H.B. 5187 (H-6), 5188 (H-6), 5223 (H-3), 5224 (H-2) GOV T INVESTMENT DISCLOSURE
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&
5256 (H-3): COMMITTEE SUMMARY
House Bill 5187 (Substitute H-6 as passed by the House) House Bill 5188 (Substitute H-6 as passed by the House) House Bill 5223 (Substitute H-3 as passed by the House) House Bill 5224 (Substitute H-2 as passed by the House) House Bill 5256 (Substitute H-3 as passed by the House) Sponsor: Representative Michael Hanley (House Bill 5187)
Representative Greg Kaza (House Bill 5188) Representative Roland Jersevic (House Bill 5223) Representative William Bobier (House Bill 5224) Representative Liz Brater (House Bill 5256)
House Committee: Urban Policy Senate Committee: Financial Services
Date Completed: 5-22-96
House Bills 5187 (H-6), 5223 (H-3), and 5256 (H-
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3) would amend various acts to require local units of government and State departments, institutions, and offices annually
to report the cost and fiscal year end market value of derivative instruments or products in their pension and nonpension
investment portfolios, and make this
information available to the public. Additional
categories of investments in the State pension system s investment portfolio also would
have to be reported and made available. House Bill 5224 (H-2) would
create the Financial Investment Clearinghouse Act to require the Library of Michigan to serve as the clearinghouse to assist securities brokers and dealers, maintain information about municipal securities offerings
in this State, and maintain the annual financial
reports of local
units. House Bill 5188 (H-6) would create
the Good Government Financial
Report Disclosure Act to require local units and State
departments, institutions, and offices to retain copies
of financial reports pertaining to them and make the reports available for public inspection.
House Bills 5187 (H-6), 5188 (H-6), and 5256 (H-
3) would define derivative instrument or product as either of the following: 1) a contract or convertible security that changes in value in concert with a related or underlying security,
future, or other instrument or index; or obtains much of its value from price movements in a related or underlying security, future, or other instrument or index; or both ; or 2) a contract or security, such as an option, forward, swap, warrant, or a debt instrument with 1 or more options, forwards, swaps, or warrants embedded in it or attached to it, the value of which contract or security is determined in whole or in part by the price of 1 or more underlying instruments or markets .
House Bill 5187 (H-6) is tie-barred to House Bill 5224. House Bills 5224 (H-2), 5223 (H-3), and
5256 (H-3) are tie-barred to House Bill 5187.
The Uniform Budgeting and Accounting Act requires each local unit of government to make an annual financial report, which must contain an accurate statement of specific information for each fiscal year. House Bill 5187 (H-6) would amend the Act to require an annual financial report also to include the cost and fiscal year end market value of derivative investments or products in the local unit s nonpension investment portfolio and pension investment portfolio at fiscal year end. This information would have to be reported on an aggregate basis and itemized by issuer and type of derivative instrument or product. Investments of defined contribution plans and deferred
compensation plans that were chosen by a participating employee would be excluded from the information reported for pension investment portfolios.
Under the Act, copies of an annual financial report must be filed with the State Treasurer within 120 days after the end of the local unit s fiscal year, unless the State Treasurer grants an exception. The bill would require the State Treasurer promptly to file with the Library of Michigan a sufficient number of copies of an annual financial report for deposit of one copy in the Library of Michigan and one copy in each designated depository library under the proposed Financial Investment Clearinghouse Act.
The bill would require a local unit to obtain a copy of an annual financial report submitted under the Uniform Budgeting and Accounting Act. A local unit or the State Treasurer would have to make an annual financial report prepared, owned, used, in the possession of, or retained by the local unit or State Treasurer available for public inspection under the Freedom of Information Act. The Library of Michigan and any designated depository libraries would have to make an annual financial report available to the public as provided under the Financial Investment Clearinghouse Act.
The bill specifies that these provisions would not authorize a local unit to make investments not otherwise authorized by law.
Under the Act, local unit generally refers to a village, city, or township, or an authority or commission established by a county, village, city, or township ordinance or charter. The bill would include a county in this definition.
The bill would repeal a section that transferred to the Department of Treasury all powers and duties of the elected auditor general relating to uniform system of accounts for county offices and examination thereof (MCL 16.180).
