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MARICOPA COUNTY INTERNAL POLICY Policy Number: A2509 Policy Title: Current Adoption x-x-xxxx02-13-2019 DEPOSIT AND INVESTMENT DISCLOSURES Date: Current x-x-xxxx02-13-2019 Implementation Date: Approved by: Board Agenda C-18-19-004-6-00 Number: BOARD OF SUPERVISORS Original Adoption Date: June 200507-06-2005 I. PURPOSE To provide guidance to and facilitate compliance by County Departments and Special Districts with the Governmental Accounting Standards Board (GASB) Pronouncements (Nos. 31, 40 and 72) as well as applicable Arizona Revised Statutes (A.R.S.) related to the administration of public monies which, when taken together, help form the County’s policy regarding deposits and investments and the County Treasurer Investment Policy (see attached document). II. AUTHORITY A. GASB Pronouncements: 1. Statement No. 31: requires the County and Special Districts to report all investments at fair market value in the financial statements. The corresponding change in the fair value of investments should be reported as revenue (gain) or expense (loss). 2. Statement No. 40: requires the County and Special Districts to disclose, in the notes to the financial statements, specific deposit and investments risks along with policies used to mitigate those risks. 3. Statement No. 72: requires the County and Special Districts to disclose the valuation techniques used in determining fair market value. The techniques should be appropriate under the circumstances and sufficient data (inputs) must be available to measure fair value. B. A.R.S. Statutory Laws: 1. A.R.S. §11-491: governs the County Treasurer’s role as the custodian of public monies. 2. A.R.S. §35-323: governs public finances, money management, investing public monies, bidding security and other related requirements in terms of eligible investments and maximum maturity timelines. 3. A.R.S. §14-5603(B): governs the Public Fiduciary deposit of funds and investment plan. 4. A.R.S. §12.286: governs the Clerk of the Superior Court investment of deposits. 5. A.R.S. §48-4231: requires the County Stadium District to follow A.R.S. §35-323 while allowing for the District to invest in maturities greater than five years. 6. A.R.S. §35-1207: requires depository institutions holding public deposits to be fully collateralized by at least 102% at all times. Policy Title: Policy Number: A2509 DEPOSIT AND INVESTMENT DISCLOSURES Current Adoption xx-xx-xxxx02-13- Date: 2019 III. APPLICATION This policy applies to all County Departments, Elected Officials, and the Flood Control District, Library District, and Stadium District (Special Districts). The Board of Supervisors is authorized to jointly adopt policies applying to the Special Districts under the Intergovernmental Agreement (C-06-18-393-6-00), approved on April 11th, 2018. This policy also applies to employees of County elected and judicial branch offices unless the elected official has implemented a similar policy specific to his or her office Department directors and administrators are responsible for ensuring that their staff are aware of and comply with this policy. IV. DEFINITIONS A. Concentration of Credit Risk: The risk of loss attributed to the magnitude of a government’s investment in a single issuer. B. Comprehensive Annual Financial Report (CAFR): The Maricopa County financial statements issued annually and audited by the Auditor General for the State of Arizona. C. Credit Risk: The possibility that an issuer of an instrument will be unable to make interest payments or repay principal. D. Custodial Credit Risk for: 1. Deposits: The risk that in the event of the failure of a depository financial institution, the County or the Special Districts will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. 2. Investments: The risk that in the event of the failure of the counterparty to a transaction, the County or the Special Districts will not be able to recover the value of their investment or collateral securities that are in the possession of an outside party. E. Department: Refers to the department, office, agency, or special district under budgetary responsibility of the Board of Supervisors or Board of Directors. F. Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date (the County’s fiscal year end). G. Federal Deposit Insurance Corporation (FDIC): A corporation created by the federal government that insures deposits in banks and savings associations. H. Hierarchy of inputs: A three-level ranking of the significance of the inputs used in determining fair market value of investments as outlined in GASB Statement No. 72: Level 1: quoted prices in active market for identical assets or liabilities. Level 2: inputs other than those included in Level 1 which are observable either directly or indirectly. Level 3: unobservable inputs I. Interest Rate Risk: The risk that changes in interest rates will adversely affect the fair value of an investment. Page 2 of 6 Policy Title: Policy Number: A2509 DEPOSIT AND INVESTMENT DISCLOSURES Current Adoption xx-xx-xxxx02-13- Date: 2019 J. Issuer: An issuer is an entity that has the authority to distribute a security or other investment. A bond issuer is the entity