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1998-3 Investments

February 11, 1998

TO:    County, City, Village and Township Treasurers

FROM:     Richard L. Baldermann, CPA, CGFM
               Administrator, Local Audit and Finance Division

SUBJECT: Public Act 196 of 1997--Amendments to Public Act 20 of 1943

Public Act 196 of 1997 was signed and took immediate affect on December 30, 1997. Following is a summary of the changes to the investment authority provided in the Act. (Comparison of old and new language in the Act)

Section 1 (1) (a)--Eliminated the restriction that principal and interest be fully guaranteed by the United States for US agency securities.

Section 1 (1) (c)--Changed the required rating from 3 highest to 2 highest classifications AND eliminated the requirement that not more than 50% of any fund be invested in commercial paper.

Section 1 (1) (d)--Repurchase agreement now agrees with authority in Section 1 (1) (a).

Section 1 (1) (f)--Added obligations of the State of Michigan or it political subdivisions which are rated as investment grade as an investment option.

Section 1 (1) (g)--Clarified mutual fund language requiring the fund to be SEC regulated and indicating that certain investment activities of the fund not disqualify the fund.

Section 1 (1) (h), (i) and (j)--Added a listing of existing investment authority of other acts to invest in pools (Urban Cooperation Act MCL 124.501; Financial Institution Investment Pools MCL 129.111; and Local Government Investment Pools MCL 129.141).

Section 1 (3)--Brought the acceptable assets for pledging to secure deposits in agreement with the investing authority of the local unit.

Section 1 (5)--Added definitions of "governing body," "funds," "investment officer," and "public corporation."

Section 2--Repealed

Section 3--Ratified and validated investments made before the effective date (December 30, 1997) of the new act.

Section 5--Added a requirement that every local unit governing body must adopt an investment policy, which includes specified matters. The policy must be adopted within 180 days after the end of the local unit's first fiscal year that ends after December 30, 1997. Required dates by which a policy must be adopted are:


Year End Effective Date
December 31, 1997 June 30, 1998
February 28, 1998 August 31, 1998
March 31, 1998 September 30, 1998
June 30, 1998 December 31, 1998
September 30, 1998 March 31, 1999


If a local unit as of December 30, 1997 has adopted an investment policy that substantially complies with the minimum requirements in the Act, the local unit is not in violation of the requirement as long as that policy remains in effect. (Sample Investment Policy)

Section 6 (1) and (2)--A local unit, beginning on the effective date of the investment policy (but no later than the effective dates listed above), shall provide the financial intermediary, broker or dealer a copy of the local unit's investment policy before executing an order to purchase or trade the funds. The financial intermediary, broker or dealer shall acknowledge receipt of the policy and agree to comply with its terms. (Example)

Section 6 (3)--The investment officer shall annually provide a written report concerning the investment of funds to the governing body.

Description of Investments which comply with the requirements of Public Act 20 of 1943, as amended (MCL 129.91).

US Treasury Bills--obligations of the United States Government sold at a discount from par with a specific maturity date up to a maximum maturity of one year. Available in minimum denominations of $10,000 and increments of $5,000 thereafter, interest in discounted and calculated using actual number of days on a 360 day year.

US Treasury Notes--obligations of the United States Government bearing interest payable at six month intervals until maturity. Maturities are from one to ten years. Denominations, after a minimum of $5,000, are in $1,000 multiples.

US Treasury Bonds--similar to notes except original maturities are ten years and longer. Interest is generally payable on February and August 15 or May and November 15, comparable to US Treasury Notes.

US Treasury STRIPS--Separate Trading of Registered Interest and Principal of Securities

TINTS--Treasury Interest Securities

PRINS or STRIP Ps-- Treasury Principal Securities

CUBES--Coupons Under Book Entry System.

US Government Agency Obligations

Certificate of Deposit--CD--is a receipt of funds deposited in a financial institution for a specified period at a specified rate of interest. A negotiable receipt may be in bearer or registered form and can be traded in the secondary market. A non-negotiable receipt is always registered and has no secondary market. Denominations can be any agreed amount, and interest is normally calculated using actual number of days on a 360 day year. However, each financial institution's calculations vary, and the investor should ask to avoid misunderstanding.

