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NYS Comptroller

THOMAS P. DiNAPOLI

The Academy for New York State's Local Officials

Cash Management: A Tutorial for Local Governments and School Districts

Module 3: Maximizing Interest Earnings

Investment Options

Any investment program involving public money must be assessed with respect to four basic criteria — legality, safety, liquidity, and yield.

One of the basic tenets of investing by local governments is that it must be in conformance with the law. For guidance on various investment options and collateral requirements, you should refer to General Municipal Law, Section 11. There are two types of investment options, however, we want to mention here.

The first one is a repurchase agreement (REPO). A repurchase agreement is a transaction in which a local government unit purchases authorized securities from a trading partner. Simultaneously, the local government agrees to resell and the trading partner agrees to repurchase the securities at a future date. However, it is important to note that local governments are not specifically authorized to enter into REPOs, and therefore may only do so as an incident to their power to buy and sell securities. Consequently local governments should structure their REPOs as purchase-and-sales,and not as secured loans.

The second option that some local governments have chosen is to participate in a cooperative investment program. Cooperative investing involves the temporary investing of money by more that one municipal corporation, and has to be in accordance with the provisions of Articles 5-G and 3-A of the General Municipal Law.

Participants of a cooperative investment program must determine that the investment option chosen is consistent with their cash flow needs, and meets the objectives of legality, safety, liquidity, and yield. Article 3-A of General Municipal Law sets forth the requirements for cooperative investing (Sections 42-45), and local governments need to make sure that they are in compliance with these requirements.

The governing body may need to revise its current adopted investment policy to assure that the cooperative investment option you choose is consistent with your municipality's cash flow needs, and meets the objectives of legality, safety, liquidity, and yield. A comprehensive investment policy should allow for cooperative investing, set diversification standards with respect to the type and the amount of investments, and designate the firms with whom to transact business. In addition, the investment policy should be updated to include the provision contained in General Municipal Law Section 39.

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