1.1                          A bill for an act 
  1.2             relating to public funds; regulating the deposit and 
  1.3             investment of these funds, and agreements related to 
  1.4             these funds; proposing coding for new law as Minnesota 
  1.5             Statutes, chapter 118A; repealing Minnesota Statutes 
  1.6             1994, sections 118.005; 118.01; 118.02; 118.08; 
  1.7             118.09; 118.10; 118.11; 118.12; 118.13; 118.14; 
  1.8             118.16; 124.05; 471.56; 475.66; and 475.76. 
  1.9   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.10     Section 1.  [118A.01] [PUBLIC FUNDS; DEPOSITORIES AND 
  1.11  INVESTMENTS.] 
  1.12     Subdivision 1.  [DEFINITIONS.] The definitions in this 
  1.13  section apply to sections 118A.01 to 118A.06. 
  1.14     Subd. 2.  [GOVERNMENT ENTITY.] "Government entity" means a 
  1.15  county, city, town, school district, hospital district, public 
  1.16  authority, public corporation, public commission, special 
  1.17  district, or any other political subdivision, except an entity 
  1.18  whose investment authority is specified under chapter 11A or 
  1.19  356A. 
  1.20     Subd. 3.  [FINANCIAL INSTITUTION.] "Financial institution" 
  1.21  means a savings association, commercial bank, trust company, 
  1.22  credit union, or industrial loan and thrift company. 
  1.23     Subd. 4.  [PUBLIC FUNDS.] "Public funds" means all general, 
  1.24  special, permanent, trust, and other funds, regardless of source 
  1.25  or purpose, held or administered by a government entity, unless 
  1.26  otherwise restricted. 
  1.27     Sec. 2.  [118A.02] [AUTHORIZATION FOR DEPOSIT AND 
  2.1   INVESTMENT.] 
  2.2      Subdivision 1.  The governing body of each government 
  2.3   entity shall designate, as a depository of its funds, one or 
  2.4   more financial institutions.  The governing body may authorize 
  2.5   the treasurer or chief financial officer to (1) designate 
  2.6   depositories of the funds; (2) make investments of funds under 
  2.7   sections 118A.01 to 118A.06 or other applicable law; or (3) both 
  2.8   designate depositories and make investments as provided in this 
  2.9   subdivision. 
  2.10     Subd. 2.  The treasurer or chief financial officer of a 
  2.11  government entity may at any time sell obligations purchased 
  2.12  pursuant to this section and the money received from such sale, 
  2.13  and the interest and profits or loss on such investment shall be 
  2.14  credited or charged, as the case may be, to the fund from which 
  2.15  the investment was made.  Neither such official nor government 
  2.16  entity, nor any other official responsible for the custody of 
  2.17  such funds, shall be personally liable for any loss sustained 
  2.18  from the deposit or investment of funds in accordance with the 
  2.19  provisions of sections 118A.04 and 118A.05. 
  2.20     Sec. 3.  [118A.03] [DEPOSITORIES AND COLLATERAL.] 
  2.21     Subdivision 1.  To the extent that funds deposited are in 
  2.22  excess of available federal deposit insurance, the government 
  2.23  entity shall require the financial institution to furnish 
  2.24  collateral security or a corporate surety bond executed by a 
  2.25  company authorized to do business in the state. 
  2.26     Subd. 2.  The following are the allowable forms of 
  2.27  collateral in lieu of a corporate surety bond:  
  2.28     (1) United States government treasury bills, treasury 
  2.29  notes, treasury bonds; 
  2.30     (2) issues of United States government agencies and 
  2.31  instrumentalities as quoted by a recognized industry quotation 
  2.32  service available to the government entity; and 
  2.33     (3) general obligation securities of any state or local 
  2.34  government with taxing powers which is rated A or better by a 
  2.35  national bond rating service, or revenue obligation securities 
  2.36  of any state or local government with taxing powers which is 
  3.1   rated AA or better by a national bond rating service. 
  3.2      Subd. 3.  The total amount of the collateral computed at 
  3.3   its market value shall be at least ten percent more than the 
  3.4   amount on deposit plus accrued interest at the close of the 
  3.5   business day.  The financial institution may furnish both a 
  3.6   surety bond and collateral aggregating the required amount. 
