Investments – Safety, Security and Act 10€¦ · May, Act 10 of 2016 expanded the types of investments permissible for school districts, but in doing so also expanded potential

October 24th, 2016

Ephrata Area School District

Investments – Safety, Security and Act 10

PSDLAF 2101 Oregon Pike

Lancaster, PA 17601Tel: 1-866-548-8634 (option 2)

E-mail: [email protected]

PSDLAF is sponsored by:

www.psdlaf.org

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P-E-R-C


P E R CARTICIPATION

XPERIENCE

ESPONSIVE

ASUAL

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Goal:Know what investments are legal under School Code

and how Act 10 of 2016 changes the permissible investment landscape for School Districts and other

Local Government Entities

Investment Rules Legality Safety and Security Policy Strategy

Goal


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Act 10 of 2016


Act 10 of 2016 broadens the scope of 440.1 of the PA School Code by expanding the list of permissible investments available to municipal entities in the Commonwealth.

This legislation does not supersede or preempt other investment powers of public corporations or municipal authorities as otherwise authorized by law.

These new permissible investments would be available to any local government entity:

County City Borough Township School District Or other municipality of the Commonwealth

Permissible Investment Landscape

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Section 440.1 Act 10 of 2016Effective as of May 24, 2016

• Direct obligations of the U.S. Government

• Obligations of U.S. Agencies & Instrumentalities (short term)

• Banking Product• FDIC Insured (Tax I.D.)• Collateralized

• Municipal Debt• PA Issuer (General Obligation)• No Credit Rating Requirement

Repurchase Agreements

• Local Government Investment Pools (LGIPs)

Debt obligation of any Federal Agency, Instrumentality, or GSE

Negotiable CD’s

Commercial Paper

Bankers Acceptances (aka “Bills of Exchange” or “Time Drafts”)


Credit Ratings Apply

• Pooled FDIC Insured CD Redeposit Program

Shares of an Investment Co. (Money Market Funds)• Modified to include Act 10

Securities

Moody's Permitted? S&P Permitted? Fitch Permitted?P-1 Yes A-1 Yes F1 YesP-2 No A-2 No F2 NoP-3 No A-3 No F3 No

Short-term Permissible Grades


Credit Ratings

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Moody's Permitted? S&P Permitted? Fitch Permitted?Aaa Yes AAA Yes AAA YesAa Yes AA Yes AA YesA Yes A Yes A Yes

Baa No BBB No BBB NoBa No BB No* BB No

Long-term Permissible Grades

*S&P definition of BB: "Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to

adverse conditions."

History

On June 13th, 2008, Moody’s Investor Services affirmed Lehman Brothers Holdings, Inc. Prime-1 (P-1)short term rating. Fitch Rating also gave Lehman a “Top” rating at that time.

On September 15th, 2008, Lehman Brothers filed for Bankruptcy protection and both Rating Agency’s cut Lehman’s credit rating to “Junk.”

The lesson here is that increased yield and “ratings” should not be the only primary factors in one’sdecision to invest in these new vehicles.



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Purchase of an allowed security with a promise to repurchase (Act 10 Securities Included)

Obligations MUST be Rated at least “A” or equivalent by at least two nationally recognized statistical ratings organizations (NRSRO)

Complex legal transaction – Use with Care

Benefits Risks

Enhanced Portfolio Diversification

Liquid Management

Yield Advantage Flexibility

Counterparty Default Risk

Complicated to set-up and understand

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Shares of an Investment Company Investment Company MUST be registered under the Investment Company Act of

1940. Rated in the Highest Category by at least one nationally recognized rating agency The underlying investments of the company need to be permissible under State Law

Section 440.1 Act 10 of 2016

Benefits Risks


Additional Yield

Credit Risk - Potential for downgrade or default of an issuer or underlying

investments

Greater volatility in market pricing



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Pooled FDIC Insured CD Redeposit Program

Savings or Demand deposits placed in a federally insured institution having a place of business in the Commonwealth

This institution will then arrange for these funds to be redeposited in institutions that are FDIC members. Principal and interest must be covered by this insurance.

