fy18 treasury management - university of georgia introduction treasury management involves the...

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Treasury Management

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Local Government Finance Officer Certification ProgramLevel 1

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Chapter 1Overview of Cash Management

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Objectives

� Recall the management of cash in the treasury management process

� Identify the two cycles and components of the treasury management process

� Recognize the goals of a treasury manager

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Introduction

Treasury management involves the management of cash from the time revenue is earned to the time an expenditure payment clears the bank.

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Treasury management and cash management are used interchangeably.

Basic Functions

There are three basic functions of cash managers:

• Collecting revenues promptly and accurately

• Disbursing monies owed

• Investing in the interim period between collection and disbursement

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Goals of a Treasury Manager

Simply stated – the goals of a treasury manager are:

� Safety

� Liquidity

� Legality

� Yield

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Safety

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� The cash manager must be aware of all risks.

� Mistakes can damage reputation of government.

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Liquidity

We exist to provide services to our residents.

We collect taxes and fees in order to provide services.

The cash manager must ensure that cash is available to support services.

Must balance meeting cash needs and maximizing each dollar.

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Legality

All applicable federal and local requirements must be followed.

The treasury manager must be aware of all legal constraints and requirements.

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Yield

A good cash manager will seek the highest yield with the least amount of risk.

More services can be provided if more cash is collected/earned.

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Constraints to Goals

� Politics

� Can determine what cash collection and disbursement procedures are acceptable.

� Can determine investments.

� Can even determine selection of bank.

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Continued on next slide

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� Past practices

� Unwillingness to change is sometimes difficult to overcome.

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� Risk

� Defined as the possibility of loss.

� Usually, the greater the risk taken, the greater the return.

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Treasury Management Process

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Cyclical process with a systems and an operating cycle operating at the same time.

See diagram on next slide.

Collecting Revenues

Making Investments

Tracking Investments

Making Disbursements

Monitoring, Evaluating &

Auditing

Forecasting Cash Flow

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Establishing Objectives

Establishing Bank & Broker Relations

Establishing Accounting Systems

Evaluating Needs

Establishing Policies

Operating Cycle

Systems Cycle

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Systems Cycle

Actions are infrequent.

Primary elements:

• Evaluating needs.

• Establishing policies.

• Establishing annual objectives.

• Establishing relationships with financial institutions.

• Establishing accounting systems.

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Evaluating Needs

State the objectives of the treasury management program.

Define long-term (3-5 year) cash flow pattern that the government can expect.

• Identify general trend in revenues and expenditures.

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Improves consistency, creates accountability and helps insure that laws and ordinances are followed.

Most common: investment policy

• State objectives of the investment activity, assign responsibility, establish internal controls, define safekeeping and collateral procedures, and establish a system of monitoring and reporting performance.

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Less common: cash availability policy

• Revenue collection

• Should state the methods used to collect revenues and establish procedures for collecting overdue accounts.

• Expenditures

• Should establish regular payroll and expenditure dates.

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Establishing Annual Objectives

Objectives should cover four measures of performance:

• Availability

• Difficult to set but can be based on something simple like maintaining an excess cash balance equal to one week’s expenditures.

• Yield

• Absolute percentage or as an amount above or below an index rate.

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Establishing Annual Objectives

• Dollar return

• Combines measures of cash availability and investment yield to set a target for total interest earnings for the year.

• Program efficiency

• Should state the percentage of idle cash to keep and invest during the year.

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Establishing Relationships with Financial Institutions

� Policies should establish minimum requirements for brokers, dealers and banks.

� There is a political element involved regardless of the selection process.

� Encourage competition through a formal selection process.

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Establishing Relationships with Financial Institutions

Selection process for brokers and dealers is usually less formal:

• Relationships with multiple dealers

• Investments are generally of a short-term nature

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Establishing Accounting Systems

Four systems are important to the cash manager

• Cash Accounting System

• Investment Accounting System

• Receivables System

• Payables System

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Cash Accounting System

Tracks cash entering and leaving.

Must assign all cash transactions to the proper fund and bank account.

Easily reconcilable to other accounting systems and to bank statements.

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Investment Accounting System

Provide a record of all investments made by account, fund, investment institution and type, maturity and yield.

Should be able to appropriate interest between funds.

Should provide reports that match requirements of the investment policy and annual objectives.

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Receivables and Payables Accounting Systems

Can help cash manager prepare accurate cash flow forecasts and make informed decisions.

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Operating Cycle

Series of regular, repetitive actions taken to manage cash:

•Forecasting cash flows

•Collecting revenues

•Making investments

•Tracking investments

•Making disbursements

•Monitoring, evaluating and auditing

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Forecasting Cash Flows

Goal is to identify revenue and expenditure streams over a given period in the future.

The forecasted cash balances are used to select investment amounts and maturities or in the case of a cash deficiency, the need for borrowing of funds.

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Collecting Revenues

A government needs to develop systems that will ensure revenues are received in a timely manner, credited to the proper fund, and deposited into the correct bank account as quickly as possible.

Offices that collect and deposit revenue should be limited.

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Making Investments

Manager must use judgment in determining the amount, mix of funds, maturity, type of investment, and financial institution.

Cash manager must rely on experience as well as the information available from internal and external sources, the cash flow forecast, and the accounting system in making investment decisions.

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Tracking Investments

Treasury managers must keep track of all outstanding investments.

For investments that are collateralized, the manager should regularly verify that the market value of the collateral exceeds the amount invested.

• This must be done on a daily basis

If the investment accounting system is inadequate, tracking investments is difficult.

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Manager must be able to anticipate upcoming expenditures by working with the payroll and payables staff and accounting systems.

Managers have to consider the timing of disbursement float.

• Time between the day a payment is issued and the time funds leave the government’s bank account for the payment.

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Disbursement pattern is the driving force that determines liquidity requirements;

Well worth the manager’s close attention.

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Monitoring, Evaluating and Auditing

Monitoring normally consists of a check on receipts, cash balances, investment balances, and disbursements each day.

• Compare these values to the values that yesterday’s investment decisions were based on to determine the validity of those decisions.

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System performance is monitored again at the end of each month.

Monthly data are usually combined to prepare annual reports, which are used in setting the next year’s objectives and forecasts.

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The program is usually audited annually as part of the government’s financial audit.

