes
[__] No
[__] Yes
[__] No
12. Has your firm, or any employees listed in items 4 – 6, ever
been subject to a regulatory, state or federal agency
investigation for alleged improper, fraudulent, disreputable or
unfair activities related to the sale of government securities
or money market instruments?
[__] Yes
● If yes, please explain on an attached sheet.
[__] No
13. Has your firm consistently complied with the capital adequacy
guidelines of the Federal Reserve Bank and Securities
Exchange Commission?
At the date of this application, is your firm in compliance with
these guidelines?
[__] Yes
[__] No
[__] Yes
[__] No
14. Is your firm and are all its representatives registered with
NASD?
Firm NASD CRD Number:
[__] Yes
[__] No
15. Is your firm and are all its representatives registered with the
Securities Division of the NC Secretary of State?
[__] Yes
● If no, please explain on an attached sheet.
[__] No
● If no, please explain on an attached sheet.
16. Does your firm participate in the SIPC program?
● If no, please explain on an attached sheet.
17. How many and what percentage of your transactions failed?
Last Month?
%
Last Year?
LGC
Page 175 of 216.
[__] Yes
[__] No
%
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Broker-Dealer Questionnaire
Applicant: ___________________________
18. Please attach a statement describing your custody and delivery process. Who audits
these fiduciary systems?
19. Please attach a statement describing the precautions taken by your firm to protect the
interest of the public when dealing with government agencies as investors?
20. Please attach a complete schedule of fees and charges for your various services and
transactions.
21. Please provide your wiring and delivery instructions. All transactions will be delivery
versus payment. Attach separate sheet, if necessary.
22. What confirmations, reports and documentation will be provided for transactions?
What monthly and annual reports will be provided? Please attach samples.
23. What research reports and market information does your firm regularly provide to
public-sector clients? Please attach samples.
23. Please attach the following financial information for your firm and, if a subsidiary, for
your parent firm:
a.
b.
c.
d.
LGC
Most recent annual report and Form 10-K filed with the SEC;
Most recent quarterly report and Form 10-Q filed with the SEC;
Most recent proxy statement; and
Any additional information necessary to provide a full disclosure of your financial
condition.
Page 176 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Broker-Dealer Questionnaire
Applicant: ___________________________
Section III: - Certification
We hereby certify that all information in this application and related attachments is complete
and materially correct.
We hereby further certify that we have received and read the Investment Policy of the [Unit
Full Name] and the laws and regulations of the state of North Carolina pertaining to the
investment of public funds and agree to comply with both. All sales and other personnel
transacting business with [Unit Type] will be routinely informed of its Investment Policy; its
investment objectives, horizon, outlook, strategies and risk constraint; and the applicable
North Carolina laws and regulations.
Primary Representative:
Date:
Manager:
Date:
Other Personnel Identified in Item 6:
Date:
Date:
Date:
 Certification to be signed by all individuals named in this application.
LGC
Page 177 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit H – Sample Broker-Dealer Questionnaire
This page intentionally left blank.
LGC
Page 178 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit I – Sample Investment Report
LGC
Page 179 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit I – Sample Investment Report
This page intentionally left blank.
LGC
Page 180 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit I – Sample Investment Report
Securities Held at [Report Date]:
Maturity
Date
dd/mm/yyyy
Security Description
Fair Market Value (FMV)
Beginning of
Fiscal Year
At Report Date
$
$
Cost
$
Unrealized
Gain or (Loss)
$
Yield
%
Recorded at:
Cost or FMV
Sort by Maturity Date
Weighted-Average Yield to Maturity: [x.xxx] %
Security Purchases to [Report Date] from [Prior Report Date]:
Security Description
Maturity
Date
dd/mm/yyyy
Cost
Yield
%
$
Broker-Dealer
Recorded at:
Cost or FMV
Security Dispositions (Other than by Maturity) for Fiscal Year-to-Date:
Security Description
Cost
$
Proceeds from
Disposition
$
Yield
%
Realized
Gain or (Loss)
$
Recorded at:
Cost or FMV
Portfolio Mix at [Report Date]:
Type
Obligations of U.S. or Guaranteed by U.S.
