Cash Management and Short-Term...
Transcript of Cash Management and Short-Term...
Cash Management and Short-Term Investing
Washington State Treasurer’s Office
Doug Extine, Deputy Treasurer – Investments
Shad Pruitt, Deputy Treasurer – Operations
In Washington, the Treasurer’s office:
• Is responsible for the safety of tax payer funds;
• Manages cash flow of all major state accounts with deposits, withdrawals and transfers that totaled nearly $469 billion last year.
• Invests the state's operating cash in safe short-term instruments that preserve the ability to access funds.
• Issues and manages the state's debt.
• Provides financial and policy direction on various boards including the State Investment Board, the State Finance Committee, and the Public Deposit Protection Commission
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Treasury Management Goal Use Cash Efficiently
• Provide Liquidity
– Meet Current / Future Financial Obligations
• Optimize Cash Resources
– Minimize Holdings of Non-Earning Cash Balances
– Safely Invest Excess Balances
• Maintain Investments
– Meet Short and Longer Term Needs
– Preserve Principal, Ensure Liquidity, then Return on Investment
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Managing the Cash Flow for the State Requires the Office of the State Treasurer (OST) to:
• Handle financial transactions that receive money collected by all state agencies and pool it in a single bank account.
• Serve as intermediary between state agencies and financial institutions through master agreements that provide economies of scale that save the state money on banking services.
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Statutory Environment
• In 1993, the legislature passed the Cash Management Act (CMA) to:
– Obtain efficient management of the state’s cash;
– Combine state cash for investment purposes; and
– Revise policies and procedures so the state could create cost effective cash management contracts.
• In 2010, at the Treasurer’s request, the legislature improved the CMA by combining all state funds managed by the Treasurer for purposes of investment, deposit, redeposit and cash balances.
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Key Results of the Cash Management Act
• Establish master agreements for financial services
• Find economies of scale to drive down costs.
• Replace cumbersome inter-fund lending with fund accounting within a large cash pool
– Accounts in surplus earn interest while accounts in temporary cash deficit pay interest at same rates.
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Cash Inflows & Outflows
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Short-Term Investments
Concentrated Cash Position
Collections (Cash Inflows)
Agency: • Cash • Checks • Debit/Credit Cards Lockbox: • Checks Electronic: • ACH • Wire Transfers
Disbursements (Cash Outflows)
Short-Term Borrowing
Main Elements of Cash Management
• Collection
• Disbursements
• Concentration
• Cash Flow Forecasting
• Investment
• Safety and Security of Public Funds
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Primary Goals of Cash Management
• Speed Up Inflows (Collections)
• Control Outflows (Disbursements)
• Minimize Net Cost of Process (Concentration)
• Manage Liquidity
– Meet Daily Obligations
– Reduce Opportunity Cost (Holding Excess Cash)
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Cash Managers Hand Off Responsibility to Investment Managers by:
Preparing Collections For Future Disbursement
• Central or Master (Concentration) Account
• Transfer Funds From Outlying Locations / Banks
• Enables Funds to Be Managed Efficiently and Effectively
• Facilitates Daily Liquidity Management
• Invest Larger Amounts – Potentially Increasing Interest Income
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Investment Managers Hand Off Responsibility to Cash Managers when Funds are Disbursed
• Primary Issue = Control
– Ensuring Disbursements Made Exactly As Requested
• Wire / ACH
– Vendor Payments
– Intergovernmental Payments
• Direct Deposit – Low Cost / Certainty of Timing
– Payroll / Expense Reimbursements
– Retirement Payments
• Purchasing / Procurement Cards (P-Cards)
– Small Dollar Purchases (Supplies)
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Effective Cash Flow Forecasting Means Better Management of Cash and Investments
• Estimate cash receipts and disbursements during period
• Optimized use of funds – Minimize Excess Balances
• Ensure sufficient liquidity to meet disbursement needs
• Helps identify maximum maturity limits
• Helps identify core funds available for longer term investing
• Mitigate need to borrow or liquidate securities
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Cash Flow Forecasts
• Involve all departments to measure all flows
