DOCUMENT RESUME 03473 - [A26.3830) [Smithsonian nstitution's Banking Practices for Private Funds]. GGD-77-67; E-133332. September 20, 1977. 9 pp. Report to Sn. Robert C. Byrd, Chairman, Senate Committee on Appropriations: Interior Subcommittee; Sen. Ted Stevens, Ranking Minority ember; by Elmer B. Staats, Comptroller General. Issue Area: Accounting and Financial Reporting (2800). Contact: General Government Div. Budget Function: General Government: Other General Government (806). Organization Concerned: Smithsonian Institution. Congressional Relevance: Senate Committee on Appropriations: Interior Subcommittee. SeD. ed Stevens. The Smithsonian Institution maintained 41 accounts financial institutions and the United States Treasury. Most in of these were small checking accounts used to pay expenses at Smithsonian locations outside the District of Columbia. The use tf five principal accounts was reviewed, two at the American Security and Trust Company, two at the Riggs National Bank, and a depcsit suspense account in the United States Treasury. Findings/Ccnclusions: The Smithsonian Institution has adopted adequate procedures for the management of cash in its private funds. It strives to maintain only sufficient funds in its two principal ncn-interest-bearing cecking accounts to pay the payrcll checks and other checks presented for payment each day. Through the use of repurchase areementc, a savings account, and short-term investments, the Smithsonian attempts to earn interest on any funds not needed immediately to pay its expenses. However, during the period January through April, 1977, it made no attempt to earn interest on the American Security and Trust checking account float. The Smithsonian keeps separate accounting records for the Smithsonian Research Foundation. (Author/SW) COMPTR(IftUR NEIRAL iF THE UNITIED "ATS WAI1NGTON,~ . 0141 3-133332 September 20, 1977 To the Chairman and Ranking Minority Member Subcommittee on Interior Committee on Appropriations United States Senate This report discusses the Smithsonian Institution's private funds banking practices,, which your Subcommittee asked us tc look into. and which Dere not discussed in our March 31, 1977. report (GGD-77-.43) on the Smithsonian. As of April 30, 1977, the Smithsonian maintained 41 accounts in f:.nancial institutions and the Un.ited States Treasury. Most of these are small checking accounts used to pay local expenses at Smithsonian locations outside Washington, D.C. Our review was limited to analysis cf the use of five principal accounts--two at the American Security and Trust Company, two at the Riggs National ank, and a deposit suspense account in the United States Treasury. In our view the Smithsonian has established adequate procedures to keep non-interest-bearing checking account balances at minimum levels sufficient to serve its needs. FUNDS MANAGEMENT The Smithsonian Treasurer has overall responsibility for the,Smithsonian's financial assets. The investments accounting division in the Office of the Treasurer is responsible for cash management and cash needs forecasting. One employee in the accounting division of the Office of the Treasurer is engaged full-time in monitoring and ana- lyzing the bank accounts and in providing the investments accounting division with information needed in its cash management responsibilities. GGD-77-67 B-133332 The invesl:ment:s accounting division. attempts through various methods to invest, on a short-term basis, any operating fund3 which ae temporarily available. In the past 2 years sveral different methods have been used. Currently, any e::cess operating funds are deposited in a savings account at American Se-urity and Trust or invested in a hort-tern :.nvestment pool. When the irision's forecasts show that a large amount of cash beyond foreseeable current needs will be accumulated, the Smithsonian Treasurer obtains authorization from the Board of Rlegents to tran3fr the excess cash to one of four investment trust accounts nmaintained at Riggs. These funds are available for longer term investment by three profes- sionai investment firms. U.S. TREASURY SSPENSE ACCOUNT The Smithsonian has had a posit suspense account at the U.S. Treasury for its private fuids since 1874. Deposits into the Treasury account consist of grants, gifts, receipts from auxiliary activi":ies such as magazine and museum shop sales, and the various other sources cf Smithsonian private funds. Some of these receipts, such as grants and museum shop sales, are now first deposited in a Riggs collection account and then transferred daily to the Treasury account. At one time the Treasury account served as the Smithsonian's principal checking account from which payroll and other pay- ments were made. However, that function is now handled pri- marily through a Rggs payroll account and the American Security and Trust operating account. Withdrawals are made from the Treasury account for transfers to the American Security and Trust operating account, Riggs payroll account, and the other checking accounts. When excess funds accumu- late in the Treasury account, they are transferred to an American Security and Trust savings account. We were advised by the Smithsonian that the Treasury account is also