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

7. Develop a strategy for earning the best rates.

The Texas Education Agency’s Financial Accountability System Resource Guide (FASRG) defines investments as all securities and other assets acquired primarily for the purpose of obtaining income. All cash and cash equivalents have the ability to earn interest. Switching to an interest-earning account, or using a sweep account to move any excess cash into an interest-bearing account can help obtain income. Checking accounts should be reviewed to determine if there is an opportunity to earn interest. If the account earns no interest, it is recorded in the accounting records as a deposit, rather than an investment.

When a district is developing its investment strategy, all assets should be considered and placed in interest-earning vehicles if possible. It is the job of the investment officer to earn the best rate available on the assets given different situations and their intended uses.

To determine the intended use of the funds, the district needs a cash flow analysis. The analysis tells the investor when given amounts of cash will be needed and, therefore, the length of time that the funds can be invested. After a cash flow analysis directs the maturity of the investment, a policy prescribes the authorized investments that can be used.

The amount to invest and the length of time that it can be invested will put certain limitations on the district’s market choices. If policy prescribes a weighted average maturity and/or maximum maturity, this will be another condition of the investment strategy. With these conditions in mind, the school district can competitively bid the time and type of investment and choose the best rate available meeting those conditions.

The Public Funds Investment Act requires each district to write a strategy statement for each type of fund invested. The strategy statement must address:

  • the suitability of the investments;

  • the preservation and safety of principal;

  • liquidity;

  • marketability of the investment;

  • diversification; and

  • yield.

The school district should address these same issues every time that money is invested.

In a simplified example, let’s say that a district needs funds in 200 days for payroll. The policy allows the use of a pool, CDs and T-Bills. The investment officer or broker that the district employs checks the rates for all three types of investments and chooses the one offering the highest rate of interest being paid for investments that mature before the end of the 200 days. However, it is not simply a rate comparison.

If the investor thinks that rates are rising, the best investment might be the pool that will reflect the rise. If rates are generally falling, the investor will want to lock in today’s higher rate for the 200-day period. And in the event that it appears that rates are rising, but suddenly the rates begin to drop, the district may move the dollars from a variable-rate investment instrument to a fixed-rate investment instrument. Good brokers search for the securities that best meet the investor’s needs and can often advise the investing district about its options.

As investments are made to match liabilities, most districts end up with a laddered portfolio. Each liability identified by the cash flow is matched to a specific investment or security and the resulting portfolio has these securities maturing regularly to pay the bills. It is called a ladder because a graph of the portfolio maturities would appear regular and almost equal to reflect the liabilities that are also normally regularly timed and relatively equal in size. Some larger districts will have funds available for longer-term investments, but even those will have a large portion of the portfolio in a laddered structure.

An important part of every portfolio is liquidity, which measures the ease with which an investment instrument can be converted to cash. And every portfolio must have a portion that is liquid, which is in cash or a cash equivalent. Unexpected liabilities that may occur. A high school boiler may need to be replaced or the district may need emergency funds to pay for extra teachers because of an unexpected enrollment surge.

Components of an Investment Portfolio
Most investment portfolios, regardless of size, will have three components:

  • liquid assets that can be tapped immediately;

  • short-term investments that will be available within a shorter time frame; and

  • longer-term investments that typically earn higher rates of interest but are more difficult or costly to liquidate should cash suddenly be needed.

Larger districts also may have even longer-term investments because they typically have larger sums of cash available for investment at any given time. Each district defines the length of these investments in accordance with its own needs and cash flows. To most small districts, short term is 1-6 months and longer term is 6-12 months.

Traditionally, districts have used only time deposits (CDs) bought from their local banks as their investments. Since all CDs are collateralized in Texas, there is little risk of loss on bank defaults. But that translates into lower interest rates, because investors are rewarded for taking risk.

Currently however, under the law and its standard of care, the district's cash should be used for maximum investment benefit. It is the responsibility of the district to thoroughly research its options and choose an appropriate strategy that safeguards funds but also earns a reasonable market yield. Since every investment has some risk, the investor must research those risks and follow some set strategy to minimize unacceptable risks.

