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; requiring a study; amending Minnesota 
  1.5             Statutes 1994, sections 6.745; and 356A.06, by adding 
  1.6             subdivisions; proposing coding for new law as 
  1.7             Minnesota Statutes, chapter 118A; repealing Minnesota 
  1.8             Statutes 1994, sections 118.005; 118.01; 118.02; 
  1.9             118.08; 118.09; 118.10; 118.11; 118.12; 118.13; 
  1.10            118.14; 118.16; 124.05; 471.56; 475.66; and 475.76. 
  1.11  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.12     Section 1.  Minnesota Statutes 1994, section 6.745, is 
  1.13  amended to read: 
  1.14     6.745 [SUMMARY BUDGET DATA TO THE STATE AUDITOR.] 
  1.15     Subdivision 1.  [CITIES.] Annually, upon adoption of the 
  1.16  city budget, the city council of each home rule charter or 
  1.17  statutory city shall forward summary budget information to the 
  1.18  office of the state auditor.  The summary budget information 
  1.19  shall be provided on forms prescribed by the state auditor.  The 
  1.20  office of the state auditor shall work with representatives of 
  1.21  city government to develop a budget reporting form that conforms 
  1.22  with city budgeting practices and provides the necessary summary 
  1.23  budget information to the office of the state auditor.  The 
  1.24  summary budget data must include separately any net unrealized 
  1.25  gains or losses from investments.  The summary budget data shall 
  1.26  be provided to the office of the state auditor no later than 
  1.27  December 31 of the year preceding each budget year. 
  1.28     Subd. 2.  [COUNTIES.] Annually, upon adoption of the county 
  2.1   budget, the county board shall forward summary budget 
  2.2   information to the office of the state auditor.  The summary 
  2.3   budget information shall be provided on forms prescribed by the 
  2.4   state auditor.  The office of the state auditor shall work with 
  2.5   representatives of county government to develop a budget 
  2.6   reporting form that conforms with county budgeting practices and 
  2.7   provides the necessary summary budget information to the office 
  2.8   of the state auditor.  The summary budget data must include 
  2.9   separately any net unrealized gains or losses from investments. 
  2.10  The summary budget data shall be provided to the office of the 
  2.11  state auditor no later than December 31 of the year preceding 
  2.12  each budget year. 
  2.13     Sec. 2.  [118A.01] [PUBLIC FUNDS; DEPOSITORIES AND 
  2.14  INVESTMENTS.] 
  2.15     Subdivision 1.  [DEFINITIONS.] The definitions in this 
  2.16  section apply to sections 118A.01 to 118A.06. 
  2.17     Subd. 2.  [GOVERNMENT ENTITY.] "Government entity" means a 
  2.18  county, city, town, school district, hospital district, public 
  2.19  authority, public corporation, public commission, special 
  2.20  district, any other political subdivision, except an entity 
  2.21  whose investment authority is specified under chapter 11A or 
  2.22  356A. 
  2.23     Subd. 3.  [FINANCIAL INSTITUTION.] "Financial institution" 
  2.24  means a savings association, commercial bank, trust company, 
  2.25  credit union, or industrial loan and thrift company. 
  2.26     Subd. 4.  [PUBLIC FUNDS.] "Public funds" means all general, 
  2.27  special, permanent, trust, and other funds, regardless of source 
  2.28  or purpose, held or administered by a government entity, unless 
  2.29  otherwise restricted. 
  2.30     Sec. 3.  [118A.02] [AUTHORIZATION FOR DEPOSIT AND 
  2.31  INVESTMENT.] 
  2.32     Subdivision 1.  The governing body of each government 
  2.33  entity shall designate, as a depository of its funds, one or 
  2.34  more financial institutions.  The governing body may authorize 
  2.35  the treasurer or chief financial officer to (1) designate 
  2.36  depositories of the funds; (2) make investments of funds under 
  3.1   sections 118A.01 to 118A.06 or other applicable law; or (3) both 
  3.2   designate depositories and make investments as provided in this 
  3.3   subdivision. 
