The September 2000 draft of the proposed bill entitled the Local Government Investment Reform Act was generated by the Bipartisan Task Force on School and Municipal Investments. This draft differs from the March 1999 draft in the following principal respects: (1) the definitions have been made more specific, (2) a surety bond may be used as collateral for the uninsured portion of bank deposits, (3) local government investment policies are specifically designated as public records subject to the Right-to-Know law, (4) a Local Government Investment Education Board is established to oversee the continuing education requirement, (5) the local government solicitor or other counsel must approve contract documents related to investments, and (6) Pennsylvania law must govern all contract documents related to investments.
Here is a summary of the September 2000 draft of the proposed investment bill of the Bipartisan Task Force on School and Municipal Investments:
- Local Governments Covered by Bill
- The bill applies to all cities, boroughs, townships, incorporated towns, counties, school districts, vocational technical schools, intermediate units, other schools described in the School Code, and local authorities. §3(g).
- Municipalities or counties who have adopted home rule charters are covered. §3(g).
- The Cities of Philadelphia and Pittsburgh and Allegheny County are covered. §3(g).
- Specific Investments
- The bill preserves the ability to invest in obligations backed by the full faith and credit of the United States, the Commonwealth or any political subdivision of the Commonwealth, without limitation as to maturity (e.g., U.S. Treasuries or GNMAs). §5(a)(4).
- The bill preserves the ability to invest in short term obligations of the United States or its agencies or instrumentalities (e.g., FNMAs). §5(a)(2). The bill clears up the current ambiguity as to the meaning of "short term": it means a remaining maturity of 397 days or less. §3(k).
- The bill preserves the ability to invest in bank deposits, including certificates of deposit, provided the deposit is FDIC-insured or collateralized. §5(a)(3). The bill requires that the collateral pledge have a market value of at least 102% and requires a written agreement and formal bank approval. These changes address the major shortcomings of Act 72. In lieu of collateral, the uninsured portion of the deposit may be secured by a surety bond from a company rated in one of the two highest categories by a nationally recognized rating agency.
- The bill preserves the ability to invest in registered investment company money market mutual funds. §5(a)(5). The bill includes specific requirements (such as a rating requirement) which are now found only in the School Code.
- The bill contains a specific authorization of repurchase agreements. §5(a)(6). Current law contains no specific authorization. Most counsel have viewed repurchase agreements under current law as a purchase of otherwise permissible federal securities. The bill permits repurchase agreements with a counterparty having an underlying rating in one of the two highest categories by a nationally recognized rating agency. §5(a)(6)(i)(B). The bill prohibits reverse repurchase agreements. §5(a)(6)(iv).
- The bill authorizes investment in local government investment pools. §5(c) and §6. Under current law, local government investment pools such as PLGIT or PSDLAF are formed and operate under the Intergovernmental Cooperation Act, but there is no specific mention of such pools in the investment statutes (other than cross-references to the Intergovernmental Cooperation Act).
- The bill does not permit investment in commercial paper, which are short term corporate debt investments. Under current law, most cities and counties may invest in commercial paper.
- Under the bill, bond proceeds are subject to the same investment guidelines as general operating funds. §16(b). The current provision of the Local Government Unit Debt Act which applies to the investment of sinking funds and other bond funds (53 P.C.S. §8224) is repealed to the extent it is inconsistent with the bill.
- The bill specifically does not apply to the investment of pension fund moneys which will continue to be governed by the prudent person standard under the Fiduciary Code. §2.
- Any investment not specifically permitted by the bill is prohibited. §5(d).
- The bill specifically prohibits investment in privately stripped obligations and derivatives. §5(e). A "derivative" is defined as "a financial instrument, contract or obligation whose value or return is based upon or linked to another asset or index, or both, separate from the financial instrument, contract or obligation itself." §5(e)(2).
- The bill requires that all contract documents governing investments be governed by Pennsylvania law and be approved as to form and legality by the local government's solicitor or other counsel. §13 and §12.
- Standards and Mechanics of Investing
- The bill sets forth a standard of care for investing: it must be done with that degree of care which persons of prudence would use in the management of their own affairs, avoiding speculation, and considering probable income to be derived as well as probable safety. §4.
- The local government must reasonably anticipate that each investment will be held to maturity (i.e., market risk is to be avoided). §5(g).
- All investments shall be made only through NASD broker/dealers or depository institutions or shall be purchased directly from the issuer. §5(f).
- All investments must be held by the local government or by a securities intermediary to be held as an asset of the local government. §5(h).
- Local Government Investment Pools
- The bill permits local governments to invest funds in local government investment pools which meet the requirements of the bill. §5(c) and §6.
- The pool may not invest in any security that does not continuously have a rating in the highest rating category from a nationally recognized rating agency. §6(f).
- The pool must furnish its investors with the following information: a disclosure instrument, investment transaction confirmations, a monthly report, and audited financials. §6(b), (c).
- Duties of Local Governments
- The local government must adopt, at the time of the adoption of the annual budget, a written investment policy which sets forth very specific investment guidelines. §9(a), (b), (c). This investment policy will be a public record subject to the Right to Know law. §9(h).
- The governing body shall designate one investment officer. The investment officer may in turn designate "designees" to assist him or her. §9(e).
- Adherence to the investment policy will be audited in connection with the local government's annual audit. §9(g).
- The investment officer must prepare a quarterly internal investment report and submit it to the governing body of the local government. §8.
- Each local government treasurer, investment officer and school district business manager must receive at least six hours of continuing education each year relating to investment responsibilities under the bill. §11(b)(3). The education program will be operated by a Local Government Investment Education Board established under the bill. §11(c). The Board will consist of nine members, including the Secretary of the Department of Community and Economic Development, the State Treasurer, the Chairman of the Pennsylvania Securities Commission, and six local government treasurers or investment officers appointed by the Governor (one each from a city, township, borough, county, school district and authority). §11(c)(2). The Board will administer the education program. §11(d). Fees may be charged for the training, and those fees will be held for the Board by the State Treasurer in a Local Government Investment Education Fund. §11(e).
- The bill contains the following conflict of interest provision: an investment advisor, broker/dealer, depository institution or underwriter engaged to provide a service to a local government may not own or receive compensation from an entity who is providing an investment to the local government unless such relationship has been disclosed in writing to the local government. §10.
- Exemption: a local government may invest in the following types of investments (which meet the investment requirements of the bill) without complying with the internal management report and continuing education requirements of the bill: (a) deposits in depository institutions, (b) local government investment pools, or (c) shares of registered investment companies. §7.
These materials are intended to furnish general information and should not be relied upon as advice in specific situations.
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