that is legally obligated to make principal and interest payments to bond holders. In the case of mutual funds, external investments pools, and other pooled investments, issuer refers to the entity invested in. K. Investments: All securities or other assets that the County (and Special Districts) (a) hold primarily for the purpose of income or profit and (b) have a present service capacity based solely on their ability to generate cash or to be sold to generate cash. L. Market Approach Valuation Technique: A valuation approach which uses prices and other relevant information (inputs) generated by market transactions involving identical or comparable assets or liabilities. M. Measurement Date: The County’s fiscal year end, June 30th. N. Segmented Time Distribution: a presentation of the fair value of investments categorized by period of maturity. (i.e., under 1 year, 1–5yrs, etc.) O. Special Districts: Refers to the County Library District, Flood Control District and the Stadium District. P. Statewide Collateralized Pool: Established under A.R.S. Title 35, Chapter 10, Article 1, which requires depository institutions within the State of Arizona to provide relevant collateral information concerning public deposits to the State Treasurer. V. POLICY The majority of deposits and investments reported in the County’s Comprehensive Annual Financial Report (CAFR) are included as part of the County Treasurer’s investment pool. The County Treasurer maintains all County and Special Districts’ deposits and investments in accordance with A.R.S. §11- 491 and consistent with A.R.S. §35-323, which specifies a maximum maturity of five years and limits eligible investments for the Treasurer’s pool. Deposits and investments held outside of the Treasurer’s investment pool represent a small portion of the County’s total deposits and investments. These amounts are accounted for in either Special Purpose Agency Funds, County Funds or Special District Funds and are subject to the same disclosure requirements as monies held and/or invested in the County Treasurer’s investment pool. A. Amounts held outside of the Treasurer’s investment pool are primarily related to the following Funds: 1. Stadium District (Special District) – is allowed to invest in maturities greater than 5 years per A.R.S. 48-4231, but otherwise must follow the guidance outlined in points B – F below. 2. Clerk of the Superior Court (Special Purpose Agency) – under court order, certain monies must be deposited with the Clerk of the Superior Court (COSC) and invested in interest bearing accounts. The COSC generally invests the money in either 30-day certificates of deposit or money market accounts, depending on the amount. The COSC adheres to A.R.S. §12-286 for investments of deposits. Page 3 of 6 Policy Title: Policy Number: A2509 DEPOSIT AND INVESTMENT DISCLOSURES Current Adoption xx-xx-xxxx02-13- Date: 2019 3. Public Fiduciary (Special Purpose Agency) – manages all client or estate depository and investment accounts in accordance with the Uniform Prudent Investor Act as adopted in 1986 by the State of Arizona. Additionally, the Fiduciary adheres to A.R.S. 14-5603(B) for establishing and continuing an estate or investment plan. As directed by court order and only when sufficient assets are available for investment, the Public Fiduciary and an independent investment manager will determine an investment objective for the client or estate. An independent Fiduciary Investment Committee reviews and monitors estate investments in order to confirm the investment objective, risk/return, diversification and the investment results and provides recommendations for adjustments and rebalancing of the portfolio as needed. B. Fair Value – all investments (pooled and non pooled) must be reported at fair value in the CAFR using the market approach. The valuation techniques used should be appropriate under the circumstances and should have sufficient data available to measure fair value. GASB 72 requires disclosure of the valuation techniques and inputs as described and categorized according to the hierarchy established by GASB Statement No. 72. Certain securities maturing within 90 days of the measurement date are reported at amortized cost instead of fair value, which is an allowable method under GASB Statement No. 31. C. Credit Risk – because changes in the financial strength of an issuer or changes in the credit rating of a security may affect its value, GASB Statement No. 40 requires disclosure of the credit quality of the County’s investments as determined by nationally recognized rating agencies. The County and Special Districts must disclose the lowest rating provided by the rating agencies for all securities or other investments such as money market mutual funds, bond mutual funds, etc. Obligations of the U.S. Government or obligations explicitly guaranteed by the U.S. Government are not considered to have credit risk and therefore, are exempt from this disclosure. If the investment is unrated, the disclosure will indicate that fact. The County and Special Districts must strive to preserve the principal value and the interest income of their investments against credit risk. To achieve this goal, the County and the Special Districts should invest in only the following debt instruments or as required by any relevant Bond Trust Indentures: 1. Obligations issued or guaranteed by the U.S. Government or any of the senior debt of its agencies, sponsored agencies, corporations, sponsored corporations or instrumentalities. 