Direct Obligations of Certain Agencies
State of NC Obligations
NC Local Government Bonds and Notes
Savings Certificates
Prime Quality Commercial Paper
Bankers’ Acceptances
Mutual Fund for Local Government Certified by LGC
Commingled Investment Pool by State Treasurer
Commingled Investment Pool by Local Government
U.S. Treasury Instruments with Coupon “Stripped”
Repurchase Agreements
Bond Proceeds Subject to Rebate and Arbitrage
Authorization
G.S. 159-30(c)(1)
G.S. 159-30(c)(2)
G.S. 159-30(c)(3)
G.S. 159-30(c)(4)
G.S. 159-30(c)(5)
G.S. 159-30(c)(6)
G.S. 159-30(c)(7)
G.S. 159-30(c)(8)
G.S. 159-30(c)(9)
G.S. 159-30(c)(10)
G.S. 159-30(c)(11)
G.S. 159-30(c)(12)
G.S. 159-30(c)(13)
Fair Market Value
$
% of Total
%
Average Maturity
Yrs.
Investment Income for Year-to-Date:
+ Interest Income
+ Realized Gains
– Realized Losses
Cash Flow from Investments
+ Unrealized Gains
– Unrealized Losses
± Amortization
= Total Income from Investments
LGC
Actual
$
Page 181 of 216.
Budget
$
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit I – Sample Investment Report
This page intentionally left blank.
LGC
Page 182 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating an Official Depository – Dedicated
Method Bank
Note: To facilitate use of this Sample Resolution Designating an Official
Depository – Dedicated Method Bank, it is posted as a Word® Document
on the website of the State Treasurer, www.nctreasurer.com, following
this Policy Manual section. Instructions to make updating and revising
easier are included.
LGC
Page 183 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating an Official Depository – Dedicated
Method Bank
This page intentionally left blank.
LGC
Page 184 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating Official
Depository – Dedicated Method Bank
[Unit Full Name]
Resolution Designating
[Exact Legal Name of Depository]
An Official Depository
WHEREAS, it is the desire of the [Governing Body] that all public funds of the [Unit
Full Name] (hereafter the “[Unit Type]”) be deposited in a secure, efficient and effective
manner;
WHEREAS, it is the responsibility of the Finance Officer, who is appointed by and
serves at the pleasure of the [Governing Body], to supervise the receipt, custody and
disbursement of the public funds of the [Unit Type];
WHEREAS, the Finance Officer has prepared and presented to the [Governing Body]
an analysis of responses to the Request for Proposals for Banking Services [analysis of bids
provided] and a review of the financial soundness of the proposing financial institutions; and
WHEREAS, the [Exact Legal Name of Depository] is qualified to be an official
depository for the [Unit Type] pursuant to G.S. 159-31 and has selected to secure its uninsured
public deposits under the “Dedicated Method” under which each public depositor’s uninsured
deposits are secured separately and which requires the establishing of a separate escrow
account for the [Unit Type].
NOW, THEREFORE, BE IT RESOLVED, by the [Governing Body] of the [Unit Full
Name] that:
Section 1.
[Exact Legal Name of Depository] (hereafter the “Official Depository”)
is hereby designated as an official depository of the [Unit Type]. The Finance Officer of the
[Unit Type] shall be and is hereby authorized and directed to deposit funds of the [Unit Type]
in the Official Depository in the name and to the credit of the [Unit Full Name].
Section 2.
As required by G.S. 159-25(b), all checks, drafts, or orders of the [Unit
Type] drawn against said funds shall be authorized and signed as appropriate by the following
(hereinafter the “Authorized Signers”):
a. One of the following officers:
Finance Officer or
Deputy Finance Officer [or other designated official];
and countersigned [when the payment amount exceeds $250][or other
amount approved by the Governing Body] by
b. One of the following officers:
[Title of Designated Countersigner], or
[Title of Alternate Designated Countersigner].
LGC
Page 185 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating Official
Depository – Dedicated Method Bank
The names and signatures of the Authorized Signers shall be duly certified by the
Clerk to the [Governing Body] to the Official Depository as from time to time may be necessary
and no check, draft, or order drawn against the Official Depository shall be valid unless so
signed or authorized.
Section 3.
