Can a Virginia county treasurer invest public funds in asset-backed securities that are also guaranteed by a federal agency?

Plain-English summary

The Arlington County Treasurer asked whether Virginia counties can invest public funds in asset-backed securities guaranteed by a U.S. government agency. The question matters because the Investment of Public Funds Act treats "asset-backed securities" and "federally guaranteed securities" as different categories with different authorized investors.

Attorney General Mark R. Herring drew a clean line. Section 2.2-4501(A)(2) authorizes political subdivisions (counties, cities, towns) to invest in "[b]onds, notes and other obligations of the United States, and securities unconditionally guaranteed as to the payment of principal and interest by the United States, or any agency thereof." That statute is about federal credit. It does not use the term "asset-backed securities" and does not condition the investment authority on the underlying collateral structure. So if a security carries an unconditional federal guarantee, a Virginia locality may invest in it, and the fact that it happens to be backed by pooled assets (a mortgage pool, for example) is irrelevant.

Section 2.2-4511 is the asset-backed securities authority. It opens that category only to "qualified public entities" of the Commonwealth, a defined term that means a "state agency, institution of the Commonwealth or statewide authority created under the laws of the Commonwealth having an internal or external public funds manager with professional investment management capabilities." That definition reaches state-level entities. It does not reach counties, cities, and towns. The AG applied expressio unius est exclusio alterius: when the General Assembly named "political subdivisions" in § 2.2-4501(A) and omitted them from § 2.2-4511's "qualified public entity" definition, the omission was deliberate.

The opinion offers a policy rationale. A federally guaranteed security carries the credit of the United States; in default, the investor has recourse against the federal government. A pure asset-backed security has only the underlying collateral pool as backstop, requiring foreclosure on a complex pool to recover. The General Assembly limited the second category to sophisticated state-level investors and imposed extra protections (AAA from two rating agencies, duration no more than five years).

Bottom line: Arlington County and other Virginia localities can invest in federally guaranteed securities even if those securities are also asset-backed. They cannot invest in stand-alone asset-backed securities.

Currency note

This opinion was issued in 2017. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Investment of Public Funds Act has been amended periodically since 2017. The category of "qualified public entity" in § 2.2-4511 and the list of authorized investments in § 2.2-4501 may now read differently. Before a treasurer relies on this analysis to make an investment, check current statutory text.

Background and statutory framework

The Virginia Investment of Public Funds Act, §§ 2.2-4500 to 2.2-4519, regulates how the Commonwealth, public officers, municipal corporations, political subdivisions, and other public bodies invest public funds. The Act's purpose is "to safeguard monies belonging to the Commonwealth and its subdivisions by requiring investment in safe and reliable devices, and by establishing standards of care by which such monies must be invested" (2012 Op. Va. Att'y Gen. 4, 6). Section 2.2-4514 imposes a trustee-standard duty of care.

Section 2.2-4501(A) lists authorized investments for political subdivisions. Subsection (A)(2) covers federal-credit investments: "[b]onds, notes and other obligations of the United States, and securities unconditionally guaranteed as to the payment of principal and interest by the United States, or any agency thereof." The text does not use the term "asset-backed securities" and contains no carve-out for securities whose payments are sourced from a pooled asset stream.

Section 2.2-4511 authorizes a different category of investment for a narrower class of investors. It permits "any qualified public entity of the Commonwealth" to invest in asset-backed securities, subject to two safeguards: duration no more than five years, and ratings of at least AAA from two rating agencies (one must be Moody's or S&P). The defined term "qualified public entity" means "any state agency, institution of the Commonwealth or statewide authority created under the laws of the Commonwealth having an internal or external public funds manager with professional investment management capabilities." Counties, cities, and towns are not on that list, and the structural reading is that the General Assembly intentionally excluded them.

The AG cited Alger v. Commonwealth, 267 Va. 255, 261 (2004), and Barr v. Town & Country Props., Inc., 240 Va. 292, 295 (1990), for the rule that legislatures choose their words "with care," and GEICO v. Hall, 260 Va. 349, 355 (2000), and Turner v. Wexler, 244 Va. 124, 127 (1992), for expressio unius est exclusio alterius. The combined inference: mentioning political subdivisions in § 2.2-4501(A) and omitting them from § 2.2-4511's defined "qualified public entity" reflected a deliberate legislative choice.

On the federally guaranteed-but-asset-backed question, the AG focused on the credit structure. A federally guaranteed security gives the investor recourse against the U.S. government or its agency. A stand-alone asset-backed security has only the underlying pool to fall back on. The risk profiles are different, which is why the General Assembly extended asset-backed authority only to qualified state-level investors with professional management. A federally guaranteed security that happens to be asset-backed retains the federal credit backstop; the asset-backing is incidental and does not disqualify the investment under § 2.2-4501(A)(2).

The opinion also relied on Moyer v. Commonwealth, 33 Va. App. 8, 35 (2000), citing McKeon v. Commonwealth, 211 Va. 24, 27 (1970), for the principle that undefined statutory terms get their ordinary meaning. Black's Law Dictionary defines "asset-backed security" as a debt security secured by pooled assets, which the AG accepted as the working definition for § 2.2-4511 purposes.