  3.4      Subd. 2.  The treasurer or chief financial officer of a 
  3.5   government entity may at any time sell obligations purchased 
  3.6   pursuant to this section and the money received from such sale, 
  3.7   and the interest and profits or loss on such investment shall be 
  3.8   credited or charged, as the case may be, to the fund from which 
  3.9   the investment was made.  Neither such official nor government 
  3.10  entity, nor any other official responsible for the custody of 
  3.11  such funds, shall be personally liable for any loss sustained 
  3.12  from the deposit or investment of funds in accordance with the 
  3.13  provisions of sections 118A.04 and 118A.05. 
  3.14     Sec. 4.  [118A.03] [DEPOSITORIES AND COLLATERAL.] 
  3.15     Subdivision 1.  To the extent that funds deposited are in 
  3.16  excess of available federal deposit insurance, the government 
  3.17  entity shall require the financial institution to furnish 
  3.18  collateral security or a corporate surety bond executed by a 
  3.19  company authorized to do business in the state. 
  3.20     Subd. 2.  The following are the allowable forms of 
  3.21  collateral in lieu of a corporate surety bond:  
  3.22     (1) United States government treasury bills, treasury 
  3.23  notes, treasury bonds; 
  3.24     (2) issues of United States government agencies and 
  3.25  instrumentalities as quoted by a recognized industry quotation 
  3.26  service available to the government entity; 
  3.27     (3) general obligation securities of any state or local 
  3.28  government with taxing powers which is rated A or better by a 
  3.29  national bond rating service, or revenue obligation securities 
  3.30  of any state or local government with taxing powers which is 
  3.31  rated AA or better by a national bond rating service; and 
  3.32     (4) time deposits that are fully insured by the Federal 
  3.33  Deposit Insurance Corporation. 
  3.34     Subd. 3.  The total amount of the collateral computed at 
  3.35  its market value shall be at least ten percent more than the 
  3.36  amount on deposit plus accrued interest at the close of the 
  4.1   business day.  The financial institution may furnish both a 
  4.2   surety bond and collateral aggregating the required amount. 
  4.3      Subd. 4.  Any collateral pledged shall be accompanied by a 
  4.4   written assignment to the government entity from the financial 
  4.5   institution.  The written assignment shall recite that, upon 
  4.6   default, the financial institution shall release to the 
  4.7   government entity on demand, free of exchange or any other 
  4.8   charges, the collateral pledged.  Interest earned on assigned 
  4.9   collateral will be remitted to the financial institution so long 
  4.10  as it is not in default.  The government entity may sell the 
  4.11  collateral to recover the amount due.  Any surplus from the sale 
  4.12  of the collateral shall be payable to the financial institution, 
  4.13  its assigns, or both. 
  4.14     Subd. 5.  A financial institution may withdraw excess 
  4.15  collateral or substitute other collateral after giving written 
  4.16  notice to the governmental entity and receiving confirmation.  
  4.17  The authority to return any delivered and assigned collateral 
  4.18  rests with the government entity.  
  4.19     Subd. 6.  For purposes of this section, default on the part 
  4.20  of the financial institution includes, but is not limited to, 
  4.21  failure to make interest payments when due, failure to promptly 
  4.22  deliver upon demand all money on deposit, less any early 
  4.23  withdrawal penalty that may be required in connection with the 
  4.24  withdrawal of a time deposit, or closure of the depository.  If 
  4.25  a financial institution closes, all deposits shall be 
  4.26  immediately due and payable.  It shall not be a default under 
  4.27  this subdivision to require prior notice of withdrawal if such 
  4.28  notice is required as a condition of withdrawal by applicable 
  4.29  federal law or regulation.  
  4.30     Subd. 7.  All collateral shall be placed in safekeeping in 
  4.31  a restricted account at a Federal Reserve Bank, or in an account 
  4.32  at a trust department of a commercial bank or other financial 
  4.33  institution that is not owned or controlled by the financial 
  4.34  institution furnishing the collateral.  The selection shall be 
  4.35  approved by the government entity. 
  4.36     Sec. 5.  [118A.04] [INVESTMENTS.] 
  5.1      Subdivision 1.  Any public funds, not presently needed for 
  5.2   other purposes or restricted for other purposes, may be invested 
  5.3   in the manner and subject to the conditions provided for in this 
  5.4   section. 