The process of monitoring, evaluating, and auditing performance thus completes and ties together both the systems cycle and the operating cycle.

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Players in the Process

Internal

• Revenue collection

• Payroll and accounts payable

• Purchasing

• Debt management

• Budgeting

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� External

◦ Government

◦ Financial service providers

◦ Financial market

◦ Citizens

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CHAPTER 1EXERCISE

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Chapter 2Banking Services

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Objectives

Define the various banking service categories

Recognize the steps involved in the competitive bid process

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Introduction

� Georgia has some of the strongest banking laws in the United States

� Banks are an integral partner in a government’s goal of maximizing the cash management function

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It’s About the Relationship

Creating and maintaining a common partnership is one of the treasury manager’s most important goals.

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Politics, Politics, Politics

Impacts both

large and small

governments

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Selecting a Bank

Politically select one or more banks to maintain accounts

Select one or more banks with the intention of rotating periodically

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Selecting a Bank

•Select a bank based on the competitive bid

• Usually is the most cost effective, and the decision is based on business principles rather than politics when the government uses a comprehensive Request for Proposal (RFP) process

• This method helps ensure the government is getting the best price for the best service

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Evaluation Process

GFOA has published recommended practices that state and local governments should undertake to receive effective banking services at reasonable costs.

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GFOA Recommended Practices

Periodically initiate competitive-bidding and negotiation processes

Have contracts that specify services, fees, etc.

Establish a relationship manager

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GFOA Recommended Practices

Evaluate the relative benefits and costs of paying for services through direct fees, compensating balances, etc.

Evaluate their needs against the costs and benefits of specific banking services

Perform a cash management review and comprehensive evaluation

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Banking Service Categories

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Collection Services

Primary objective is to accelerate the availability of funds by reducing the time needed to receive, process and deposit payments. Time lag is known as the collection float.

• Wire transfers

• ACH collection

• Lockbox collection systems

• Concentration account

• Over the counter payments


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Collection Services

Primary objective is to accelerate the availability of funds by reducing the time needed to receive, process and deposit payments. Time lag is known as the collection float.

• Credit and debit cards

• Coin processing

• Remote deposit capture

• Sweep accounts

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Disbursement Services

The goal is to pay bills when due—but not before—on a timely and accurate basis

• Wire transfers

• ACH payments

• Controlled disbursement accounts

• Zero balance accounts

• Positive pay services

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Disbursement Services

The goal is to pay bills when due—but not before—on a timely and accurate basis

Additional services

• Check retention services

• Account reconciliation services

• Disbursement float summary

• Online banking

• Balance reporting

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Investment Services

Primary goal is to maximize yield on idle funds subject to the priorities of safety, liquidity, and legality

• Certificates of deposits

• Money market instruments

• Repurchase agreements

• Reverse repurchase agreements

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Credit Services

Short-term services—standard product

Long-term services—solicited separately

• Lines and letters of credits

• Municipal commercial paper

• Short-term notes

• Bond purchasing

• Bond underwriting

• Bond transfer and registration services

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Competitive Bid Process

Advantages

• Additional interest earnings

• Resulting from improved yields if investments are separated from routine banking services

• Resulting from an overall increase in amounts available for investments through better use of a bank’s collection services

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Advantages (cont.)

• Additional bank services

• Reduced bank service charges or compensating balances as a direct result of the competition

• An overall increase in efficiency of cash management operations

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Additional costs

• Costs related to the bidding process

• Costs incurred when changing established procedures

• Costs incurred when changing banks

Usually offset by the additional interest earnings and increased services

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The Process—Step 1

Review of the present system and determination of what bank services are desired and available

Request only services that are truly needed

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Preparation of a request for proposal (RFP) and distribution to all banks in the area

Other government’s RFPs should be used ONLY as a helpful guide

RFPs must be impartial and reasonable


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Step 2

Generally, an RFP will contain several standard sections, identified as follows:

Section 1: Introduction

Section 2: Scope of Banking Services

Section 3: Bidding Instructions

Section 4: Bank Credit Evaluation

Section 5: Bidding Forms

Section 6: Bid Timeline

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Pre-bid conference for all potential bidders to answer questions and to clarify the RFP

• Mandate attendance?

Minimize politicization by government officials having no other communication (in excess of normal operating discussions) with the banking community during the bidding process

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• Preparation and submission of proposals by banks

• Thirty days is sufficient time for a bank to receive and respond to an RFP

• Banks should respond only on the standard forms provided

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• Compensation to Bank

• Compensating balances

• Specific balances are maintained by the government in their bank account to help offset the cost of services

• Earnings credit rate

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• Compensation to Bank (cont.)• Direct payment method

• Allows the government to pay for banking services as it does for other services

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Direct Pay


Evaluation of proposals

• Banks should know what criteria will be used in evaluating the banking services proposals

• Generally, the bank that submits the lowest overall cost or compensating balance requirement and meets the other criteria will be awarded the contract

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Evaluation of proposals

• Abnormally low bids should be carefully evaluated to assure the bank could deliver the services promised

• The government should always reserve the right to refuse all bids and start the process over again, if necessary

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Recommendation of the best proposal to the legislative body

• List the acceptable bids starting with the lowest cost, since cost is the primary criterion

• Additional explanatory material should accompany the recommendation

• A bank not meeting all of the other criteria should be disqualified

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Award of a contract to the recommended bank

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Execution of a banking services contract

• Generally, the contract is signed immediately after the governing authority has voted

• Include the RFP document and the bank’s response in the contract as exhibits

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Implementation of the contract.

• A 30 – 180 day transition period

• Additional time granted if necessary

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Compensation for Bank Services

Compensating Balances

Direct Payment

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Compensation for Bank Services

Compensating Balances� Require governments to maintain specific balances in

their bank accounts

� Offset the cost of services

� An earnings credit rate (ECR) is determined

� Government receives a reduction in interest income or earnings credit that offsets the bank services charges

� Amount available for the ECR is the average collected balance less any reserve requirements based on the Federal Reserve Bank regulations

Earnings Credit Calculation

The formula for the Earnings Credit Calculation is

Collected Balance x [1 – Reserve Requirement] x [Earnings Credit Rate x Days in Month/365]

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Average Collected Balance $4,000,000Reserve Requirement 10%Earnings Credit Rate 3%Days in Month 30

Based on the following information, calculate the earnings credit amount.


