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  4. XVI.4.A Cash and Investments

XVI. Financial Reporting

Guide to Financial Operations

XVI.4.A Cash and Investments

XVI. Financial Reporting
Guide to Financial Operations

Policy References:

GASB Statement No. 40 – Deposit and Investment Risk Disclosures (an amendment of GASB Statement No. 3) (GASB Codification Section C20 – Cash Deposits with Financial Institutions and GASB Codification Section I50 – Investments) most recently updated by GASB Statement No. 72 - Fair Value Measurement and Application

GASB Statement No. 28 – Accounting and Financial Reporting for Securities Lending Transactions (GASB Codification Section I60 - Investments – Securities Lending)

Process and Document Preparation:

Cash includes all interest bearing and non-interest bearing deposits with financial institutions. The State maintains approximately 3,000 bank accounts for various purposes at locations throughout the State. Bank deposits may be under the joint custody of the State Comptroller and the Commissioner of Taxation and Finance or under the sole custody of a specified State Official. Both the State Comptroller and the Commissioner of Taxation and Finance are also sole custodians of certain accounts.

The State holds investments both for its own benefit and as an agent for other parties. Major investment programs conducted for the direct benefit of the State include the Short Term Investment Pool (STIP) which is used for the temporary investment of funds not required for immediate payments; sole custody funds administered by the Department of Taxation and Finance; and funds of the Division of the Lottery. The New York State and Local Retirement System as well as various public benefit corporations also have large investment holdings.

The three major policy issues relating to deposits and investments are:

  • Footnote disclosure of deposit and investment information;
  • Valuation basis for investments; and
  • Amortization of discounts and premiums.

FOOTNOTE DISCLOSURE

GASB Statement No. 40 and GASB Statement No. 72 require various disclosures of risk exposure arising from the State’s cash and investment activities. The following is a list of the disclosures required by GASB Statement No. 40:

  • Deposit and Investment Policies - A brief description of deposit and investment policies related to credit risk, concentration of credit risk, interest rate risk, and foreign currency risk that have been formally adopted for the purpose of limiting a government’s allowable deposits and investments.
  • Credit Risk - Credit quality ratings on investments, including credit quality ratings of external investment pools, money market funds, bond mutual funds, and other pooled investments of fixed-income securities, but excluding obligations of the U.S. Government or those guaranteed by the U.S. Government, both of which are not considered to have credit risk. If disclosure is required and the investment is unrated, the footnote disclosure should indicate that.
  • Custodial Credit Risk - If the government has deposits exposed to custodial credit risk, disclose the amount of those bank balances, the fact that the balances are uninsured, and whether the deposits are exposed on the basis of being either:
  1. Uncollateralized;
  2. Collateralized with securities held by the pledging financial institution; or
  3. Collateralized with securities held by the pledging financial institution’s trust department or agent but not in the depositor-government’s name.

A government is exposed to custodial credit risk if it has investment securities at the end of the period that are uninsured, not registered in the name of the government, and held by either (i) the counterparty or (ii) the counterparty’s trust department or agent but not in the government’s name. In this situation the government should disclose the investments' types, the reported amounts, and how the investments are held as defined above. Investments in external investment pools, open-end mutual funds, and securities underlying reverse repurchase agreements are not exposed to custodial risk because their existence is not documented in physical or book entry form.

  • Concentration of Credit Risk – A concentration in credit risk exists when investments in any one type represent 5 percent or more of total investments and must be disclosed. Excluded from this requirement are investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments.
  • Interest Rate Risk – The Segmented Time Distribution method will be used for the footnote disclosure which requires reporting by the Investment Type, Fair Value and Investment Maturities in Years (segregated by: Less than 1 year, 1-5 years, 6-10 years, and More Than 10 years).
  • Foreign Currency Risk – Disclose foreign currency risk by investment, currency, maturity, and fair value. Disclose foreign currency-denominated investments by investment type and credit rating. Also include foreign investment policy, for example, percent of total investment that can be invested and percentage currently invested in foreign currency.

GASB Statement No. 72, Fair Value Measurement and Application (GASBS 72), establishes a three-level valuation hierarchy of fair value measurements for all investments not recorded at amortized cost. This valuation hierarchy is based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions and other inputs subject to management judgment. These inputs are incorporated in the following fair value hierarchy:

  • Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that a government can access at the measurement date.
  • Level 2 inputs are inputs – other than quoted prices – included within Level 1 that are observable for an asset or liability, either directly or indirectly.
  • Level 3 inputs are unobservable inputs for an asset or liability.

The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. If the fair value of an asset or a liability is measured using inputs from more than one level of the fair value hierarchy, the measurement is considered to be based on the lowest priority.

VALUATION BASES FOR INVESTMENTS

Investments are reported at fair value. Short-term investments are carried at amortized cost. Bonds are carried at amortized cost and equity securities are carried at market value. Mortgages are valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar instruments.

AMORTIZATION OF DISCOUNTS AND PREMIUM

Discounts and premiums on investments, if material, must be amortized. The "effective interest rate" method of amortization will be used as it results in a constant rate of interest being applied to each investment.

SECURITIES LENDING TRANSACTIONS

Securities lending transactions occur when governmental entities transfer their securities to broker-dealers and other entities for collateral, which may be cash, securities, or letters of credit, and simultaneously agree to return the collateral for the same securities in the future. These transactions should be reported and disclosed in accordance with GASB Statement No. 28, as amended by GASB Statement No. 40.

It is also the State’s policy to disclose information about certain investment programs which cannot be categorized in accordance with GASB Statement No. 40. These are:

  • Securities in Lieu of Retainage; and
  • Certain investments of the SUNY and CUNY Endowment Funds.

Guide to Financial Operations

REV. 01/05/2021