In Investing School District Funds
A school districts investment policy, strategy, and procedures provide the basis for managing risk in the investment of its funds. Risk can never be completely eliminated, but it can be controlled. The districts investment policy provides the framework for the investment program. The policy defines the programs objectives, sets parameters, and creates investment authority. Acceptable risk levels are established through approval of authorized investments, selection of maximum maturity by investment type and maximum weighted average maturity for internally pooled funds, limitations on investment of funds in any one investment type, and the choice of an investment performance benchmark.
The investment programs objectives as defined in the investment policy become the source of the programs investment strategy. The most important considerations in formulating strategy are the type of funds involved and the resources available to manage the investment program, i.e., implementation of a complex strategy may increase staff and/or technical resource requirements. Cash flow analysis will determine the investment time period for the districts funds as well as the need for readily available funds. The more reliable the cash flow analysis, the more confident the investment officer can be in the choice and placement of investments.
An investment procedures manual should be developed and maintained. The manual should address internal controls, employee competence, ethics and disclosure, relationships with investment providers, investment reporting, and monitoring. A system of internal controls should protect each element of the investment process from the investment decision to transaction settlement. The investment function should incorporate separation of duties so that no one individual is responsible for the entire process. Pre-employment screening, regular training, and periodic audits can be used to assure employee competence.
Public funds management is always subject to public scrutiny. The investment policy and the procedures manual should recognize the importance of ethics by including the Public Funds Investment Act requirement to disclose the business and personal relationships of investment officers. Competitive selection of investment providers should be instituted. Whether or not a formal selection process is used, the criteria and method of provider selection should be documented in the manual. (The Act requires that a brokers list be approved and reviewed annually either by the districts investment committee or board of trustees.)
Regular investment reporting is required by the Public Funds Investment Act. The procedures manual should assign responsibility and define the process of preparing the reports as well as identifying information sources for the reports. Finally, the manual should address how monitoring of the program will be accomplished. If the district has designated in the investment policy that an investment committee will be established, the manual will detail committee member selection and responsibilities.
One objective of the reporting and review of the portfolio performance should be an assessment of rate of return relative to comparable benchmarks. Once an investment policy has been developed and the investment strategy is determined, the identification of comparable benchmark standards should be identified. For example, if the investment strategy determines that the overall weighted average maturity of the portfolio should not exceed one year and that the portfolio should only contain money markets and short-term U.S. Treasuries, perhaps one of the constant maturity Treasury benchmarks would be appropriately targeted. The point of selecting comparable benchmarks and measuring performance relative to that benchmark is to identify risk. If the performance of an organizations portfolio is far higher than a comparable benchmark, this should be an indication of possible risk-taking in the program. Should the portfolios return fall far below the benchmark return, perhaps the program is being managed far too conservatively.
Another facet of the review process is to ensure that the portfolio is adequately diversified and not too concentrated in a particular security-type, a particular maturity range on in a particular issuer name. Proper diversification allows a portfolio to spread and mitigate risk. Other articles providing a more in-depth discussion of diversification can be found by utilizing the website search system and the word "diversification."