Earnings Credit = $4,000,000 x [1-.10] x [.03 x 30/365]= $4,000,000 x .90 x .00246575= $8,876.71

Based on the above scenario, the total earnings credit for the month is $8,876.71 and will offset any bank service charges for the month.

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Direct Payment

Direct payment method • Government pays for banking services• Prices for services are computed and billed monthly• Payment for bank services should be made only after the

billing has been analyzed and approved

Comparison of Methods

Important to evaluate direct payment compared to compensating balances

• Determine the most efficient use of the government’s funds

• Maximize the interest earnings of cash on hand• The lower the earnings credit rate, the higher the

compensating balance required to offset the bank fees• Compare the ECR with rate of return that the government

receives currently on investments.

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CHAPTER 2EXERCISE

Chapter 3Forecasting

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Objectives

Recall the steps involved in preparing a cash flow forecast

Prepare a basic cash flow forecast

Define the moving average method forecasting technique

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Introduction

Important to know how much, when and for how long cash is available

Proactive approach to forecasting can reap significant benefits

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Cash Flow Forecast

A schedule of receipts and disbursements over a given time period

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Benefits

Improved interest earnings

Borrowing at lower rates

Enhanced rating agency confidence

Can identify potential budget problems

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First Step

Identifying all the funds, departments and financial data in a government.

• Budget is best source for identifying all the funds and departments.

Governments account for revenues and expenditures at the fund level.

• Fund level is the most common cash forecasting level.

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Types and Frequency of Forecasts

Depends upon several factors

• Predictable cash flows and sufficient cash reserves = simple monthly forecast

• Volatile cash position, erratic cash flows or changing demographics = more detailed and complex forecast

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Things to Consider

� Type of financial information available

� Time period to forecast

� Level of detail needed

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Methodology and accuracy of a cash flow forecast will depend on the cooperation from other departments within the government entity and on the experience and expertise of the cash manager

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Forecasting

Monthly financial statements going back two to three years

• Provide historical data on actual receipts and disbursements and help identify peaks and valleys of cash flows

Prior year’s bank statements

• Add insight on check float, disbursement float and periodic cash balances

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Forecasting

Current year budget and estimated draw schedules for capital projects

• Supply information on future revenues and expenditures and help identify potential changes to previous cash flow patterns

Summary of investment maturities

• Detail the timing of expected cash flows from investments to match maturities to disbursement needs

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Forecasting

Debt service schedule

� The schedule will provide the timing of the principal and interest payments for debt service obligations which typically have a significant impact on cash flows.

Annual payroll schedule

� Salaries and benefits are typically the largest expenditures of the government and have a significant impact on the cash flows. The annual payroll schedule provides the cash manager with the timing of the payroll and related cash requirements to incorporate in the forecast.

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Revenues

� Should be limited to four or five major sources

� Additional revenues can be lumped together

� Use 15% rule of thumb

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Property Taxes and Charges for Services analyzed separately – 15% of total revenue

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Forecast Future Expected Receipts

Prepare a monthly schedule of prior receipts

Calculate a simple three

year average

Determine what percent of each revenue source contributes to the total

Adjust for any planned changes in timing or amount

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Class Discussion

Discuss reasons why we have to make adjustments to our

forecast?

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Expenditures

Prepared the same way as revenues.

• Categorized by major type.

Cash manager should prepare a monthly schedule of historical disbursements and calculate a three year average.

• Make adjustments for anticipated variations and trends.

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Equation

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Equation

Doesn’t answer the “when” or “how long” question

A determination of the frequency of the cash flow must be made

• Most common is the monthly forecast

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Georgia Fund I

Local Government Investment Pool (LGIP of Georgia) pays very competitive market rates in the short term (30 days and up).

The more frequent decision may not generate more interest earnings if you utilize the Georgia Fund 1 or an equivalent vehicle.

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Moving Average Method

Most common forecasting method

Looks at past history (example: 3 months) and uses the average to project the next month

Each succeeding month, the earliest month is dropped and the newest month is added to use in the averaging technique

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Should be used with very short-term and volatile funds such as Accounts Payable

Straight historical trends should be used with more predictable receipts and disbursements such as property taxes and salaries, respectively

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Results must be analyzed for reasonableness

• Compare forecast numbers with historical numbers for the last 3 – 5 years to note any material differences

• Research these variances against the cash flow forecast as appropriate

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CHAPTER 3EXERCISE

Chapter 4Collections

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Objectives

Recognize the types of collection methods available

Recall the types of collection strategies

Define float and identify methods to reduce float time on collections

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Introduction

Major goal of any revenue collection system is to increase the amount of funds available for investment

Funds can’t be invested until deposits are presented to the bank from which they are drawn.

Until then, those deposits are considered deposit float.

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Deposit Float

NOT available for cash.

NO opportunity for investment.

LOSS of interest.

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Cash Mobilization

•The receipt of payments from citizens and businesses to the government

�First task of the cash manager

•Before funds can be invested and eventually disbursed, they must be:

�Received and secured

�Accounted for

�Deposited at a bank or similar financial institution

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Types of Collections

First step in developing effective collection procedures is to identify the various types of collections

�Different types of collections place different demands on staff time and have differing administrative costs

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Most common collections are:

�Cash and checks

�Night deposits

�Lockbox

�Payment Consolidation Services

�Electronic fund transfers

�Payment (Debit and Credit) Cards

�Government websites

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� Collection options available influenced by trends in consumer payment methods

� Most governments now allow e-payments

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Cash and Checks

Most common form of collections

Public can either mail in payments or pay in person

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Cash and Checks

Very time consuming and expensive from a staffing standpoint

� Major reason most governments are moving away from this method to more advanced, technological methods

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Cash and Checks

Most frequent revenues collected by this method:

�User fees

� License and permit fees

� Fines and forfeitures

� To some extent, property taxes (mostly car tags)

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Night Deposits

�Convenient for the public to make payments after office hours.

�Locations should be very secure, conveniently located, well lit and accessible by both pedestrians and automobiles.

�Most common payments:

�Utility bills or user fees.

