Performance Guaranties and Negotiable Instruments

SUBJECT:

PERFORMANCE GUARANTIES AND NEGOTIABLE INSTRUMENTS
NUMBER:

M.3.

DEPARTMENTS & DISTRICTS AFFECTED:

ALL AGENCIES, DEPARTMENTS, AND DISTRICTS GOVERNED BY THE BOARD OF SUPERVISORS
EFFECTIVE: 5/1/86
REVISED: 2/00
signed
_________________________________
David E. Sundstrom, Auditor-Controller
1. POLICY
Performance guaranties and equivalent substituted legal instruments used to guarantee performance and all negotiable instruments in the possession of a department/agency/district as defined under Sections 1.3.1 and 1.3.4 of this policy shall be recorded in a trust fund. Specific information concerning these instruments shall be maintained by the department/agency/district in a subsidiary ledger. All other performance guaranties as defined in Section 1.3.3 should not be recorded in the General Ledger, as these instruments have no monetary value. Each department/agency/district shall provide the necessary security and control consistent with the below-listed procedures to safeguard these assets.
1.1 Purpose
To provide security, accountability, and central control for all performance guaranties and their equivalent substituted legal documents and all negotiable instruments received by the County.
1.2 Authority
Authority
Subject
Board of Supervisors' Resolution No. 82-162, dated February 2, 1982. Authorizes the Auditor-Controller to prescribe the accounting policies for all offices, departments, and institutions under the control of the Board of Supervisors.
1.3 Definitions
1.3.1 Performance Guaranty
A performance guaranty is any legal instrument given to the County for the purpose of assuring that a second party will perform as contractually agreed and/or for the purpose of offsetting any financial loss due to the second party's noncompliance with a contractual agreement. Examples of performance guaranties are letters of credit, savings passbooks or time certificates with the power of attorney, notes receivable or installment notes secured by deeds of trust. These performance guaranties must be recorded in the trust funds and in subsidiary ledgers. See Section 2.
1.3.2 Savings Passbook: Conditional Power of Attorney
A conditional power of attorney over a savings passbook should provide that a failure of the agreed-upon performance will give the County the right to negotiate the instrument for restitution purposes.
1.3.3 Other Types of Performance Guaranties
All other performance guaranties, for purposes of this policy, are a guaranty of faithful performance of a contract and protection for the County against loss due to the mobility or refusal of a contractor to perform his contract. Examples of performance guaranties are completion bonds, contract bonds, escrow agreements, indemnity agreements, indemnity bonds, and surety bonds. Some of these instruments, such as completion bonds, are not payable upon demand and require a court order to collect monies due the County. These documents, therefore, have no financial value. These types of performance guaranties are not recorded in trust funds, but a listing of these instruments should be maintained by the department and a periodic inventory of them conducted. See Section 3.
1.3.4 Negotiable Instruments
Negotiable instruments are written unconditional promises to pay in money a sum certain upon demand or at a particular future time. Examples of negotiable instruments are: promissory notes, drafts or bills of exchange, checks, and certificates of deposit. Negotiable instruments must be recorded in trust funds and subsidiary ledgers. See Section 2.
2. PROCEDURES FOR PERFORMANCE GUARANTIES AND NEGOTIABLE INSTRUMENTS THAT ARE RECORDED IN A TRUST FUND AS DEFINED UNDER SECTIONS 1.3.1 AND 1.3.4 OF POLICY
2.1 Accountability
2.1.1 Trust Fund / Written Procedures / Subsidiary Ledger / Inventory
All departments/agencies/districts maintaining guaranties and negotiable instruments must have a trust fund and written procedures regarding the handling and safeguarding of these instruments. A subsidiary ledger of these instruments must be maintained which balances to the trust fund balance. The responsibility for the receipt, maintenance, and disposition of the performance guaranties and negotiable instruments is to be fixed in a single person whenever possible. That is, each department/agency/district handling guaranties and negotiable instruments should designate one employee as being responsible for ensuring compliance with this policy and related procedures. On a monthly basis, each department/agency/district maintaining guaranties and negotiable instruments should reconcile these items to their respective ledgers and trust fund. An actual inventory of the instruments themselves should be taken at least semiannually. The Auditor-Controller should be advised in writing of any needed adjustments to the trust fund of the department/agency/district.
2.1.2 Board of Supervisors/County Counsel Approval
All performance guaranties and negotiable instruments shall be presented to the Board of Supervisors or their designated representative for acceptance or rejection and for the purpose of establishing the conditions necessary for the returning of the guaranty. The conditions for return should be clearly documented at the time of acceptance. County Counsel should review and approve all guaranties/negotiable instruments as to whether or not the terms used are adequate to make the necessary assignment. Once County Counsel has approved the form of a particular type of instrument, like instruments need not be submitted for approval in like situations.
