1. Investing for Small Governments
Tuesday ■ MAY,
10:20AM-12PM
Investing for Small Governments
MODERATOR
Al Rolek
Finance Director, River Falls, WI
SPEAKERS
John Grady
Managing Director, Public Trust Advisors
Darrel Thomas
Assistant City Manager/CFO, City of Weston, FL
Cory Kampf
Finance & Central Services Division Manager
Anoka County, MN
#GFOA2017

2. Common Investments for Public Funds
Permitted Investments:
State Laws
Investment Policy Statement
Risk Tolerance & Constraints
Cash Flows/Liquidity Needs

3. Short Term Investments
Demand Deposit Accounts
Safety - below 250K accounts receive FDIC insurance coverage.
Low Yield – minimal earnings power as an investment.
Bank Certificates of Deposits
Safety - also FDIC insured and pay more than DDA.
Less Liquidity – limited investment income in rising rate cycle as banks historically only pass along roughly 33% of fed rate hikes, also limited to no secondary market.

4. Short Term Investments
Money Market Funds (Prime vs. Govt)
Prime
May provide higher yield than bank products.
Money Market Reform reduced liquidity (gates/fees) and complicated accounting.
Govt
Higher liquidity since fees and gates are not mandatory.
Typically lower yields at roughly 60-65% of Prime yields.

5. Short Term Investments
Local Government Investment Pools (Floating vs. Fixed NAV)
Fixed NAV
Typically high credit quality portfolios, offering daily liquidity, with earnings power of month government bonds.
Most suitable funds designated for short term expenditures.
Floating NAV
Typically high credit quality, with earnings power of month government bonds.
Most suitable for reserve or longer term funds, floating NAV funds are exposed to higher interest rate risk and thus offer less liquidity as compared to fixed NAV pools.

6. Short Term Investments
Discount Notes (T-bills, Agency discos)
High safety and liquidity.
Typically lower yields due to increased demand created via Basel III/Dodd-Frank Act and Money Market Fund Reform regulations that require or promote higher holdings of these instruments.

7. Medium-Long Term Investments
U.S. Treasury Notes
Federal Instrumentalities (FNMA, FHLMC, FFCB, FHLB)
High safety and liquidity
May have lower yields due to increased demand created via Basel III/Dodd-Frank Act and Money Market Fund Reform regulations that require or promote higher holdings of these instruments.

8. Medium-Long Term Investments
Corporate Notes
Typically higher yield than U.S. Treasury & Agency notes.
Due to increased leverage, safety in A-rated names has declined, while liquidity has been reduced as a result of Basel III/Dodd-Frank Act regulations, which require higher capital allocation to hold corporate notes, causing dealers to reduce inventory levels.
Asset Backed Securities
Backed by asset such as autos
May have lower liquidity than corporate notes.

9. Example of Cash Flow Analysis
Revenue
Expenses
Date
Beginning Balance
Additions
Subractions
Net Operations
Net Investments
Ending Balance
Difference
Sep-15 -
#VALUE!
Aug-15
Jul-15
12,580,963.76
8,712,670.41
(6,549,047.33)
2,163,623.08
14,744,586.84
Jun-15
8,172,290.41
3,102,557.93
(6,693,884.58)
(3,591,326.65)
8,000,000.00
May-15
13,042,974.32
3,274,715.56
(8,145,399.47)
(4,870,683.91)
Apr-15
7,191,334.94
5,653,308.43
(6,801,669.05)
(1,148,360.62)
7,000,000.00
Mar-15
13,951,218.80
5,259,789.12
(12,019,672.98)
(6,759,883.86)
Feb-15
15,853,837.03
4,942,558.65
(6,845,176.88)
(1,902,618.23)
Jan-15
48,508,628.17
7,778,966.34
(7,433,757.48)
345,208.86
(33,000,000.00)
Dec-14
9,867,060.89
45,936,524.86
(7,294,957.58)
38,641,567.28
Nov-14
8,671,127.75
7,376,912.06
(6,180,978.92)
1,195,933.14
Oct-14
6,835,156.44
4,036,197.96
(11,200,226.65)
(7,164,028.69)
9,000,000.00
Sep-14
7,469,707.78
2,846,843.89
(6,581,395.23)
(3,734,551.34)
3,100,000.00
Aug-14
10,281,915.69
3,143,589.36
(5,955,797.27)
(2,812,207.91)
Jul-14
6,411,157.21
3,174,405.03
(7,303,646.55)
(4,129,241.52)
Jun-14
10,612,697.12
2,330,148.70
(6,531,688.61)
(4,201,539.91)
May-14
12,839,872.19
4,431,357.34
(14,108,532.41)
(9,677,175.07)
7,450,000.00
Apr-14
6,463,738.99
4,958,456.63
(6,582,323.43)
(1,623,866.80)
Mar-14
9,712,746.81
3,331,687.58
(6,580,695.40)
(3,249,007.82)
Feb-14
10,768,287.13
4,212,254.93
(5,267,795.25)
(1,055,540.32)
Jan-14
50,457,236.04
3,448,322.81
(10,837,271.72)
(7,388,948.91)
(32,300,000.00)
Dec-13
9,548,798.55
46,417,212.89
(5,508,775.40)
40,908,437.49
Nov-13
17,469,204.91
6,628,421.93
(14,548,828.29)
(7,920,406.36)
Oct-13
7,887,846.94
2,855,423.97
(6,274,066.00)
(3,418,642.03)
13,000,000.00
Sep-13
11,046,237.13
4,183,027.74
(7,341,417.93)
(3,158,390.19)
Aug-13
13,255,281.72
2,667,212.65
(4,876,257.24)
(2,209,044.59)
Jul-13
15,484,370.52
3,797,368.64
(6,026,457.44)
(2,229,088.80)