Some of the basic points to consider in making investment decisions are:

  • Matching, to the extent possible, the investment maturity to the most distant liability date. For example, the district needs $10,000 to pay for building repairs in January, and another $20,000 for repairs in March. Provided there is sufficient cash on hand to pay both bills, invest $20,000 of excess cash so that it will mature in March and $10,000 to mature in January rather than investing $30,000 to mature in January. This course of action allows the district to match liabilities but also to attain the normally longer and higher rates.

  • Compare all the various investment types available to the district. No investment is always going to be the best. Do your comparison shopping on all the types authorized for each investment decision.

  • Competitively bid each investment. No one broker or bank is always going to have the best rate. At least three bids/offers should be taken to ensure that the best rate is received. It is also important to remember to compare apples to apples. Ask if CDs are all quoted on a 360 or 365 days basis and if you are comparing yield and not other rates.

  • Document each purchase with a trade ticket of some type, which records all the information and that can be used to compare to supporting documents like safekeeping receipts and confirmations later.

  • Consider all the costs of a transaction. Buying a security may not be better than a pool for example when clearing and safekeeping costs are included.

  • Reconcile regularly to broker and bank confirmations.

  • Report each security and interest-bearing investment on your monthly report.

A new service available, which helps small and large districts, is Treasury Direct from the U.S. Treasury. Districts wanting to buy T-Bills or T-Notes can do so online (or otherwise) directly from the Treasury and have them safekept at the Federal Reserve.

Local Government Investment Pools
Many small districts use local government investment pools for all their investment needs. These commingled investment vehicles address all the strategy requirements required by law and offer current market rates through an economy of scale and professional management. Larger districts use the pools for the liquidity portion of their portfolios for the same reason. The biggest advantage of pools is having a full-time professional making the "big" decisions while the district reaps the benefits.

There are several pools available in Texas to help districts. There are different types of pools, however, and the investor should understand the pool’s objectives and structure. Small districts normally need pools that strive to maintain $1 net asset value (constant dollar pools). A constant dollar pool is a type of money market fund that offers safety of principal and liquidity. The fund maintains a stated objective of a $1 share value for all participants, which means that the dollar value of the original deposit is expected to be maintained through conservative management practices. Even though these are extremely conservative, their size and active management create rates normally above both CDs and Treasury Bills.

Brokers
When buying securities, a district will most likely use a broker to search the marketplace for the best rates available—within the limitations set for that decision by the district (for example, time limits and authorized investment types.) But no broker will always have the best investment idea. Seeking suggestions from a minimum of three broker/dealers is advisable.

Investment Advisors
Some larger districts use investment advisors to manage its portfolios. An advisor does not sell securities but instead manages or provides advice on a portfolio in accordance with the district’s unique policy and cash flow. As with brokers, districts are required to give a written copy of the district’s investment policy to any investment management firm that is under contract with the district to invest or manage the district’s investment portfolio. And the investment management firm is required to certify in writing that the firm has reviewed the district’s policy and acknowledges its responsibility to implement reasonable controls to comply with the policy.

The Public Funds Investment Act requires monitoring and reporting on the portfolio quarterly, and this reporting is an important part of the investment strategy. Reporting will show whether the goals and objectives set by the board are being met and whether the risks to necessary liquidity and credit quality set in policy are being controlled.

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.

Purpose of Investments
(Treasury Operations, Texas Comptroller of Public Accounts)
The three basic purposes of investments: safety, liquidity and yield.

Types of Investments
(Treasury Operations, Texas Comptroller of Public Accounts)
The various types of allowed and disallowed investments, the advantages and disadvantages of different types of allowed investments and their risks.

Investment Decision Making Information: From Wall Street to the Web
(Patterson and Associates)
Information available for school districts making investment decisions.

State and Local Government Series Securities:
http://www.publicdebt.treas.gov/spe/spe.htm

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.