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Lockbox

Banks or third party processors receive and deposit payments for a government

Usually, the processor can forward the payment data on to the government electronically

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Lockbox

Benefits

• reduction in mail time

• reduction in government’s processing time

• funds are available sooner

• bank/third party records provide an audit trail

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Lockbox

Compare cost of lockbox and in-house collections for cost effectiveness

Most common payments:

• High volume transactions such as utility billings and property taxes

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Electronic Lockbox(Payment Consolidation Services)

Customer remit through their financial institution payments to government

No payment stub available

Consolidation providers match payment information to account information for ease of posting to government’s billing system

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Sequence of Activities for Lockbox

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Mail sent to PO Box

Courier picks up mail; delivers to lockbox facility

Mail sorted by bank staff

Data on checks captured using MICR scanners

Checks deposited at bank

Check clearing begins (bank process)

Remittance data captured using OCR scanners

Remittance data transferred to government

Posting to internal financial system (government process)

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Electronic Fund Transfers

�EFTs are automatic transfers of funds from specific banks to the government

�Encompass both ACH-based payments and wire transfers

�Funds are transferred from the payor to the government bank account electronically

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Electronic Fund Transfers

Cost effective and efficient

� saves staff time and banking cost

� credits the funds on the same day or the next day

Most effective for large payments

�monthly sales tax checks

� large property tax (escrow) payments

� repetitive billings and federal and state grants

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Wire Transfers�Transferred using the Federal Reserve Communications System (Fedwire) or Bankwire

�No mail float and funds are immediately available

�Can be transferred from one account to another in the same day

�Cost per transaction is greater than for ACH-based transactions and is therefore for larger-dollar transactions

�Bond proceeds, investment maturities, or grants.

�Higher the interest rate paid on bank balances, the lower the break-even point amount will be.

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ACH

� Electronically clears and settles debits and credits between banks—uses network of Federal Reserve affiliated facilities

� Works well for recurrent transactions and receivables.

� The cost per transaction is lower than for wire transfers

� Cost-benefit analysis should always be performed

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Payment Cards (Debit or Credit)

•More prevalent and acceptable for governments to use this as a method of payment

•Can be an efficient way for the public to pay for services and the government to collect fees

•Receipt of funds is guaranteed

•Biggest disadvantage

• Discounted amount (usually 1-3%) to cover processing fees

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Payment Cards (Debit or Credit)

GFOA Best Practice

• Electronic Transfers for Collections

EMV

• Card Authentication

• Cardholder Verification Method (PIN)

• Transaction Authorization

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Collection Strategies—Property Taxes

�Largest sources of revenue for most local governments is the property tax

�Collection involves two activities

• The collection of current taxes and

• the collection of delinquent taxes

• The more successful a government is at the first task, the less the need for the second

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Collection Strategies—Property Taxes

� General rule of thumb is that local government should be able to collect 95 percent or more of the current tax levy in the current fiscal year

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Collection Strategies–Property Taxes

�Well-designed tax statements� Clearly identifies the amount due,

� Basis for determining tax liability, and the penalties and interest charges for late payment.

� Return envelope should be enclosed with the statement.

� State law defines the information that must be provided on the statement, but within those guidelines, governments can exercise discretion in bringing taxpayer’s attention to the amount due and the due date.

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Other Property Tax Collection Strategies

• Mail reminder notices two to three weeks before taxes are due.

• Keep taxpayer records current, especially mailing addresses.

• Build taxpayer goodwill through more convenient collection points and office hours.

• Apply penalties and interest rates that discourage delinquent payment.

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Delinquent Taxes

�More difficult to collect.

�Collection begins with the preparation of a delinquent taxpayer roll.

� Some states require the tax collector to publish in a newspaper the names of delinquent taxpayers and the amount owed.

� Encourages taxpayer compliance.

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Other Tips for Property Tax Collection

� Installments with One Billing

� The Tag Reader

� Use discretionary powers, such as placing liens on property.

� Contract out delinquent collections to a law firm or collection agency.

� Use small claims court for minor delinquency cases.

� Take advantage of services offered through agencies such as GMA.

� Attend CVIOG Revenue Administration class.

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Other Major Revenue– Sales Tax

Can take the form of a:

• Special Purpose Local Option Sales Tax (SPLOST, ESPLOST or TSPLOST)

• Local Option Sales Tax (LOST)

• Homestead Option Sales Tax (HOST)

• Municipal Option Sales Tax (MOST)

• Metropolitan Atlanta Rapid Transit Authority (MARTA)

One way to increase sales tax revenue receipt is to work with the DOR to wire transfer the sales taxes to your government thereby reducing mail float

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Float

Treasury managers seek to increase the speed of the deposit since interest does not begin to be earned until payment has been made by the bank.

The time lapse between the deposit of a check and the time it is paid by the bank is known as “check collection float.”

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Float

There are three primary types of deposit float:

• Mail float

• Processing float

• Collection float

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Mail Float

� The amount of time a payment remains in the mail system from the time sent to the government until the government has physical possession of the payment

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Can be reduced by:

Assigning P.O. Box numbers.

Multiple pick-ups throughout the day that bring items into the processing stream faster.

Processing Float

�The amount of time necessary to process the payment

�Under the control of the government

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Can be minimized through:

Use of technology, such as machines that can read scanned documents such as remote deposit capture, and trained personnel

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Collection Float

� The amount of time necessary to credit a government’s bank account after the payment has been received

� The time necessary for a government to receive good funds on a payment

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Collection Float

� Request a copy of their bank’s availability schedule that states how long it takes to convert ledger balances into collected balances

� Responsibility of the government’s treasurer to assure that the government has the best possible availability from the bank selected

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Reduce Float Time on Collections

Over the counter

�Banks can accept payments for the government, and directly deposit the funds in the government’s account.

�Most common payments received in this manner are tax and utility payments.

� Convenient to residents, expedites funds into the government account and may be more cost effective for small payments than a lock box system.

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�Account consolidation

�Can reduce the cost of monitoring cash availability and result in a larger common pool of balances available for investment purposes.

�Can simplify the investment process by making it easier to space investment maturities to meet overall cash needs.

�Permits the treasury manager to lengthen maturities which usually means higher interest rates.

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�Concentration accounts

� Gain the benefit of consolidation without sacrificing the control of separate disbursement accounts with a concentration account.

