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

8. Monitor your investments and deposits.

Monitoring investments means regularly checking to see if the district’s money is safely earning a competitive market rate and that purchases comply with statute. By law, districts must report on a quarterly basis. However, one of the primary purposes of monitoring is to give the investment officer warning about potential problems with the portfolio. Some districts have found it useful to require monthly reports on the performance of their portfolios. Monitoring book values, market values per instrument invested and their changes can be accomplished using a spreadsheet. Districts also can also use free tracking by outside brokers or pay investment consultants for monitoring services.

Investments are defined in TEA’s Financial Accountability System Resource Guide as securities and other assets acquired primarily for the purpose of obtaining income or profit. The primary purpose of a checking account, however, is not to make a profit and checking accounts are therefore accounted for as a deposit rather than an investment in the district’s accounting records. But cash or cash equivalent assets all have the potential to earn interest.

On any given day, interest rates can change. Most interest rates move up and down as the Federal Reserve raises or lowers prevailing interest rates for short-term borrowing. Often, districts will earn a higher yield by investing for a longer period of time or investing in different security types. By carefully monitoring pool rates and comparing them to agency and commercial paper yields, it is possible to determine their relative value.

One basis point, a measure used to quote yields on bills, notes and bonds, is equal to .01 percent of yield. One percentage point (1 percent) is equal to 100 basis points. When investments total hundreds of thousands and even millions of dollars, the difference between 6 percent interest and 6.5 percent interest, or 50 basis points, can translate into a significant sum of money. For example, the effect of 50 basis points on a $1 million investment is $5,000 in additional annual income.

Therefore, if the money manager has the flexibility to move money between investment instruments at little or no cost to the district, the district can earn a higher yield, or rate, on its investments. The ability to adjust investment allocations frequently, however, depends on the district’s having qualified staff with the time to monitor the market and move money when appropriate.

Consequently, some districts with considerable sums to invest may hire investment managers to manage the district’s investment portfolio within the policies established by the board. Others simply opt to leave all money in their local banks in a lower yielding instrument or account. Still others have chosen investment pools, or a group of investors that have joined together and used their combined resources to invest in higher-yielding instruments that would not otherwise be available to smaller investors.

Another key to monitoring investments is understanding what type of investment instruments work best for the district. A fixed-interest rate is good for investors when interest rates are falling because the investors are guaranteed the rate on the day the instrument was purchased, no matter how low the rate drops before the instrument matures. But during times when interest rates are rising, an investor would lose money with a fixed-rate instrument that remained at the lower rate. However, even the experts can not predict the direction rates will move with any regularity, so a district is best served by diversifying its investments.

Certificates of Deposit (CDs) and certain bonds have fixed-interest rates. With CDs, there is little risk that the bank will default on its obligation to the investor, therefore, the interest rates are typically very low. Also, CDs are considered illiquid, meaning there is no secondary market or opportunity to sell the investment should the district need money before the CD’s maturity date. If the district chooses to withdraw its funds early, it must pay a sizable penalty. Therefore, the purchase of investments should be made with the intent and ability to hold the investment to maturity.

For many districts, investment pools represent a desirable option. The biggest advantage is that the pool employs experts to make the "big" decisions, and the school district benefits from the pool’s ability to invest in instruments to which smaller investors would not have access. There are several major investment pools available to districts in Texas. Each of them offers daily liquidity, which means that districts can deposit and withdraw funds daily without penalty. Because of the size of these pools, interest rates exceed the interest paid on CDs and U. S. Treasury bills and short-term securities issued by the U.S. Treasury.

The major challenge in deciding which pool is most desirable is the yield or rate of return on investments. The good news is that joining multiple pools allows a district to pick and choose the pool that is paying the highest rate of interest.

Safekeeping Investment Securities and Collateral
All investments in treasuries, agencies and commercial paper should be held in the district’s name and safekept by the trust department of the bank. The bank issues safekeeping receipts to the district, listing par amount, maturity date, discount/coupon rate and the CUSIP (Committee on Uniform Securities Identification Procedures) number. These receipts should be checked when received from the bank and filed in a secure place.

CUSIP numbers track individual securities. This is a unique identification number attached to each security that allows dealers, brokers, bankers and others to track and keep up with securities and their movements. CUSIP is a standard alphanumeric system of identification of security issues that is used throughout the financial community. It is a nine-digit code assigned to each issue. The CUSIP is like a social security number for each issue. There is only one for each issue, which can very specifically identify the security. For example, a CUSIP number could be 313396ME9.

In the process of investing, it is important that securities a school district purchases are kept safe. Typicaly a school district buys securities electronically, and securities are delivered before payment is made, which secures the assets for the buyer. Once purchased, they must be kept in a safe place with the school districts’ names attached to them. This task is typically performed in a bank’s safekeeping department. However,in selecting a bank for safekeeping, be warned of potential problems with independence.

For example, the district’s depository bank is Bank A. The collateral may be safekept at any Bank (B through Z), however not by Bank A. Bank B through Z could be in the same town or out of town. This third-party bank (B through Z) will issue a receipt that lists the collateral pledged by Bank A to the district. This collateral cannot be released by Bank B without the approval of the district.

A surety bond or securities collateralize all of a district’s deposits in its depository. The securities for collateral should be held at either a third-party bank or the Federal Reserve Bank or Federal Home Loan Bank.

After securities have been received by the bank, ask for an accounting to show what has been received. The district should carefully check the par amount because discrepancies can occur from what was transferred and what the receiving bank shows it has received.

While this process seems fairly simple, care should be taken to ensure that what the district owns has been transferred and received in like fashion. Human error in keying in amounts transferred could be disastrous and a nightmare for the district to correct.

In the cash management process, it is also important that cash in the bank is fully collateralized. This means that the funds a school district’s depository bank has on deposit should be secured by securities of equal value plus 2 percent. This collateral should be monitored daily to ensure the safety of the school district’s money. The amount and cost of a bank’s charge for over collateralizing can be negotiated with the depository bank.

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)
Three basic purposes of investments: safety, liquidity and yield.

Choosing and Using Benchmarks
(Patterson and Associates)
How to use benchmarks to create a sound investment portfolio.

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.