The BOI should work with the Legislative Auditor's Budget and Fiscal Affairs Division to develop annual projections of daily cash flow for the General Revenue Fund for the upcoming fiscal year. Thereafter, the BOI will develop these projections on its own. These 12 month projections should then be made available to advisors every month.

Level of Compliance: Non - Compliance

The intent of recommendation one was to develop daily cash flow projections that would indicate an appropriate amount to be invested in cash-equivalent assets. This would help to maximize investment earnings for the state. At the conclusion of the original audit in July, 1995, the agency agreed with the recommendation and acknowledged the need for better cash flow data. Since the elimination of the Board of Investments and the creation of the Investment Management Board (IMB), the IMB and the Treasurer's Office have had a Memorandum of Understanding in which the Treasurer's Office provides portfolio accounting services to the IMB. The Treasurer's Office has taken on the responsibility to develop daily cash flow data.

The Assistant Treasurer responded to the status on complying with recommendation one, as follows:

A project team has been established to develop cash flow projections for investing purposes. The Treasurer's Office is currently working with IS&C to develop cash reports and interface application using Crystal. As of this date we are working with IS&C to build the necessary table to provide daily cash balances. In addition, data will be received from the state's disbursement bank to assist in the development of clearing patterns. The Budget Section of the Department of Administration is currently providing revenue data for the General Revenue Fund. Special and Federal Revenue estimates and actuals will also be included in the overall project as Crystal is further developed.

Crystal is a reporting tool that will allow State agencies to have customized reports generated from data contained in the State's automated financial system (WVFIMS).

In previous updates, discussions with staff at IS&C verifies the attempt to develop daily cash flow data between the Treasurer's Office and IS&C. Problems with Crystal were intended to be rectified by October, 1997. However, as of January, 1999, the problems with Crystal providing the information in a form that the Treasurer's Office can use still exist. Given that this is the third update in which this recommendation has not been completed, it is the Legislative Auditor's opinion that the level of compliance be reduced from Planned Compliance to Non- Compliance.

The Legislative Auditor commends the IMB for reducing the amount invested in cash-equivalent assets from 56% to 34% of the Cash Liquidity Pool. Furthermore, over $200 million was taken out of the Cash Liquidity Pool soon after the original audit (as recommended) and placed in the Enhanced Yield Pool which was restructured (as recommended) to be less liquid and earn more than the Cash Liquidity Pool. However, 34% of the $606 million remaining in the Cash Liquidity Pool means that $209 million is invested in cash-equivalent assets. This may be an optimal amount for the state to have to meet daily expenditures. The problem is that we really do not know this exactly until daily cash flow projections are made. Therefore, the Treasurer's Office needs to comply completely with recommendation one, as it agreed should be done.

Recommendation 2

The BOI should consider giving advisors more specific guidelines that reflect the BOI's objectives for the Consolidated Operating Fund overall. The BOI should provide advisors specific information on what levels of liquidity the BOI desires, how much of a liquidity cushion is needed, and specific ranges of average maturities within the pool's structure, instead of giving only the top maturity limit. The performance measures may need to be adjusted periodically if specific guidelines preclude the possibility of the advisor meeting the performance measures.
Level of Compliance: In Compliance

This recommendation has been in compliance for the previous two updates. During the February compliance review, BOI minutes showed evidence of BOI taking a more active role in providing more specific guidelines to advisors concerning the Board's investment objectives. BOI encouraged one advisor to invest more in commercial paper because too much was being invested in overnight repurchase agreements resulting in a lower rate of return than another advisor. The advisor invested in commercial paper, resulting in a higher average maturity that compares well with the other advisor of the Cash Liquidity Pool. IMB's financial statements for June 30, 1997 on the Cash Liquidity Pool indicates that the repurchase agreement balance as a percent of the Cash Liquidity Pool was at 34%. This is down from 56% at the time of the Legislative Auditor's initial review. The average maturity of the Cash Liquidity Pool was 67 days, up from 39 days at the time of the preliminary audit. This will generally provide a higher rate of return.

Recommendation 3

The BOI should consider rule changes that allow the Consolidated Operating Fund to be invested between the guidelines of a money market structure and a mutual fund structure.

Level of Compliance: Partial Compliance

In the February compliance review, the Executive Director of the BOI responded to this recommendation as follows:

"To the extent that the BOI can obtain better cash flows based on many of the above points (referring to response to Recommendation 2), we will be able to increase the amount of state dollars invested in longer term, higher yield investments. However, a large portion of this fund is comprised of participants who do not want the risk of a mutual fund structure."

The Legislative Auditor acknowledges, once again, that although the strict sense of the recommendation has not been complied with, the restructuring of the Enhanced Yield Pool (recommendation 4) complies with some of the intent of the recommendation. The Enhanced Yield Pool was structured as a mutual fund during the preliminary audit, however, it did not provide much of an enhanced yield. The basic contention of the audit was that most of the Consolidated Operating Fund was under a money market structure with no option for investing longer term except for the Enhanced Yield Pool, which was not a significant improvement over the money market structure. The restructure of the Enhanced Yield Pool, in compliance with recommendation 4, doubled the average maturity restrictions. Agencies have been offered the flexibility of investing shorter term or longer term depending on each agency's liquidity needs. Over $200 million has been added to the Enhanced Yield Pool since the original audit as indicated in recommendation 4. The Legislative Auditor again recommends that State agencies be kept informed of their investment options and strive for better cash flow management in order to avoid excessive liquidity. Both the IMB and the Treasurer's Office have indicated possible plans to enhance state agency's knowledge of their investment options.

