Presentation: Government Treasurers’ Organization of Texas (GTOT)Winter Seminar

Creating the Right Investment Solution for your Public Funds

Sheila DuffyDirectorInvestment Advisory Services

December 6, 2016

What are the Key Drivers inCreating the Right Investment Solution

What are the key factors to consider when managing public funds?

Why have an investment policy if we have the Public Funds Investment Act (PFIA) that outlines the rules?

What should be included in the investment policy?

Should all fund types be managed the same?

Once you have set the course, are you done?

Objectives and Take-Aways

Key Drivers in Creating a Solution

What should be considered in creating the right investment solution for your local government, with a focus on safety-first investing?

What governing documents should be considered: from statute to policy to bond covenants?

How important is it to prepare a cash flow analysis, in order to develop a solution that provides sufficient liquidity?

How should the investment strategy and implementation be managed and monitored?

We will walk through creating the right solution for your local government: considering proper planning; the creation of the right solution; and strategy implementation and ongoing management of the funds.

Creating the Right Investment Solution

6

Investment Management Cycle

PLANNING

Review governing documents, including Texas Public Funds Investment Act (PFIA), the investment policy, and bond covenants

Analyze cash flow, based upon historical spending and forward looking budget

Assess risk tolerance

SOLUTIONS

Develop a solution based upon information gleaned from the planning phase

Prepare a strategy summary document

Discussion

SERVICING

Prepare investment reports (monthly, quarterly, annual)

Prepare market and strategy updates, considering maturities, liquidity needs and markets

Present to staff, investment committee and/or governing body

Annual Investment Management Cycle

In-depth Review of Current Program

Cash Flow Analysis/Investment

Strategy

Consult with Client/Strategy

Recommendations

Investment Strategy Development

Implementation: Trades/Compliance

Review

Annual Comprehensive

Review and Update

PHASE ONE - PLANNING PHASE TWO - SOLUTIONS PHASE THREE - SERVICING

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PFIA and Policy

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Investment Policy Objectives

Investment Objectives:

Safety is primary objective

Transparency

Compliance

Liquidity

Yield

PFIA - Chapter 2256 of the Texas Government Code.*

PFIA dictates the highest level of rules for investing public funds.

Policy must comply with PFIA and may be more restrictive, but not less restrictive.

PFIA dictates what investments and maturities are allowable as well as reporting, governance, responsibility, and ethical (conflict of interest) considerations.

Texas Public Funds Investment Act (PFIA):

* Must also comply with Collateral for Public Funds - Chapter 2257 of the Texas

Government Code

Is your local government investment policy a comprehensive, well developed investment policy?

Does it include, among other things, clearly stated investment objectives, allowable investment instruments, and compliance with relevant statutes?

Is it time to fine-tune it, to remove vague, contradictory requirements that may artificially constrain your investment program?

Fine Tuning your Investment Policy

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Investment Policy Development

A well-defined investment policy is vital to governing the investment and safekeeping of public funds and should include sections, such as:

General investment rules:Statutory and constitutional constraintsRoles and responsibilities of staff/board Standard of care: fiduciary dutyInvestment objectivesAllowable investments

All forms of risk mitigation and safekeeping:DiversificationMaximum maturitiesCollateral requirementsCustodial servicesSelection and management of outside services (advisors, broker and dealers, etc.)

Governance:Define investment committeeGoverning boardAdoption of policy by formal actionAnnual review of policy

Reporting and accountability standards:BenchmarksReporting requirements and frequencyRecord keeping

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Investment Policy Review

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Should All Fund Types be Managed Alike?

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Strategy by Fund Type – Cash Flow

Create investment strategies by fund type:

Operating Funds – Consider creating 2 investment strategies for operating funds:Liquidity Bucket – This fund or portfolio would be established to pay for all operating expenses over a normal business cycle, plus some reserves. Core Portfolio Bucket – This is the long-term strategic investment portfolio. Consider a maximum maturity of 5 years .

Debt Service Funds – These funds should have unique investment strategies, so as to maximize interest income within the parameters of the I.R.S. regulations.

Construction Funds – In the event that there are bond-funded capital projects, we recommend a specific investment strategy for bond funds associated with each project, focused on unique project draw schedules and cash needs.