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Concentration Account Structure

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Investments

LGIP

Concentration

Account

Daily Investments

(REPOS)

Special

Programs

ZBA

Accounts

Payable

ZBA

Payroll

ZBA

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�Wire transfers

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Sales tax checks, large grants, and other large dollar revenue should be investigated as to the feasibility of usage of the wire transfer.


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CHAPTER 4EXERCISE

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Chapter 5Disbursements

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Objectives

� Recall the major goal of a disbursement system and the goal of the treasury manager in the disbursement area

� Differentiate between centralized and decentralized disbursements

� Identify the types and characteristics of disbursements

� List the components of disbursement float

� Recognize how the use of electronic banking services optimizes disbursements

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Introduction

Disbursements should be timed so that they remove cash from the local government’s treasury only at the last possible moment

• Slow the payment of funds so that the maximum amount is available for investment

Vendors and suppliers should be paid on the due date –not before

• There may be times when the investment of funds will earn more interest than what is saved by taking the discount

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Introduction

Take discounts when available

• Immediate savings

• Strive to pay vendors and suppliers on a timely basis

Manual and computerized

• Basic disbursements are substantially the same and include payroll, accounts payable, capital outlay and debt service

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Centralization

Preferred over decentralization

� Helps streamline the number of accounts that must be maintained

� Reduces the number of transactions

� Limits the amount of oversight needed to monitor account activity and related transaction

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Truth or Myth?

Some studies have determined that generating a single payment can cost as much as $50 to $125

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Brainstorming exercise

List all the steps and people involved with processing an invoice.

To begin, think about how you receive the invoice.

The last step will probably involve account reconciliation.

After you have everything listed, discuss the costs associated with each of the steps.

Did your initial answer change regarding the statement being a truth or myth?

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Types of Disbursements

Payroll

� Typically handled through a computerized program and disbursed on a weekly, bi-weekly, semi-monthly or monthly basis

� Computerized accounting files are created

� Normally, one payment is made to cover the total disbursement

� Typically paid through ACH or direct deposit

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Accounts Payable

Covers the day to day operating and maintenance expenditures

Two forms, “batch” processing and “just in time” processing

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Accounts Payable

Batch processing is usually payable weekly, bi-weekly, semi-monthly or monthly. Bills are received and matched with purchase orders and receiver documents. Payment is scheduled for the next cycle.

Just in time processing schedules payments according to aging schedules built into a computerized program and produces a

steady flow of disbursements.

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Capital Outlay

� Larger in nature and not as easily scheduled. Working with purchasing schedules and construction engineers can assist in projecting these types of payments.

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Debt Service

• Very predictable and usually occur two times a year

• Should be wired on the due date

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Electronic Banking Services to Optimize Disbursements

Important goal of treasury manager in the area of disbursements is to increase float.

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Electronic Banking Services to Optimize Disbursements

Disbursement float has three components:

1. Delivery - the time it takes to deliver payment to payee

2. Processing - the time it takes for the payee to process the payment that the government has sent

3. Collection float - the time it takes for the payment to clear the banking system

• Most clearing arrangements now take only one business day

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Methods to IncreaseDisbursement Float

�Payment date

� Should correspond to due dates from vendors

� Do not pay early, but do not pay late

� Consider the time it takes for the payment to be received by the vendor

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�Electronic funds transfer

� Excellent way to remit larger sums immediately.

� Wire at the last possible moment.

� Should not be used for small transactions.

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�Electronic banking services relevant to the management of disbursements include:

� Wire transfers - most expensive way to move funds but also the fastest. There are repetitive and non-repetitive wires.


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�Electronic banking services relevant to the management of disbursements include:

� Automated clearinghouse payments (ACH) –the most frequently used means to disburse funds electronically and takes approximately one to two days to process. The most common ACH transfer is direct deposit payroll to place funds into employees’ accounts.

� Preauthorized debits for recurring transactions

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84


�Purchasing cards

� Help minimize the use of purchase orders and checks.

� Assigned certain limitations, such as dollar value of credit, allowable items, and daily purchasing limits.

� Eliminate procedures related to purchasing requisitions, invoices, checks, receipts and expense reimbursements.

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�Purchasing cards cont.

� Procurement costs fall from $90 per purchase to $20.

� Benefits include:

� rebates to the entity using the card,

� detailed information used for monitoring procurement activity that can be easily obtained through the Internet

� more leverage in negotiating discounts

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85


�Purchasing cards cont.

� Caution is required and solid internal controls must be in place.

� Educate card users about card policies and procedures and continually audit the card program.

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OCGA 36-80-24New Law

1/1/16

Elected officials using purchasing card

• Governing body adopt a policy that meets requirements of new law

• Publicly vote to authorize elected official to use the card

• Enter into user agreement with each authorized elected official

Sample Resolution

• http://www.accg.org/content.asp?contentid=2359

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Payroll cards

� Appealing if you have an employee that has no bank account or when an employee does not elect to participate in your direct deposit program.

� Type of debit card that can have funds placed on the card through an ACH transfer initiated by the government.

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Payroll cards cont.

�Can be used at an ATM machine to obtain cash and can also be used to make purchases where credit cards are accepted.

�Can be easily replaced and is usually less expensive than issuing a stop payment on a check and then going through the reissue process.

� Note: There are start-up costs involved with using payroll cards, and they are still more costly than direct deposit.

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Disbursements and Zero Balance Accounts

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Government sets up a central bank account –usually a zero-balance (ZBA) and

concentration account.

Accounts are intended to carry a zero balance.

Deposits and disbursements are centralized into one or more ZBA accounts.

Established for the purpose of handling disbursements such as payroll, accounts

payable, etc.

Disbursements and Zero Balance Accounts

174

Checks are written from the ZBAs which create a daylight or intraday overdraft in that account.

At the end of the business day, the bank automatically transfers funds from the concentration account to the ZBA to cover the overdraft and bring the balance back

up to zero.

Balance in the concentration account that is not needed to cover overdrafts in the ZBA accounts is kept invested to earn a return for the government.

88

Conclusion

Governments should design and develop a disbursement system that works for them.

Efficient and effective by providing the information needed to meet timing and internal control requirements.

Governments should utilize these methods to increase the disbursement float as much as is feasible.

Strive to disburse the cash at the last possible moment (while still paying on time) so the funds are working to earn interest as long as possible.

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CHAPTER 5EXERCISE

89

Chapter 6Investments

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Objectives

•Differentiate between treasury management law and policy

•Recall various sections of Georgia law related to investments

•Recognize various types of investment instruments

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Introduction

Once the process begins, investments become one of the most important responsibilities of the treasury manager’s job

More demanding, difficult and risky

• Explosion of investment management products and services

• Technological advances

179


Introduction

Benefits

• Public dollar being stretched much further

The loss of public funds have increased the need for more training, education and information in the field of public fund investing

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Law

Before a policy is developed, applicable laws and regulations governing investments must be reviewed. Determining the legal constraints and issues sets the framework for determining which types and duration of investments are appropriate.

181

Law versus Policy

182

Spells out the objectives and constraints for approved investments

Spells out how to proceed with those instruments

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Georgia Law

Treasury managers will want to focus on the following sections of Georgia Law

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Title Chapter Subject

O.C.G.A. 36-82-7 Investment of Bond Proceeds

O.C.G.A. 36-83 Local Government Investment Pool (LGIP)

O.C.G.A. 45-8 Accounting for Public Funds

LGIP OCGA 36-83

Local Government Investment Pool

• Georgia Fund 1 and Georgia Extended Asset Pool

• State-administered pools for investment of local public funds

• State treasurer develops policies for efficient administration of the pool

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LGIP OCGA 36-83

• Requires local government ordinance or resolution authorizing investment in the LGIP

• Local government must indicate who is authorized to deposit and withdraw funds from the state pool

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Accounting for Public FundsOCGA 45-8

Bond required for all officers who collect and hold public funds

All depositories must give security for deposits of public funds

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A depository may pledge as security the following obligations

• Obligations of the US or its subsidiaries

• Obligations of counties or municipalities of Georgia

• Bonds of public authorities or industrial development authorities

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Deposits may be secured by a combination of surety bond, deposit insurance, or pledge of securities

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Examining an Investment Policy

Policy can be defined as a set of guiding principles that determine a course of action

Sound cash management policies improve consistency, create accountability, help ensure that laws and ordinances are followed, and create goals by which to measure performance

189


Examining an Investment Policy

Local governments should have a written investment policy adopted by its governing authority to provide guidance for making investment and treasury management decisions

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96

GFOA “Creating an Investment Policy”

Review state public funds investment and collateral laws

Review investment policies for similarly sized jurisdictions

Draft the policy

Review the policy by appropriate parties

Adopt the policy by governing authority

Establish procedures

Annually review policy

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Investment Practices

Investing funds should be carried out within the parameters as set out by the investment policies adopted by the government.

The GFOA recommends a step by step approach in their Investing Public Fundsmanual. These steps provide the framework for prudent and effective investment of public funds.

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11 Steps to Prudent Investing by GFOA

1. Identify the entity’s objectives, constraints, preferences and capabilities.

2. Develop investment policies.

3. Develop administrative systems and internal controls.

4. Prepare a cash flow forecast.

5. Determine the investment horizon.

6. Establish an investment outlook and strategy.

7. Analyze the yield curve.

8. Select optimizing instruments.

9. Monitor the markets and investment results.

10. Report results.

11. Adjust and rebalance the portfolio accordingly.

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Investment Instruments

U.S. Treasury obligations

U.S. Agency obligations

Certificates of deposit

Repurchase agreements

Georgia LGIP

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U.S. Treasury Obligations

Most commonly purchased by Georgia local governments are Treasury bills, Treasury notes and Treasury bonds.

195

All carry an explicit guarantee backed by the full faith and credit of the U.S. Government and are considered the safest securities in which to invest.



Treasury Bills

• Short-term (less than one year) obligations of the Federal government

• Issued in 3 month, 6 month and 1 year maturities in denominations from $10,000 to $1,000,000

• Issued at a discount mature at par and are not coupon bearing

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Treasury Notes and Bonds

• Pay interest every six months

• Notes and bonds are virtually identical in their investment features, except that the term on notes is ten years or less, while bond maturities are longer than ten years

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U.S. Agency Obligations

NOT backed by the full faith and credit of the U.S. government but do have an implied “moral obligation” of the Congress to protect investors

Lack of an explicit guarantee compels investors to seek higher yields in return for the perceived higher risk

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U.S. Agency Obligations

Popular securities of this type among local government investors

• Fannie Mae

• Federal Home Loan Bank

• Federal Home Loan Mortgage Corporation

• Federal Farm Credit Bank

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Certificates of Deposit

�Backbone of most local government investment programs for many years

�Governments now investing in other securities, but very few are abandoning altogether their local financial institutions and the CDs they offer

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Certificates of Deposit

�Negotiable CD – bought and sold on a secondary market

• Issuing bank sets face amount and interest to be paid

• Maturity, holder receives face amount and accrued interest

�Non-negotiable CD – cannot be transferred by holder and penalizes for return of principal before maturity

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Repurchase Agreements

Characterized as the sale of securities with a simultaneous agreement to repurchase them on an agreed upon date in the future

The purchase price paid is a loan of cash that is collateralized by the securities

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When the securities are repurchased

• the loaned cash is returned plus an amount constituting interest, which is the repurchase price paid in exchange for the securities

Longer term repurchase agreements are called term repos

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Parties to the trade are referred to as counterparties

It is important to continually assess and understand your counterparty risk exposure

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LGIP

State of Georgia’s Local Government Investment Pools are Georgia Fund 1 and the Georgia Extended Asset Pool (GEAP)

Allows local governments to consolidate and invest idle funds so earnings on such investments would reduce the need for additional taxes and other public revenues

Objective in managing the Pools is to preserve capital contributions; maximizing investment income is of secondary importance

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LGIP

By state statue, allowable investments in the Pools include all instruments that can be purchased directly by local governments

• Obligations issued by the federal government (Treasury bills and notes), obligations fully insured or guaranteed by the federal government or a federal government agency, federal government corporation obligations, banker’s acceptances, repurchase agreements, obligations of political subdivisions in Georgia and obligations of any state in the United States, commercial paper and negotiated investment deposits.

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LGIP

Each local government will receive a higher rate of return on instruments of larger denominations than could be possible if investing on an individual basis

Funds are not locked into longer maturities so all participants have maximum flexibility in withdrawing and depositing funds without losing the advantage of higher investment yields

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LGIP

Investment policies are established by the State Depository Board.

Deposits are NOT guaranteed or insured

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GEAP

Georgia Extended Asset Pool

Created in 2000 to allow for longer investment duration than Georgia Fund 1

Requires minimum investment of $1,000,000 for periods of one year or longer

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Conclusion

Governments must be committed to seeking out all the opportunities open to them under a formally adopted investment policy

All actions must consider that public funds safety and liquidity always come before yield

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211

CHAPTER 6EXERCISE

Chapter 7Internal Controls

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Objectives

�Recognize the importance of developing policies and procedures that include strong internal controls

�Apply the basic concepts of good internal controls related to treasury management.

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Introduction

•Internal control is the plan of organization under which

• assets are protected

• accuracy and reliability of records are assured

• compliance with policies and procedures is maintained

• the efficiency of operations is promoted

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Introduction

It is the duty of the professional cash manager to be a good steward of the portfolio

� Protecting cash and investments against loss, misuse, and inefficiency

Top management must be involved and committed to ensuring that internal controls are a high priority

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Concepts of Internal Controls

Authorizations

• Should be documented in the financial procedures manual for employees.

• Lines of authority should be well defined and clear.

• Special controls should be designed for telephone orders, wire transfers and securities safekeeping.

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Authorizations (cont.)

• Appropriate level of authority should authorize each transaction.

• Example: Disbursements over a certain dollar amount may require approvals from the Director and a supervisor could approve the smaller dollar items.

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Communications

• First step is preparing, maintaining, and using well written investment procedures that spell out each step of the investment process.

• Should be clearly documented and communicated to all employees.

• Examples of documents used to authorize transactions could be included in the procedures manual.

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Segregation of Duties

• one person performing all aspects of an investment transaction increases the government’s exposure to fraud as well as inaccurate reporting

Any segregation is better than no segregation

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Without adequate segregation of duties, internal control management becomes virtually impossible

Use other department personnel if necessary to achieve the proper segregation of duties

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Some guidelines are:

• Separate operational responsibility from financial recordkeeping responsibility

• Separate custody of assets from accounting

• Separate authorization of transactions from the custody of the related assets

• Separate duties within the accounting function

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•Compliance Monitoring

� Compare actual results to the budget and look for unusual deviations over or under budget expectations. Once variances are discovered, explanations must be given

� Assess competence and trustworthiness of the individuals in the particular department

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Compliance Monitoring (cont.)

� Establish physical control

� Checks and Balances

� Prevention Controls

� Detection Controls

223

Conclusion

Written investment procedures are an important step towards safeguarding public assets.

224

Once established, these procedures should be updated at least annually and periodic surprise audits should be conducted.

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225

CHAPTER 7EXERCISE

Chapter 8Staffing and Supervision

226

114

Objectives

Recognize the importance of proper staffing and supervision in treasury management

Recall the job of the cash manager and the different areas of responsibility

227

Introduction

Proper staffing and supervision is the single most important internal control a government entity can put in place.

Cutbacks and savings in this area should be made only when carefully considering the safety of the government’s cash and investments.

• A dollar saved today is no consolation if millions are lost tomorrow.

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Who is Responsible?

Individuals range from appointed clerks, accountants, professional cash managers and CPAs, to elected Tax Commissioners

•Vast majority are appointed employees who may work on cash management as a full-time or part-time basis depending on the size and structure of the government entity

229


Who is Responsible?

Function should be carried out with the following in mind:

• safeguard the cash and investments of the government from loss

• maintain the cash and investments to meet the cash flow needs of the government’s operation

• and maximize the yield on “idle” cash all within the state and federal laws and local policies and procedures

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Who is Responsible?

Investment/cash management policy

• Should cover who is responsible for carrying out a government’s cash management and investment duties

• Not just how those duties should be carried out

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Who is Responsible?

�The smaller the government, the more likely that one person will be performing the cash management

�Larger governments will probably have the Chief Financial Officer responsible, but with staff positions doing the daily work

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Who is Responsible?

�All individuals dealing with the management of the government’s cash must be educated and trained

�They must be monitored and measured on an ongoing basis against the standards set for them

�Ultimately, the top elected or appointed officials are responsible

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The Cash Manager’s Job

Most cash managers are responsible for one or more of the following areas or functions:

234

Revenue Collection

Disbursements

Bank Accounts for Operating Funds

Bank Cash Management Products and Services

Banking Relations

Liquidity Forecasting and Management

118


Most cash managers

are responsible for one or more of the following areas or

functions:

235



Most cash managers are responsible for one or more of the following areas or functions:

• Accounting and controls for bank accounts and investments, and possibly for all the entity’s budgets and financial forecasts

• Policies covering liquidity, funds management, and investment

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119


• Reporting and oversight for bank accounts and investments, and possibly for all the entity’s financial transactions and related management information

• Compliance with applicable regulations

• Management of debt

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Supervision of the Cash Manager

Because of the specialized education and training required, officials that are ultimately responsible for the function may lack the experience and knowledge necessary to oversee the cash management function

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Supervision of the Cash Manager

Best cash managers understand that sound oversight policies and procedures are implemented to protect both the assets of the government and the cash manager himself

Supervisors should expect a cash manager to report on liquidity, investments, policy compliance, and legal compliance

• There should also be a report that shows that the portfolio’s risk is maintained within policy limits

239

Conclusion

�All governments should be structured to assign cash management responsibility to specific individual(s)

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Conclusion

�Important to:

� Hire the right individuals

� Properly training those individuals

� Appropriately supervise their work

�In the end, it is the employees who make the day-to-day decisions about cash management, both internal and external, that can potentially place a government in a precarious and/or embarrassing situation

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CHAPTER 8EXERCISE

122

Chapter 9Accounting & Reporting

243

Objectives

Define risk terms

Recall depositor risk disclosure requirements

Recognize the different types of risks associated with investments

244

123

Introduction

There must be an accounting of all transactions and the reporting of the results

Accounting records should reflect GAAP as related to governmental accounting per GASB

Reports should be prepared directly from the accounting records and reflect the financial and operating status of the treasury management function

245


Introduction

Operating reports are the best tool for monitoring

the daily activity in the treasury management area

Financial reports reflect the status of cash and

investments activity at a certain point in time

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Introduction

Operating Report Examples

• Budgeted interest/actual interest income

• Projected cash balances/actual cash balances

• Projected yield/actual yield

• Projected investment mix/actual mix

Yield benchmarks should be set for comparison purposes against standard marks

247

Deposits & Investments: Information in the Notes

Cash deposits and investments can be quite significant relative to other assets and a source of substantial revenue

The investment of a government’s available cash to generate more resources comes with a variety of risks

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125


A body of accounting and reporting standards has developed around deposits and investments in order to give the public information about the risks that accompany them

249



GASBS 3, Deposits with Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements (as amended by GASBS 40 and GASBS72)

250


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GASBS 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (as amended by GASBS 72)

GASBS 40,Deposit and Investment Risk Disclosures.