Recommendation 4

The BOI should consider restructuring the Enhanced Yield Pool to achieve a higher enhanced yield. The BOI should also consider increasing the amount within the Enhanced Yield Pool from the current level of $25 million.

Level of Compliance: In Compliance

In response to recommendation 4, BOI established new investment policy guidelines soon after the original audit. The new guidelines restructured the Enhanced Yield Pool to allow a longer average maturity. The average maturity restriction was doubled from one to two years. According to IMB's June 30, 1997 financial statements, the new guidelines remain in effect for the Enhanced Yield Pool. Also, the amount in the Enhanced Yield Pool is $246,529,349 as of October 31, 1998. This is in contrast to the $25 million the pool contained during the preliminary audit.

Recommendation 5

The Legislature should consider amending WVC §5-10D-4 to require the actuary for the pension funds to provide the BOI with monthly projections of withdrawals and contributions for the fiscal year for each pension plan. In addition, the amendment should include the requirement that the projections be updated each quarter or more frequently if necessary. The actuary currently projects annual contributions and benefit payments for the pension funds.

Level of Compliance: Requires Legislation

According to the Executive Director of the IMB, staff from the Consolidated Public Retirement Board (CPRB) provides a letter, annually, on estimated benefit payments for each plan for the ensuing year. The State Actuary has provided annual projections on the amount of contributions. Nevertheless, annual data is inadequate for knowing daily cash needs for investment purposes.

The IMB has indicated that it has adequate historical data on contributions and uses these data to make projections. It has also worked with a consultant to perform an asset liability study. The analysis performed by the consultant shows that the liquidity needs for most of the retirement funds are less than 3% of total assets. The analysis covered a period starting from 1997, so it cannot be determined what the analysis would have shown for the years of the original audit. However, given that the Public Employees' Retirement System is the largest fund and it had a liquidity need close to zero in 1997, and other retirement funds had liquidity needs less than 3% in 1997, it is likely that the amount of liquidity (6% of total pension fund assets) held during the time of the original audit was excessive. It appears that the IMB is moving in the right direction with respect to assessing liquidity needs on the pension side through other means.

Recommendation 6

The Legislature should consider amending WVC §5a-2-11 to require the Department of Administration to provide the BOI with its monthly revenue projections. The Legislature should also consider requiring the Department of Administration to project daily revenue flows for the General Revenue Fund.

Level of Compliance: In Compliance

This recommendation was resolved by the passage of Enrolled HB 4866 in 1996. This bill amended WVC §5A-2-11 as recommended. The Department of Administration is providing monthly and daily revenue projections to the Treasurer's Office.

Issue Area 2: The BOI Should Use Greater Diligence in Carrying Out Its Investment Responsibilities

Recommendation 7

The Legislature should consider amending WVC 12-6-5(9) to require that the BOI use Delivery-versus-Payment or Tri-Party arrangements in conducting repurchase agreements.

Level of Compliance: In Compliance

The Legislature implemented this recommendation by passage of Enrolled HB 4866 in 1996. Passage of SB 563 in 1997 did not affect the language with respect to this recommendation. Under current law, IMB is required to take physical possession of securities involved in its repurchase agreements, or enter into a tri-party arrangement. IMB has made the following statement for the previous update:

Currently, the WVIMB utilizes a tri-party arrangement for repurchase agreements on the Consolidated Pension Fund. Collateral for the Consolidated Fund repurchase agreements is currently done through physical possession. We are currently working on obtaining a tri-party contract for the Consolidated Fund.

Issue Area 3: Management Fees Do Not Reflect Actual Costs of Managing Funds

Recommendation 8

The Legislature should consider amending §12-6-6a to allow the BOI to calculate the management service fee using an actual cost allocation formula. An alternative amendment would be to have the fee based on net assets. Net earnings are volatile and do not reflect the actual cost of investing the funds. The service fee should pay for the BOI's actual expenses, not its appropriated budget.

Level of Compliance: In Compliance

Senate Bill 563 amended the language requiring the charge of management fees for investment services. The current language requires IMB to charge management fees as a percentage of assets, which is consistent with recommendation 8. IMB has indicated that it is charging fees consistent with the statute.

Recommendation 9

If the Legislature decides to amend §12-6-6a to base the service fee on net assets, PERD recommends that the language allow the BOI to transfer to the Consolidated Pension Fund and local governments, any excess service fees charged, rather than have any overcharge diverted to the General Revenue Fund.

Level of Compliance: No Longer Applicable

Since the restructuring of the IMB, it determines its budget through approval of the full board. Under the old system, the agency received an appropriation from the State General Fund, and service fees charged were credited to the State General Fund to repay the appropriation. On occasion, the service fees credited to the General Revenue Fund were more than the appropriation because it was difficult to charge the exact costs based on net earnings. The IMB no longer credits the General Revenue Fund because its budget is sustained by the service fees. If there are overcharges in a year, the IMB can simply carry forward the excess to the following year and next year's fees will reflect the carryover. The problem (overcharges of fees going into the General Revenue Fund) for which recommendation nine was made no longer exists.