10. Monthly Cash Receipts

11. Monthly Cash Disbursements

12. Monthly Net Cash Flow

13. Cumulative Net Cash Flow

14. Liquidity Needs Analysis
Highest disbursement total in any single month in last 24 months
14,548,828.29
"Minus" Lowest receipt total in any single month in last 24 months
(2,330,148.70)
"Equals" Worst scenario liquidity
12,218,679.59
Maximum Cash Need
2x Highest single operating cash disbursement
5,626,556.66
Minimum Cash Need

15. Example of Asset Tiers Liquidity Tier (1 – 90 Days, WAM)
Enhanced Cash Tier (90 Days – 1 Year)
Short-Term Tier (1 – 5 Years)

16. Example of Asset Tiers
Cash/MMA

17. Net Investment Transfers

18. Pillars of Public Funds Investing
Portfolio Strategies
Minimization of Risk
Safety
Traditionally focused on credit risk. Should also consider total risk and market risk.
Cash availability
Liquidity
Maintaining enough funds to meet ongoing operations
Yield and Total Return
Return
Total Return = yield plus capital appreciation /depreciation. Captures reward / penalty for risk assumed. Captures current economic value. Pay attention to Book Yield – easy measure.
Pillars of Public Funds Investing

19. Myth Portfolio Strategies Fact
We should keep our cash safe and Return On Investment (ROI) is of distant secondary importance
Fact
We need to Forecast / maintain appropriate liquid cash and prudently invest residual

20. Portfolio Strategies Define your Portfolios:
Liquidity Portfolio (Property Tax Receipts / emergency reserve)
Operational Portfolio (needed for day to day operations)
Core Reserves (generally never needed)

21. Portfolio Construction
Total Investment Portfolio
Liquidity Portfolio
Income Portfolio
Operational
Core Reserves
Primary Liquidity (PL)
Secondary Liquidity (SL)

22. The Cash Equation Understand Your Liquidity
Review your Historical cash balances
Determine your comfort level – manage liquidity spikes
Awareness of projects and their timing
Determine your operating cash needs
Communicate with your departments

23. The Cash Equation Managing Liquidity is first priority!!!
Cash Flow Forecasting - a must (keep it up to date)
Develop a Liquidity Formula and follow it
Moving from Intuition to informed Decision Making

25. Determining Liquidity
Data Gathering:
Your lowest monthly bank balance over the last 12 months.
Monthly disbursements over past 12 months ( exclude non-recurring).
Revenues received over last 12 months (excluded non-recurring).

26. First Liquidity Check Average Bank Balance (last 12 months)
Average Liquidity Scenario in Past 12 months
Average Revenue Collected (last 12 months)
Don’t include special circumstance or one-time dollars and disbursements in this Check. Represents Operating Need.
Average Disbursements (last 12 months)

27. Worst –Case Liquidity Check
Lowest Bank Balance (last 12 months)
Worst – case Liquidity Scenario in Past 12 months
Lowest Revenue Collected (last 12 months)
Repeat for 36 months and compare.
These represent the Perfect Storm you may face
Highest Disbursements (last 12 months)

28. Develop Liquidity Multiple
Estimate PL & SL Multiple = X times lowest CF Balance (last 12 months).
X = Judgment call by your comfort level.
PL = Same day (MM / LGIP) investments
SL = 2 days to 12 months (MM, CP, Term, CD’s, Treasuries).

29. PL & SL Portfolios Liquidity Portfolio:
Leverage cash flow opportunities (tax receipts etc…)
Keep it short (Same day for PL, less than 1yr for SL)
Money Market or LGIP
Term Notes
Commercial Paper (credit awareness)
Short CD’s

30. Portfolio Construction
Total Investment Portfolio
Liquidity Portfolio
Income Portfolio
Primary Liquidity (PL)
Secondary Liquidity (SL)
Operational
Core Reserves

31. Income Portfolio Strategy
Why Develop a Strategy:
Lost opportunity - cost of not having one
Network with brokers/ bankers – understand marketplace
Use portfolio analytics – quarterly (at least annually).
Subscribe to receive online communications:
Weekly market updates (yield curve, rate tables)
Economic updates (fed actions, market conditions)
Bloomberg Terminal (?) – weigh cost vs benefit

32. Income Portfolio Strategy
Keep the Following in Mind:
Generally hold to maturity
Determine your risk tolerance
Keep Best Practices in mind (GFOA):
Having an Investment Policy
Managing Risk in Investment Portfolios
Diversifying the Investment Portfolio
Spreading risk (multiple institutions)
Risk tolerance – taxable Munis example. Use concrete examples.

33. Operational Portfolio Strategies
Some successful approaches include:
Matching maturities w/ disbursements
Bar Bell Approach
Ladder
Using External Money Managers
Duration – definition

34. Operational Portfolio Strategies
Operational Portfolio: Multi-year Laddered Strategy
Define time frame (Example years 2-5 duration)
Design maturities around Cash Flow Needs:
Payroll
A/P
Debt Service
Capital Projects
Duration – definition

35. External Money Managers
Determine type of use (Core vs Operational)
Consider RFP (define scope / amount / benchmark)
Should meet at least twice annually for review
Define reporting (Monthly / Quarterly)
Consider using a Trust Account setup