Municipalities Investments Protected
By Illinois State Treasurer JAMES H. DONNEWALD

As a result of our intense lobbying efforts, municipalities and other units of local government nationwide will be able to invest in lucrative government securities — risk free — through the auspices of their respective state treasurers. The U.S. Treasury recently announced the availability of investment safekeeping accounts at federal reserve banks that will fully guarantee the Safety of public funds invested in repurchase agreements involving government securities.

This means that in the future, securities received by public investors under repurchase agreements will be listed on the U.S. Treasury's Book-Entry System, and that these securities can be sold immediately if a bank, savings and loan association, or broker/dealer should fail during the term of the agreement.

Since the failure of Drysdale and Lombard-Wall Securities' dealers in 1982, a cloud of uncertainty has hovered over the use of repurchase agreements by public investors. A Federal Judge's ruling in New York that securities held by investors were collateral backing a cash loan, rather than securities received through an investment transaction has led to hundreds of millions of dollars in losses for this country's public investors.

Although Congress attempted to clarify the situation by amending the bankruptcy code in 1984, removing such securities from the jurisdiction of the bankruptcy courts, this action only affected transactions executed with broker/dealers. This left investors executing repurchase agreements with banks and savings and loan associations exposed to potential loss through liquidation proceedings.

To some extent the market has cleansed itself since 1982, adopting rigid standards governing repurchase agreements. However, we believed the state's liquidity requirements, and the competitive rate of return offered by repurchase agreements necessitated a more definitive solution. Since the primary recommendation by virtually all market analysis was that the investor take possession of all securities received under repurchase agreements, we began pursuing an appropriate safekeeping facility for these securities more than 18 months ago.

Establishment of this account is particularly timely in view of the legislative mandate regarding repurchase agreements executed by Illinois municipalities, which becomes effective July 1, 1986. As you may be aware, Public Act 84-958, which we co-sponsored with the Illinois Municipal League, requires that all securities received by Illinois municipalities under repurchase agreements be held by a third-party under the sole control of the investor.

Although it is possible for public investors to establish custodial relationships with financial institutions to act on their behalf, it is often extremely costly to do so.

When this new municipal safekeeping account is implemented, repurchase agreements may be executed in the following manner at a considerable savings to the municipalities:

1. The municipal investor contacts a local bank or savings and loan association to advise of his/her intent to enter a repurchase agreement.

2. After negotiating the interest rate and the maturity date of the agreement, the municipal treasurer advises the bank to transfer the agreed upon U.S. Government securities to the State Treasurer's designated account at the Federal Reserve Bank of Chicago.

3. The municipal treasurer advises the State Treasurer of the identity of the securities by phone.

4. As soon as the securities are received in the State Treasurer's account at the Federal Reserve, the Treasurer will notify the municipality that it may release the cash to the bank.

5. At maturity, the municipal treasurer advises the State Treasurer to release the securities back to the custody of the financial institution in exchange for cash plus interest.

Availability of this account will guarantee that all public funds invested by Illinois municipalities in repurchase agreements will be absolutely protected. With federal revenue sharing dollars running out, local tax dollars are being stretched to the limit. With smart investment tools like the repurchase agreement generating additional income for local governments, future tax increases may be avoided.

By offering this new safekeeping facility to municipal governments, I am continuing the fine tradition of Illinois State Treasurers offering their assistance to local governments in investing taxpayers' dollars.

One of the finest examples, of how successful the investment relationship between the State Treasurer and Illinois Municipal Governments has been, is the Illinois Public Treasurers' Investment Pool. Since I have been in office, we have reduced the cost of participation in the IPTIP by more than 25 percent, while improving service and providing absolute protection for funds invested in the Pool. During fiscal year 1985, the Pool earned nearly $10.0 million for the 730 participant accounts.

At the present time, membership in the Pool includes:
school districts
library districts
park districts
pension fund accounts
motor fuel accounts
water & sewer districts
debt service accounts

The success of the investment relationship between the State Treasurer and Illinois Municipal Governments is well documented. That's why it is with great anticipa-

February 1986 / Illinois Municipal Review / Page 5

tion that we look forward to the establishment of the investment safekeeping account at the Federal Reserve Bank of Chicago. Like IPTIP, the investment safekeeping account enhances the investment opportunities for public treasurers, and of even more importance, guarantees the safety of invested funds under his/her custodial care. As details surrounding the opening of this account become clear we will be in contact with all who wish to take advantage of this innovative safekeeping facility. •

Page 6 / Illinois Municipal Review / February 1986