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10 Key Steps For Managing School District Investments: | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | Glossary |

10. Use the experts when you need them.

Most Texas districts lack the technical expertise or the time to monitor investments each day, and smaller portfolios do not usually warrant constant attention to investments. Some investment decisions require specialized expertise. There are various types of experts with whom a district can consult for assistance. Some districts are reluctant to spend money for these services. In many cases, however, the expenditure of funds for these services can and will result in decreased risk and increased revenues for the district.

Who are these experts? Moreover, what sort of services can they provide? It pays to know what resources are available and how to obtain and manage those resources should the district decide to use them.

Banks offer depository services that basically include the traditional banking services such as deposits and withdrawals. They can also offer debt issuance and investment advice particularly to small districts. In Texas, each bank must certify that it has reviewed the district’s investment policy and acknowledge that the bank has implemented reasonable procedures to ensure compliance with the district’s policy.

Broker/Dealers are registered with the Securities and Exchange Commission to sell securities to entities. Brokers simply broker the trades between two institutions (the district and the seller of the security), while a dealer actually has an inventory of securities to sell to the entity. In either case, a broker/dealer can provide current market information to the district and can canvass the markets for the best rates. To ensure the district is receiving fair market prices, it is imperative to do competitive bidding on all securities and ensure that all securities are delivered to the district’s depository or safekeeping bank (custodian) to perfect the district’s ownership. In fact, Texas law mandates that all securities are settled delivery versus payment. There are two methods for delivery of investment securities, one of which is delivery versus payment, the other is delivery versus receipt. Delivery versus payment occurs when securities are delivered before payment is made, which secures the assets for the buyer. Delivery versus receipt occurs when securities are delivered via the exchange of a signed receipt for the securities. This is considered to be less secure than delivery versus payment. This is considered a secure method of delivery. This means that no broker/dealer should ever hold the district’s securities. In Texas, each broker must certify that he has reviewed the district’s investment policy and acknowledge that the broker has implemented reasonable procedures to ensure compliance with the district’s policy.

In choosing a broker to work with the district, you should have some basic information about the brokers and their firms. The district can develop a short questionnaire that gathers information about the firm, its address and contacts, its credit and in which markets it specializes. Other important requirements for brokers might be their National Association of Security Dealers (NASD) registration, their Texas registration with the State Securities Commission and references from other districts or trusted advisors. According to the Public Funds Investment Act, brokers should be provided a copy of the district’s investment policy and certify that they will comply with the policy. The district is also required to annually review, revise, and adopt a list of qualified brokers who are authorized to engage in investment transactions with the district.

Financial Advisers offer financial counsel on debt issuance and sometimes about reinvesting bond proceeds. Some charge a fee and earn commissions on the products they recommend. Other advisors only charge fees and do not sell any product or accept commissions. Some are generalists, while others specialize in specific areas such as investing, insurance, taxes or other areas.

Investment Advisers must be registered with the Securities and Exchange Commission and must abide by the rules of the Investment Advisers Act. An investment adviser acts as a district’s adviser and agent in the marketplace. They advise on particular securities or manage the portfolio of a district. Some also provide consulting on cash management. Investment advisory services usually specialize in a particular kind of investment (fixed income or stocks) or type of funds (public funds or private individual investor’s funds). They charge a fee for their services, which can be a flat fee or a fee based on the assets under management.

Investment Advisers are often called Investment Counsel or Investment Managers or Portfolio Managers or Money Managers or Pool Managers when they have the fiduciary responsibility for managing pools, treasuries, agencies, commercial paper or other security types. Their responsibility is the optimization of the portfolio. The district can grant them that responsibility partially or fully. Regardless, the adviser must manage the funds within the parameters and restrictions of the district’s investment policy and be fully accountable to the district. In Texas, each adviser must certify that the district’s investment policy has been received and reviewed and acknowledge that the adviser’s firm has implemented reasonable procedures to ensure the policy is followed.

Bond counsel is an attorney or law firm that prepares the legal opinion for a municipal bond issue. Their "opinion" is part of the official statement (OS) that is the municipal equivalent of a prospectus for the buyer of the bonds. These individuals or firms specialize in public borrowings and charge a fee for services rendered. These fees are accounted for and charged against bonds as a cost of debt issuance.

