Title 9 Part 1645

The division will require local agencies to invest, promptly, all excess funds in their custody. Excess funds, as a general rule, mean cash in checking accounts not required for disbursement within a period of one or, at most, two months.

The Public Housing Law permits authorities to invest funds held in reserves, or any funds not required for immediate disbursement in property or securities which are legal investments for savings banks. The law, however, imposes a further restriction on the investment of development funds of State-aided projects. Such development funds may be invested only in such securities as are approved by the State Comptroller. In most instances, the Comptroller has limited development fund investments to U.S. government obligations maturing not more than one year from date of purchase. In some instances, however, the Comptroller has permitted development funds to be invested in 13-month obligations. The Law, in effect directs local agencies to place safety and security of the principal above all other considerations. The investments (other than development fund investments), which may be made by a local agency, are therefore, limited to deposits in savings banks, savings and loan associations, certain types of bonds and similar obligations so that the income element to be accounted for will, ordinarily, be in the form of interest. Local agencies should consult with the division, and secure its approval prior to making investments. The division is prepared to make recommendations of legal investments at all times. While the division will insist on the prompt investment of all excess funds, its recommendations with respect to specific investments are strictly advisory and not mandatory. For the investment of development fund or administration fund balances in excess of immediate needs and a reasonable allowance for working capital, the division recommends short-term U.S. government securities, such as U.S. treasury bills, treasury notes and certificates of indebtedness. For the investment of replacement reserve funds the division recommends long-term U.S. government securities, Federal National Mortgage Association Notes and deposits in savings accounts of savings banks insured by the Federal Deposit Insurance Corporation and savings and loan associations insured by the Federal Savings and Loan Insurance Corporation. For painting and decorating reserve funds or operating improvement reserve funds, short term U.S. government securities and Federal Home Loan Bank Notes are recommended. For vacancy and collection loss reserves the division recommends these funds be invested in three to five year U.S. government securities and Federal National Mortgage Association Notes. The division does not recommend the investment of security deposit funds. All securities recommended by the division will be normally selected with a view to obtaining the maximum yield over the period it is anticipated the security will be held, inasmuch as there is ordinarily a direct relationship between the yield and both the maturity date of the security and the time it is held. The date on which it is anticipated that the invested funds will be required is, therefore, an important factor in the selection of securities for investment. For example, the yield on a series “K” United States savings bond, redeemed after one year from purchase date is only 1.16 per cent. The yield on the same bond, if held 12 years to maturity is 2.76 per cent. It is evident that series “K” bonds would be suitable for long term investments, such as replacement reserve funds, but not for investment, such as painting and decorating reserve funds, which has a maximum turnover of three years. For the latter investment, a security having a shorter maturity, such as a treasury note or certificate of indebtedness, would give a higher yield over the anticipated holding period. In selecting securities for investment, the division also considers diversification of the portfolio held by each local agency. This results in greater flexibility when the need arises for the “cashing in” of securities to meet current reserve fund needs. In compliance with New York State Banking Department regulations [see 3 NYCRR Banking], all reserve funds deposited in savings banks and savings and loan associations must be of a long-term investment nature. To comply with this directive the division recommends deposit of funds in these savings institutions only if it is anticipated that such funds will remain on deposit a minimum of five years.

Local agency funds, representing the proceeds of a bond issue not yet remitted to the local agency, are held by the Comptroller in the State Housing Fund and may be invested by him from time to time, in securities which are legal for the investment of State funds. Such investments are not made at the direction or request of the local agency, but sole discretion with respect thereto is reserved by the Comptroller, within the limitations of the State Finance Law.