  5.5      Subd. 2.  Public funds may be invested in governmental 
  5.6   bonds, notes, bills, mortgages (excluding high-risk 
  5.7   mortgage-backed securities), and other securities, which are 
  5.8   direct obligations or are guaranteed or insured issues of the 
  5.9   United States, its agencies, its instrumentalities, or 
  5.10  organizations created by an act of Congress. 
  5.11     Subd. 3.  Funds may be invested in the following:  
  5.12     (1) any security which is a general obligation of any state 
  5.13  or local government with taxing powers which is rated A or 
  5.14  better by a national bond rating service; 
  5.15     (2) any security which is a revenue obligation of any state 
  5.16  or local government with taxing powers which is rated AA or 
  5.17  better by a national bond rating service; and 
  5.18     (3) a general obligation of the Minnesota housing finance 
  5.19  agency which is a moral obligation of the state of Minnesota and 
  5.20  is rated A or better by a national bond rating agency. 
  5.21     Subd. 4.  Funds may be invested in commercial paper issued 
  5.22  by United States corporations or their Canadian subsidiaries 
  5.23  that is rated in the highest quality category by at least two 
  5.24  nationally recognized rating agencies and matures in 270 days or 
  5.25  less. 
  5.26     Subd. 5.  Funds may be invested in time deposits that are 
  5.27  fully insured by the Federal Deposit Insurance Corporation or 
  5.28  bankers acceptances of United States banks. 
  5.29     Subd. 6.  For the purposes of this section and section 
  5.30  118A.05, "high-risk mortgage-backed securities" are: 
  5.31     (a) interest-only or principal-only mortgage-backed 
  5.32  securities; and 
  5.33     (b) any mortgage derivative security that:  
  5.34     (1) has an expected average life greater than ten years; 
  5.35     (2) has an expected average life that: 
  5.36     (i) will extend by more than four years as the result of an 
  6.1   immediate and sustained parallel shift in the yield curve of 
  6.2   plus 300 basis points; or 
  6.3      (ii) will shorten by more than six years as the result of 
  6.4   an immediate and sustained parallel shift in the yield curve of 
  6.5   minus 300 basis points; or 
  6.6      (3) will have an estimated change in price of more than 17 
  6.7   percent as the result of an immediate and sustained parallel 
  6.8   shift in the yield curve of plus or minus 300 basis points.  
  6.9      Subd. 7.  (a) For the purpose of this section and section 
  6.10  118A.05, the term "broker" means a broker-dealer, broker, or 
  6.11  agent of a government entity, who transfers, purchases, sells, 
  6.12  or obtains securities for, or on behalf of, a government entity. 
  6.13     (b) Prior to completing an initial transaction with a 
  6.14  broker, a government entity shall provide annually to the broker 
  6.15  a written statement of investment restrictions which shall 
  6.16  include a provision that all future investments are to be made 
  6.17  in accordance with Minnesota Statutes governing the investment 
  6.18  of public funds. 
  6.19     (c) A broker must acknowledge annually receipt of the 
  6.20  statement of investment restrictions in writing and agree to 
  6.21  handle the government entity's account in accordance with these 
  6.22  restrictions.  A government entity may not enter into a 
  6.23  transaction with a broker until the broker has provided this 
  6.24  written agreement to the government entity. 
  6.25     (d) The state auditor shall prepare uniform notification 
  6.26  forms which shall be used by the government entities and the 
  6.27  brokers to meet the requirements of this subdivision. 
  6.28     Sec. 6.  [118A.05] [CONTRACTS AND AGREEMENTS.] 
  6.29     Subdivision 1.  In addition to other authority granted in 
  6.30  sections 118A.01 to 118A.06, government entities may enter into 
  6.31  contracts and agreements as follows. 