Benefits Risks


Insured by FDIC up to $250,000 in each participating bank.

Risk of depositing above the FDIC insurance limit, if the public entity owns this product through multiple institutions

or directly at one of the underlying banks.




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Debt Obligations of ANY Federal Agency, Instrumentality, or GSE

Obligations MUST be Rated at least “A” or equivalent by at least two nationally recognized statistical ratings organizations (NRSRO)

Federal Home Loan Bank (FHLB), Freddie Mac, Fannie Mae, Ginnie Mae, Federal Farm Credit

Includes Short (13 months or less) and NOW Long Term Investments with Act 10 of 2016

Benefits Risks


Yield Advantage

These entities do not all have the direct backing of the United States

Gov’t (Default Risk)

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Bankers’ Acceptances (aka “Bills of Exchange” , “Time Drafts”) (NEW)

Must not exceed 180 day maturity The accepting bank must be rated in the Top Short-term Category by at

least two NRSROs.

Benefits Risks


Additional Yield

Credit Risk - Potential for downgrade or default of an issuer

Marginal yield pickup over agencies

Few issuers in the marketplace


Permissible Investment Landscape – Act 10 of 2016


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Commercial Paper (NEW)

Must be issued by Corporations or Business Entities in Accordance with Federal and State Law

Must not exceed 270 day maturity Must be rated in the Top Short-Term Category by at least two NRSROs

Benefits Risks


Additional Yield

Credit Risk - Potential for downgrade or default of an issuer


Act 10 of 2016 – Permissible Investments


Act 10 of 2016 – Permissible Investments

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Negotiable CDs (NEW) - PSBA released an urgent Alert in reference to NCDs on June 10th, 2016 Must be issued by a nationally or State-chartered bank, Savings & Loan, or a

State-licensed branch of a foreign bank. Maturities of 1 year or less

Must be rated in the Top short-term rating category by at least two NRSROs Maturities in excess of 1 year

The senior debt obligations of the issuing institution or its parent must be Rates at least “A” or its equivalent by at least two NRSROs

Benefits Risks


Additional Yield

Credit Risk (No Collateral)- Potential for downgrade or default of an issuer

Marginally greater volatility in market pricing


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As highlighted in PSBA’s Policy News Network Volume III of 2016 issued inMay, Act 10 of 2016 expanded the types of investments permissible forschool districts, but in doing so also expanded potential exposure tofinancial risk. Accordingly, PSBA’s revised policy guide for Policy 609,Investment of District Funds, emphasizes the need for extra caution withregard to Act 10 investments.

PNN Volume III and the policy guide also flagged a potential legal obstaclefor school districts with regard to one category of Act 10 investments—“negotiable certificates of deposit or other evidences of deposit”. This alertis being provided to inform PSBA members and their solicitors that furtherlegal review and analysis by highly experienced school finance attorneyshas been shared with PSBA that confirms that the existing School Coderequirements that deposits of district funds be secured by specified formsof collateral (to the extent not covered by FDIC insurance) continue toapply to the negotiable certificates of deposit or other evidences of depositotherwise permitted by Act 10.

This alert should not be understood as a criticism of negotiable CDs as aninvestment vehicle generally, nor as to their merit relative to otherinvestments allowed by Act 10. Rather, the legal obstacle arises from thefacts that these types of investments do not appear to currently exist inthe marketplace in a collateralized form, and that they constitute a form ofdeposit of district funds otherwise subject to the collateralizationrequirements of Sections 621, 622 and 623 of the Public School Code.Thus, to the extent the amount of a negotiable CD of the uncollateralizedkind currently available in the market exceeds $250,000 (the limit of FDICdeposit protection), it would be an impermissible investment in violation ofthe School Code, notwithstanding Act 10.

Act 10 makes clear that the investment authority it provides is to be inaddition to any other investment powers provided by law for a “publiccorporation” (which is defined to include school districts), and that itdoes not supersede or preempt such powers. However, Act 10 did notamend the School Code, and its language does not otherwise statethat it replaces safeguards in the School Code specific to deposits ofschool district funds.

Therefore, unless and until this issue is resolved by correctivelegislation, or there is a final judicial or other ruling having the force oflaw concluding that School Code requirements for collateralization ofdeposits do not apply to the negotiable certificates of deposit or otherevidences of deposit otherwise permitted by Act 10, PSBA iscompelled to caution members against including such investments intheir districts’ portfolios. PSBA is revising the policy guide for Policy609 accordingly, and the revised version will be transmitted toparticipants in PSBA’s Policy News Network service next week. Watchfor further details on this issue in next week’s PNN.

Contact: Stuart Knade Esq., General Counsel, 717‐506‐2450 x‐3377

Urgent Legal Alert on Act 10 Investments

http://us1.campaign‐archive1.com/?u=4d60b7fb05ab634363de69ce9&id=8758496cd

4&e=b5c1e6a18d

PSBA

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Strategy – Risk & Return

Items to Consider before Investing:

1. Does your Investment Policy permit Act 10 Investments?

PSBA has issued an updated Investment Policy

2. Define the Investment - What is the product being offered?

3. Does the investment have insurance or collateral?

4. What is the underlying Credit Rating of the Investment?

5. Is the Investment’s rating on the Credit Watch List?

6. Does it fit within the LEA Investment Policy?


Recap:

Know what investments are legal under School Code and how Act 10 of 2016 changes permissible investment

landscape for School Districts and other Local Government Entities

Reviewing Permissible Investment Landscape Section 440.1 of PA School Code Act 10 of 2016

Investment Rules Legality Safety and Security Policy Strategy

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Questions?

This does not purport to be a complete statement of all material facts relating to securities mentioned. The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources, which we believe to be reliable. Opinions expressed herein are subject to change without notice. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation or sale

would be unlawful prior to registration or qualification under the securities law of any such state. Please refer to the PSDLAF Information Statement for any questions at www.psdlaf.org.

Sponsored by PASBO & PSBA

30+ years of Exceptional Service

Act 10 of 2016 Executive Summary Security New? Benefits Risks

Debt obligation of any Federal Agency,

Instrumentality, or GSE

Now permissible for longer

terms


Yield Advantage

The entities do not have the direct backing of the United States (Default risk)



Liquid Management Yield Advantage Flexibility

Counterparty Default Risk Complicated to set-up and

understand

Negotiable CD’s Enhanced Portfolio

Diversification Additional Yield

Credit Risk – No Collateral Marginally greater volatility in

market pricing

Bankers Acceptances Enhanced Portfolio


Credit Risk – potential for downgrade

Marginal yield pickup over agencies

Few issuers in marketplace

Commercial Paper Enhanced Portfolio


Credit Risk – potential for downgrade


Shares of an Investment Company

Modified to also include Act 10

Securities


Additional Yield

Credit Risk – Potential for Downgrade


Pooled FDIC Insured CD Redeposit Program


Insured by FDIC up to $250,000 in each participating bank

Risk of depositing above the FDIC insurance limit if the public entity owns this product through multiple institutions or directly at one of the underlying banks.

This does not purport to be a complete statement of all material facts relating to securities mentioned. The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources, which we believe to be reliable. Opinions

expressed herein are subject to change without notice. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation or sale would be unlawful prior to

registration or qualification under the securities law of any such state. Please refer to the PSDLAF Information Statement for any questions at www.psdlaf.org.

***PSBA Alert*** “they [NCD’s] constitute a form of deposit of district funds otherwise subject to the collateralization requirements of Sections 621,

622 and 623 of the Public School Code. Thus, to the extent the amount of a negotiable CD of the uncollateralized kind currently available in the market exceeds $250,000 (the limit of FDIC deposit protection), it would be an impermissible investment in violation

of the School Code, notwithstanding Act 10.”

Investments – Safety, Security and Act 10€¦ · May, Act 10 of 2016 expanded the types of investments permissible for school districts, but in doing so also expanded potential

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