Every transaction involving investments can be broken down into component elements, such as purchase or sales price, accrued interest purchased or sold, expense of acquisition or disposition, etc. Some or all of these elements will be present in every investment transaction. For example, some securities are bought and sold on the open market. Some may be bought through brokers who charge a commission, others may be bought through banks which may not charge a commission. Others, like certain U.S. bonds, are not traded on the open market, but may only be bought from, or redeemed by, the issuer or its agents. The agents, in the latter case, may or may not be entitled to compensation. Some securities may be bought and sold, or redeemed, at face value, with or without accrued interest; other transactions may involve discounts from face value, or premiums; interest may be receivable periodically on some securities, on others the interest may merely accrue and be reflected in increased redemption values, etc. The elements to be accounted for, some or all of which will occur in every investment transaction, are summarized as follows:

Entry (1):

Debit: Account 1172, Development

Fund Investments $1,648,692.47

Debit: Account 1144, Accrued Interest

Receivable on Investments

$ 282.19

Debit: Account 1420.1,Interest Expense

$ 32.85

Credit: Account 1111, Development Fund $1,649,007.51

Note:

The same entry would be made if the above transaction represented a direct application by bank of the proceeds of a temporary loan note issue (see Part 1643, Financing).

Note:

Interest earned on reserve fund investments shall not be apportioned among the various reserves, but shall be accumulated in account 2511 and considered as a part of the replacement reserve.

The entry to record the transaction is made through the cash receipts register as follows:

The entry to record the loss on disposition is made by a journal voucher, as follows:

Note that, in recording gain or loss on disposition of investments, the applicable investment account is credited directly for a loss and charged for a gain.

U. S. series F bonds were issued on a discount basis of 74 per cent of their maturity value until April 1952, at which time the U. S. Treasury replaced them by series J bonds, which are issued on a discount basis of 72 per cent of their maturity value. Both are basically the same type of security and the description of the investment features and accounting treatment which follows is applicable to each.

No interest, as such, is paid on the bonds, but the redemption values of the bonds increase at the end of the first year from the date of issue and at the end of each successive semiannual period thereafter until, at maturity, the bond is redeemable at face value. The bonds are registered and cannot be bought and sold on the open market but are directly purchased from and redeemed by the issuer, the U. S. government, through any Federal reserve bank or other authorized agencies. No commission is payable on either the purchase or redemption of these bonds. The bonds may be redeemed prior to maturity at fixed redemption values, in accordance with a table of redemption values appearing on each bond. Because of the sharp reduction in yield resulting from redemption prior to maturity, these bonds are suitable only for long-term investments, such as of replacement reserve funds.

The bonds are charged, when purchased, to the appropriate investment account in the 1170 group of asset accounts. However, the procedure for recording the interest earned, which is reflected by an increase in the redemption value, differs from that of other investments in two respects. First, the increase in redemption value is charged to the applicable investment account so that the book value of the investment agrees with the redemption value, rather than to an accrued interest receivable account. The credit for the increase in redemption value is to the applicable interest earned account. Second, the increase in redemption values is not continuous, but occurs at stated intervals, in accordance with the table of redemption values. To illustrate, the issue price of a $1,000 maturity value series F bond is $740. No change in the redemption value of the bond takes place until the end of the first year from the date of issue, when the redemption values rises to $742. If the issue date was May 1, 1947, no entry would be made until April 30, 1948, when the investment account would be charged with two dollars and the interest earned account credited. Thereafter, similar entries would be made at the end of each six-month period to reflect the increases in redemption value.

Entry (4):

Explanation::

To record interest accrued on U. S. series G bond, issued May 1, 1947, for the six months ending October 31, 1947.

Entry (5):

Explanation::

To record interest accrued on U. S. series G bond issued May 1, 1947, for the six months ending October 31, 1954.

If the development fund investments were $150,000, the interest earned during the quarter on $100,000 would be credited to offsite clearance, on $35,000 to rehabilitation, on $10,000 to relocation of buildings, and the interest on the residual amount of $5,000 would remain as a credit to project development cost (account 1420.2) or project income (account 3610). If the development fund investments were $125,000, the interest earned during the quarter on $100,000 would be credited to offsite clearance and that on $25,000 to rehabilitation, with no credit to relocation of buildings or project development cost (account 1420.2) or project income (account 3610). If the development fund investments were $15,000, the entire credit for the interest earned during the quarter would be to offsite clearance.