The Official Depository shall be required to submit to the [Unit Type]
a surety bond or such other collateral as may be by law required.
Section 4.
Officer must:
Upon opening an account with the Official Depository, the Finance
a. Give written instructions that the proceeds from all checks payable to the
order of the [Unit Type] shall be deposited to the credit of the [Unit Full
Name] and that under no circumstance may such an item be converted
into cash.
b. Verify the method currently used by the depository to collateralize the
public deposits and stay informed of any change in methods as the result
of conversions to a different method or as the result of merger of
depositories;
c. Notify the depository at the time a new deposit account is opened or a
certificate of deposit is purchased that the account is a public deposit
account subject to the collateralization requirements;
d. File a “Notification of Public Deposit” (Form INV-91) with each
depository and provide a copy to the State Treasurer as of June 30 of
each year;
e. Execute such other forms and documentation with provisions consistent
with this resolution as may be reasonably required by the Official
Depository to establish the account;
f.
Report the amount of deposits and investments and such other
information as may be required on the semi-annual reports on form
LGC 203 required to be filed with the Local Government Commission
pursuant to G.S. 159-33; and
g. Comply with other requirements of law, regulation or sound banking
practice and with any requirements described in the State Treasurer’s
publication, The Collateralization of Public Deposits in North Carolina.
Section 5.
The Official Depository designated herein uses the Dedicated Method
of Collateralization of Public Deposits. Therefore, it is further resolved that, in addition to the
requirements enumerated in Section 4 of this resolution, the Finance Officer must:
a. Determine that a “Security Agreement With Resolution” (Form INV-94A)
is executed with each depository and that the resolution of the depository
must be passed by depository’s board of directors or loan committee;
LGC
Page 186 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating Official
Depository – Dedicated Method Bank
b. Determine that an “Escrow Agent Agreement” (Form INV-94B or Federal
Reserve Bank’s signature card) is executed with each depository;
c. Maintain a record of the securities pledged by each depository for
monitoring purposes and, if securities having periodic principal pay
downs are pledged, consideration should be given to record their decline
in “outstanding principal” balance amounts;
d. Periodically check the market values of the collateral pledged to verify at
least 100% of the amount required to be collateralized. The frequency of
checking the market values would depend upon the amount of excess
collateral pledged, the types of collateral pledged, and the volatility of
market conditions;
e. Sign “Request for Collateral Pledge/Release” forms (Form INV-95),
authorizing the release or substitution of collateral whenever requested
by the depository, provided sufficient collateral remains pledged after the
transaction is effected; and
f.
Report the amount of collateral pledged by each depository on the semiannual reports on Form LGC 203 required to be filed with the Local
Government Commission pursuant to G.S. 159-33.
Section 6.
Certified copies of this resolution shall be provided to the Official
Depository herein designated.
Section 7.
This resolution shall take effect immediately upon its passage.
Upon motion of _______________, and seconded by __________________, the foregoing
Resolution was passed by the following vote:
Ayes:
___________________________
___________________________
___________________________
Nays:
None
Abstentions: None
***************
I, ____________________, Clerk of the [Governing Body] of the [Unit Full Name], do
hereby certify that the foregoing resolution is a true and exact copy of the “Resolution
Designating [Exact Legal Name of Depository] An Official Depository” duly adopted
by the [Governing Body] of the [Unit Type] at the regular [special] meeting thereof duly called
and held on ____________, a quorum being present.
WITNESS my hand at __________, N.C., this _____ day of ________, 20__.
________________________
Clerk
LGC
Page 187 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit J – Sample Resolutions Designating Official
Depository – Dedicated Method Bank
This page intentionally left blank.
LGC
Page 188 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official Depository – Pooling Method
Bank
Note: To facilitate use of this Sample Resolution Designating an Official
Depository – Pooling Method Bank, it is posted as a Word® Document on
the website of the State Treasurer, www.nctreasurer.com, following this
Policy Manual section. Instructions to make updating and revising easier
are included.
LGC
Page 189 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official
Depository – Pooling Method Bank
This page intentionally left blank.
