Rural Water - Quarter 4, 2008 - (Page 22)

parties. The public entities’ control is not in the maturity of the security, it is in constantly maintained margins and regular, monitored reporting. 2. What is your required margin and is it in place? The margin set of collateral market value to your total funds on deposit is set by Texas law to only 100 percent. This does not protect you from volatility in the markets. Every policy and collateral agreement should require an additional margin that absorbs the risk of market price ﬂuctuation. The industry standard on collateral is 102 percent. Your entity can and should demand 102 percent coverage. The best place to demand this condition is in the bank RFP or bid process, and make sure it is in the agreement. You need to review your collateral reports received from the custodian (not the bank) once a month. Check the values reported and ask any necessary questions. 3. Is the collateral truly there and is it pledged to my entity? Your monthly collateral report should be carefully scrutinized to assure that it is information that comes directly from the custodian and not the bank or a separate reporting agency. The report should clearly state that it is pledged to your entity speciﬁcally by name. You should have safekeeping receipts or reports conﬁ rming safekeeping in your possession. The public entity must require that the list of collateral come from the custodian and not the depository bank. You want independent conﬁ rmation of what is being held. Check your reports and if they are being sent by the bank or a reporting service and not the custodian directly, you do not have a solid audit trail of what is pledged and where it is held. By holding marketable securities, you can easily determine the market value. If you are unable to price the collateral yourself, it is wise to have a third party verify the price or market value at least quarterly. An independent broker or adviser can do this easily for you. The Special Case of Water Supply Corporations We all consider nonproﬁt water supply corporations (WSC) as public entities doing a public service, but the FDIC regulations do not, and this creates a dangerous situation that requires your ongoing attention and action. The FDIC deﬁ nition of a public entity does not include WSCs. In the case of a bank closure or bridge action by the FDIC, a WSC will not be treated as a public entity. That means any collateral pledged to the WSC will not be honored. The WSC will not receive its funds for the collateral even if the bank has pledged it. As with all public and private entities, FDIC coverage is determined by and restricted to the entity’s tax id number not the number of accounts held. Every separate tax identiﬁcation number has the coverage afforded it under FDIC coverage. Not being deﬁ ned as a public entity means the WSC has no right to collateral pledges. A WSC has only the normal $100,000 coverage for all its interest-bearing funds, whether it is in time deposits (CD) or demand deposits (interest bearing accounts). Since pledges of securities for a WSC will not be honored by the FDIC, funds over $100,000 should not be maintained in any one bank and should be moved out of any one bank. A water district of any type is a deﬁ ned public entity (an FDIC deﬁ ned public unit) – and is clearly covered by the FDIC insurance. For these entities, the FDIC will honor pledges of securities if they are pledged under FIRREA executed collateral agreements. However, a WSC stands alone. Under the FDIC regulations such a non-public unit may be pledged collateral by the bank but, in the worst case scenario of a bank failure, the FDIC will NOT honor the collateral agreement (regardless of how it is executed) because under their regulations, the WSC is not a “public entity” and cannot therefore be legally pledged collateral of the bank. The issue is critical enough that every WSC should review its situation and should not maintain more than $100,000 in any one bank holding company. Move funds to other alternatives. The pools provide an alternative (except for Texpool, which also does not deﬁ ne a WSC as a public entity) for the funds, as does an SEC registered money market fund or direct investment securities such as treasuries or agencies. The WSC can use the CDARS program (www. cdars.com) to spread the funds and remain under FDIC coverage. A broker should not be used to spread CDs because mergers and acquisitions are normally not monitored by the broker. The Texas Municipal League, the Texas Rural Water Association and the banks are working on getting a mechanism to address this unusual situation to relieve the risk for the WSC. Until this situation is resolved, however, it is a risk that has to be addressed proactively. The TRWA Public Investment Training is useful in helping you protect your assets. About the author: Linda Patterson is a certified treasury professional with Patterson & Associates Investment Professionals. 22 • Fourth Quarter 2008 http://www.cdars.com http://www.cdars.com

Table of Contents Feed for the Digital Edition of Rural Water - Quarter 4, 2008

Rural Water - Quarter 4, 2008 Contents From the President Rural Water: Where are We Headed? The Future of Water in America Bank Collateral Controls in Nervous Times Bottle of Water or Billion Dollar Bully? Aqua Chocolate No Mas Why Even Small Water Systems Should Have Personnel Policy Manuals Safe Drinking Water Regulatory Update 2008 NRWA Industry Event Throwing My Loop Advertisers.com Index to Advertisers From the CEO

Rural Water - Quarter 4, 2008

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