Common questions

Q: Can my county invest in mortgage-backed securities issued by Fannie Mae or Ginnie Mae?
A: It depends on the guarantee. Securities unconditionally guaranteed by a U.S. agency are authorized under § 2.2-4501(A)(2), even if they happen to be asset-backed. Securities without that unconditional federal guarantee are not authorized for localities.

Q: Why can state agencies invest in asset-backed securities but localities can't?
A: The General Assembly defined "qualified public entity" in § 2.2-4511 to mean state agencies and statewide authorities with professional investment management. Localities are not on the list. The AG read the exclusion as deliberate.

Q: What protections apply to qualified public entities investing in asset-backed securities?
A: Section 2.2-4511 caps duration at five years and requires at least AAA from two rating agencies (one must be Moody's or S&P).

Q: What other categories of investment are open to localities?
A: Section 2.2-4501 lists multiple. The Act also permits sinking fund investments (§ 2.2-4500), prime quality commercial paper (§ 2.2-4502), and high-quality corporate notes with strict guidelines (§ 2.2-4510).

Q: Does the locality have any duty of care when investing public funds?
A: Yes. Section 2.2-4514 imposes a trustee standard of care on the Commonwealth and political subdivisions investing public funds.

Q: Is this analysis driven by the term "political subdivision"?
A: In part. The AG cited § 15.2-952 and 3232 Page Ave. Condo. Unit Owners Ass'n v. City of Va. Beach, 284 Va. 639, 646 (2012), to confirm that counties such as Arlington are political subdivisions. The exclusion from "qualified public entity" therefore matters: localities cannot invest in stand-alone asset-backed securities.

Citations and references

Virginia statutes:

• Va. Code Ann. § 2.2-4500 (sinking funds)
• Va. Code Ann. §§ 2.2-4500 to 2.2-4519 (Investment of Public Funds Act)
• Va. Code Ann. § 2.2-4501 (authorized investments for political subdivisions)
• Va. Code Ann. § 2.2-4502 (commercial paper)
• Va. Code Ann. § 2.2-4510 (corporate notes)
• Va. Code Ann. § 2.2-4511 (asset-backed securities, qualified public entities)
• Va. Code Ann. § 2.2-4514 (standard of care)
• Va. Code Ann. § 15.2-952 (locality acquisition of federal property)
• Va. Code Ann. § 25.1-100 (eminent domain definition of "person")
• Va. Code Ann. § 2.2-505 (AG advisory opinion authority)

Cases:

• 3232 Page Ave. Condo. Unit Owners Ass'n v. City of Va. Beach, 284 Va. 639 (2012)
• Alger v. Commonwealth, 267 Va. 255 (2004)
• Barr v. Town & Country Props., Inc., 240 Va. 292 (1990)
• GEICO v. Hall, 260 Va. 349 (2000)
• Turner v. Wexler, 244 Va. 124 (1992)
• Moyer v. Commonwealth, 33 Va. App. 8 (2000)
• McKeon v. Commonwealth, 211 Va. 24 (1970)

Prior AG opinions:

• 2012 Op. Va. Att'y Gen. 4

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2017/16-035-De-la-Pava---asset-backed-securities---for-issuance.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring
Attorney General

January 23, 2017

The Honorable Carla de la Pava
Treasurer of Arlington County
2100 Clarendon Boulevard, Suite 201
Arlington, Virginia 22201-0530

Dear Ms. de la Pava:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issue Presented

You ask whether localities such as Arlington County are permitted to invest in asset-backed securities guaranteed by a United States government agency pursuant to § 2.2-4501(A)(2) of the Code of Virginia.

Applicable Law and Discussion

The Virginia Investment of Public Funds Act ("the Act")[1] regulates the investment of public moneys by the Commonwealth, public officers, municipal corporations, political subdivisions, and all other public bodies. A prior opinion of the Attorney General notes that "the purpose of the [A]ct as a whole is to safeguard monies belonging to the Commonwealth and its subdivisions by requiring investment in safe and reliable devices, and by establishing standards of care by which such monies must be invested."[2]

Section 2.2-4501(A)(2) of the Act authorizes political subdivisions, a term that includes localities such as Arlington County,[3] to invest in "[b]onds, notes and other obligations of the United States, and securities unconditionally guaranteed as to the payment of principal and interest by the United States, or any agency thereof."[4] It does not authorize any public entity to invest in "asset-backed securities" and does not even use that term.

The term "asset-backed securities" is used in a different statute, § 2.2-4511, which authorizes some, but not all, public entities to invest in some, but not all, asset-backed securities:

Notwithstanding any provision of the law to the contrary, any qualified public entity of the Commonwealth may invest any and all moneys belonging to it or within its control, other than sinking funds, in asset-backed securities with a duration of no more than five years and a rating of no less than AAA by two rating agencies, one of which must be either Moody's Investors Service, Inc., or Standard and Poors, Inc.

