BILL ANALYSIS
C.S.H.B. 2459
By: Marchant
April 10, 1995
Committee Report (Substituted)
BACKGROUND
Over the course of the last year, in Texas and nationwide,
political entities have faced financial hardship as a result of
poor investments. It has often been the case that these
investments were made by a single individual with complete
authority over what investments were made, with little or no
supervision.
PURPOSE
As proposed, H.B. 2459 imposes various reporting requirements on
entities investing public funds and on the people selling those
investments.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly
grant any additional rulemaking authority to a state officer,
department, agency, or institution.
SECTION BY SECTION ANALYSIS
SECTION 1: Chapter 2256, Government Code is amended as follows:
CHAPTER 2256. PUBLIC FUNDS INVESTMENT
SUBCHAPTER A. AUTHORIZED INVESTMENTS FOR GOVERNMENTAL ENTITIES
Sec. 2256.001. SHORT TITLE: Public Funds Investment Act.
Sec. 2256.002. Defines "bond proceeds," "carrying value,"
"funds," "institution of higher education," "investment pool,"
"local government," "market value," "school district,"
"investing entity," "entity" and "state agency."
Sec. 2256.003. A local government; state agency; or an
investment pool acting on behalf of two or more local
governments, state agencies, or a combination of those
entities may invest its funds and funds under its control
pursuant to investment policies of the entity's governing
board and in accordance with Section 2256.005.
Sec. 2256.004. (a) The governing body of the investing entity
shall adopt a written investment policy regarding the
investment of its funds and funds under its control in
accordance with subsections (b) and (c).
(d) The governing body shall adopt an investment strategy
describing, in order of importance:
(1) suitability of the investment to the financial
requirements of the entity;
(2) safety of principal;
(3) liquidity;
(4) marketability of the investment if the need arises
to liquidate the investment before maturity;
(5) diversification of the investment portfolio; and
(6) yield.
(e) Each investing entity shall designate one or more
officers or employees of the state agency, local government,
or investment pool to be responsible for the investment of its
funds. A person may in no way manage investment of funds
without express written consent of the chief executive officer
of the investing entity, consistent with the investment policy
adopted by the entity. Makes conforming changes.
(f) Subsection (e) does not apply to a state agency, local
government, or investment pool for which an officer of the
entity is assigned by law the function of investing its funds.
(g) An officer or employee of a commission created under
Chapter 391, Local Government Code (Regional Planning
Commissions), is ineligible to be designated as an investment
officer under Subsection (e).
(h) The governing body may specify in its investment policy
that any investment authorized by this chapter is not suitable
for the entity.
(i) A written copy of the investment policy will be given to
any person seeking to sell to an entity an investment. The
person will execute a written instrument indicating that the
person has read the policy and will implement procedures and
controls to preclude imprudent investment activities arising
out of investment transactions between the entity and the
person.
(j) The investment officer may not buy any securities from a
person who fails to deliver the written instrument required by
subsection (i).
Sec. 2256.005. STANDARD OF CARE. (a) Adds language
requiring funds investment to be governed by the following
investment objectives, in order of priority:
(1) preservation and safety of principal;
(2) liquidity; and
(3) yield.
(b) In determining whether an investment officer has acted
prudently with respect to an investment decision, the
determination shall be made by taking into consideration:
(1) the investment of all funds, rather than a single
investment.
(2) consistency with the investment policy of the
entity.
Sec. 2256.006. AUTHORIZED INVESTMENTS: (a) Adds to the
list of investments authorized under this chapter
obligations of agencies of the
United States, and obligations
backed by the full faith and credit
of this state or the United States.
(b) The following are not authorized investments under this
section:
(1) interest only strips;
(2) principal only strips;
(3) CMO's that have a stated final maturity date of
greater than 10 years; and
(4) inverse floaters.
Sec. 2256.007. AUTHORIZED INVESTMENTS: CERTIFICATES OF
DEPOSIT. Certificates of deposit secured by mortgage-backed
securities described is Sec. 2256.006(b) are not authorized
investments under this chapter.
Sec. 2256.008. AUTHORIZED INVESTMENTS: REPURCHASE AGREEMENTS
(a)(3). A repurchase agreement is authorized under this
subchapter if the repurchase agreement requires the securities
to be pledged to the entity and deposited with the entity or
a third party selected and approved by the entity.
(b) Amended to conform to Section 2256.006 and to reflect
actual market practice.
(c) Notwithstanding any other law, the term of any reverse
security repurchase agreement may not exceed 90 days after the
date the reverse security repurchase agreement is delivered.