  6.32     Subd. 2.  Repurchase agreements consisting of collateral 
  6.33  allowable in section 118A.04, and reverse repurchase agreements 
  6.34  may be entered into with any of the following entities:  
  6.35     (1) a financial institution qualified as a "depository" of 
  6.36  public funds of the government entity; 
  7.1      (2) any other financial institution which is a member of 
  7.2   the Federal Reserve System and whose combined capital and 
  7.3   surplus equals or exceeds $10,000,000; 
  7.4      (3) a primary reporting dealer in United States government 
  7.5   securities to the Federal Reserve Bank of New York; or 
  7.6      (4) a securities broker-dealer licensed pursuant to chapter 
  7.7   80A, or an affiliate of it, regulated by the securities and 
  7.8   exchange commission and maintaining a combined capital and 
  7.9   surplus of $40,000,000 or more, exclusive of subordinated debt. 
  7.10     Reverse agreements may only be entered into for a period of 
  7.11  90 days or less and only to meet short-term cash flow needs.  In 
  7.12  no event may reverse repurchase agreements be entered into for 
  7.13  the purpose of generating cash for investments, except as stated 
  7.14  in subdivision 3. 
  7.15     Subd. 3.  Securities lending agreements, including custody 
  7.16  agreements, may be entered into with a financial institution 
  7.17  meeting the qualifications of subdivision 2, clause (1) or (2), 
  7.18  and having its principal executive office in Minnesota.  
  7.19  Securities lending transactions may be entered into with 
  7.20  entities meeting the qualifications of subdivision 2 and the 
  7.21  collateral for such transactions shall be restricted to the 
  7.22  securities described in sections 118A.04 and 118A.05. 
  7.23     Subd. 4.  Government entities may enter into agreements or 
  7.24  contracts for shares of a Minnesota joint powers investment 
  7.25  trust whose investments are restricted to securities described 
  7.26  in sections 118A.04 and 118A.05, subdivision 2, or shares of an 
  7.27  investment company which is registered under the Federal 
  7.28  Investment Company Act of 1940, and whose shares are registered 
  7.29  under the Federal Securities Act of 1933, as long as the 
  7.30  investment company's fund receives the highest credit rating and 
  7.31  is rated in one of the two highest risk rating categories by at 
  7.32  least one nationally recognized statistical rating organization 
  7.33  and is invested in financial instruments with a final maturity 
  7.34  no longer than 13 months. 
  7.35     Subd. 5.  Agreements or contracts for guaranteed investment 
  7.36  contracts may be entered into if they are issued or guaranteed 
  8.1   by United States commercial banks, domestic branches of foreign 
  8.2   banks, United States insurance companies, or their Canadian 
  8.3   subsidiaries.  The credit quality of the issuer's or guarantor's 
  8.4   short- and long-term unsecured debt must be rated in one of the 
  8.5   two highest categories by a nationally recognized rating 
  8.6   agency.  Should the issuer's or guarantor's credit quality be 
  8.7   downgraded below A, the government entity must have withdrawal 
  8.8   rights. 
  8.9      Sec. 7.  [118A.06] [DELIVERY AND SAFEKEEPING.] 
  8.10     Investments, contracts, and agreements may be held in 
  8.11  safekeeping with:  
  8.12     (1) any Federal Reserve Bank; 
  8.13     (2) any bank authorized under the laws of the United States 
  8.14  or any state to exercise corporate trust powers, including, but 
  8.15  not limited to, the bank from which the investment is purchased; 
  8.16     (3) a primary reporting dealer in United States government 
  8.17  securities to the Federal Reserve Bank of New York; or 
  8.18     (4) a securities broker-dealer having its principal 
  8.19  executive office in Minnesota, licensed under chapter 80A, or an 
  8.20  affiliate of it, and regulated by the Securities and Exchange 
  8.21  Commission; provided that the government entity's ownership of 
  8.22  all securities is evidenced by written acknowledgments 
  8.23  identifying the securities by the names of the issuers, maturity 
  8.24  dates, interest rates, CUSIP number, or other distinguishing 
  8.25  marks. 
  8.26     Sec. 8.  [118A.07] [ADDITIONAL INVESTMENT AUTHORITY.] 
  8.27     Subdivision 1.  [AUTHORITY PROVIDED.] As used in this 
  8.28  section, "governmental entity" means a city with a population in 
  8.29  excess of 200,000 or a county that contains a city of that 
  8.30  size.  If a governmental entity meets the requirements of 
  8.31  subdivisions 2 and 3, it may exercise additional investment 
  8.32  authority under subdivisions 4, 5, and 6. 