  3.7      Subd. 4.  Any collateral pledged shall be accompanied by a 
  3.8   written assignment to the government entity from the financial 
  3.9   institution.  The written assignment shall recite that, upon 
  3.10  default, the financial institution shall release to the 
  3.11  government entity on demand, free of exchange or any other 
  3.12  charges, the collateral pledged.  Interest earned on assigned 
  3.13  collateral will be remitted to the financial institution so long 
  3.14  as it is not in default.  The government entity may sell the 
  3.15  collateral to recover the amount due.  Any surplus from the sale 
  3.16  of the collateral shall be payable to the financial institution, 
  3.17  its assigns, or both. 
  3.18     Subd. 5.  A financial institution may withdraw excess 
  3.19  collateral or substitute other collateral after giving written 
  3.20  notice to the governmental entity and receiving confirmation.  
  3.21  The authority to return any delivered and assigned collateral 
  3.22  rests with the government entity.  
  3.23     Subd. 6.  For purposes of this section, default on the part 
  3.24  of the financial institution includes, but is not limited to, 
  3.25  failure to make interest payments when due, failure to promptly 
  3.26  deliver upon demand all money on deposit, or closure of the 
  3.27  depository.  If a financial institution closes, all deposits 
  3.28  shall be immediately due and payable. 
  3.29     Subd. 7.  All collateral shall be placed in safekeeping in 
  3.30  a restricted account at a Federal Reserve Bank, or a trust 
  3.31  department of a commercial bank or other financial institution 
  3.32  that is not owned or controlled by the financial institution 
  3.33  furnishing the collateral.  The selection shall be approved by 
  3.34  the government entity. 
  3.35     Sec. 4.  [118A.04] [INVESTMENTS.] 
  3.36     Subdivision 1.  Any public funds, not presently needed for 
  4.1   other purposes or restricted for other purposes, may be invested 
  4.2   in the manner and subject to the conditions provided for in this 
  4.3   section. 
  4.4      Subd. 2.  Public funds may be invested in governmental 
  4.5   bonds, notes, bills, mortgages (excluding high-risk 
  4.6   mortgage-backed securities), and other securities, which are 
  4.7   direct obligations or are guaranteed or insured issues of the 
  4.8   United States, its agencies, its instrumentalities, or 
  4.9   organizations created by an act of congress. 
  4.10     Subd. 3.  Funds may be invested in the following:  
  4.11     (1) any security which is a general obligation of any state 
  4.12  or local government with taxing powers which is rated A or 
  4.13  better by a national bond rating service; 
  4.14     (2) any security which is a revenue obligation of any state 
  4.15  or local government with taxing powers which is rated AA or 
  4.16  better by a national bond rating service; and 
  4.17     (3) a general obligation of the Minnesota housing finance 
  4.18  agency which is a moral obligation of the state of Minnesota and 
  4.19  is rated A or better by a national bond rating agency. 
  4.20     Subd. 4.  Funds may be invested in commercial paper issued 
  4.21  by United States corporations or their Canadian subsidiaries 
  4.22  that is rated in the highest quality category by at least two 
  4.23  nationally recognized rating agencies and matures in 270 days or 
  4.24  less. 
  4.25     Subd. 5.  Funds may be invested in bankers acceptances of 
  4.26  United States banks. 
  4.27     Subd. 6.  For the purposes of this section and section 
  4.28  118A.05, "high-risk mortgage-backed securities" are: 
  4.29     (a) interest-only or principal-only mortgage-backed 
  4.30  securities; and 
  4.31     (b) any mortgage derivative security that:  
  4.32     (1) has an expected average life greater than ten years; 
  4.33     (2) has an expected average life that: 
  4.34     (i) will extend by more than four years as the result of an 
  4.35  immediate and sustained parallel shift in the yield curve of 
  4.36  plus 300 basis points; or 
  5.1      (ii) will shorten by more than six years as the result of 
  5.2   an immediate and sustained parallel shift in the yield curve of 
  5.3   minus 300 basis points; or 
  5.4      (3) will have an estimated change in price of more than 17 
  5.5   percent as the result of an immediate and sustained parallel 
  5.6   shift in the yield curve of plus or minus 300 basis points.  
  5.7      Subd. 7.  (a) For the purpose of this section and section 
  5.8   118A.05, the term "broker" means a broker-dealer, broker, or 
  5.9   agent of a municipality, who transfers, purchases, sells, or 
  5.10  obtains securities for, or on behalf of, a government entity. 