Selecting an Expert
Most of these services are considered professional services, and therefore competitive bidding is not required, however the district may be well served by issuing a formal request for proposals so that services and fee structures may be compared. Price comparisons, credentials, registrations and reference checks are highly recommended.

Expectations for these experts should be clearly defined and agreed to before entering into any sort of written agreement for services. Before even contacting one of these experts for a proposal, the district should know what it wants and needs. Some questions that district officials should ask themselves are:

  • What services is the district looking for?

  • Will the district participate in decisions?

  • How will the board ensure district policies are followed?

  • Are there confidentiality or other agreements needed to protect the district’s interests and ensure compliance with board policy?

  • What results is the board expecting?

  • When does the board expect to see results?

  • Will the service pay for itself?

  • How will performance be assessed?

  • How, when and under what circumstances will services be terminated by both parties?

  • What type of bonding, liability insurance or other assurances can be provided to the district to ensure that assets will be protected?

  • Will there be monthly or quarterly reports on progress?

  • Will there be regular reports to the board?

A contract with an investment management firm may not be for a term longer than two years. The board of trustees of the district must make a renewal or extension of the contract by order or resolution.

Contract Monitoring
Regular monitoring of the contract is critical. Designate someone to be responsible for monitoring the contract. Establish regular contact with the expert. The Public Funds Investment Act requires quarterly progress reports to the board. In addition, the Act requires that the district, in conjunction with its annual financial audit, perform a compliance audit of management controls on investments and adherence to the district’s investment policy. Provide for termination of the contract in cases of non-compliance or poor results.

No matter what services are acquired, a district should never relinquish total control over its investments or debt issues. And the use of an expert to assist the district does not relieve the district of the responsibility for monitoring its investments to ensure they are in compliance with the investment policy. In the long run, it will be the district that is held accountable by the public.

Additional Resources:

Below is a list of additional resources you may find helpful. Information in the documents and URLs listed below are not endorsed by this agency, but only provided as resource material. For more information on these resources, consult the bibliography.

The Benefits of Using an Investment Advisor
(First Southwest Asset Management)
Benefits of using an investment advisor when investing school district funds.

Choosing an Investment Advisor
(Laura Fowler, Henslee, Fowler, Hepworth and Schwartz)
Strategies for choosing an investment advisor, including the types of certification different financial planners may obtain and the regulatory agencies that review the activities of investment advisors.

Conclusion
The primary goal of any school district’s investment strategy is to obtain a reasonable market rate of interest on all investments, without putting the district’s assets at risk. Accomplishing this goal requires a great deal of planning and expertise—expertise that many smaller and some larger districts may not possess.

While managing funds presents a risk of losing money, albeit very small in some cases, there is also a risk of not earning as much as possible. A balance must be established between the risk of avoiding a low return and the risk of earning less than you could. TSPR has found that the most successful districts have a plan that recognizes the district’s unique needs and builds a foundation for safety, liquidity and yield through a combination of investment strategies.

INNOVATIONS IN AMERICAN GOVERNMENT

The Texas School Performance Review won a 1999 Innovations in American Government award for its efforts to improve education. The John F. Kennedy School of Government of Harvard University administers the awards in partnership with the Council for Excellence in Government. They are funded by the Ford Foundation, which gave TSPR and nine other award winners $100,000 grants to replicate their cutting-edge programs across the nation. Learn more about the Innovations in American Government and this year's other winners at our web site www.window.state.tx.us/txinnovator/ti9911/special.html.

If you would like more information on any aspect of the Texas School Performance Review, please visit the Comptroller's Web site at http://www.window.state.tx.us or call 1-800-531-5441 extension 5-3676.

IMPORTANT NOTICE: The information in this document is presented solely as technical assistance and as a resource available to school districts. The information does not serve as a substitute for legal advice nor replace the independent judgement of a district's governing body concerning its investments. A district should consult its attorney or other appropriate counsel such as its investment adviser to resolve questions about its investment transactions.