2.1.3 Subsidiary Ledgers
All departments/agencies/districts having guaranties/negotiable instruments in their possession shall maintain a ledger of all such documents which includes the following information:
  • The date the guaranty/negotiable instrument was received.
  • The reasons or purpose for obtaining the guaranty/negotiable instrument.
  • The name and address of the person/entity from whom the guaranty/negotiable instrument was received.
  • A complete description of the guaranty/negotiable instrument including type, amount, issue date, maturity date, and reference numbers such as account number, note number, bank or surety company, or other pertinent descriptive information concerning the instrument.
  • The date the guaranty/negotiable instrument was returned to its depositor.
  • The expiration date if applicable.
  • The name of the person/entity to whom the guaranty/negotiable instrument was released and, if different from the depositor, an explanation including documentation of appropriate authority. Also, a signed receipt from the person/entity to whom the guaranty instrument was released must be obtained.
2.1.4 Trust Fund Coding
The value of all performance guaranties and negotiable instruments in the possession of the department/agency/ district and any financial transaction involving a guaranty/negotiable instrument is recorded by a journal voucher in the trust fund of the department/agency/ district. Performance guaranties and negotiable instruments are recorded to Balance Sheet Account Code 8080, "Certificates of Deposit/Security Deposits," and to Balance Sheet Account Code 9200, "Balance - Trust Funds."
2.1.5 Deposit of Cash and Checks
Cash and checks received for guaranty purposes shall be deposited in the County Treasury on a daily basis by each department/agency/district in their trust fund (xxx-9200 - "Monies Held for Others"). Deposits should be made in accordance with County Accounting Procedure No. 8, "Deposits," unless the Clerk of the Board of Supervisors is holding a guaranty/negotiable instrument prior to acceptance of a bid. Once a bid is accepted, cash or checks should be deposited as described above. If rejected, these assets should be returned by certified mail, return receipt requested, or in person upon presentation of proper identification and after obtaining a signed receipt.
2.2 Security
2.2.1 Locked Safe/Restricted Access
All departments/agencies/districts are to secure their guaranties and negotiable instruments in a locked safe with access restricted to a minimum number of authorized personnel.
2.2.2 Safe Deposit Box
Those departments/agencies/districts who are unable to provide adequate security shall immediately obtain a safe deposit box to store their performance guaranties and negotiable instruments. The safe deposit box acquisition should be coordinated through the Treasurer-Tax Collector's Office.
2.2.3 Instruments Held by County
Whenever possible, guaranty instruments should be held by the County rather than with a third party. For example, the practice of accepting the power of attorney over a savings passbook left at the savings institution is to be discouraged, and the County should retain the passbook with conditional power of attorney.
2.3 Release
2.3.1 Release Conditions
Performance guaranties/negotiable instruments shall be released according to the conditions established at the time of their acceptance.
2.3.2 Acceptance/Release by Board of Supervisors
If the performance guaranty/negotiable instrument has been formally accepted by the Board of Supervisors, then it must be released by formal action of the Board of Supervisors unless at the time of acceptance, the Board's original action delegates the authority for release to someone else or specifically states that the guaranty/negotiable instrument is to be released in some other manner.
2.3.3 Acceptance/Release by Board Designee
If the performance guaranty/negotiable instrument was originally accepted by the Board of Supervisors' designee, then the release should be authorized by this same designee within the limits of the specifically delegated authority.
3. PROCEDURES FOR PERFORMANCE GUARANTIES AND NEGOTIABLE INSTRUMENTS THAT ARE RECORDED IN A TRUST FUND AS DEFINED UNDER SECTIONS 1.3.1 AND 1.3.4 OF POLICY
3.1 Accountability/Written Procedures
All departments/agencies/districts with performance guaranties that have no monetary value shall have written procedures describing the receiving and handling of these guaranties which fixes the responsibility for verifying that required instruments are received and properly filed.
3.2 Listing
A listing of all performance guaranties that have no monetary value shall be maintained, and the listing shall include the following information:
  • The date the guaranty was received.
  • The name and address of the person/entity from whom the guaranty was received.
  • Contract name/ID number.
  • Time period that the guaranty is in effect.
  • The date the guaranty was returned to its depositor.
3.3 Inventory/Secure Restricted Access/Release
At least once each year these documents must be reviewed to determine that all instruments are on file and in effect, and that all instruments listed on the ledger are physically accounted for. These instruments should be placed in a secure location with access restricted to a minimum number of authorized personnel. The release of these performance guaranties shall be in accordance with the conditions established at the time of acceptance.
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