[First Reprint]

ASSEMBLY, No. 832

STATE OF NEW JERSEY

PRE-FILED FOR INTRODUCTION IN THE 1996 SESSION

By Assemblymen ARNONE and JONES

An Act concerning the investment powers of boards of education and local units and amending P.L.1977, c.177 and P.L.1977, c.396.

    Be It Enacted by the Senate and General Assembly of the State of New Jersey:

    1. Section 1 of P.L.1977, c.177 (C.18A:20-37) is amended to read as follows:

    1. ¹a.¹ When authorized by resolution adopted by a majority vote of all its members the board of education of any school district may use moneys, which may be in hand, for the purchase of the following types of securities which, if suitable for registry, may be registered in the name of the school district:

    ¹[a.] (1)¹ Bonds or other obligations of the United States of America or obligations guaranteed by the United States of America ¹[, including securities of, or other interests in, any open-end or closed-end management type investment company or investment trust registered under the "Investment Company Act of 1940," 54 Stat. [847] 789 (15 U.S.C.§80a-1 et seq.), purchased and redeemed only through the use of National or State banks located within this State or other financial intermediaries registered pursuant to section 9 of P.L.1967, c.93 (C.49:3-56), if the portfolio of that investment company or investment trust is limited to bonds or other obligations of the United States of America, bonds or other obligations guaranteed by the United States of America and repurchase agreements fully collateralized by bonds or other obligations of the United States of America or bonds or other obligations guaranteed by the United States of America, which collateral shall be delivered to or held by the investment company or investment trust, either directly or through an authorized custodian;

    b. Bonds of any Federal Intermediate Credit Bank, Federal Home Loan Bank, Federal Land Bank, Federal National Mortgage Associates or of any United States Bank for Cooperatives which have a maturity date not greater than 12 months from the date of purchase; or

    c.];

    (2) Government money market mutual funds;

    (3) Any obligation that a federal agency or a federal instrumentality has issued in accordance with an act of Congress, which security has a maturity date not greater than 12 months from the date of purchase, provided that such obligations bear a fixed rate of interest not dependent on any index or other external factor;

    (4)¹ Bonds or other obligations of the school district ¹[.] or bonds or other obligations of the local unit or units within which the school district is located;

    (5) Bonds or other obligations, having a maturity date of not more than 12 months from the date of purchase, approved by the Division of Investment in the Department of the Treasury for investment by local units;

    (6) Local government investment pools;

    (7) Deposits with the State of New Jersey Cash Management Fund established pursuant to section 1 of P.L.1977, c.281 (C.52:18A-90.4 et seq.); or

    (8) Agreements for the repurchase of fully collateralized securities, where:

    (a) the underlying securities are permitted investments pursuant to paragraphs (1) and (3) of this subsection a.;

    (b) the custody of collateral is transferred to a third party;

    (c) the maturity of the agreement is no more than 30 days;

    (d) the underlying securities are purchased through a public depository as defined in section 1 of P.L.1970, c.236 (C.17:9-41) and for which a master repurchase agreement providing for the custody and security of collateral is executed.

    b. Any investment instruments where the security is not physically held by the school district shall be covered by a third party custodial agreement which shall provide for the designation of such investments in the name of the school board and have such safeguards to prevent unauthorized use of such investments.

    c. Purchase of investment securities shall be executed by the "delivery versus payment" method to ensure that securities are deposited in the financial institution prior to the release of the school district's funds.

    d. Any investments not purchased and redeemed directly from the issuer, shall be purchased and redeemed through the use of a national or State bank located within this State or other financial intermediary registered pursuant to section 9 of P.L.1967, c.93 (C.49:3-56).

    e. For the purposes of this section:

    (1) a "government money market mutual fund" means a fund:

    (a) of an investment company or investment trust, which company or trust is registered with the Securities and Exchange Commission under the "Investment Company Act of 1940," 15 U.S.C. §80a-1 et seq., and which fund is operated in accordance with 17 C.F.R. §270.2a-7;

    (b) the portfolio of which is limited to U.S. Government securities that meet the definition of an eligible security pursuant to 17 C.F.R. §270.2a-7 and repurchase agreements that are collateralized by such U.S. Government securities;

    (c) which is rated in the highest category by a nationally recognized statistical rating organization; and 

    (d) which does not permit investments in instruments that: are subject to high price volatility with changing market conditions; cannot reasonably be expected, at the time of interest rate adjustment, to have a market value that approximates its par value; or utilize an index that does not support a stable net asset value.

    (2) a "local government investment pool" means an investment pool:

    (a) which is managed in accordance with 17 C.F.R. §270.2a7;

    (b) which is rated in the highest category by a nationally recognized statistical rating organization; and

    (c) the portfolio of which is limited to U.S. Government securities that meet the definition of an eligible security pursuant to 17 C.F.R. §270.2a-7 and repurchase agreements that are collateralized by such U.S. Government securities;

    (d) which is in compliance with rules adopted pursuant to the "Administrative Procedure Act," P.L.1968, c.412 (C.52:14B-1 et seq.) by the Local Finance Board of the Division of Local Finance in the Department of Community Affairs, which rules shall provide for disclosure and reporting requirements, and other provisions deemed necessary by the board to provide for the safety, liquidity and yield of the investments; and

    (e) which does not permit investments in instruments that: are subject to high price volatility with changing market conditions; cannot reasonably be expected, at the time of interest rate adjustment, to have a market value that approximates its par value; or utilize an index that does not support a stable net asset value.¹

(cf: P.L.1991, c.458, s.1)

    ¹2. N.J.S.40A:5-14 is amended to read as follows:

    40A:5-14. a. Each local unit shall adopt a cash management plan and shall deposit its funds pursuant to that plan. The cash management plan shall include the designation of a depository or depositories as defined in section 1 of P.L.1970, c.236 (C.17:9-41) , designation of any fund that meets the requirements established pursuant to section 8 of P.L.1977, c.396 (C.40A:5-15.1), or authorization for investments in other investment instruments as permitted pursuant to law, or any combination of the previously permitted designations or authorization, and may permit deposits in such depository or depositories as permitted in section 4 of P.L.1970, c.236 (C.17:9-44). [In lieu of designating a depository or in addition to the designation, the cash management plan may provide that the local unit make deposits with the State of New Jersey Cash Management Fund established pursuant to section 1 of P.L.1977, c.281 (C.52:18A-90.4).]

    b. The cash management plan shall be approved annually by majority vote of the governing body of the local unit and may be modified from time to time in order to reflect changes in federal or State law or regulations, or in the designations of depositories or investment instruments. The chief financial officer of the local unit shall be charged with administering the plan.

    c. The cash management plan shall be designed to assure to the extent practicable the investment of local funds in interest bearing accounts and [may be modified from time to time in order to reflect changes in federal or state law or regulations] other permitted investments. The cash management plan shall be subject to the annual audit conducted pursuant to N.J.S.40A:5-4. When an investment in bonds maturing in more than one year is authorized, the maturity of such bonds must approximate the prospective use of the funds invested.

    d. The cash management plan may include authorization to invest in any of the investments authorized pursuant to P.L.1977, c.396 (C.40A:5-15.1) and shall set policies for selecting and evaluating investment instruments accordingly. Such policies shall consider preservation of capital, liquidity, current and historical investment returns, diversification, maturity requirements, costs and fees, and when appropriate, policies of investment instrument administrators. Policies shall be based on a cash flow analysis prepared by the chief financial officer and be commensurate with the nature and size of the funds held by the local unit. All investments shall be made on a competitive basis insofar as practicable.

    e. The cash management plan shall require a monthly report to the governing body summarizing all investments made or redeemed since the last meeting. The report shall set forth each organization holding local unit funds, the amount of securities purchased or sold, class or type of securities purchased, book value, earned income, fees incurred, and market value of all investments as of the report date and other information that may be required by the governing body.

    f. The official charged with the custody of moneys of a local unit shall deposit or invest them as designated by the cash management plan and shall thereafter be relieved of any liability for loss of such moneys due to the insolvency or closing of any depository or fund designated in the cash management plan.

      g. Any official involved in the naming of depositories or government money market mutual funds, pursuant to subsection a. of this section, or selection of an entity seeking to sell an investment to the local unit who has a material business or personal relationship with that organization shall disclose that relationship to the governing body of the local unit and to the Local Government Ethics Board.

      h. The registered principal of any security brokerage firm selling securities to the local unit shall be provided with, and sign an acknowledgment that the principal has seen and reviewed the local unit's cash management plan, and certifies that the firm has implemented controls against investments that are contrary to the local unit's cash management plan or State law.¹

(cf: P.L.1983, c.8, s.2)

      ¹[2.] 3.¹ Section 8 of P.L.1977, c.396 (C.40A:5-15.1) is amended to read as follows:

      8. Securities which may be purchased by local units.

      ¹a.¹ When authorized by ¹[resolution adopted by a majority vote of all its members, the governing body of] a cash management plan approved pursuant to N.J.S.40A:5-14,¹ any local unit may use moneys which may be in hand for the purchase of the following types of securities which, if suitable for registry, may be registered in the name of the local unit:

      ¹[a.] (1)¹ Bonds or other obligations of the United States of America or obligations guaranteed by the United States of America ¹[, including securities of, or other interests in, any open-end or closed-end management type investment company or investment trust registered under the "Investment Company Act of 1940," 54 Stat. [847] 789 (15 U.S.C.§80a-1 et seq.), purchased and redeemed only through the use of National or State banks located within this State or other financial intermediaries registered pursuant to section 9 of P.L.1967, c.93 (C.49:3-56), if the portfolio of that investment company or investment trust is limited to bonds or other obligations of the United States of America, bonds or other obligations guaranteed by the United States of America and repurchase agreements fully collateralized by bonds or other obligations of the United States of America or bonds or other obligations guaranteed by the United States of America, which collateral shall be delivered to or held by the investment company or investment trust, either directly or through an authorized custodian;

      b. Bonds of any Federal Intermediate Credit Bank, Federal Home Loan Bank, Federal Land Bank, Federal National Mortgage Associates or of any United States Bank for Cooperatives which have a maturity date not greater than 12 months from the date of purchase;

      c.];

      (2) Government money market mutual funds;

      (3) Any obligation that a federal agency or a federal instrumentality has issued in accordance with an act of Congress, which security has a maturity date not greater than 12 months from the date of purchase, provided that such obligation bears a fixed rate of interest not dependent on any index or other external factor.

      (4)¹ Bonds or other obligations of the local unit or bonds or other obligations of school districts of which the local unit is a part or within which the school district is located; ¹[or

      d.] (5)¹ Bonds or other obligations, having a maturity date not more than 12 months from the date of purchase, approved by the Division of Investment of the Department of the Treasury for investment by local units.

      ¹(6) Local government investment pools;

      (7) Deposits with the State of New Jersey Cash Management Fund established pursuant to section 1 of P.L.1977, c.281 (C.52:18A-90.4); or

      (8) Agreements for the repurchase of fully collateralized securities, where:

      (a) the underlying securities are permitted investments pursuant to paragraphs (1) and (3) of this subsection a.;

      (b) the custody of collateral is transferred to a third party;

      (c) the maturity of the agreement is not more that 30 days;

      (d) the underlying securities are purchased through a public depository as defined in section 1 of P.L.1970, c.236 (C.17:9-41); and

      (e) a master repurchase agreement providing for the custody and security of collateral is executed.

      b. Any investment instruments where the security is not physically held by the local unit shall be covered by a third party custodial agreement which shall provide for the designation of such investments in the name of the local unit and have such safeguards to prevent unauthorized use of such investments.

      c. Purchase of investment securities shall be executed by the "delivery versus payment" method to ensure that securities are deposited in the financial institution prior to the release of the local unit's funds.

      d. Any investments not purchased and redeemed directly from the issuer, shall be purchased and redeemed through the use of a national or State bank located within this State or other financial intermediary registered pursuant to section 9 of P.L.1967, c.93 (C.49:3-56).

      e. For the purposes of this section:

      (1) a "government money market mutual fund" means a fund:

      (a) of an investment company or investment trust, which company or trust is registered with the Securities and Exchange Commission under the "Investment Company Act of 1940," 15 U.S.C. §80a-1 et seq., and which fund is operated in accordance with 17 C.F.R. §270.2a-7;

      (b) the portfolio of which is limited to U.S. Government securities that meet the definition of an eligible security pursuant to 17 C.F.R. §270.2a-7 and repurchase agreements that are collateralized by such U.S. Government securities; and

      (c) which is rated in the highest category by a nationally recognized statistical rating organization; and

      (d) which does not permit investments in instruments that: are subject to high price volatility with changing market conditions; cannot reasonably be expected, at the time of interest rate adjustment, to have a market value that approximates its par value; or utilize an index that does not support a stable net asset value.

      (2) a "local government investment pool" means an investment pool:

      (a) which is managed in accordance with 17 C.F.R. §270.2a7;

      (b) which is rated in the highest category by a nationally recognized statistical rating organization; and

      (c) which is limited to U.S. Government securities that meet the definition of an eligible security pursuant to 17 C.F.R. §270.2a-7 and repurchase agreements that are collateralized by such U.S. Government securities;

      (d) which is in compliance with rules adopted pursuant to the "Administrative Procedure Act," P.L.1968, c.412 (C.52:14B-1 et seq.) by the Local Finance Board of the Division of Local Finance in the Department of Community Affairs, which rules shall provide for disclosure and reporting requirements, and other provisions deemed necessary by the board to provide for the safety, liquidity and yield of the investments; and

      (e) which does not permit investments in instruments that: are subject to high price volatility with changing market conditions; cannot reasonably be expected, at the time of interest rate adjustment, to have a market value that approximates its par value; or utilize an index that does not support a stable net asset value.¹

(cf: P.L.1991, c.458, s.2)

      ¹[3.] 4.¹ This act shall take effect immediately.

Allows school boards and local units to invest mutual funds through certain financial intermediaries other than banks.