Cash Flow – Operating Funds

Illustrates a sample three year fund balances. The cash flow analysis is unique to each entity’s individual cash needs and budget constraints. For illustration purposes only.

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

$100,000,000

General Fund Balances

FY1 FY2 FY3

Cash Flow – Bond Proceeds

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

Bank or LGIP U.S. Treasuries U.S. Gov. Agencies AA Municipals Blended Yield

Draw Amounts

InterestRates

Illustrates a sample construction draw schedule. Public Trust has provided a sample assets allocation for this hypothetical draw schedule. Rates are shown as “Gross of Fees” for all draws except Bank or LGIP draws which are shown “Net of Fees” . Blended Yield represents the yield at each draw based upon the asset allocation. For illustrative purposes only. Not guaranteed. Source: Bloomberg. 1/11/2016

Consider points learned in Planning stagePFIA compliancePolicy considerationsCash needs

Risk Tolerance and Market ConsiderationsCredit or no credit?Credit research and risk managementMoney Market reform

Opportunities to Add ValueYield curve placementSector allocationAdding creditOther

Creating a Solution

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Yield Curve Placement

Data Source: Treasury yields - United State Treasury: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield. Bank Rate Assumption = 0.25%.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

3/9/2016 4/9/2016 5/9/2016 6/9/2016 7/9/2016 8/9/2016 9/9/2016 10/9/2016 11/9/2016

Inte

st R

ate

(%

)US Treasury Rates

1/4/16 to 11/18/16

1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr Bank Dep.

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Sector Allocation

Data Source: Bloomberg 11/21/16. Chart for illustration purposes only.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

3M 6M 1Y 2Y 3Y

Yields by Sector

US TAXABLE AA MUNI US CORP AA US TREASURY US AGENCIES

Ongoing Management, Reporting and Transparency

Daily monitoring of market news

Monthly reports for monitoring portfolios

Quarterly reports to Commissioner’s Court

Annual review of policy, cash needs and budget forecasts

Ongoing Servicing

In-depth Review of Current Program

Cash Flow Analysis/Investment

Strategy

Consult with Client/Strategy

Recommendations

Investment Strategy Development

Implementation: Trades/Compliance

Review

Annual Comprehensive

Review and Update

What are the key factors to consider when managing public funds?

Governing Documents

Cash Flow

Risk Tolerance

Why have an investment policy if we have the Public Funds Investment Act (PFIA) that outlines the rules?

PFIA highest level rulebook

Policy must comply with PFIA and can be more restrictive based on risk tolerances

What should be included in the investment policy?

Delegation of authority

Risk Management – authorized investments, maturities and safekeeping

Governance

Reporting and transparency

Objectives and Take-Aways - Review

Should all fund types be managed the same?

Differing investment objectives

Differing cash needs in various funds

Differing fund objectives

Once you have set the course, are you done?

Dynamic markets

Changing cash needs

Regular policy review and updates

Objectives and Take-Aways – Review continued

Contact

Sheila A DuffyDirector Investment Advisory Services

Public Trust Advisors, LLC 717 17th Street, Suite 1850 Denver, CO 80202

o (303) 244-0462 m (505) 263-1453 sheila.duffy@publictrustadvisors.com

This presentation is for informational purposes only. All information is assumed to be correct but the accuracy has not been confirmed and therefore is not guaranteed to be correct. Information is obtained from third party sources that may or may not be verified. The information presented should not be used in making any investment decisions and is not a recommendation to buy, sell, implement or change any securities or investment strategy, function or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact, and these assumptions may or may not be correct based on foreseen and unforeseen events. All calculations and results presented and are for discussion purposes only and should not be used for making calculations and/or decisions.

The investment advisor providing these services is Public Trust Advisors, LLC (Public Trust), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940, as amended. Registration with the SEC does not imply a certain level of skill or training. Public Trust is required to maintain a written disclosure brochure of our background and business experience. If you would like to receive a copy of our current disclosure brochure, privacy policy, or code of ethics please contact us.

The data in this presentation is unaudited.

Performance comparisons will be affected by changes in interest rates. Investment returns fluctuate due to changes in market conditions. Investment involves risk, including the possible loss of principal. No assurance can be given that the performance objectives of a given strategy will be achieved. Past Performance is no guarantee of future results. Any financial and/or investment decision may incur losses.

Additional Disclosure