I.
Cash Management and Investments (8)
A. Objectives of cash management and investment function (5)

Objectives - Efficiency, Speed, Control
B. Components of the cash management and investments function (3)

7 components
1) Receipt & deposit (accurate receipt records w/ audit trail, quick deposit for investment)
2) Custody of cash & securities
3) Disbursement with proper authorization
4) Dealing w/ financial institutions
5) Investment of cash
6) Cash budgeting & forecasting
7) Short term borrowing

Cash mgmt includes short term investments, NOT long term investing.
II. Collections and Concentration (16)
A. Objectives of collections and concentration (4)

Most efficient to collect at a central location

Benefits of a central location include:
1) Timely and consistent
2) Taxpayer equity
3) Operational efficiency
4) improved public relations
5) eliminate duplicate efforts
6) comply with GASB

Deposit daily!!

Use pre-numbered cash receipts forms

Segregation of duties - cashiers, bank recs, check preparation
B. Methods used to collect and concentrate funds (6)

Night deposit, lockbox, EFT, credit cards

Test: Collection float can be reduced by all of the following (lockbox, credit card payments,
EFT) except: establishing a concentration account.
C. Collateralization (e.g., safekeeping, mark-to-market pricing, and custody of funds) (6)

43 States require collateralization of public deposits

3 common methods of collateralization
1) Statewide rules administered by State Treasurer
2) Statewide rules administered by local officials
3) 4 States have partial pools
III. Disbursements (14)
A. Objectives of disbursements (4)

Pay bill when due in most effective way possible

Focus on payroll, A/P, D/S, capital outlay
B. Methods used to disburse funds (6)

EFT (certainty of payment date), EDI, ACH

Test: Disbursement float can be maximized by all of the following (controlled disbursement
account, EFT, payroll direct deposit), except: implementing an in-house lockbox program.
C. Fraud prevention (e.g., positive pay) (4)
IV. Cash flow forecasting (10)
A. Objectives of cash flow forecasting (3)

Goal - Provide a projection of funds available for investment purposes for a specific time
horizon.

Should result in higher interest earnings.
B. Controls and support forecasting (2)
C. Types and frequency of forecasts (2)

Moving average (recent history of 3 months)
Exponential Smoothing (trends and seasonal patterns)
Box-Jenkins for univariate forecasting based on past history
Dynamic Regression for multi-variate forecasting (requires lots of historical data)
D. Methodology used to forecast (3)

Focus on revenues that comprise 15% or more of total revenues.

4 steps
1) collect historical database
2) choose statistical model
3) fit parameters of the model to the historical data
4) use equations to extrapolate (forecast)

Factors include:
1) environmental factors
2) organizational factors
3) financial factors
V. Banking relationship management (20)
A. Depository selection (4)

Safety of public funds is #1 objective in cash management (SLY).

Competitive selection using RFP - Evaluate cost, available services, credit worthiness.

Concerns to address: Data security, confidentiality, accuracy, completeness, timeliness.

Banking services are categorized into 4 areas:
1) Collection services
2) Disbursement services
3) Investment services
4) Credit services

Disbursement services are not to delay payment as long as possible. The goal should be the
accuracy of payment, avoid late fees, and maintain good vendor relations.

Test: A wire transfer agreement with the government’s bank is important because it: specifies
the responsibilities and liabilities of the parties to the transaction.
B. Custodian selection (4)

Look at credit analysis of financial institution.

Measures of selection include:
1) Capital adequacy
2) Asset quality
3) Management
4) Earnings
5) Liquidity
C. Bank compensation (e.g., compensating balances, direct fees, acct analysis statement (3)

Compensating balances is the most common. Primary advantage is no appropriation is
required to pay for banking services. Primary disadvantage is the need to closely monitor any
lost interest earnings vs. the service costs.

Direct payment of services shows clean costs.

Account analysis statement show account activity, balances, and earnings.
D. Bank safety (e.g., role of federal regulators, factors to evaluate) (4)

Evaluate credit worthiness of bank with CAMEL:
C = Capital adequacy
A = Asset quality
M = Management
E = Earnings
L = Liquidity

Community Reinvestment Act
E. Insurance and collateralization (e.g., FDIC limits, GASB Statement 3, surety bonds, collateral
safekeeping.) (5)

Collateral for deposits should be held by a 3rd party (Fed bank, another bank, trust dept.)

Collateralization is the only way to guarantee safety of bank deposits.

Should also implement program of risk control such as credit analysis and use of fully secured
investments. Can also use State wide collateralization program.

Collateral agreements must be in writing, held by a 3rd party, monitor value on a regular
basis.

FDIC limit is $100,000.

Interstate Banking and Branching Efficiency Act of 1994 - mergers.