Savings Deposit Receipt--a non-negotiable receipt evidencing a deposit with interest to be paid at a stated rate. Maturity may be fixed, but normally is subject to presentation by the depositor for payment. The amounts may be small or large but Federal Regulations will regulate the interest rate to be paid. This instrument is somewhat outdated due to popularity of regular passbook and statement savings accounts with daily interest.

Savings Account--a deposit evidenced by a passbook or monthly statement. Entries are made for each deposit and withdrawal and interest is paid in accordance with the policy of the financial institution. It is often used to accumulate small amounts of funds until a larger, higher yielding investment can be made.

Commercial Paper--Short term unsecured debt obligation issued by a bank holding company, finance company, utility or industrial company to raise short term cash.

Repurchase Agreement--is not a security but a contractual arrangement between a financial institution or dealer and an investor. The agreement normally can run for one to thirty days, but some can go longer. The investor puts up his funds for a certain number of days at a stated yield. In return he takes title to a given block of securities as collateral. At maturity the securities are returned and the funds repaid plus interest. Usual amounts are $500,000 or more, but some repurchase agreements can be smaller. Interest is calculated the same as certificates of deposit.

Extreme caution should be exercised to obtain an undivided interest in the securities under repurchase agreement. Furthermore, if the securities are held for you in safekeeping, they should be held in a customer-segregated safekeeping account, preferably by a third party.

The securities under repurchase agreement should also be "Marked-to-Market," meaning that the value of the securities should be maintained during the entire life of the agreement at levels equal to or greater than the amount advanced for the agreement.

Bankers' Acceptance--a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity. Bankers' acceptances are usually created to finance the import and export of goods, the shipment of goods within the United States and the storage of readily marketable staple commodities. Bankers' acceptances are sold at a discount from par similar to US Treasury Bills, and, since an acceptance is tied to a specific loan transaction, the amount and maturity of the acceptance are fixed.

Investment Pools--Those investment pools organized under the authority of the Urban Cooperation Act, PA 7 of 1967 (Ex Sess) (MCL 124.501 to 124.512), the surplus funds investment pool act, PA 367 of 1982 (129.111 to 129.118) and the local government investment pool act, PA 121 of 1985, (MCL 129.141 to 129.150). Those pools are managed by contractual agreement contained in the interlocal agreement, banks and a county treasurer, respectively. All of the pools are limited to investments described in section 1 (1) (a) through (g).

Description of Investments which do not comply with the requirements of Public Act 20 of 1943, as amended (MCL 129.91).

The following potential investments are not securities but are contractual agreements between a broker or dealer and an investor. They are not investments in the underlying securities. Repurchase agreements are contractual agreements specifically authorized by the act, while these contractual agreements are not mentioned in the act and are therefore specifically excluded.

CATS--Certificates of Accrual on Treasury Securities were originated by Salomon Brothers in 1984.

COUGRs--Certificates on Government Receipts ("Cougars") were originated by A.G. Becker.

ETRs--Easy Growth Treasury Receipts ("Eaters") were issued by Dean Witter.

TBRs--Treasury Bond Receipts ("Teddy Bears") were originated by E.F. Hutton.

TIGRs--Treasury Investment Growth Receipts ("Tigers") were issued by Merrill Lynch.

TRs--Treasury Receipts, the generic form of zero coupons were issued by a group of dealers. "TRs" is also the generic term used to reference the family or "zoo" of Proprietary/Government-Guaranteed Receipts.

ZCTOs--Zero Coupon Treasury Obligations ("Zitcos") were originated by Lehman Brothers.

CMOs--pools (not mutual funds) of GNMAs packaged as a bond and are classical derivatives per the October 14, 1994 edition of the Wall Street Journal, "those arcane securities, whose returns are based on or derived from some underlying asset or index."

Certificate of Deposit--CD--Some brokers and dealers have programs whereby $100,000, federally insured, certificates of deposit from numerous institutions are packaged in million dollar multiples and sold on an average yield of all the institutions participating in the package. This type of arrangement does not fall under the authority for investment pools under the Urban Cooperations Act, PA 7 of 1967 (Ex Sess), MCL 124.501 to 124.512, the surplus funds investment pool act, PA 367 of 1982, 129.111 to 129.118 or the local government investment pool act, PA 121 of 1985, MCL 129.141 to 129.150 and is therefore NOT appropriate.

If you have any questions please contact:

Michigan Department of Treasury
Local Audit and Finance Division
P.O. Box 30728
Lansing, Michigan 48909-8228
Telephone (517) 373-3227