  5.11     (b) Prior to completing an initial transaction with a 
  5.12  broker, a government entity shall provide to the broker a 
  5.13  written statement of investment restrictions which shall include 
  5.14  a provision that all future investments are to be made in 
  5.15  accordance with Minnesota Statutes governing the investment of 
  5.16  public funds. 
  5.17     (c) A broker must acknowledge receipt of the statement of 
  5.18  investment restrictions in writing and agree to handle the 
  5.19  municipality's account in accordance with these restrictions.  A 
  5.20  municipality may not enter into a transaction with a broker 
  5.21  until the broker has provided this written agreement to the 
  5.22  municipality. 
  5.23     (d) The state auditor shall prepare uniform notification 
  5.24  forms which shall be used by the municipalities and the brokers 
  5.25  to meet the requirements of this subdivision. 
  5.26     Sec. 5.  [118A.05] [CONTRACTS AND AGREEMENTS.] 
  5.27     Subdivision 1.  In addition to other authority granted in 
  5.28  sections 118A.01 to 118A.06, government entities may enter into 
  5.29  contracts and agreements as follows. 
  5.30     Subd. 2.  Repurchase agreements consisting of collateral 
  5.31  allowable in section 118A.03, subdivision 2, and reverse 
  5.32  repurchase agreements may be entered into with any of the 
  5.33  following entities:  
  5.34     (1) a financial institution qualified as a "depository" of 
  5.35  public funds of the government entity; 
  5.36     (2) any other financial institution which is a member of 
  6.1   the Federal Reserve System and whose combined capital and 
  6.2   surplus equals or exceeds $10,000,000; 
  6.3      (3) a primary reporting dealer in United States government 
  6.4   securities to the Federal Reserve Bank of New York; or 
  6.5      (4) a securities broker-dealer having its principal 
  6.6   executive office in Minnesota, licensed pursuant to chapter 80A, 
  6.7   or an affiliate of it, regulated by the securities and exchange 
  6.8   commission and maintaining a combined capital and surplus of 
  6.9   $40,000,000 or more, exclusive of subordinated debt. 
  6.10     Reverse agreements may only be entered into for a period of 
  6.11  90 days or less and only to meet short-term cash flow needs.  In 
  6.12  no event may reverse repurchase agreements be entered into for 
  6.13  the purpose of generating cash for investments, except as stated 
  6.14  in subdivision 3. 
  6.15     Subd. 3.  Securities lending agreements including custody 
  6.16  agreements, consisting of collateral allowable in section 
  6.17  118A.03, subdivision 2, may be entered into with a financial 
  6.18  institution qualified as a depository and having its principal 
  6.19  executive office in Minnesota. 
  6.20     Subd. 4.  Agreements or contracts for shares of a Minnesota 
  6.21  joint powers investment trust, or shares of an investment 
  6.22  company which is registered under Federal Investment Company Act 
  6.23  of 1940 and whose shares are registered under the Federal 
  6.24  Securities Act of 1933, may be entered into.  The investment 
  6.25  trust or investment company's investments are restricted to 
  6.26  securities described in sections 118A.04 and 118A.05, 
  6.27  subdivision 2. 
  6.28     Subd. 5.  Agreements or contracts for guaranteed investment 
  6.29  contracts may be entered into if they are issued or guaranteed 
  6.30  by United States commercial banks, domestic branches of foreign 
  6.31  banks, United States insurance companies, or their Canadian 
  6.32  subsidiaries.  The credit quality of the issuer's or guarantor's 
  6.33  short- and long-term unsecured debt must be rated in one of the 
  6.34  two highest categories by a nationally recognized rating 
  6.35  agency.  Should the issuer's or guarantor's credit quality be 
  6.36  downgraded, the government entity must have withdrawal rights. 
  7.1      Sec. 6.  [118A.06] [DELIVERY AND SAFEKEEPING.] 
  7.2      Investments, contracts, and agreements may be held in 
  7.3   safekeeping with:  
  7.4      (1) any Federal Reserve Bank; 
  7.5      (2) any bank authorized under the laws of the United States 
  7.6   or any state to exercise corporate trust powers, including, but 
  7.7   not limited to, the bank from which the investment is purchased; 
  7.8      (3) a primary reporting dealer in United States government 
  7.9   securities to the Federal Reserve Bank of New York; or 
  7.10     (4) a securities broker-dealer described in section 
  7.11  118A.05, subdivision 2, provided that the government entity's 
  7.12  ownership of all securities is evidenced by written 
  7.13  acknowledgements identifying the securities by the names of the 
  7.14  issuers, maturity dates, interest rates, serial numbers, or 
  7.15  other distinguishing marks. 