As used in this section, "qualified public entity" means any state agency, institution of the Commonwealth or statewide authority created under the laws of the Commonwealth having an internal or external public funds manager with professional investment management capabilities.[5]

This second statute authorizes only "qualified public [entities] of the Commonwealth" to invest in asset-backed securities.[6] It defines the term "qualified public entity" as a "state agency, institution of the Commonwealth or statewide authority ... having an internal or external public funds manager with professional investment management capabilities."[7] That description cannot be reasonably interpreted to include political subdivisions such as counties, cities, and towns. Indeed, had the General Assembly intended to include political subdivisions, it could have used that term, as it did in § 2.2-4501(A), discussed above, which specifically mentions political subdivisions. We must "'assume that the legislature chose, with care, the words it used when it enacted the ... statute.'"[8] The maxim expressio unius est exclusio alterius "'provides that mention of a specific item in a statute implies that omitted items were not intended to be included within the scope of the statute.'"[9] Here, we must assume that the General Assembly chose with care its words when it did not include political subdivisions or localities in the definition of "qualified public entities."

For securities that are backed only by assets, investors do not enjoy the extra protection afforded by the credit of the United States, and in the event of default investors might have to seek recourse through foreclosure on the underlying assets. This would be inherently more risky, and it may explain why the General Assembly chose to limit the field of investors to state-level entities with a certain degree of financial sophistication. Moreover, even for these sophisticated investors, the securities must be of short duration and carry the highest credit ratings.[10]

Your inquiry is whether a political subdivision such as Arlington County may invest in asset-backed securities guaranteed by a United States government agency. Because political subdivisions are authorized by the Act to invest in unconditionally backed obligations of a United States government agency, I conclude that such an investment is permitted by the Act. When choosing to invest in these securities, political subdivisions are protected by the credit of the federal government. In the event of default, a political subdivision would have recourse against the federal government or one of its agencies. The authorization for investment in such federal securities applies, regardless of whether the federally backed security is also asset-backed or not. The fact that an authorized federal security is coincidentally backed by assets does not disqualify it as a permissible investment for a political subdivision. In the event of default, recourse would lie against the federal government or federal agency, and there would be no need to foreclose on the underlying assets backing the security.

Conclusion

Accordingly, it is my opinion that political subdivisions such as counties, cities, and towns may invest in securities unconditionally guaranteed by the United States government or a federal agency in accordance with § 2.2-4501(A)(2), and the fact that such a security may be asset-backed does not disqualify it as a permitted investment. However, investment by a political subdivision in any other asset-backed security is not authorized.

With kindest regards, I am

Very truly yours,

Mark R. Herring
Attorney General

[1] VA. CODE ANN. §§ 2.2-4500 through 2.2-4519 (2014 & Supp. 2016).

[2] 2012 Op. Va. Att'y Gen. 4, 6. See § 2.2-4514 (2014) (Commonwealth and its political subdivisions as trustee of public funds; standard of care in investing such funds). See also §§ 2.2-4500 (2014) (permitting sinking funds to be invested in, among other things, federal and state debt, and Virginia municipal debt where there is no evidence of default); 2.2-4502 (2014) (permitting investment in prime quality commercial paper, and other commercial paper, provided that certain safeguards are taken); 2.2-4510 (2014) (permitting investment in high quality corporate notes, provided that strict investment guidelines are established).

[3] See § 15.2-952 (2012) ("[A]ny locality ... or other political subdivision may, by ordinance or resolution, authorize the acquisition and purchase [of federal property] ...." (emphasis added)). See also 3232 Page Ave. Condo. Unit Owners Ass'n v. City of Va. Beach, 284 Va. 639, 646 (2012) (quoting § 25.1-100) ("[T]he definition of '[p]erson' applicable to eminent domain proceedings ... specifically includes ... any 'city, county, town, or other political subdivision . . ..'" (emphasis added)). Black's Law Dictionary defines "political subdivision" as "[a] division of a state that exists primarily to discharge some function of local government." BLACK'S LAW DICTIONARY p. 1346 (Bryan A. Garner et al. eds., 10th ed. 2014).

[4] Section 2.2-4501(A)(2) (Supp. 2016) (emphasis added).

[5] Section 2.2-4511 (2014) (emphasis added).

[6] Section 2.2-4511. The statute does not define the term "asset-backed securities." As a general rule, when a particular word in a statute is not defined therein, the word should be accorded its ordinary meaning. Moyer v. Commonwealth, 33 Va. App. 8, 35 (2000) (citing McKeon v. Commonwealth, 211 Va. 24, 27 (1970)). Black's Law Dictionary defines "asset-backed security" as "[a] debt security ... that is secured by assets that have been pooled and secured by the assets from the pool." BLACK'S LAW DICTIONARY p. 1560 (Bryan A. Garner et al. eds., 10th ed. 2014).

[7] Section 2.2-4511.

[8] Alger v. Commonwealth, 267 Va. 255, 261 (2004) (quoting Barr v. Town & Country Props., Inc., 240 Va. 292, 295 (1990)).

[9] GEICO v. Hall, 260 Va. 349, 355 (2000) (quoting Turner v. Wexler, 244 Va. 124, 127 (1992)).

[10] Section 2.2-4511.