(d) Moneys received by an entity under a repurchase agreement
may be used to purchase other authorized investments, however
those investments must mature not later than the expiration
date of the repurchase agreement.
Sec. 2256.009. AUTHORIZED INVESTMENTS: BANKERS' ACCEPTANCES.
Sec. 2256.010. AUTHORIZED INVESTMENTS: COMMERCIAL PAPER.
Sec. 2256.011. AUTHORIZED INVESTMENTS: MUTUAL FUNDS. (a)
A no-load money market fund is an authorized investment under
this subchapter if it:
(1) is regulated by, rather than only registered with,
the SEC;
(2) has a dollar-weighted averaged stated maturity of
90 days or fewer, rather than a portfolio maturity of
120 days or fewer;
(3) is continuously rated as to investment quality by
at least one nationally recognized investment rating
firm of not less than AAA or its equivalent.
(b) A no-load mutual fund is an authorized investment under
this subchapter if it:
(1) is register with the SEC;
(2) has an average weighted maturity of less than two
years;
(3) is invested exclusively is obligations described
by Sections 2256.006(a)(1) and Section 2256.008; and
(4) is continuously rated as to investment quality by
at least two nationally recognized investment rating
firms of not less than AAA or its equivalent.
(c)(1) Adds mutual funds described in Subsection (b) to those
investments that in the aggregate may not exceed 80 percent of
the entity's monthly average fund balance, excluding bond
proceeds and reserves and other funds held for debt service.
(2) Prohibits investment in any one mutual fund described in
Subsection (a) or Subsection (b) in an amount that exceeds 10
percent of the total assets of the mutual fund.
Sec. 2256.012. AUTHORIZED INVESTMENTS: GUARANTEED
INVESTMENTS CONTRACTS. (a) A guaranteed investment contract
is authorized under this subchapter if it:
(1) has a defined termination date;
(2) is secured by obligations described in Section
2256.006(a)(1), in an amount at least equal to the
amount of bond proceeds invested under the contract;
(3) is pledged to the entity and deposited with a third
party selected and approved by the entity; and
(b) Bond proceeds may not be invested in a guaranteed
investment contract with a term of longer than five years from
the date of issuance of the bonds.
(c) To be eligible as an authorized investment:
(1) the governing body of the entity must specifically
authorize guaranteed investment contracts as an eligible
investment;
(2) the entity must receive bids from at least three
separate providers with no material financial interest
in the bonds from which proceeds were received;
(3) the entity must purchase the highest yielding
guaranteed investment contract for which a qualifying
bid is received;
(4) the price of the guaranteed investment contract
must take into account the reasonably expected draw down
schedule for the bond proceeds to be invested; and
(5) the provider must certify the administrative costs
reasonably expected to be paid to third parties in
connection with the guaranteed investment contract.
Deletes common trust funds provisions.
Sec. 2256.013. AUTHORIZED INVESTMENTS: INVESTMENT POOLS.
(a) An entity may invest in an eligible investment pool if the
governing body authorizes investment in the particular pool.
An investment pool may invest the funds it receives from
entities in investments authorized by this subchapter. An
investment pool shall establish an advisory board.
(b) To be eligible to receive funds from or invest funds on
behalf of an entity under this chapter, an investment pool
must submit to the entity's investment officer a disclosure
instrument containing:
(1) the types of investment in which money is allowed
to be invested;
(2) the maximum average dollar-weighted maturity
allowed, based on the stated maturity date, of the pool;
(3) the maximum stated maturity date any investment
security within the portfolio has;
(4) the objectives of the pool;
(5) the size of the pool;
(6) the names of the members of the advisory board of
the pool and the dates their terms expire;
(7) the custodian bank that will keep the pool's
assets;
(8) whether the intent of the pool is to maintain a net
asset value of one dollar and the risk of market price
fluctuation;
(9) whether there is a secondary source of payment,
other than the assets of the pool at market value;
(10) the name and address of the independent auditor
of the pool
(11) the requirements for an entity to deposit funds
into or withdraw funds from the pool and any deadlines
or operating policies for the entity to invest funds in
and withdraw funds from the pool; and
(12) the performance history of the pool, including
yield, average dollar-weighted maturities, and expense
ratios.