used, in a limited way, for payroll purposes and for payment of some accounts payable. The account is charged for salary payments to private employees who want checks sent to a bank, thus enabling Treasury to merge into one document both Federal and private salary payments of Smithsonian employees who designate the same bank. Occa- sionally checks are also drawn on the account to pay vendors who submit bills for work chargeable in part to the Smith- sonian's private funds and in part to its appropriated funds. - 2 - B-133332 The vendors get one check to cover the appropriated fund and private fund charges. Using the deposit suspense account for these two purposes, according to Smithsonian officials, faci.itates the cccunting work for the Smithsonian, assures prompt and safe receipt of paychecks for those Smithsonian employees designating banks, and eliminates confusion for vendors who would otherwise ceceive two checks for partial payment of each bill. In calendar year 1976 the Treasury account had an average daily balance of $442,000, according to the Smith- sonian's books. The Smithsonian later decided to keep the balance at about $250,000 by transferring the excess to the savings account. A Smithsonian official recently told us that they would reassess the use of the account and the average balance nay be further reduced. ACCOUNTS AT ANERICAN SECURITY AND TRUST In March 1966, the Smithsonian opened an account at the American Security and Trust Company for the purpose of de- positing receipts from museum shop sales. Later, payments under Federal grants and contracts were deposited in the account. Originally the only checks written on this account were for monthly or bimonthly withdrawals for deposit in the Smithscnian's Treasury suspense account. In July 1968, the Smithsonian began drawing checks on the American Security and Trust account to pay some operating expenses and began making deposits to it, when necessary, from the Treasury suspense account. The account became the Smithsonian's primary operating account--taking over that role from the Treasury suspense account. The change was made because the Smithsonian Treasurer believed that the private bank pro- vided more timely service and information on the operating transactions flowing through the account. In April 1977, the Smithsonian discontinued using the American Security and Trust operating account as the initial depository for museum shop sales receipts and payments under Federal grants and contracts. All such receipts now go to the Riggs collection account. Thus, the only deposits to the American Security and Trust account are transfers from the Treasury suspense account to cover checks issued in pay- ment of operating expenses. -3- B-133332 Investment: of excess cash In Jne 1975 the Smithsonian entered into a repurchase agreement with American Security and Trust whereby the Smith- sonian would withdraw daily from the operating account excess funds whict: American Security and Trust would invest in short- term money market securities (usually Treasury bills and notes) with the tipulation that American Security and rust would repurchasE: them from the Smithsonian to fulfill any Smithson- ian cash needs. Pior to this agreement the Smithsonian invested ts excess operating funds primarily in Certificates of Deposit:. According to the Smithsonian the repurchase agreement provided greater liquidity with a comparable rate of return. In late 1975 Smithsonian analysis of the operating account. chowed that: there was an opportunity to s/so earn interest on the "float" resulting from the timing difference between t:he writinc of the checks on the operating account and their being chairTed against the account. To accomplish this the Smithsonian broadened its repurchase agreement with American Security and Trust on December 3, 1975. Under the new agreement American Security and Trust exam- ined the Smithsonian's operating account at the start of busi- ness each day, If the balance exceeded whatever amount the Smithsonian had designated as necessary for daily operations (that is, necessary to pay the checks which it expected to clear that day) American Security and Trust would invest the excess. If the balance went below the Smithsonian-designated minimum, American Security and Trust would sell or repurchase for its own account enough of the notes and bills it was hold- ing for the Smithsonian to bring the balance up 'to the desig- nated minimum. American Security and Trust did not charge the Smithsonian directly for this service but recovered its costs by giving the Smithsonian a slightly lower rate of interest than the bank earned on the funds invested for the Smithsonian. The use of the repurchase agreement for investment of excess operating funds and checking account float was inter- rupted twice after December 1975. The first occasion was early in 1976 when interest rates available on money market investments fell below the rate of interest which American Security and Trust paid on savings accounts. The Smithsonian - 4- 8-133332 opened a savings account at American Security and Trust on March 18, 1975, and kept the excess operating funds and the checking account float in the saving account. When needed, transfers