  8.33     Subd. 2.  [WRITTEN POLICIES AND PROCEDURES.] Prior to 
  8.34  exercising any additional authority under subdivisions 4, 5, and 
  8.35  6, the governmental entity must have written investment policies 
  8.36  and procedures governing the following: 
  9.1      (1) the use of or limitation on mutual bond funds or other 
  9.2   securities authorized or permitted investments under law; 
  9.3      (2) specifications for and limitations on the use of 
  9.4   derivatives; 
  9.5      (3) the final maturity of any individual security; 
  9.6      (4) the maximum average weighted life of the portfolio; 
  9.7      (5) the use of and limitations on reverse repurchase 
  9.8   agreements; 
  9.9      (6) credit standards for financial institutions with which 
  9.10  the government entity deals; and 
  9.11     (7) credit standards for investments made by the government 
  9.12  entity. 
  9.13     Subd. 3.  [OVERSIGHT PROCESS.] Prior to exercising any 
  9.14  authority under subdivisions 4, 5, and 6, the governmental 
  9.15  entity must establish an oversight process that provides for 
  9.16  review of the government entity's investment strategy and the 
  9.17  composition of the financial portfolio.  This process shall 
  9.18  include one or more of the following: 
  9.19     (1) audit reviews; 
  9.20     (2) internal or external investment committee reviews; and 
  9.21     (3) internal management control. 
  9.22     Additionally, the governing body of the governmental entity 
  9.23  must, by resolution, authorize its treasurer to utilize the 
  9.24  additional authorities under this section within their 
  9.25  prescribed limits, and in conformance with the written 
  9.26  limitations, policies, and procedures of the governmental entity.
  9.27     If the governing body of a governmental entity exercises 
  9.28  the authority provided in this section, the treasurer of the 
  9.29  governmental entity must annually report to the governing body 
  9.30  on the findings of the oversight process required under this 
  9.31  subdivision.  If the governing body intends to continue to 
  9.32  exercise the authority provided in this section for the 
  9.33  following calendar year, it must adopt a resolution affirming 
  9.34  that intention by December 1. 
  9.35     Subd. 4.  [REPURCHASE AGREEMENTS.] A government entity may 
  9.36  enter into repurchase agreements as authorized under section 
 10.1   118A.05, provided that the exclusion of mortgage-backed 
 10.2   securities defined as "high risk mortgage-backed securities" 
 10.3   under section 118A.04, subdivision 6, shall not apply to 
 10.4   repurchase agreements under this authority if the margin 
 10.5   requirements is 101 percent or more. 
 10.6      Subd. 5.  [REVERSE REPURCHASE AGREEMENTS.] Notwithstanding 
 10.7   the limitations contained in section 118A.05, subdivision 2, the 
 10.8   county may enter into reverse repurchase agreements to: 
 10.9      (1) meet cash flow needs; or 
 10.10     (2) generate cash for investments, provided that the total 
 10.11  securities owned shall be limited to an amount not to exceed 120 
 10.12  percent of the annual daily average of general investable monies 
 10.13  for the fiscal year as disclosed in the most recently available 
 10.14  audited financial report.  Excluded from this limit are: 
 10.15     (i) securities with maturities of one year or less; and 
 10.16     (ii) securities that have been reversed to maturity. 
 10.17     There shall be no limit on the term of a reverse repurchase 
 10.18  agreement.  Reverse repurchase agreements shall not be included 
 10.19  in computing the net debt of the governmental entity, and may be 
 10.20  made without an election or public sale, and the interest 
 10.21  payable thereon shall not be subject to the limitation in 
 10.22  section 475.55.  The interest shall not be deducted or excluded 
 10.23  from gross income of the recipient for the purpose of state 
 10.24  income, corporate franchise, or bank excise taxes, or if so 
 10.25  provided by federal law, for the purpose of federal income tax. 