LGC
Page 190 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official
Depository – Pooling Method Bank
[Unit Full Name]
Resolution Designating
[Exact Legal Name of Depository]
An Official Depository
WHEREAS, it is the desire of the [Governing Body] that all public funds of the [Unit
Full Name] (hereafter the “[Unit Type]”) be deposited in a secure, efficient and effective
manner;
WHEREAS, it is the responsibility of the Finance Officer, who is appointed by and
serves at the pleasure of the [Governing Body], to supervise the receipt, custody and
disbursement of the public funds of the [Unit Type];
WHEREAS, the Finance Officer has prepared and presented to the [Governing Body]
an analysis of responses to the Request for Proposals for Banking Services [analysis of bids
provided] and a review of the financial soundness of the proposing financial institutions; and
WHEREAS, the [Exact Legal Name of Depository] is qualified to be an official
depository for the [Unit Type] pursuant to G.S. 159-31 and has selected to secure its uninsured
public deposits under the “Pooling Method”, which is a collateral pool under which each public
depositor’s uninsured deposits are secured with securities held by the State Treasurer’s agent
in the name of the State Treasurer.
NOW, THEREFORE, BE IT RESOLVED, by the [Governing Body] of the [Unit Full
Name] that:
Section 1.
[Exact Legal Name of Depository] (hereafter the “Official Depository”)
is hereby designated as an official depository of the [Unit Type]. The Finance Officer of the
[Unit Type] shall be and is hereby authorized and directed to deposit funds of the [Unit Type]
in the Official Depository in the name and to the credit of the [Unit Full Name].
Section 2.
As required by G.S. 159-25(b), all checks, drafts, or orders of the [Unit
Type] drawn against said funds shall be authorized and signed as appropriate by the following
(hereinafter the “Authorized Signers”):
a. One of the following officers:
Finance Officer or
Deputy Finance Officer [or other designated official];
and countersigned [when the payment amount exceeds $250][or other
amount approved by the Governing Body] by
b. One of the following officers:
[Title of Designated Countersigner], or
[Title of Alternate Designated Countersigner].
LGC
Page 191 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official
Depository – Pooling Method Bank
The names and signatures of the Authorized Signers shall be duly certified by the
Clerk to the [Governing Body] to the Official Depository as from time to time may be necessary
and no check, draft, or order drawn against the Official Depository shall be valid unless so
signed or authorized.
Section 3.
Officer must:
Upon opening an account with the Official Depository, the Finance
a. Give written instructions that the proceeds from all checks payable to the
order of the [Unit Type] shall be deposited to the credit of the [Unit Full
Name] and that under no circumstance may such an item be converted
into cash.
b. Verify the method currently used by the depository to collateralize the
public deposits and stay informed of any change in methods as the result
of conversions to a different method or as the result of merger of
depositories;
c. Notify the depository at the time a new deposit account is opened or a
certificate of deposit is purchased that the account is a public deposit
account subject to the collateralization requirements;
d. File a “Notification of Public Deposit” (Form INV-91) with each
depository and provide a copy to the State Treasurer as of June 30 of
each year;
e. Execute such other forms and documentation with provisions consistent
with this resolution as may be reasonably required by the Official
Depository to establish the account;
f.
Report the amount of deposits and investments and such other
information as may be required on the semi-annual reports on Form
LGC 203 required to be filed with the Local Government Commission
pursuant to G.S. 159-33; and
g. Comply with other requirements of law, regulation or sound banking
practice and with any requirements described in the State Treasurer’s
publication, The Collateralization of Public Deposits in North Carolina.
Section 4.
Certified copies of this resolution shall be provided to the Official
Depository herein designated.
Section 5.
This resolution shall take effect immediately upon its passage.
Upon motion of _______________, and seconded by __________________, the foregoing
Resolution was passed by the following vote:
Ayes: ___________________________
___________________________
___________________________
LGC
Page 192 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official
Depository – Pooling Method Bank
Nays: None
Abstentions: None
***************
I, ____________________, Clerk of the [Governing Body] of the [Unit Full Name], do
hereby certify that the foregoing resolution is a true and exact copy of the “Resolution
Designating [Exact Legal Name of Depository] An Official Depository” duly adopted
by the [Governing Body] of the [Unit Type] at the regular [special] meeting thereof duly called
and held on ____________, a quorum being present.
