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

2. Establish sound policies.

School boards are responsible for setting the investment policy and the investment strategy for the district. But what is a sound investment policy? The answer can be very different for different districts; all district officials however, should understand certain basic points, regardless of their district’s size.

Section 2256.005 of the Government Code requires school districts to annually review and adopt local investment policy and strategies. The local investment policy must be written, primarily emphasizing the safety of principal and liquidity, and address investment diversification, yield, maturity and the quality and capability of investment management.

The school district investment policy must include the following elements:

  • a list of the types of authorized investments in which the funds of the school district may be invested;

  • the maximum allowable stated maturity of any individual investment by fund owned by the school district;

  • for pooled fund groups, the maximum dollar-weighted average maturity allowed based on the stated final maturity date of the portfolio of any individual portfolio managed by the school district;

  • methods to monitor the market price of investments acquired with public funds; and

  • a requirement for settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis, according to Section 2256.005(b)(4) of the Government Code.

A school district is also required to adopt a separate written investment strategy for each fund or pooled fund group (portfolio) under its control, according to Section 2256.005(d) of the Government Code. Each investment strategy must describe the investment objectives for the fund using the following priorities in order of importance:

  • Understanding the suitability of the investment to the financial requirements of the entity;

  • Preservation and safety of principal;

  • Liquidity;

  • Marketability of the investment if the need arises to liquidate the investment before maturity ;

  • Diversification of the investment portfolio; and

  • Yield.

Each school district must customize its investment policy and strategies to meet board and administrative objectives as defined, as well as the unique conditions and resources of the district. School districts are required to review annually their investment policies and investment strategies, according to Section 2256.005(e) of the Government Code. Furthermore, the district must adopt a written instrument, such as a resolution, stating that it has reviewed the investment policy and investment strategies, and record any changes made to the policy or strategies.

A school district is also required to designate one or more of its employees (or other designee such as an investment adviser) as its investment officer to be responsible for the investment of funds, according to Section 2256.005(f) of the Government Code.

Training Required
Investment officers, treasurers and chief financial officers must attend two types of training: (1) at least one training session containing at least 10 hours of instruction relating to investment responsibilities within a year after taking office and (2) 10 hours of training every two years thereafter. The Public Funds Investment Act requires training to be provided by an independent source approved by the school district’s board or a designated investment committee who advises the investment officer as provided for in the district’s investment policy, according to Section 2256.008(a) of the Government Code. Training must include education in investment controls, security risks, strategy risks, market risks, diversification of investment portfolio, and compliance with the Public Funds Investment Act, according to Section 2256.008(c) of the Government Code.

Written Quarterly Report
Not less than quarterly, the investment officer of a school district must prepare and submit to the school board a written report of investment transactions made by the district, following generally accepted accounting principles (GAAP), according to Section 2256.023 (a) of the Government Code.

The report must include (1) a detailed description of the investment position of the school district on the date of the report and (2) a summary statement of each pooled fund group (portfolio), including:

  • beginning market value for the reporting period;

  • fully accrued interest during the period (accrued interest minus coupon payment: not cash basis);

  • additions and changes to the market value during the period;

  • ending market value for the period;

  • statement of the book value and market value of each invested asset at the beginning and end of the reporting period;

  • statement of the maturity date, if applicable, of each invested asset;

  • statement of the account, fund, or pooled fund group for which each asset was acquired; and

  • statement of the compliance of the investment portfolio with the school district’s investment policy and investment strategies and with state law, according to Section 2256.023(b) of the Government Code.

In addition, the report must be prepared jointly by all investment officers of the district and be signed by each investment officer, according to Section 2256.023(b)(2) and (3) of the Government Code.

Considerations in Developing an Investment Policy
There are at least five variables that school boards must consider as they develop investment policies: the source of the funds, the amount of money available, the length of time that the money is available, the market rate that the board expects to achieve and the amount of risk the board is willing to take to achieve the desired income.

Investments can range from small dollar amounts that are only available for a matter of days or hours, to operating funds available for approximately a year, to millions of dollars that result when municipal bonds are sold for construction projects that may not be used for a year or more. And while municipal bonds are the single largest lump sum of cash that districts may have to work with, bonds are not the only source of funds for investment.

All school districts, even the smallest ones that are particularly strapped for cash, have money to invest. Funds sitting in low or no interest bank accounts or not yet deposited are funds that can earn interest. The structure of bank services can make districts money. Cash flow analysis can identify when funds are needed and funds that can be invested for longer periods.