The bill would amend the Uniform Budgeting and Accounting Act to provide that, if a local unit failed to report investments in derivative instruments or products as required under House Bill 5187, the State Treasurer could determine that the local unit could not report the investments without his or her assistance, advice, or instruction. The State Treasurer would have to submit a written statement of the findings and recommendations to
the legislative body of the local unit. Within 90 days after receiving this statement, the local unit would have to retain a certified public accountant or the State Treasurer to report the investments and would have to notify, by resolution of the legislative body, the State Treasurer of this action. If the local unit failed to respond within the 90-day period, the State Treasurer would have to report the investments.
The State Treasurer could charge reasonable and necessaryexpenses, including per diem and travel expenses, to the local unit for services performed under these provisions, and the local unit would have to pay the State Treasurer for these expenses. The Treasurer would be required either to execute a contract with the local unit or to bill the local unit on a monthly basis.
Under the Uniform Budgeting and Accounting Act, every audit report must disclose any fiscal irregularities, defalcations, misfeasance, nonfeasance, or malfeasance that came to the auditor s attention. The bill specifies that the irregularities would include, but not be limited to, any deviations from the requirements of the Act concerning annual financial reports.
Annual Financial Report
The bill would amend Public Act 71 of 1919, which requires each State department, institution, and office, and each county office to make an annual financial report and file a copy with the Auditor General and the Governor. The bill would delete county offices from these requirements. In addition to the currently required information, the bill would require a report to contain the cost and fiscal year end market value of derivative instruments or products in the department s, institution s, or office s nonpension investment portfolio at fiscal year end. This information would have to be reported on an aggregate basis and itemized by issuer and type of derivative instrument or product.
A report also would have to include, for each State pension system, the cost and fiscal year end market value for each item in each of the following categories of pension investments in the State pension system s investment portfolio at fiscal year end:
-- U.S. government or agency obligations, itemized by type of security.
-- Commercial paper, itemized by issuing bank.
-- U.S. government or agency repurchase agreements, itemized by institution with type of security specified.
-- U.S. bank bankers acceptances, itemized by issuing bank.
-- Mutual funds, itemized by mutual fund name.
-- Common stock, itemized by issuing corporation.
-- Corporate bonds, itemized by issuing corporation and type of security.
-- Real estate, itemized by separately described holding.
-- Mortgages, itemized by mortgagor.
-- Derivative instruments or products, itemized by issuer and type.
-- Other pension investments not listed above itemized by type of investment.
In addition, an annual financial report would have to include the total cost and fiscal year end market value for each category of investments described above in the State pension system s investment portfolio at fiscal year end; as well as the total cost and fiscal year end market value on an aggregate basis.
Investments of defined contribution plans and deferred compensation plans that were chosen by a participating employee would be excluded from the information that would have to be reported under these provisions.
A State department, institution, or office would have to obtain and retain, subject to the Management and Budget Act, a copy of an annual financial report submitted under Public Act 71. A State department, institution, or office, including the Auditor General, would have to make an annual financial report prepared, owned, used, in the possession of , or retained by the department, institution, or office available for public inspection under the Freedom of Information Act.
The bill specifies that these provisions would not authorize a department, institution, or office of State government to make investments not otherwise authorized by law.
Failure to Report
If a State department, institution, or office failed to report nonpension investments in derivative instruments or products or pension investments as required above, the Auditor General could
determine that the department, institution, or office could not report the investments without his or her assistance, advice, or instruction. The Auditor General would have to submit a written statement of the findings and recommendations to the department, institution, or office. Within 90 days after receiving this statement, the department, institution, or office would have to retain the Auditor General to report the investments or retain a certified public accountant to report them and notify the Auditor General of that action. If the department, institution, or office failed to respond within the 90-day period, the Auditor General would have to report the investments.
The Auditor General would have to charge reasonable and necessary expenses, including per diem and travel expenses, to the department, institution, or office for services performed under these provisions, and the department, institution, or office would have to pay the expenses. The Auditor General would have to execute a contract with the department, institution, or office or bill it on a monthly basis.
The bill would create the Financial Investment Clearinghouse Act to require that the Library of Michigan serve as the financial investment clearinghouse in this State for the purpose of assisting brokers and dealers, including municipal securities dealers, in complying with certain Federal regulations (17 C.F.R. 240.15c2-12). (The terms broker , dealer , municipal securities , and municipal securities dealer would be defined as they are in the Federal Securities Exchange Act.)
