A New Approach to Treasury Analysis & Liquidity Status Reporting
By Kristin Montgomery, Controller, Financial Reporting & Accounting Services Division, California Public Employees' Retirement System (CalPERS)
One of the primary components of treasury management is to ensure adequate liquidity to meet funding obligations. As pension funds across the US face increasing risks with uncertain market returns and changing demographics, the California Public Employees’ Retirement System (CalPERS, the nation’s largest public pension fund with more than $300bn in assets) developed the Treasury Management Program (TMP) to mitigate uncertainty and provide relief to liquidity challenges.
Part of the TMP, CalPERS’ Treasury Analysis and Liquidity Status Report is an innovative new report that helps stakeholders to understand the balance of risks and provides visibility over the financial soundness of CalPERS’ funds. The report provides a comprehensive six-month snapshot analysis of the liquidity coverage ratio (LCR) and cash flow forecast for the Public Employees’ Retirement Fund (PERF) — CalPERS' primary fund. The report is the first of its kind for CalPERS and is proving valuable in making enterprise-wide financial decisions, such as those regarding budgets and operational requirements.
Background to the Treasury Analysis and Liquidity Status report
CalPERS created the report as part of the Treasury Management Program. The TMP was developed in response to the CalPERS Board of Administration (Board) Finance and Administration Committee request to identify a process to meet funding obligations and ensure promised pension and organisational payments are consistently met without interruption from financial or market events. In 2015, CalPERS Chief Financial Officer (CFO) presented the new Treasury Analysis and Liquidity Status report to comply with requirements set by the Board and in response to liquidity challenges, such as those that arose from the 2008 liquidity crisis. These requirements are outlined in the Treasury Management Policy, which governs treasury management principle and practice at CalPERS.
One strategic objective of the policy is to provide an integrated process for the oversight and management of enterprise cash and liquidity during normal, stressed, and crisis events. To meet this objective, CalPERS implemented a new Treasury Management Reserve Policy and developed a funding contingency plan in October 2015. The reserve policy allows CalPERS to establish and manage reserves to ensure the payment of member benefits and other obligations without interruption, while optimising the use of fund assets. The funding contingency plan defines the available asset and financial based options, the usage criteria, and the management protocols for a liquidity event.
Constructing the report
To accurately capture and calculate the liquidity status of all funds, CalPERS needed to build a new in-house liquidity management framework with reporting capabilities. Production of the framework began in October 2015 and required a complete overhaul of the cash forecasting process. It also centralised the hub for capturing accounting information and investment data across multiple asset classes. A key feature is the system’s ability to generate liquidity status reports for seven CalPERS’ funds in normal, stressed, and crisis environments. In addition to details regarding the current liquidity health of each fund, the framework also produces forecasted liquidity coverage ratios (LCR) for the next 30, 60, and 90 days.
The development and implementation of the framework was successfully completed in March 2016 and effectively provides a financial control that ensures CalPERS member benefits are consistently covered without interruption from financial or market events. In addition, the framework helps safeguard CalPERS against future market events that could potentially require the sale of long-term valued assets.