(c) To remain eligible to receive funds from or invest funds
on behalf of an entity under this chapter, an investment pool
must submit to the entity's investment officer:
(1) investment transaction confirmations; and
(2) a monthly report that contains, at a minimum, the
following information:
(A) the types and percentage breakdown of
securities in which the pool is invested;
(B) the current average dollar-weighted maturity,
based on the stated maturity date, of the pool;
(C) the current percentage of the pool's portfolio
in investments that have stated maturities of more
than one year;
(D) the carrying value versus the market value of
the pool's portfolio, using amortized cost
valuation;
(E) the size of the pool;
(F) the number of participants in the pool;
(G) the custodian bank that is safekeeping the
assets of the pool;
(H) a listing of daily transaction activity of the
entity participating in the pool;
(I) the yield and expense ratio of the pool;
(J) the portfolio managers of the pool; and
(K) any changes or addenda to the offering
circular.
(d) An entity by contract may delegate to an investment pool
the authority to hold legal title as custodian of investments
purchased with local funds.
(e) In this section, "yield" shall be calculated in
accordance with rules promulgated by the federal SEC. Deletes
bids for common trust fund investments provisions.
Sec. 2256.0131. PORTFOLIO OF CERTAIN INVESTMENT POOLS. A
public funds investment pool created to funcation as a money
market mutual fund must mark to market its portfolio daily and
stabilize at a $1 net asset value.
Sec. 2256.0132. ADVISORY BOARD OF INVESTMENT POOLS. (a) An
investment pool other than on described in (b) must create an
advosiry board composed of participants in the pool and other
persons.
(b) A public funds investment pool created under CHapter 791
and managed by a state agency must establish an advisory board of
qualified persons composed equally of participants in the pool
and other persons who have no business relationship with the pool.
Sec. 2256.0133. A public funds investment pool must be
continuously rated at no lower than AAA or AAA-m or its
equivalent by at least one nationally recognized rating service.
Sec. 2256.014. AUTHORIZED INVESTMENTS: INSTITUTIONS OF
HIGHER EDUCATION. In addition to investments authorized under
this subchapter, institutions of higher education may invest
funds in:
(1) cash management and fixed income funds sponsored
by organizations exempt from federal income taxation
under Section 501(f), Internal Revenue Code of 1986;
(2) negotiable certificates of deposit issued by a bank
meeting certain requirements; and
(3) corporate bonds, debentures, or similar debt
obligations meeting certain requirements.
Sec. 2256.015. INTERNAL MANAGEMENT REPORTS. (a) At least
quarterly, the investment officer shall prepare and submit to
the governing body a written report of the entity's local
funds investment. (b) The report must:
(1) describe the entity's investment position
(2) be prepared jointly by all investment officers of
the entity;
(3) be signed by each investment officer;
(4) contain a summary statement of each pooled fund
group that states the beginning market value, changes
to market value, and ending market value for the
reporting period.
(5) state the carrying value and market value of each
separately invested asset at the beginning and end of
the reporting period by type of asset and fund type
invested;
(6) state the maturity date of each separately invested
asset;
(7) state the account, fund, or pooled fund group in
the agency or local government for which each individual
investment was acquired; and
(8) state the compliance of the investment portfolio
as it relates to the entity's investment strategy.
(c) The report shall be delivered to the governing body and
the CEO of the entity.
(d) Defines "pooled fund group" and "separately invested
asset."
Sec. 2256.016. SUBCHAPTER CUMULATIVE. This subchapter does
not prohibit an investment specifically authorized by other
law or authorize an investment specifically prohibited by
other law.
Sec. 2256.017. This subchapter does not apply to a public
retirement systems as defined by Section 802.001, to state
funds invested as authorized by Section 404.024, or to funds
invested by institutions of higher education.
SUBCHAPTER B.
Sec. 2256.051. PRIVATE AUDITOR. A state agency shall employ
a private auditor at the legislative audit committee's request
or at the request of the governing body of the agency.
Sec. 2256.052. PAYMENT FOR SECURITIES PURCHASED BY STATE.
The comptroller, the state treasurer, or the disbursing
officer of an agency may pay for securities purchased from an
authorized dealer after a proper invoice has been received.
Sec. 2256.053. DELIVERY OF SECURITIES PURCHASED BY STATE.
A security purchased under this chapter may be delivered to
the state treasurer, a bank, or the board or agency investing
its funds. The delivery shall be made under normal recognized
practices.
Sec. 2256.054. DEPOSIT OF SECURITIES PURCHASED BY STATE. A
security purchased under this chapter may be deposited in
trust with a bank or federal reserve bank or branch. The
deposit shall be evidenced by a trust receipt.
Sec. 2256.055. ELECTRONIC FUNDS TRANSFER. Use of electronic
means to transfer or invest all funds of local governments.
Deletes Sections 2256.051, 2256.052, 2256.053, 2256.054,
2256.055, 2256.056, 2256.057, 2256.058, 2256.059, and
Subchapter C, Sections 2256.101-2256.104.
SECTION 2: Repeals Section 1, Chapter 181; Section 1, Chapter 858;
and Section 1, Chapter 946, Acts of the 73rd Legislature,
Regular Session, 1993.
SECTION 3: This Act controls over S.B. 959 to the extent of any
conflict.
SECTION 4: Effective Date: September 1, 1995.
SECTION 5: Liquidation of unauthorized investments made before
effective date of this act not required.
SECTION 6: Emergency Clause
COMPARISON OF ORIGINAL TO SUBSTITUTE
Sec. 2256.003 deletes reference to nonprofit corporation because
defined terms "local government" and "state agency" include
reference to nonprofit corporations.
Sec. 2256-004, Subsection (e) is changed to recognize that under
Texas law, certain officials (e.g. county treasurers) possess this
right without governing body approval; Subsection (i) is changed
to require officers of brokerage firms to sign off on investment
policies; "acknowledges" is substitituted for "certifies" as
ertification standard may discourage frims from sellnig securities
to state agencies/local governments.
Sec. 2256.006 removes State of Israel as dealt with in other law.
Sec. 2256.008 - Subsection (a)(3) is changed to reflect actual
market practice; Subsection (b) is changed to relect changes made
to Section 2256.006, as well as tighten the language to reflect
actual market practice; Subsection (c) is changed to tighten
restrictions on term of reverse repurchase agreements to six
months.
Sec. 2256.011, Subsection (a) is changed to reflect need for only
one rating, at the higher "AAA" standard; Subsection (b) raises
the rating to AAA by which a firm must be rated and conforms to the
requirements set forth in subsection (b) and (c) of Section
2256.013.; Subsection (c) relettered and changed to reflect that
only money market mutual funds are permitted.
Section 2256.0131 requires that public funds investment pools
created to function as a money market mutual fund mark to market it
portfolio daily and stabilize at a $1 net asset value.
Section 2256.0132 requires that public funds investment pools
establish advisory boards of qualified persons composed equally of
participants in the pool and other persons who have no business
relationship with the pool. Other investment pools must establish
an advisory board composed of participants in the pool and other
persons.
Section 2256.0133 requires that a public funds investment pool be
rated no lower than AAA or AAA-m by at least one nationally
recognized rating service.
Section 2256.015, Subsection (a) is revised to require reports be
prepared and presented not less than once a quaarter; scope of
report changed to reflect that many entities pool investments, and
thus summaries of investments, reflecting original market value,
fluctuations during reporting period, and market value at the time
of report for pooled investments, and carrying value and market
value for individual investments, are included in the report to be
prepared and presented; statement of individuals with whom market
transactions made deleted as unnecessary.
Section 2256.017 is revised to specifically exclude general funds
of the state as currently invested by the State Treasurer.
Section 2256.052 adds language to include funds invested by an
institution of higher education as authorized by law.
Section 2256.055 grants electronic funds transfer for all funds of
local governments.
New Section 3 is an attempt to reconcile any conflicts that may
arise as a result of the adoption of the "clean up bill" as it
pertains to Chapter 2256 and the adoption of HB 2459.
SUMMARY OF COMMITTEE ACTION
HB 2459 was considered by the committee in a public hearing on
April 3, 1995.
Rep. Kenny Marchant testified as the bill's author.
The following persons testified for the bill:
Mark G. Johnson representing the Texas Public Funds Investment
Pool
George Greanias representing himself and the City of Houston
Susan K. Anderson representing herself and the Government
Treasurers Organization of Texas
Kathy Hynson representing herself and the County Treasurers
Assoc.
Richard E. Scott representing himself and LOGIC
Cheryll Adair representing herself
John W. Fainter, Jr. representing FGIC Advisors, Inc.
The following person testified neutrally on the bill:
Thomas Ricks representing himself and the University of Texas
The committee considered a complete substitute for the bill. Two
amendments were offered to the substitute. Amendment No. 1 was
adopted by a record vote of 5 ayes, 1 nays, 0 pnv & 3 absent.
Amendment No. 2 was adopted without objection. The substitute as
amended was adopted by a record vote of 6 ayes, 0 nays, 0 pnv & 3
absent. The Chair instructed staff to incorporate the amendments
into the substitute.
The bill was reported favorably as substituted with the
recommendation that it do pass and be printed, by a record vote of
6 ayes, 0 nays, 0 pnv & 3 absent.