• Use historical data to measure cyclical nature for receipts and disbursements
• Receipts = expected inflows + investment maturities
• Disbursements = regular expenditures (payroll) + non-repetitive expenditures
• Expect fluctuations
• Updated regularly for changes in revenues and expenditures
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OST Investment Program Two Separate Pools
• Local Government Investment Pool (LGIP)
– 100% voluntary / 100% liquidity
– Constant share price
– Runs like a SEC Rule 2(a)-7 money market fund
• State Treasury
– 100% mandatory / 100% liquidity but only to meet cash flows
– Constant share price
– Beyond 2(a)-7 parameters
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Treasury Pool Investment of Temporary Surplus Balances
• Objectives, in priority order
1. Safety of principal
2. Liquidity to meet agency cash requirements
3. Yield
• An important source of revenue
– 10-year total of over $2.5 Billion
• Investment policy defines the parameters
– Sets the boundaries between conflicting objectives of safety, liquidity, and yield
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State Treasury Portfolio
– Significant, volatile cash flow makes it difficult to: • Effectively manage portfolio duration
• Establish a meaningful performance benchmark
• Provide effective oversight of the portfolio manager
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Month-End Actual Balance Treasury & Treasurer's Trust
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Solution: Subdivide the Treasury Pool into Two Portfolios
• “Liquidity” Portfolio: – Size ranges from $0.2 - $2 Billion
– Responsible for all cash requirements
– Manages cash for the core portfolio
– Follows 2a-7 investment guidelines
– Valid performance benchmarks
– Creates cushion against unforeseen cash flows
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Solution: Subdivide the Portfolio
• Enhanced Cash “Core” Portfolio – Sole focus is fixed income investing
• Managers relieved of cash flow considerations
• STIF/Liquidity available for cash investing
– Improved accountability and oversight
– Valid performance benchmarks • Merrill 1-3 Year Govt/Agency Index (total return)
• Blended Ladder (Earnings yield)
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Treasury & Treasurer's Trust Actual Balance by Portfolio
July 2001 - May 2011 Liquidity Total Core CDs
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Quarterly 1 Year 3 Years 5 Years 10 Years
LGIP 0.217% 0.27% 0.83% 2.43% 2.38%
Treasury Core 1.785% 2.76% 3.78% 4.34% 4.18%
Merrill 1-3Y 1.871% 1.99% 2.68% 3.36% 3.71%
**Based on July to June Fiscal Year
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Accrued Yield Comparison LGIP v Core v Merrill 1-3Y
LGIP Treasury Core Merrill 1-3Y
Accrued Yield Comparison: State Core Portfolio, LGIP and Benchmark
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LGIP vs. Treasury Core Accrued Yield
LGIP Main Core
Washington Treasury Returns
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Questions?
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Additional Information – Cash Management
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Payment Systems and Procedures
Manage Collection & Disbursement Functions
• Cash Systems: Currency & Coin
– Safeguarded Until Transported To Bank
• Paper Systems: Checks / Warrants
• Electronic Systems:
– Wire Transfers
– Automated Clearing House (ACH) Transactions
– Bankcards: Credit or Debit
– Image Deposits of Paper Items (Remote Deposit)
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Collection Goals
• Reduce Paper-Related Float As Much As Possible
• Timely collection of receipts (Opportunity Cost)
– Uncollected Funds Cannot Be Invested or Used
• Efficient handling of cash and checks
– In-House or Lockbox Service Provider
• Deposit receipts timely (same day or next day)
• Acceptance of Electronic Payments via Automatic bank debit, Internet, or Telephone
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Cash Management Contracts Administered by OST
Lockbox
• Master Agreement with 3rd Party (Bank)
• Expedites collection of paper-based payments
• Improves cash flow by reducing processing time between mail delivery and depositing of payments
• Available to any agencies accepting large numbers of paper checks
• Competitively Bid Every 4 to 7 Years
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Lockbox Systems
• 3rd Party Receives and Processes Payments
• Advantages:
– Mail Float Reduced: Use Unique Postal Code
– Processing Float Reduced
– Efficient Processing
• Economies of Scale
• Lower Per-Unit Processing
– High Levels of Security / Segregation of Duties
– Uninterrupted Service
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Cash Management Contracts Administered by OST