 10.26     Subd. 6.  [OPTIONS.] A government entity may enter into 
 10.27  option agreements to buy or sell securities authorized under law 
 10.28  as legal investments for counties, but only with respect to 
 10.29  securities owned by the governmental entity, including 
 10.30  securities that are the subject of reverse repurchase agreements 
 10.31  under this section that expire at or before the due date of the 
 10.32  option agreement. 
 10.33     Sec. 9.  Minnesota Statutes 1994, section 356A.06, is 
 10.34  amended by adding a subdivision to read: 
 10.35     Subd. 8a.  [COLLATERALIZATION REQUIREMENT.] (a) The 
 10.36  governing board of a covered pension plan shall designate a 
 11.1   national bank, an insured state bank, an insured credit union, 
 11.2   or an insured thrift institution as the depository for the 
 11.3   pension plan for assets not held by the pension plan's custodian 
 11.4   bank. 
 11.5      (b) Unless collateralized as provided under paragraph (c), 
 11.6   a covered pension plan may not deposit in a designated 
 11.7   depository an amount in excess of the insurance held by the 
 11.8   depository in the federal deposit insurance corporation, the 
 11.9   federal savings and loan insurance corporation, or the national 
 11.10  credit union administration, whichever applies. 
 11.11     (c) For an amount greater than the insurance under 
 11.12  paragraph (b), the depository must provide collateral in 
 11.13  compliance with section 118A.03. 
 11.14     Sec. 10.  Minnesota Statutes 1994, section 356A.06, is 
 11.15  amended by adding a subdivision to read: 
 11.16     Subd. 8b.  [DISCLOSURE OF INVESTMENT AUTHORITY; RECEIPT OF 
 11.17  STATEMENT.] (a) For this subdivision, the term "broker" means a 
 11.18  broker, broker-dealer, investment advisor, investment manager or 
 11.19  third party agent who transfers, purchases, sells, or obtains 
 11.20  investment securities for, or on behalf of, a covered pension 
 11.21  plan. 
 11.22     (b) Before a covered pension plan may complete an 
 11.23  investment transaction with or in accord with the advice of a 
 11.24  broker, the covered pension plan shall provide annually to the 
 11.25  broker a written statement of investment restrictions applicable 
 11.26  under state law to the covered pension plan or applicable under 
 11.27  pension plan governing board investment policy. 
 11.28     (c) A broker must acknowledge in writing annually the 
 11.29  receipt of the statement of investment restrictions and must 
 11.30  agree to handle the covered pension plan's investments and 
 11.31  assets in accord with the provided investment restrictions.  A 
 11.32  covered pension plan may not enter into or continue a business 
 11.33  arrangement with a broker until the broker has provided this 
 11.34  written acknowledgment to the chief administrative officer of 
 11.35  the covered pension plan. 
 11.36     Sec. 11.  [NO SUPERSEDING EFFECT.] 
 12.1      Except as provided in section 13, sections 2 to 7 shall not 
 12.2   supersede any general or special law relating to the deposit and 
 12.3   investment of public funds. 
 12.4      Sec. 12.  [STUDY; REPORT.] 
 12.5      The department of finance, in cooperation with the 
 12.6   Minnesota Association of County Treasurers, the Minnesota 
 12.7   Association of School Board Officials, and the Minnesota 
 12.8   Government Finance Officers Association, shall review the 
 12.9   adequacy of training and certification programs for 
 12.10  representatives of local government entities which are entrusted 
 12.11  with the deposit and investment of public funds.  The department 
 12.12  shall report its finding and any recommendations to the local 
 12.13  government and metropolitan affairs committee of the house of 
 12.14  representatives and the metropolitan and local government 
 12.15  committee of the senate no later than November 15, 1995. 
 12.16     Sec. 13.  [REPEALER.] 
 12.17     Minnesota Statutes 1994, sections 118.005; 118.01; 118.02; 
 12.18  118.08; 118.09; 118.10; 118.11; 118.12; 118.13; 118.14; 118.16; 
 12.19  124.05; 471.56; 475.66; and 475.76, are repealed. 
 12.20     Sec. 14.  [EFFECTIVE DATE.] 
 12.21     Sections 2 to 7 and 13 are effective January 1, 1996.  
 12.22  Section 12 is effective the day following final enactment.