WITNESS my hand at __________, N.C., this _____ day of ________, 20__.
________________________
Clerk
LGC
Page 193 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit K – Sample Resolution Designating an Official
Depository – Pooling Method Bank
This page intentionally left blank.
LGC
Page 194 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
LGC
Page 195 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
This page intentionally left blank.
LGC
Page 196 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Custody and Overnight Repurchase Agreement – September 4, 1991
REMICs and Other Asset-Backed Securities – February 21, 1990
Commercial Paper Sweep Arrangements – October 25, 1989
Bankers Acceptances – March 20, 1990
Gift of Ineligible Securities – September 27, 1989
LGC
Page 197 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
This page intentionally left blank.
LGC
Page 198 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topics:
LGC
Custody and Overnight Repurchase Agreement – Page 1 of 2
Page 199 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topics:
LGC
Custody and Overnight Repurchase Agreement – Page 2 of 2
Page 200 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topics:
LGC
REMICs and Other Asset-Backed Securities – Page 1 of 2
Page 201 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topics:
LGC
REMICs and Other Asset-Backed Securities – Page 2 of 2
Page 202 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topic:
LGC
Commercial Paper Sweep Arrangement – Page 1 of 2
Page 203 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topic:
LGC
Commercial Paper Sweep Arrangement – Page 2 of 2
Page 204 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topic:
LGC
Bankers Acceptances – Page 1 of 1
Page 205 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
This page intentionally left blank.
LGC
Page 206 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topic:
LGC
Gift of Ineligible Securities – Page 1 of 2
Page 207 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit L – North Carolina Attorney General’s Memorandums
Topic:
LGC
Gift of Ineligible Securities – Page 2 of 2
Page 208 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit M – Cash Flow Worksheet
LGC
Page 209 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit M – Cash Flow Worksheet
This page intentionally left blank.
LGC
Page 210 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit M – Cash Flow Worksheet
This worksheet, which includes instructions, is available as an Excel® Worksheet at
www.nctreasurer.com under “Divisions”, “State and Local Government”, “Local Fiscal
Management”, “Forms and Instructions” under “Interim Financial Reporting and Templates”.
LGC
Page 211 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Part VII – Exhibits
Exhibit M – Cash Flow Worksheet
This page intentionally left blank.
LGC
Page 212 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Authorities
STATUTES
G.S. 105-321(e) – Disposition of tax records and receipts; order of collection ............................ 13
G.S. 115C-443 – Investment of idle cash..................................................................................... 51
G.S. 115C-444(b) .......................................................................................................................... 28
G.S. 147-69.3 ................................................................................................................................ 57
G.S. 159-13(b)(6) ............................................................................................................................ 9
G.S. 159-25(a)(4) ............................................................................................................................ 5
G.S. 159-25(a)(6) .................................................................................................................. 2, 5, 43
G.S. 159-25(b)................................................................................................................. 5, 185, 191
G.S. 159-28 – Budgetary accounting for appropriations............................................................. 18
G.S. 159-28.1 – Facsimile signatures .......................................................................................... 23
G.S. 159-30 – Investment of idle funds ................................ 1, 2, 47, 48, 49, 51, 61, 153, 158, 163
G.S. 159-30(a)..................................................................................................................... 2, 43, 45
G.S. 159-30(b)............................................................................................................................... 51
G.S. 159-30(b1)............................................................................................................................. 52
G.S. 159-30(c) ............................................................................................................................... 51
G.S. 159-30(c)(1)..................................................................................................................... 52, 53
G.S. 159-30(c)(10) ......................................................................................................................... 57
G.S. 159-30(c)(11) ......................................................................................................................... 57
G.S. 159-30(c)(12) ..................................................................................................... 48, 50, 57, 158
G.S. 159-30(c)(13) ................................................................................................................... 58, 61
G.S. 159-30(c)(2)........................................................................................................................... 54
G.S. 159-30(c)(3)........................................................................................................................... 54
G.S. 159-30(c)(4)........................................................................................................................... 55
G.S. 159-30(c)(5)........................................................................................................................... 55
G.S. 159-30(c)(6)........................................................................................................................... 55
G.S. 159-30(c)(7)........................................................................................................................... 56