were made from the savings account to the checking account to cover checks presented for pay- ment. On May 28, 1976, it was again more profitable to use the repurchase agreement, and the Smithsonian then discontinued using the savings account. The second interruption lasted from January 3 to Anril 21, 1977, when Smitthsonian officials were rmaking a general reassessment of Smithsonian bank accounts. During this interruption the savings account was used for investment of excess operating funds, but no attempt was made to earn interest on the checking account float. On Aril 21, 1977, the Smithsonian reverted to using the repurchase areement with American Security and Trust for investment of the checking account float, after judg- ing t to be the most effective method for investing such funds. Excess operating funds were retained in the sav- ings account. Our review of the daily bank statement balances in the operating account showed that the Smithsonian was most ef- fective in maintaining this balance at minimum levels when it was investing both excess oerating funds and the float. From July 1, 1975, through November 30, 1975, when the Smithsonian retained sole management of the American Secur- ity and Trust account, investing only the excess operating funds uncer the repurchase agreement, the average daily bank balance in the account was $798,000. For the 13 mo-ths (Dec. 1975 to Dec. 1976) that the checking acco,:..c fluat, in addition to the excess operating fund., invested through the repurchase agreement or in a savings account with American Security and Trust sharing in the managemert of the funds, the average daily bank balance dropped to $2',000. During January and February of 1977, when the Smithsonian again had sole management of the funds and used the savings account for invescing only the excess operating funds, the average daily bank balance in the operating account was $850,000. However, the average daily check book balance was about $225,u00--the difference of $625,000 represented by outstanding checks or the float. Investment of the checking account float, as well as the excess operat- ing funds, with daily contact between American Security and - 5- B-133332 the most effec- officials seeras to be the Trust and Smithsonian nonearning balance in operating tive way to keep the account to a minimum. and Trust The operating account at American Security check- principal was used extensively as the Smithsonian's During the ing account for payments other than payroll. an average of 15-month period ended September 30, 1976, a month over 2,600 transactions (deposits and withdrawals) deposits to only were handled by this account. Since the Treasury from the the operating account as of April 1977 are operating funds no account to cover issued checks, excess longer accumulate in this account. Excess operating funds are transferred periodically Security and Trust from the Treasury account to the Aim.rican balance gets larger savings account. When tie savings account are transferred to than needed for operating liquidity, sums or to the outside pool the Smithsonian's short-term investment The savings investment managers for longer term investment. $1.4 million on June 22, 1977, account had a balance of aboutbeen the day after $1 million had transferred to an investment manager for long-term investment. Secretary's relationship to American Security and Trust by the The Secretary of the Smithsonian was appointed to employee Board of Regents in 1963 as a private payroll assume his duties in 1964. He became a member of the board of directors cf American Security and Trust in February 1967 !976. His and resigned after 10 years service in Decembe committee service on the board was approved by the executive The Smithscnian In- of the Smithsonian's Board of Regents. Foundation opened stitution and the Smithsonian Research Trust in 1966, bank accounts with American Security and of the bank's board of before the Secretary was a member he was appointed directors, and they were maintained after not the first accounts to the board. However, these were Security with American and Trust. The the Smithsonian had bank in 1927. Smithsonian first opened an account at the Foundatijn's Although the Secretary is a member of the when at the meeting board of directors, he was not present Security and it was decided to open the account at American - 6 - B-133332 Trust. At that time, however, he was serving as president of the Foundation. We were advised by the Smithsonian that the Secretary no longer owns the American Security and Trust stock which he as required to hold as a director of the bank. ACCOUNTS AT THE RIGGS NATIONAL 3ANK The Smithsonian opened its payroll checking account at Riggs National 3ank in 1955. It is usd to pay employees on the private payroll who do not have their paychecks sent to a bank. The Smiths'onian's usual procedure for administering the payroll account is as follows. For each 2-week pay period the Smithsoniar deposits in two increments the total amount of the paychecks written against the account for that period, The first deposit, usually for $150,000, is made on the same day for which the paychecks are dated. The second deposit, for the remaincer of the payroll, follows 3 to 5 days later. The average da4ly bank balance in the account from July 1, 1975, to Januaiy 31, 1977, wa, about $96,000. The Smith::onian also has a collection account at Riggs. 