2. Commercial paper rated “A1” or better by Standard and Poor’s, or rated “P1” or better by Moody’s Investors Service at the time of purchase. 3. Corporate Bonds rated “A”, or better by Standard and Poor’s or Moody’s Investor Service at the time of purchase. D. Custodial Credit Risk - GASB Statement No. 40 requires specific disclosure when the County or the Special Districts maintain deposits or investments which are exposed to custodial credit risk as of the measurement date. Custodial credit risk is defined as follows: 1. Deposits are exposed to custodial credit risk if they are not covered by depository insurance (FDIC) and the deposits are: a. Uncollateralized b. Collateralized with securities held by the pledging financial institution, or c. Collateralized with securities held by the pledging financial institution’s trust department or agent but not in the County’s name. Page 4 of 6 Policy Title: Policy Number: A2509 DEPOSIT AND INVESTMENT DISCLOSURES Current Adoption xx-xx-xxxx02-13- Date: 2019 2. Bank deposits disclosures for custodial credit risk should include the amount of the bank balances, the fact that the balances are uninsured, and whether the balances are exposed on the basis as described in a, b or c above. At a minimum, depository accounts will be collateralized within categories b or c, as described above. 3. The County and the Special Districts routinely maintain deposits in outside bank accounts that exceed FDIC depository insurance, however these public deposits should be held with eligible depository institutions within the state of Arizona which are required to be collateralized at a minimum of 102% under A.R.S. §35-1207. This will guarantee that these deposits of public monies are part of the Statewide Collateralized Pool administered by and reported to the State Treasurer’s office. 4. Investment Securities are exposed to custodial credit risks if the securities are: a. Uninsured or, b. Not registered in the name of the government and are held by either: i. The counterparty, or ii. The counterparty’s trust department or agent but not in the governments name. 5. Investment custodial credit risk disclosures should include a description of the investment type(s), the reported amount, and whether or not the investment is held in the County’s name. Investments in external pools and in open-end mutual funds are not exposed to custodial risk because their existence is not evidenced by specific securities. 6. From time to time the County and the Special Districts may maintain investments in outside accounts that are uninsured and not registered in the name of the County or the Special Districts. These investments are generally related to Bond Trust Indentures and include amounts available for construction, debt service, bond covenants, etc. where policy dictates that any securities invested will be in accordance with the Bond Trust Indenture. Uninsured investments that are not registered in the name of the County or the Special District’s will be held and reported as type 4bi or 4bii as described above. E. Concentration of Credit Risk – Due to the limited investments available under Arizona Revised Statutes and the desire to preserve the principal value of these investments, investments of the County and the Special Districts may be subject to concentration of credit risk. The County and Special Districts must provide information about the concentration of credit risk associated with investments held at year end by disclosing, by issuer and percentage, the amount of their investments in any one issuer that represent 5 percent or more of total investments. Investments issued or explicitly guaranteed by the U.S. Government and investments in mutual funds, external investment pools, and other pooled investments are excluded from this requirement. F. Interest Rate Risk – The County and Special Districts should hold investments to maturity and/or invest in securities of shorter durations where practical in order to avoid any loss on investment resulting from an early sale or retirement. Generally speaking, when interest rates increase, the value of a debt obligation decreases with the effect being more pronounced for securities with longer dates to maturity. The County and the Special Districts must disclose information about the interest rate risk of debt investments by type and amount using the segmented time distribution method, as allowed and recommended by GASB Statement No. 40. Page 5 of 6 Policy Title: Policy Number: A2509 DEPOSIT AND INVESTMENT DISCLOSURES Current Adoption xx-xx-xxxx02-13- Date: 2019 Revision History Version Revision Date Description of Revision Initial version. (C-18-06-002-6-00, C-18-06-003-6-00, C-18-06-004- 1 6/200507/06/2005 6-00, C-18-06-005-6-00) Review, update language, and cite authority. Update to current policy 2 3/XX/201802/13/2019 formatting. (C-18-19-004-6-00) Page 6 of 6