  7.16     Sec. 7.  [118A.07] [ADDITIONAL INVESTMENT AUTHORITY.] 
  7.17     Subdivision 1.  [AUTHORITY PROVIDED.] A government entity 
  7.18  that meets the requirements of subdivisions 2 and 3 has 
  7.19  additional investment authority under subdivisions 4, 5, and 6. 
  7.20     Subd. 2.  [WRITTEN POLICIES AND PROCEDURES.] Prior to 
  7.21  exercising any additional authority under subdivisions 4, 5, and 
  7.22  6, a government entity must have written investment policies and 
  7.23  procedures governing the following: 
  7.24     (1) the use of or limitation on mutual bond funds or other 
  7.25  securities authorized or permitted investments under law; 
  7.26     (2) specifications for and limitations on the use of 
  7.27  derivatives; 
  7.28     (3) the final maturity of any individual security; 
  7.29     (4) the maximum average weighted life of the portfolio; 
  7.30     (5) the use of and limitations on reverse repurchase 
  7.31  agreements; 
  7.32     (6) credit standards for financial institutions with which 
  7.33  the government entity deals; and 
  7.34     (7) credit standards for investments made by the government 
  7.35  entity. 
  7.36     Subd. 3.  [OVERSIGHT PROCESS.] Prior to exercising any 
  8.1   authority under subdivisions 4, 5, and 6, a government entity 
  8.2   must establish an oversight process that provides for review of 
  8.3   the government entity's investment strategy and the composition 
  8.4   of the financial portfolio.  This process may include audit, 
  8.5   committee review, or internal management control. 
  8.6      Subd. 4.  [REPURCHASE AGREEMENTS.] A government entity may 
  8.7   enter into repurchase agreements as authorized under section 
  8.8   118A.05, provided that the exclusion of mortgage-backed 
  8.9   securities defined as "high risk mortgage-backed securities" 
  8.10  under section 118A.04, subdivision 6, shall not apply to 
  8.11  repurchase agreements under this authority if the margin 
  8.12  requirements are 101 percent or more. 
  8.13     Subd. 5.  [REVERSE REPURCHASE AGREEMENTS.] Notwithstanding 
  8.14  the limitations contained in section 118A.05, subdivision 2, a 
  8.15  government entity may enter into reverse repurchase agreements 
  8.16  to: 
  8.17     (1) meet cash flow needs; or 
  8.18     (2) generate cash for investments, provided that the total 
  8.19  securities owned shall be limited to an amount not to exceed 120 
  8.20  percent of the annual daily average of general investable monies 
  8.21  for the fiscal year as disclosed in the most recently available 
  8.22  audited financial report.  Excluded from this limit are: 
  8.23     (i) securities with maturities of one year or less; and 
  8.24     (ii) securities that have been reversed to maturity. 
  8.25     There shall be no limit on the term of a reverse repurchase 
  8.26  agreement.  Reverse repurchase agreements shall not be included 
  8.27  in computing the net debt of the county, and may be made without 
  8.28  an election or public sale, and the interest payable thereon 
  8.29  shall not be subject to the limitation in section 475.55.  The 
  8.30  interest shall not be deducted or excluded from gross income of 
  8.31  the recipient for the purpose of state income, corporate 
  8.32  franchise, or bank excise taxes, or if so provided by federal 
  8.33  law, for the purpose of federal income tax. 
  8.34     Subd. 6.  [OPTIONS.] A government entity may enter into 
  8.35  option agreements to buy or sell securities authorized under law 
  8.36  as legal investments for counties, but only with respect to 
  9.1   securities owned by the government entity, including securities 
  9.2   which are the subject of reverse repurchase agreements under 
  9.3   this section which expire at or before the due date of the 
  9.4   option agreement. 
  9.5      Sec. 8.  [REPEALER.] 
  9.6      Minnesota Statutes 1994, sections 118.005; 118.01; 118.02; 
  9.7   118.08; 118.09; 118.10; 118.11; 118.12; 118.13; 118.14; 118.16; 
  9.8   124.05; 471.56; 475.66; and 475.76. 
  9.9      Sec. 9.  [EFFECTIVE DATE.] 
  9.10     Sections 1 to 8 are effective January 1, 1996.