'he account wa;i: opened in April 1976 for receipt of mail order payments for museum shop items. Three times daily Riggs' messengers pick up the mail orders from a post office box rented in the ZS.ithsonian's name. The same day the mail is picked up, Riggs deposits any checks received into the collection account and forwards a deposit receipt and a ist- ing of the checks received to the Smithsonian. In April 1977, the use of this account was expanded to include receipts from over-the-counter museum shop sales and payments received under letters of credit on Federal grants and contracts. Previously these receipts were initially deposited in the American Security and Trust operating account. Money is transferred daily from the collection account to the Treasury suspense account. The balance in the collection account is maintained, together with the payroll account bal- ance, at a level high enough to reimburse Riggs for its pay- roll and collection services. Smithsonian officials advised us that use of the collec- tion account reduces the amount of clerical work performed -7- 3-131332 by Smithsonian employees and results in receipts from revenue-producing activities becoming available to the Smithsonian more quickly than if the receipts were deposited directly into the Treasury suspense account. Four separate trust accounts are also maintained at Riggs to temporarily held funds awaiting investment by professional investment managers engaged by the Smithson- ian for this purpose. These funds; are used for long-term investment, as opposed to the day-to-day investing of op- erating funds by Smithsonian officials through the check- ing account repurchase agreement or the savings account at American Security and Trust. CONCLUSION In our opinion, the Smithsonian has adopted adequate procedures for the management of cash in its private funds. It strives to maintain only sufficient funds in its two principal non-interest-bearing checking accounts to pay the payroll checks and other hecks presented for payment each day. Through the use of repurchase agreements, a savings account, and short-term investments, the Smithson- ian attempts to earn interest on any funds not needed im- mediately to pay its expenses. We believe that beginning in December 1975 it did this successfully, except during the period January 3 through April 20, 1977, when it made no attempt to earn interest on the American Security and Trust checKing account float. On April 21, 1977, the Smithsonian resumed earning interest on that float. Private, nonprofit corporations The Smithsonian Research Foundation maintained a bank account with American Security and Trust for about 11 years beginning in June 1966. In Januar? 1977, the Smithsonian began acting as the Foundation's fibsal agent and custodian and closed the Foundation's account at American Security and Trust on May 3, 1977. As needed, the Foundation's funds are now withdrawn from the Smithsonian's appropriated fund accounts and deposited in the Smithsonian's U.S. Treasury suspense account. Foundation funds are then withdrawn from the Treasury account and deposited in the Riggs payroll account or the American Security and Trust operating account for the Foundation's se in paying payroll and other costs. B-133332 The Smithsonian keeps sepa::!'ate accounting records for the Foundation's funds. tn the 15-month period from July 1, 1975, to Septem- ber 30, 1976, the average ieposits per month in the f'oun- dation's bank account totaled $166,144, while an average of 300 checks were paid pel: month, totaling $162,766, The average daily balance in the account for the 15-nionth period was $64,185. l Although the Smithsonian Science Informatior Exc:hange has a small checking accouit at the Madison Naticnal Bank for satisfying minor immediate needs, its major cash trans- actions have been handled :Dy the Smithsonian in man:ner similajr to that currently .:sed fer the Smithsoniain Rsearch Foundzltion. Scope of review We reviewed the Smithsonian's policies and rocedure for the use of bank accour'ts and banking services; in,man- aging its private funds. In this regard, we examined spe- cifically the transactions, recorded in two principal bank accounts--the American Security and Trust operating account and the Riggs payroll acc unt--during the 15-month period ended September 30, 1976. We conducted followup work con- cerning several bank accot'nts to find out the current status of the Smithsonian's banking practices. We also discussed the Smithsonian's banking practices with Smithsonian officials and the certified public account- ants who examined Smithsonian private funds, including those on deposit at financial institutions and the United .'tates Treasury. Smithsonian officials reviewed the draft report and we considered their comments in preparing our final report. Comptroller General of the United States - 9 -
Smithsonian Institution's Banking Practices for Private Funds
Published by the Government Accountability Office on 1977-09-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)