FIRREA (US Code Section 1823(e) - Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 - Requirements to perfect a security interest in pledged collateral
include:
1) in writing
2) executed contemporaneously with acquisition of asset
3) approved by board of directors of financial institution
4) has been official record of institution since time of execution.

In 1993 the FDIC re-confirmed all 4 requirements except “contemporaneous execution not
required for public depositors (Riegle Community Development Regulatory Improvement Act
of 1994).
VI. Investing (64)
A. Legal requirements of investing (3)

Governed by State laws and provisions. Also consider the purpose of the laws.
B. Objectives of investing (e.g., safety, liquidity, yield, prudence) (5)

Main focus of investment management is controlling risk.

Some types of risk include:
1) market risk
2) liquidity risk
3) credit risk
4) yield curve risk
5) regulatory risk
6) opportunity risk

A good investment program controls, not eliminates risk exposure.

Diversification is the key to better controlling risk.

Diversify by:
1) asset classification
2) market sector
3) credit rating
4) maturity/duration

The single most important reason to diversify is to ensure liquidity is never threatened.
C. Process of establishing investment policy (including approval process) (4)

Should consider entity’s goals and objectives, distinct characteristics, risk tolerance, staff
expertise, and investment opportunities. Can also establish procedures and controls.

Investment policy focuses on 3 components:
1) Liquidity
2) Diversification
3) Ownership

Investment policy clarifies:
1) Investment objectives
2) Preferences
3) Constraints
4) Procedures

Investment policy should contain:
1) Scope
2) Objectives (SLY), legality, diversification
3) Delegation of authority
4) Prudence (prudent investor rule)
5) Allowable investment instruments
6) Process of buying investments
7) Qualified institutions
8) Diversification
a) by type
b) by financial institution
c) by maturity
9) Safekeeping and custody
10) Collateralization requirements
11) Internal controls
12) Monitoring and adjusting portfolio (market to market)
13) Accounting requirements (GAAP, GASB)
14) Reporting requirements
15) Investment committee
16) Performance evaluation (benchmarks)

Internal controls should be established to monitor compliance with the investment policy.
D. Investment risks (8)

Types of risk:
1) Credit (default) risk
2) Liquidity risk
3) Market risk
4) Interest rate risk
5) Reputational risk

Diversification can be in three areas:
1) by investment instrument
2) by banking institution
3) by maturity

Test: Diversification can be achieved except by varying the credit quality of instruments. (i.e.
you might take credit quality risk to increase yield, but not to reduce risk).

Test: Interest rate risk can be minimized by: keeping maturities short if interest rates are
expected to rise.
E. Process of making investments (e.g., competitive bidding, safekeeping, custody, delivery vs.
payment) (8)

Banks and security dealer selection process:
1) RFP competitive bid
2) Comply with Federal Reserve Bank of N.Y. capital adequacy guidelines
3) Written confirmation of receipt of investment policy
4) Aware of risk
5) Gov’t staff get quotes prior to security purchase

Test: Delivery vs. payment (D.P.) protects against fraud.

Test: Marking to market refers to the practice of: determining the market value of an
investment in a portfolio.
F. Investment strategies (8)

Several valid strategies

Choice of a strategy depends of factors such as:
1) portfolio size
2) staff sophistication
3) Availability of investment services
4) management support

Strategy can be passive or active

Passive strategy - liquidity pool should be an important component. Does not require
analyzing the markets. Passive is OK. Often used with lack of staff time or experience. The
market average rate of return is the goal, not maximizing return.

Active strategy focuses on maximizing the investment returns thru active management.
Three types:
1) Spread or swap strategies - take advantage of yield differentials and fluctuations
2) Yield strategies - seeking highest yield for given maturity with acceptable risk.
3) Market timing - buy long securities when rates are falling, shorter when rates are rising.
G. Investment instruments (e.g. U.S. government securities, repurchase agreements, depository
instruments, certificates of deposit, bankers' acceptances, commercial paper, mutual funds, local
government investing pools, derivatives) (12)

U.S. Treasury securities - T-Bills (purchase price is discounted, no interest payments)
- S.T. notes & bonds (interest every 6 months)
- L.T. bonds (too volatile)

Gov’t agencies and instrumentalities - backed by full faith & credit of US Gov’t
Agencies include:
GNMA
Export-import bank
SBA
Farmers Home Admin
General Services Admin
Maritime Admin





Instrumentalities include:
Federal Farm Credit System Banks
FHLB
FHLMC (Freddie mac) - Fed Home Loan Mortgage Corp
FNMA (Fannie Mae) - Fed National Mortgage Corp
SLMA (Sallie Mae) - Student Loan Marketing Assoc
TVA -Tennesee Valley Authority
Also derivatives (“structured debt” = derivatives)
Bank CD’s - mostly non negotiable, but collateralized by bank.
Banker’s acceptances (BA’s) - Short term, sold at a discount, usually 90 day (20 to 270 days)
Commercial paper - unsecured, short term - no SEC registration if < 120 days.
Money market funds - short term, liquid, high quality.
State investment pools.

Repurchase Agreements - An investor purchases securities (collateral) from a bank or a
dealer for cash, and the bank or dealer contractually agrees to repurchase the collateral
securities at the same price (plus interest) on a specific date. Should use DVP. Should also
use a Master Repurchase Agreement.

Reverse Repurchase Agreements - Investor (gov’t) sells securities in exchange for cash. Two
basic types:
1) meet unexpected cash flow needs w/o actually liquidating a security (legitimate use).
2) Leveraging. Using the cash to invest in higher yielding securities (controversial use).

Test: Non-negotiable CDs are: the least liquid money market instrument.

Test: A prudent reason to use reverse repos is: to avoid liquidating securities to meet cash
shortfalls.
H. Investment economics (e.g., the yield curve, strategy, monitoring financial markets and interest
rates) (6)
I.
Relationships with broker/dealers (5)

Primary functions of a broker/dealer:
1) To provide access to money markets.
2) To conduct market analysis, economic trends.
3) To Provide advice on portfolio mgmt, yield curve analysis.
4) For credit research on unsecured obligations (commercial paper, bank acceptances).
5) To conduct relative value analysis when comparing two securities.

Test: Primary dealers are registered by the Federal Reserve.

Primary dealers make a market in Gov’t securities. Therefore, all primary dealers are broker
dealers.

The NY Fed monitors a primary dealer’s financial condition. They must maintain a liquid
capital to measured risk ratio of 125%.

Second tier dealers only deal in niche securities.

The SEC Uniform Net Capital Rule (SEC 15c3-1) applies to all regulated securities
broker/dealers. They are overseen by the SEC or Commodities Trading Commission (CFTC).

Bank dealers are reviewed by the bank regulatory authority such as the FDIC, the Office of
the Comptroller of the Currency (OCC), the FED, the Office of Thrift Supervision (OTS), and
State regulatory agencies.

Broker/dealers are req’d to register with the SEC and to join a self-regulatory organization
(SRO), such as the National Assoc of Security Dealers (NASD) or the NYSE.

NASD regulates:
1) OTC securities market
2) financial and operational status of member organizations
3) Qualifications of individuals
4) also regulates sales practices and investigates complaints.

Congress created the Gov’t Securities Dealer’s Act of 1986. Imposed regulatory structure
and net capital requirements for all broker/dealers in US Gov’t securities. Did NOT regulate
sales practices. However, Congress passed the Gov’t Securities Act Amendments of 1993
that included sales practice regulation.

Selecting A Broker Dealer
1) Review financial statements including capital adequacy and profitability.
2) Audited financials. Read footnotes.
3) Background checks thru NASD Central Registration Depository (CRD).
4) Certification compliance.
5) Staff qualifications.
6) References.
7) Internal control compliance.
8) Registered in State.

“Capital adequacy” is a test of financial solvency measuring the relationship between the
firm’s capital position and its risk exposure. Can avoid this risk by using DVP with 3rd party
custody. The standard ratio required by FED is 125%.

Monitoring Broker/Dealer Services
Key: 1) Are securities priced competitively?
Key: 2) Number of transactions that failed.
Key: 3) Following investment policy.
4) 3rd party custody
5) Timely market info.
6) Accurate info and analysis
7) Good recommendation.
8) Establish performance benchmarks such as 90 day T-bill, pools, Money market fund index.

J.
Disadvantages of using a broker/dealer:
1) Costs and incentive to sell higher commission securities and/or ones with bigger spreads.
2) Limited benefit due to investment policy restrictions on allowable securities.
3) Potential for abuse such as churning, inappropriate recommendations, etc.
Relationships with investment advisors (5)

Take precautionary measures:
1) delivery vs. payment
2) 3rd party custody
3) timely reconciliations
4) independent audits
5) prohibit self dealing

An investment advisors authority can be:
1) Discretionary - complete authority (investment pools, mutual funds, etc.)
2) Non-discretionary - must obtain transaction approval. The advisor in this role often acts
as an intermediary between the agency and the broker/dealers.


Advisors are required to register with the SEC (some exemptions). Not very effective.
Some State security laws require registration.

Agency can evaluate advisors performance against a benchmark (i.e. 90 day T-bills).

Performance should be measured over a 3 to 5 year cycle.

Test: An investment advisor with discretionary authority: executes investment transactions on
the government’s behalf.
VII. Short-term borrowing (8)
A. Federal laws and regulations (2)

Use short term borrowing to meet temporary cash flow shortfalls.

Regulated at State and local levels by laws and policies.

Federal regulation is arbitrage investment regulations.
B. Access to credit markets (e.g., credit ratings, interest rates) (3)

Sources of S.T. borrowing include local banks, regional & national credit markets, and some
State liquidity pools.
C. Borrowing methods (e.g., direct loans, short-term debt instruments, lines of credit) (3)

Local banks - direct loans thru pre-established relationships.

Tax exempt debt financing - interest rates are usually lower than thru a bank.
1) includes TANs (tax anticipation notes), RANs (revenue...), and GANs (grant...).

Bond banks thru State pools - States issue L.T. debt and make S.T. loans to local agencies.
- cost savings by State having credit rating = lower interest rates.
- lower costs by issuing big block of bonds.
- Don’t have to pay for obtaining a credit rating.

Strategies for S.T. borrowing depend on the direction of interest rate movement.
VIII. Information and control (20)
A. Cash accounting (e.g., bank and cash reconciliations, treasurer's reports, interest allocation) (4)
B. Investment reporting (6)
C. Internal controls (6)

Single most important step for mgmt to prevent fraud is effective internal control structure.

Commitment to internal controls must be by mgmt & elected officials.

Costs of fraud extend beyond lost assets - includes loss of public confidence, loss of
reputation of innocent, and punishment of guilty.

Kiting - stolen $ covered in deposits in transit - segregate bank recs from cash handling.

Lapping - moving A/R from 1 account to another - segregate A/R & cash receipting.
D. Use of technology (including security measures) (4)

Computer security = 1) control continuity of information
2) protect computing assets from loss or damage.

Computer security objectives:
1) Integrity (accuracy, reliability, confidentiality)
2) Availability (timely response and capacity)
3) Control (mgmt control over access and use of system)
4) Auditability (audit trail of access and use)
READING LIST: CASH MANAGEMENT AND INVESTMENTS EXAMINATION
Bold = required on most recent list.
Underline title = already read this source.
1. Banking Relations: A Guide for Governments (NOW ALL CHAPTERS)
Part I: Bank Services
Chapter 1: Overview
Chapter 2: Collection Services
Chapter 3: Disbursement Services
Chapter 4: Credit Services
Part II: Selecting the Bank
Chapter 6: Paying for Bank Services
Chapter 7: Political Considerations
Chapter 9: Evaluating Bank Credit
Part III: Today and Tomorrow
Chapter 10: The Regulators
Appendix B: Float
Appendix C: The Federal Reserve System
Appendix E: Wire Transfer Agreements and Security
2. Cash Management for Small Governments (NOW JUST CHAPTERS #2 AND #12)
3. An Elected Official's Guide to Debt Issuance, pp. 13-17, 60-64
4. An Elected Official's Guide to Internal Controls and Fraud Prevention, pp. 39-60
5. An Elected Official's Guide to Investing
6. An Introduction to Broker/Dealer Relations for State and Local Governments
7. An Introduction to Collateralizing Public Deposits
8. An Introduction to Investment Advisers for State and Local Governments
9. An Introduction to Treasury Agreements for State and Local Governments
10. Investing Public Funds (1997), (SECOND EDITION)
Chapter 1: Introduction
Chapter 2: The Investment Process
Chapter 3: Investment Policies
Chapter 4: Cash Budgeting, Cash Forecasting and Arbitrage Investing
Chapter 5: Administrative Systems and Internal Controls
Chapter 6: Short-term Investment Instruments
Chapter 7: Relationships with Depositories and Dealers
Chapter 8: Factors that Influence Interest Rates
Chapter 9: The Yield Curve
Chapter 10: The Markets
Chapter 11: Establishing an Investment Outlook
Chapter 12: Technical Approaches to Short-term Investing
Chapter 13: Short-term Investment Strategies
Chapter 14: Fixed-income Investments
11. Local Government Finance: Concepts and Practices
Chapter 13: Cash Management
12. A Public Investor's Guide to Money Market Instruments, 2nd Edition
13. Revenue Collection Administration: A Guide for Smaller Governments (NOW ALL)
Chapter 1: Revenue Collection Administration
Chapter 4: Accounting, Internal Controls, Auditing
Chapter 5: Collecting and Processing Taxes and Other Revenues
Chapter 6: External Collection Services
Chapter 7: Deposit of Revenue Receipts
14. GFOA's Model Investment Legislation
15. GFOA Recommended Practices for State and Local Governments (section devoted to "Cash
Management")
16. GFOA Sample Investment Policy
17. Selected articles from Government Finance Review
18. Selected articles from Public Investor
19. An Introduction to Treasury Management Practices