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252

• GASBS 53, Accounting and Financial Reporting for Derivative Instruments (as amended by GASBS 72)

• GASBS 59, Financial Instruments Omnibus

• GASBS 72, Fair Value Measurement and Application

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Investor & Depositor Risk

State statutes require some level of collateral for deposits when the deposits exceed depository insurance (uninsured deposits).

253

Depositor risk

Most folks do not worry about the safety of the cash they have on deposit at the local bank because of FDIC or FSLIC coverage.

What if you had $1 Million?

Current FDIC Coverage

254

128


�Depository risk involving cash:

�There is the risk the bank could fail.

�For a government that requires the bank to collateralize deposits, the name the collateral is in and who is actually holding the collateral become real issues. This is a major point in bankruptcy law, because if it isn’t set up correctly – you lose!

�What about the risk associated with the quality of the collateral; it may have been worth as much as the deposit yesterday, but what about today?

255



�Investor risk - Suppose you had a million dollars to invest, how would you invest it? Consider the following list of questions:

�Do you want to invest it in debt or equity securities (bonds or stocks)?

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129


�Are you going to put it all in one investment, a variety of investments all of the same type, or do you want to diversify?

�How much risk are you willing to accept? Are you willing to play the field of derivatives?

�Are you going to take physical possession of the investments or place them in a depository?

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Investment Risk

Credit risk

• the risk that an issuer or other counterparty to an investment will not fulfill its obligations

Custodial credit risk

• the risk that a government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party if the counterparty to the transaction fails

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130

Investment Risk

Concentration of credit risk

• the risk of loss attributed to the magnitude of a government’s investment in a single issuer

259


Investment Risk

Interest rate risk

• the risk that changes in interest rates will adversely affect the fair value of an investment

Foreign currency risk

• the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit

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Deposit Risk Disclosure

Deposits with financial institutions that are fully insured or collateralized by securities held by the governmental entity or its agent in the governmental entity’s name

• the only disclosure necessary is a statement that deposits with financial institutions are fully insured or collateralized by securities held in the government’s name

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Deposits not fully insured or collateralized, the governmental entity is exposed to custodial credit risk to the extent

• Uninsured portion of a deposit is not collateralized

• Uninsured portion of a deposit is collateralized, but the collateral is held by the pledging financial institution itself

• Uninsured portion is collateralized and the collateral

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Deposits not fully insured or collateralized, the governmental entity is exposed to custodial credit risk to the extent

• Uninsured portion is collateralized and the collateral is held by either the financial institution’s trust department or agent, but the collateral is not held in the name of the depositor government

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Custodial Risk Disclosure

Year end disclosures should include

1) the amount of the bank balance

2) a statement that the balance is uninsured

3) the nature of the custodial credit risk for each uninsured deposit (category 1, 2, or 3)

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Sample Disclosure

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Investment Risk Disclosure

Investments at fair value in the financial statements

Changes in their fair value reported as investment income

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134


The types of investments that the government is legally or contractually allowed to purchase, if there were any violations of those legal or contractual provisions, and actions the government took to address the violations

If fair value amounts are based on anything other than quoted market prices, a government discloses its methodology and assumptions for estimating fair value

267



Governments should briefly describe their investment policies that are related to investment risks defined in the previous section. If no policy exists, that fact should also be disclosed.

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External Investment Pool Disclosure

The regulatory oversight, if any, for a pool that is not registered with the Securities and Exchange Commission and whether there is a difference between the fair value of the investments and the value of the government’s shares in the pool

269


External Investment Pool

Whether involvement in the external investment pool is involuntary (for example, state law might require that if a government invests, it do so through a specific pool).

The methods and assumptions made to estimate fair value if a government cannot obtain from the pool the information needed to determine fair value.

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136

Debt Investments

Classify debt investments as of the entity’s balance sheet date by debt type and by credit quality ratings assigned by nationally recognized rating agencies

271

Credit Risk Disclosure

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137

Concentration of Credit Risk Disclosures

Disclose, by amount and issuer, investments in any single issuer that represent more than 5 percent of the total investments in the column they are reported in

No disclosure required if concentrations in investments of or guaranteed by the U.S. government or investments in mutual funds, external investment pools, or other pooled investments

273

Custodial Credit Risk Disclosures

Investments that are uninsured, unregistered, and are held by either (1) the counterparty or (2) the counterparty’s trust department or agent, but not in the government’s name

Disclose

• Type of investment

• The reported amount

• How the investments are held

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Interest Rate Risk Disclosures

Changes in interest rates that will reduce the fair value of a government’s investments is called interest rate risk

The longer the period until an investment matures, the greater the negative impact that changes in interest rates can have on fair value

275

Foreign Currency Risk Disclosures

Chance that changes in exchange rates will adversely affect the fair value of a government’s investments and deposits

Disclose the amounts, in U.S. dollars, of deposits and investments exposed to foreign currency risk, organized by currency denomination and investment type

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Other Basic Reporting

� At a minimum, annual reviews should be done to ensure the reports accurately evaluate the cash management objectives

� Reports should always be sent to senior management as well as elected officials for analysis of results to determine that standards established are being met

� Auditors should be directed to monitor internal and external policies and procedures in order to ensure compliance

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Conclusion

� Good sound accounting and reporting complete the professional cash manager’s responsibilities as a steward of the public’s money

� Establishes trust and credibility with both the elected officials and the public

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Conclusion

� Allows the professional cash manager to demonstrate that the cash and investments operations are strong profit centers and in a positive way to keeping taxes lower and service levels higher

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CHAPTER 9EXERCISE

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