With the exception of certain special districts and open enrollment charter schools, every school district in the state collects property taxes, and most of those taxes are collected from December through February of each school year. All of the money is not spent immediately; rather some is used incrementally throughout the year. There is money that may be available for longer-term investments.

Districts also receive some portion of their revenues from the state. On average, the state provides about 46.1 percent of district revenues, with property wealthy districts getting less, less frequently and property poor districts getting more, more frequently. State payments are sent to districts periodically over the year. A month or more may lapse between the time that state money is received and expenditures are made from those funds. These monies may only be invested for a few weeks or days, but even these short-term investments can earn money.

On any given day of the week, districts have six to 100 active bank accounts, depending on the size of the district. Some of these accounts are interest bearing and some are not. Money moves in and out of those accounts daily. And, these are monies that can be invested for short periods of time, even invested overnight.

The strategies for investing for longer periods are significantly different from the strategies used for short-term investments. For some school districts, longer-term investments are defined as 90 days or longer. Only a district’s own cash flow analysis will define cash use and appropriate strategies.

For example, when a district knows that it will not need a given amount money for a period of three months or more, the types of investment instruments considered appropriate might include certificates of deposit, agency notes and commercial paper that yield higher rates of interest. The downside is that these longer-term investment instruments may be subject to interest rate risk in the event that market interest rates increase. For example, if a district invests in a fixed rate instrument that pays 3 percent interest and the rate rises to 4 percent during that period, the district will have lost the opportunity for a higher rate of return. Therefore, board policy must be very clear about what dollars can and should be invested in instruments with early withdrawal penalties (such as Certificates of Deposits) or market price risk (such as securities). And the board must be prepared to consider the ramifications of spending decisions that might require early withdrawal of those funds.

Once the board fully understands what money it has available or anticipates having available in the future for investment purposes, it must then set the administration’s investment parameters. Those parameters should be based upon the benchmark yield that the board has established, the amount of risk the board is willing to assume in order to achieve the desired income and the expertise and time available to manage the investments.

For example, a savings account in a bank or a certificate of deposit that is fully insured by the Federal Depository Insurance Corporation (FDIC) pays a lower interest rate because it has no market or volatility risk, but it does have collateral risk and risk of withdrawal penalties. Volatility risk is the risk that a specific security price will increase or decrease by greater increments than the general market. Collateral risk is the risk that the market value of collateral pledged to secure a deposit or an investment will not be sufficient to pay the principal of the investment.

The Public Funds Investment Act and the Texas Education Code contain a list of investment instruments that are prohibited by law because they are deemed to be too risky for governments or school districts. The school board’s challenge is to examine all of the types of investments available to them and the capabilities of staff who will be administering the policy and set workable parameters for staff to follow.

While the Act lists all the types of investments, it is up to the board to tailor that list to its district. These parameters should authorize various types of investments for the many varieties of money. For example, in a smaller district with few staff resources to monitor the marketplace, a strong depository contract that allows funds held in the bank to earn a yield and one or more local government investment pools may be appropriate for both short and long-term investments.

In a moderate to large-sized district with the staff to conduct more extensive market analysis, some combination of investments in agency notes, commercial paper and local government investment pools may be possible and more appropriate. When a district has funds that it will not need for a period of three or more months, the district may want to consider investing in securities with higher interest rates and longer maturity dates. External sources of investment assistance or advice are available to help districts decide on the best approach for them.

Interest earnings can make it possible for even smaller districts to hire an extra teacher, buy needed technology or simply keep up with inflation between the time that bonds are issued and construction projects are complete. During 1998-99, for example, school districts in Texas reported interest earnings of $664 million. Once policies and strategies are in place, the administration should report quarterly to the school board and show board members how the policies are affecting the yield, positively or negatively.

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.

Public Funds Investing in Texas
(University of North Texas) An overview of developing an investment policy, including the requirements of the Public Funds Investment Act and the necessary investment controls.

Investment Controls
(University of North Texas)
The elements of investment controls, the purpose of the school district investment policy, the role of ethics and disclosure in controlling risk, relationships with investment providers, and reporting requirements.

Sample Investment Policies
For illustration purposes only, the following school districts have granted permission for use of their investment policies as samples for other school districts to review. Once at the Web site, type "investment" in the search option.

Allen ISD
http://www.tasb.org/policy/pol/private/043901/

Eanes ISD
http://www.tasb.org/policy/pol/private/227909/

Mansfield ISD
http://www.tasb.org/policy/pol/private/220908/

North East ISD
http://www.tasb.org/policy/pol/private/015910/

Paris ISD
http://www.tasb.org/policy/pol/private/139909/

Round Rock ISD
http://www.tasb.org/policy/pol/private/246909/

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.