Master Depository Agreements
• Agreements with Various Banks Statewide
• Available To State Agencies Authorized by state Office of Financial Management (OFM) to Have Local Bank Account Outside The Treasury
• Banks Are All FDIC and PDPC Qualified
• Fees Kept Static for Two Year Contract Periods
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Cash Management Contracts Administered by OST
Merchant Bankcard Services
• Master Agreement with Bank for Processing Merchant Card Transactions
– VISA/MasterCard
– PIN Debit
• Separate Agreements with American Express and Discover
• Competitively Bid Every 4 to 7 Years
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Cash Management Contracts Administered by the OST
State Concentration Account
• Main Bank Account for Treasury/Treasury Trust
• Includes All Banking Services Needed By State, for the Collection and Disbursement of State Money
• Includes Provisions for Collecting and Disbursing Funds Electronically
• Competitively Bid Every 4 to 7 Years
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Electronic Systems Goals
• Faster Deposit of Funds (Collection Speed)
• Predictability of Settlement Timing (Cash Flows)
• Accelerated Availability of Funds
• Flexibility of Directing Payments to Any Account
• Ease of Transmitting Customer Remittance Information
• Reduced Risk of Fraud
– Less Cash / Check Handling
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Bankcards
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• From a Fee Perspective, Most Expensive Option for Collecting Funds.
• Costs Can Range From 1% to 4% On Average of Total Collection.
• Reward Cards and Business Cards Cost Merchants More Than Standard Cards.
• Sometimes Difficult To Pass Fees on to Customers
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Comparison of Transaction Costs Bankcards vs ACH
Bankcards
$100 Transaction Interchange $1.43
Assessment $0.09
Discount $0.08
Processor $0.10
TOTAL $1.70
Total for 50,000 transactions:
$85,125
ACH
$100 Transaction Bank Fee for ACH $0.025
TOTAL $0.025
Total for 50,000 transactions:
$1,250
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New Banking Services: Converting Checks to Images
Remote Deposit Service (RDS)
• Deposit Paper Checks Electronically
• Scan / Transmit Images To Bank
• Reduce Processing Float
• Improves Availability of Funds
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New Banking Services: Cash Pay Cards
• Alternative to checks/warrants
• Sold as a Payroll Card Solution, but can be used to disburse any funds, not just payroll
• Good for agencies with “unbanked” clients/workers
• Can be used as ATM card anywhere VISA / MC is accepted
• If managed properly, no fee to recipients
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Additional Information – Local Government Investment Pool
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Washington LGIP
• Created by legislation in 1986 – separate from state treasury, local funds never co-mingled with state
• Open to all local governmental entities in the state – Voluntary participation – As of 2010, state can invest in LGIP, but LGIP cannot come into state – As of 2010, tribal governments can invest their governmental funds
• 100% liquidity daily by 10 am – No restrictions on transaction size or balances
• 450 participants – All 39 counties – All cities > 10,000 – PUDs, Ports, transit agencies, higher ed, tribes, etc.
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Washington LGIP
• Objective: Provide a safe, liquid, short-term investment vehicle for local governments – Patterned after private sector 2a-7 money market funds
– Benchmark: net and gross yields of the iMoneyNet Government and Agency group of funds
• Fee = 3.5 basis points
• By statute can only charge what it costs to run the LGIP – Fee includes all direct and indirect costs
• Net Fee < 1 bp for last several years – Net Fee in 2010 was 0.69 bp, with balance of fee rebated
back to participants
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Washington LGIP
• All aspects of LGIP done by OST staff – Administration
– Portfolio management
– Accounting
– IT: System and Support
• Audited annually by outside firm
• Transactions may be done: – On-line
– By phone
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Washington LGIP: Yield and Balance History
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LGIP EOM Balances Fed Funds LGIP Gross Yield
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Agency Callables 0%
Agency Discount Notes 36%
Agency Floating Rate Notes 11%
Agency Variable Rate Notes
7%
CDs 0%
IBDDAs 4%
Treasury Bills 22%
Treasury Coupons 1%
TCD Program 1%
Repurchase Agreements
17%
NOW Accounts 1%
LGIP Holdings May 31, 2011
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