G.S. 159-30(c)(8)..................................................................................................... 56, 61, 154, 159
G.S. 159-30(c)(9)........................................................................................................................... 57
G.S. 159-30(d) ............................................................................................................ 48, 49, 50, 66
G.S. 159-30(e) ....................................................................................................... 2, 15, 80, 82, 153
G.S. 159-30(g)............................................................................................................................... 59
G.S. 159-31 – Selection of depository, deposits to be secured ....................... 1, 153, 156, 163, 185
G.S. 159-31(a)............................................................................................................................... 33
G.S. 159-31(b)....................................................................................................... 2, 28, 51, 61, 158
G.S. 159-32 – Daily deposits .................................................................................... 1, 5, 6, 11, 153
G.S. 159-33 – Semiannual reports on status of deposits and investments . 1, 2, 28, 60, 161, 162,
163, 186, 187, 192
G.S. 159-33.1 – Semiannual report of financial information .................................................... 163
G.S. 159-42(i) ............................................................................................................................... 51
G.S. 159-7 ..................................................................................................................................... 56
G.S. 160A-460 .............................................................................................................................. 57
LGC
Page 213 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Table of Authorities
G.S. 160A-461 – Interlocal Cooperation Authorized ..................................................................... 9
G.S. 160A-464 .............................................................................................................................. 57
OTHER AUTHORITIES
GASBS No. 14 - The Financial Reporting Entity.................................................................... 3, 61
GASBS No. 3 - Deposits with Financial Institutions, Investments (including Repurchase
Agreements), and Reverse Repurchase Agreements .......................................................... 3, 61
GASBS No. 31 - Accounting and Financial Reporting for Certain Investments and for External
Investment Pools................................................................................................ 3, 54, 57, 61, 62
GASBS No. 34 - Basic Financial Statements and Management's Discussion and Analysis for
State and Local Governments ............................................................................................. 3, 61
GASBS No. 40 - Deposit and Investment Risk Disclosures (an amendment of GASBS No. 3) .. 3,
61, 63, 64
GASBS No. 7 - Advance Refundings Resulting in Defeasance of Debt ...................................... 49
North Carolina Administrative Code, 20 NCAC 07 ........................................................ 28, 29, 36
CONSTITUTIONAL PROVISIONS
North Carolina State Constitution, Article V, Section 7(2) .......................................................... 5
LGC
Page 214 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Index
A
Arbitrage ................................................................................................................................ 58, 61
B
Bank Reconciliation ............................................................................................. 7, 23, 26, 34, 157
Broker-Dealer ...................................................................................................... 47, 156, 169, 173
C
Central Depository..................................................................................................... 14, 21, 22, 75
Collateralization ........................................................... 29, 30, 31, 39, 56, 60, 61, 64, 66, 158, 164
Credit Risk ...................................................................................... 53, 54, 55, 59, 65, 66, 154, 158
Custodial ...................................................................................................... 44, 48, 49, 50, 64, 157
Custodial Credit Risk .............................................................................................. 59, 65, 66, 157
Custodian ......................................................................................................... 49, 52, 58, 157, 173
Custody ....................................................................................... 5, 6, 23, 50, 58, 66, 157, 197, 199
F
Finance Officer................................................ 5, 14, 18, 26, 29, 30, 43, 46, 49, 52, 60, 66, 77, 161
Form INV-91 .................................................................................................. 29, 30, 161, 186, 192
Form LGC 203 ..................................................................................................................... 30, 161
I
Interest Rate Risk ............................................................................................ 54, 59, 65, 154, 158
Internal Control .............................................................................. 6, 7, 10, 14, 15, 16, 23, 44, 157
M
Money Market Account .......................................................................................................... 60, 61
O
Official Depository ........................................................................................... 5, 52, 183, 189, 192
P
Preaudit ....................................................................................................................... 5, 18, 19, 21
Public Deposits .......................................................................................................... 28, 29, 30, 31
R
Request for Proposals ...................................................................................... 34, 35, 89, 185, 191
LGC
Page 215 of 216.
Revision Issued: June 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 30: Cash and Investments
Index
This page intentionally left blank.
End of Section 30: Cash and Investments
LGC
Page 216 of 216.
Revision Issued: June 2014