The advisability of investing security deposits funds should be carefully considered by local agencies in view of the bookkeeping problems raised by the requirement in the New York State Real Property Law to the effect that the return, if any, on the investment of security deposits accrues to the tenant. The local agency, therefore, derives no benefit from the investment of such funds and the benefit to the individual tenants, in view of the size of most security deposits, is not only nominal, but out of all proportion to the expense to the local agency of keeping the records involved. In addition, the factor of possible loss on disposition of security deposit fund investments, which by law, are in the nature of trust funds, must be considered. Local agencies desiring, nevertheless, to invest security deposit funds should consult with the division and secure approval of the accounting system and procedures for recording and apportioning to the tenants accounts the interest earned.

Detailed records shall be kept of all investments made directly by the local agency in a subsidiary investment ledger. A specimen ledger sheet which reflects the procedures described in this Part, is appended as Exhibit 1 of Appendix S-10. A separate sheet should be maintained for each lot, by type of securities, acquired. For example, if $10,000 maturity value series F bonds, and $20,000 series G bonds were acquired on May 1, 1956, separate ledger sheets would be set up for each lot. If $5,000, maturity value, series F bonds were acquired at a later date, a separate ledger sheet would, similarly be set up. The ledger sheets should be segregated by the funds and each investment of reserve funds should, further, be marked for the particular reserve to which the investment is applicable. The investment ledger should, at all times, reflect the current book value of each investment and the sum of the balances should agree with the balances in the general ledger investment accounts (1170 group). The investment ledger should also reflect the current balance for interest receivable on investments and the sum of the balances should agree with the general ledger accrued interest account (1144).

For reasons of administrative facility, all reserve fund investments, like reserve fund cash, are pooled to the extent that all the investments are charged to the one account (account 1176, Reserve Fund Investments) and are registered in the name of the reserve fund. Separate accountability of reserve fund investments by reserves, is prescribed and may be accomplished by a general ledger analysis, using a columnar ledger sheet. See also sections 1645-3.1 and 1647-5.1. A similar general ledger analysis is maintained of reserve fund cash. In this manner, the assets of each reserve can be accounted for, so that, at all times, each reserve may be reconciled with its assets.

“Yorkburgh Housing Authority, a public corporation, in trust for the purposes of the Sunshine Courts, Project NYS-999 Reserve Fund, under Section ________________ of the contract dated _______________ with the City of Yorkburgh, State of New York.”

“Yorkburgh Housing Authority, Sunshine Courts, Reserve Fund, in trust under New York State Loan and Subsidy Contract, NYS—999.”

Investments may be transferred from one fund to another. Such transfers shall take the form of a sale must be duly authorized by resolution of the local agency, must be accompanied by an actual transfer of cash from one fund to the other, and shall be made at the book value of the investment as of the date of the transfer. In addition, if the security has been registered, steps must be taken to endorse on the security the name of the fund to which the investment has been transferred, by advising the issuer, or its fiscal or transfer agents, of the change in ownership and submitting the security to be transferred for cancellation and re-issue in the new name.

Cash and investments for reserves may be transferred to and from each other, as the need arises, by journal entry, duly authorized by resolution of the local agency. Such transfers shall be made at the book value of the investment as of the date of transfer. For example, assume that the vacancy and collection loss reserve has cash and that the painting and decorating reserve, which needs cash, has investments with a book value of $1,050. The journal entry to record the transfer would be:

Entry (6):

Explanation:

To record the transfer or $1,000 face value U.S. Treasury certificate of indebtedness, due October 1, 1948, from the painting and decorating reserve to the vacancy and collection loss reserve, as authorized by resolution no. ____, dated ______, 19_.