The Library of Michigan would have to maintain current, accurate information about municipal securities offerings of issuers of municipal securities located in this State and about obligated persons with respect to those securities, including final official statements, annual financial information, audited financial statements, notices of material events (defined below), and notices of failure to provide annual financial information by obligated persons under Federal regulations at no charge to the issuers or obligated persons. The Library would have to accept the information described in this provision from any issuer located in Michigan and any obligated person for the municipal securities offerings of such an issuer. The Library would not have to verify the accuracy of this information.
The Library also would be required to maintain the
annual financial reports of local units filed with it by the State Treasurer under the Uniform Budgeting and Accounting Act.
The Library would have to make the information about municipal securities offerings and obligated persons, and the annual financial reports, available promptly to the public on a contemporaneous basis upon payment of any applicable fee. Any fee would have to be reasonable and set to defray the costs of operating under the proposed Act.
In addition, the Library would have to deposit copies of the information and reports in each designated depository library on a basis substantially contemporaneous with the acceptance of that information. The State Librarian would have to designate the depository libraries. Each depository library would have to comply with the requirement that information be made available to the public.
The State Treasurer could require the State Library to supply any information or reports relative to its function under the bill that the Treasurer considered appropriate. The information or reports would have to be provided at no charge.
Material event would mean the failure of an issuer of municipal securities to file timely an annual financial report under Public Act 71 of 1919 or under the Uniform Budgeting and Accounting Act, or any of the following occurrences with respect to securities being offered in an offering, if material: principal and interest payment delinquencies; nonpayment-related defaults; unscheduled draws on debt service reserves or on credit enhancements reflecting financial difficulties; substitution of credit or liquidity providers, or their failure to perform; adverse tax opinions or events affecting the tax-exempt status of the security; modifications to rights of security holders; bond calls; defeasances; release, substitution, or sale of property securing repayment of the securities; or rating changes.
The bill would create the Good Government Financial Report Disclosure Act to require a local unit or a State department, institution, or office to retain a copy of any financial report pertaining to that unit or department, institution, or office. A local unit or State department, institution, or office, including the State Treasurer or Auditor General, would have to make an annual financial report prepared, owned, used, in the possession of, or
retained by the local unit or State department, institution, or office available for public inspection under the Freedom of Information Act. Investments of defined contribution plans and deferred compensation plans that were chosen by a participating employee could not be made available to the public. The proposed Act would not authorize a local unit or the State to make investments not otherwise authorized by law.
Financial report would include an audit report or other report for a local unit showing the cost and fiscal year end market value of derivative instruments or products in the local unit s pension investment portfolio or nonpension investment portfolio at fiscal year end reported on an aggregate basis and itemized by issuer and type of derivative instrument or product.
Financial report also would include an audit report or other report for a State department, institution, or office showing, for each State pension system, the following:
-- The cost and fiscal year end market value for each item in each of the following categories of pension investments in the State pension system s investment portfolio at fiscal year end (itemized as described in House Bill 5256 (H-3)): U.S. government or agency obligations; commercial paper; U.S. government or agency repurchase agreements; U.S. bank bankers acceptances; mutual funds; corporate bonds; real estate; mortgages; derivative instruments or products; and other pension investments.
-- The total cost and fiscal year end market value for each category of investments described above in the State pension system s investment portfolio at fiscal year end, as well as on an aggregate basis.
In addition, financial report would include an audit report or other report for a State department, institution, or agency showing the cost and fiscal year end market value of derivative instruments or products in the department s, institution s, or office s nonpension portfolio at fiscal year end reported on an aggregate basis and itemized by issuer and type of derivative instrument or product.
MCL 141.422b et al. (H.B. 5187)
141.428 et al. (H.B. 5223)
21.44 et al. (H.B. 5256)
Legislative Analyst: S. Margules
House Bill 5187 (H-6)
At this time, information is not available to determine accurately the fiscal impact.
The bill would have no fiscal impact on State or local government.
Local units in which the State Treasurer reported the investments would be charged reasonable and necessary expenses for services performed bythe State Treasurer.
According to the Library of Michigan, costs would depend upon any new responsibilities under the bill. Requiring the Library to act as a depository for the information under the Michigan Documents Depository System would have a minimal fiscal impact.
The Auditor General estimates its costs under the bill for compiling the report at $12,200.
Fiscal Analyst: R. Ross
B. Bowerman
S9596\S5187SA
This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent.