STATE OF NEW JERSEY

   Executive Deptartment

June 23,1997


ASSEMBLY BILL NO. 832

( Fifth Reprint )


To the General Assembly:

 

     Pursuant to Article V, Section I, Paragraph 14 of the New Jersey Constitution, I am returning Assembly Bill No. 832 (Fifth Reprint) with my recommendations for reconsideration.

 

A. Summary of Bill

 

    This bill accommodates the changing nature of the securities industry by adjusting current law regarding investment opportunities for school boards and local units. First, this bill allows them to purchase securities directly from the securities industry. Under current law, school districts and local units may purchase securities only from national or State banks located in New Jersey. Under this bill, they will be able to purchase securities from issuers, broker-dealers, and agents as well as State banks.

          Second, this bill expands the types of securities in which school boards and local units may invest. Under current law, they may invest only in federal bonds or other obligations guaranteed by the federal government. This bill changes current law by allowing them to invest in seven other securities: (1) government money market mutual funds; (2) any federal security which has a maturity date not greater than 397 days from the date of purchase; (3) school district obligations; (4) bonds or other obligations having a maturity date of not more than 397 days from the date of purchase, approved by the Department of Treasury for investment by the school district; (5) local government investment pools; (6) deposits with the New Jersey Cash Management Fund; and (7) agreements for the purchase of fully collateralized securities.

    Under the bill, government money market mutual funds must satisfy two criteria in order for them to be purchased bY local governments and school districts. First, the funds must be registered and operated in accordance with the rules of the Securities and Exchange Commission ("SEC"). Second, the funds must have either attained the highest rating of a nationally recognized rating organization or, in lieu of a rating requirement, the funds must have retained an investment advisor registered or exempt from registration with the SEC with experience investing in U.S. government securities for at least the most recent 60 months and with assets under management in excess of $500 million.

    Third, the bill broadens the role of a local unit's cash management plan. Currently, cash management plans identify only the depositories of its funds. The purpose of the plan is to assure the investment of local funds in interest bearing accounts. The plan is subject to an annual audit by a registered municipal accountant hired by the municipality or, if the municipality prefers, by the Department of Community Affairs, Division of Local Government Services.

    Under the bill, cash management plans must require that a report of all investments made or redeemed be provided to the governing body on a monthly basis. This report must include the following information: (1) the name of the organization holding the local unit's funds; (2) the amount of securities purchased or sold; (3) the class or type of securities purchased; (3) the book value of the securities; (4) earned income; (5) fees incurred; and (6) the market value of all investments as of the report date. The bill allows the governing body to require that the monthly report include other items of interest to the local unit.

    Additionally, the bill requires that the cash management plan be approved annually by a majority vote of the governing body.The bill allows the governing body to make more frequent modifications of the cash management plan to reflect changes in federal or State law or regulations, or in the designation of depositories, or the authorization for investments. The bill charges the chief financial officer with the responsibility to administer the cash management plan.

    The bill also imposes a disclosure requirement upon some officials involved in the implementation of the cash management plan. The disclosure requirement applies only to those officials involved in the designation of depositories, the selection of investments, or the selection of securities sellers. Under the bill, those officials must disclose any material business or personal relationships with the potential sellers or investment organizations. The bill requires that the information be disclosed to the Department of Community Affairs, Local Finance Board or local ethics board.

 

B. Recommended Action

    I commend the sponsors for introducing this bill. By increasing the investment options available to local government, the bill both recognizes the changing nature of the securities industry and advances one of this Administration's consistent goals: to afford local government greater flexibility to manage its property tax levy.

    I am concerned, however, that in affording greater flexibility, the bill must also provide the necessary assurance that local government investing will be done prudently. Accordingly, I recommend that the bill be amended to provide such additional assurances.

    First, the bill should be amended to require that government money market mutual funds be rated. Requiring that local governments invest only in rated government money market mutual funds encourages a common-sense approach to investing. Ratings ensure the investor that an independent party has reviewed and analyzed the security. While ratings do not guarantee a safe investment, they provide indicia of reliability which investors use in deciding in which securities to invest. Most important, requiring that local governments invest only in rated funds reassures the public that local government is interested in investing its money wisely.

    Second, I propose that the bill be amended to require that the cash management plan identify in which funds local government may invest. Amending the cash management plan to require that local units designate in which funds they may invest reaffirms the significance of the deliberative process on how local government money is spent. The amendment encourages informed decision making. It ensures that governing bodies will consider a variety of funds available for investments and that the funds are identified with particularity. Because the bill allows the governing body to modify the cash management fund from time to time, updated decisions can be incorporated into the plan as necessary. Again, information is key to the decision making process. This amendment encourages local representatives to discuss and share information with their chief financial officers, who are statutorily required to administer the cash management plan.

    The bill should also be amended to clarify that the U.S. government securities in which local units and school boards may invest are those in which direct investment may be made pursuant

to the terms and conditions outlined in the bill.

    Therefore, I herewith return Assembly Bill No. 832 (Fifth Reprint) and recommend that it be amended as follows:

 

Page 3. Section 1, Line 24:       After "securities" insert "in which direct investment may be made pursuant to paragraphs (1) and (3) of subsection (a) of this section"

 

Page 3. Section 1, Line 25:       After "which" insert "is rated by a nationally recognized statistical rating organization."

 

Page 3, Section 1, Line 26:       Delete "has:"

 

Page 3, Section 1, Lines 27-34:   Delete in entirety.

 

Page 4. Section 1, Line 4:        After "securities" insert "in which direct investment may be made pursuant to paragraphs (1) and (3) of subsection (a) of this section"

 

Page 5,Section 2, Line2:          After "(2)" insert "the designation of any fund or funds that meets the requirements established pursuant to section 8 of P.L. 1977, c.396 (C.40A-5-15.1 )and"

 

Page 5, Section 2, Line 16:       After "depositories" insert ", funds or investment instruments"

 

Page 8, Section 3, Line 42:       After "securities" insert "in which direct investment may be made pursuant to paragraphs (1) and (3) of subsection (a) of this section"

 

Page 8, Section 3, Line 43:       After "which" insert "is rated by a nationally recognized statistical rating organization."

 

Page 8, Section 3, Line 44:       Delete "has:"

 

Page 8, Section 3, Line 45:       Delete in entirety.

 

Page 9, Section 3, Lines 1-7:     Delete in entirety.

 

Page 9, Section 3, Line 22:       After "securities" insert "in which direct investment may be made pursuant to paragraphs (1) and (3) of subsection (a) of this section"

 

          Respectfully,

          /s/ Christine Todd Whitman

          Governor

 

 

     [seal]

 

Attest:

 

Michael P. Torpey

Chief Counsel to the Governor