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Investment Controls
(University of North Texas)

Elements of Investment Controls

The school district’s investment policy, investment process, program ethics/disclosure, relationships with investment providers, investment reports, and the compliance audit are the "building blocks" of investment controls.
Purpose of the School District Investment Policy
The school district investment policy provides the framework for the district’s investment program. The investment policy defines the investment program’s objectives, establishes risk parameters, and creates investment authority.

The Public Funds Investment Act authorizes a number of investments for public funds, including school district funds. Note: not all investments are appropriate for every portfolio. The investments allowable under the Public Funds Investment Act are:

  • United States government obligations
  • State of Texas direct obligations
  • Obligations of other states, agencies, counties or cities
  • Collateralized mortgage obligations
  • Bankers’ acceptances
  • Commercial paper
  • Repurchase agreements
  • Certificates of deposit
  • Share certificates
Securities and Exchange Commission-registered no-load money market mutual funds
  • SEC-registered no load mutual funds
  • Local government investment pools

The school district investment policy sets the maximum stated maturity of a particular investment and the maximum weighted average maturity of pooled fund groups. Together with the list of authorized investments, maturity limits will establish the risk parameters.

The objectives of the school district’s investment program are translated into its strategy statement. When establishing investment objectives, the most important considerations are the type(s) of funds involved and the resources available to manage the investment program.

The investment policy also establishes internal controls and monitoring and review procedures to ensure safety and adequate performance.

It is important to remember that detailed and/or unrealistic policy provisions can prevent the school district’s investment program from operating properly.

How the Investment Process Controls Risk
Defining the investment process through documentation of procedures can reveal where risk may occur. Risk can never be eliminated entirely, but it can be controlled.

Ongoing investment training is now required, but investment officers should be encouraged by their school districts to exceed the minimum requirements for expanding their investment knowledge. Investment education does not have to be expensive or time-consuming.

The separation of functions within the organization (e.g., school district) is the most effective means to control risk. Separation of functions is also the most difficult element of control to implement in small organizations (e.g., small school districts).

The Role of Ethics and Disclosure in Controlling Risk
Public funds management is always subject to public scrutiny. The Public Funds Investment Act recognizes the importance of ethics by requiring the disclosure of business and personal relationships.

The school district investment staff, the investment staff supervisors, and the school board should adhere to the prudent person standard in managing and governing the school district’s investment program. The Public Funds Investment Act includes the prudent person standard of care in its provisions (see Chapter 2256.006, Government Code).

Relationships with Investment Providers
Competitive selection of investment providers should be instituted. Where or not a formal selection process, such as a Request for Proposal (RFP) is used, the criteria and method of selection for an investment provider should be documented by the school district.

Depository law governs the selection of the depository bank but not necessarily the placement of certificates of deposit.

The Public Funds Investment Act has extensive disclosure requirements for investment pools and mutual funds. Investment pools and mutual funds (but not money market mutual funds) are required by law to be rated. These investments should also be reviewed for consistency with the approved school district investment policy and strategy.

The 1997 amendments to the Public Funds Investment Act require that brokers be approved and reviewed annually by either the governing body or the investment committee designated in the school district investment policy.

Reporting Requirements in the Public Funds Investment Act
Reporting requirements in the Public Funds Investment Act require reports that provide oversight of the school district investment program and communicate the investment program’s results to the school board, community and other interested parties. In addition the reports can demonstrate the performance of the school district’s investment program.

The elements of the required reports must include a summary statement of each pooled fund group prepared in compliance with Generally Accepted Accounting Principles (GAAP). Fully accrued interest must also be included.

The Annual Compliance Audit Checklist
The annual compliance audit checklist must contain the following:
  • Presence of an approved investment policy and documentation of the governing body’s annual review.
  • Designation of investment officers by the governing body and verification that such designation is current.
  • Confirmation that the training requirements have been met through an independent source approved either by the governing body or the designated investment committee.
  • Presence of quarterly reports with all the required elements. The reports must be annually reviewed by an independent auditor unless the investment portfolio contains only certain investments (as specified in law).
  • Documentation of internal controls through adherence to the school district investment policy, strategy, and any written procedures. Copies of all current contracts/disclosure documents should be on file. Investment ownership and collateral interest should also be examined.
  • Presence of a "written instrument" signed by a qualified representative of a bank, pool, or brokerage firm. Presence of a brokers’ list approved either by the governing body or the designated investment committee.
  • Demonstration that interest from internally pooled funds is distributed fairly.