Skip to content
Quick Start for:

Public Funds Investing in Texas
DeeAnn Cheatham
University of North Texas

References used:
MTA model Investment Policy
City of Denton Investment Policy
City of Mesquite Investment Policy
City of Dallas Investment Policy
Public Funds Investment Act
Texas Association of Counties Sample Investment Policy

Developing an Investment Policy and Strategy

  1. Scope — Which funds held in the custody of the government does the policy apply to? These funds need to be listed in the investment policy.

    Sample Language — Scope
    This Investment Policy shall govern the investment of all financial assets of the entity. These funds are accounted for in the entity's Comprehensive Annual Financial Report (CAFR) and include: 1) General Fund; 2) Special Revenue Funds; 3) Capital Projects Funds; 4) Enterprise Funds; 5) Trust and Agency Funds, to the extent not required by law or existing contract to be kept segregated and managed separately, and 6) Debt Service Funds.

  2. Prudence — Investment officers acting in accordance with written procedures and the investment policy and exercising due diligence shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

    Sample Language — Prudence
    Investments shall be made with judgment and care — under circumstances then prevailing — which person of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probably safety of their capital as well as the probably income to be derived. The standard of prudence to be used by investment officials shall be the "prudent person" standard and shall be applied in the context of managing an overall portfolio. Investment officers acting in accordance with written procedures and the Investment Policy and exercising due diligence shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is take to control adverse developments. In determining whether an investment official has exercised prudence with respect to an investment decision, the determination shall be made taking into consideration the investment of all funds over which the official had responsibility rather than consideration as to the prudence of a single investment and, whether the investment decision was consistent with the City's Investment Policy and written investment procedures.

  3. Objectives — The investment objectives and strategies must be included in an investment policy. Objectives must be stated using the following priorities in order of importance: 1) understanding the suitability of the investment to the financial requirements of the entity; 2) preservation and safety of principal; 3) liquidity; 4) marketability of the investment if the need arises to liquidate the investment before maturity; 5) diversification; and 6) yield. Strategies for each individual fund or group of funds under the entity’s control must also be developed.

    Sample Language: Objectives
    It is the policy of the "Entity" that, giving due regard to the safety and risk of investment, all available funds shall be invested in conformance with State and Federal Regulations, applicable Bond Resolution requirements, adopted Investment Policy and adopted Investment Strategy.

    In accordance with the Public Funds Investment Act, the following prioritized objectives (in order of importance in accordance with Section 2256.005(d) of the Act), apply for each of the entity's investment strategies:

    A. Suitability — Understanding the suitability of the investment to the financial requirements of the entity. Only eligible investments listed in the Investment Policy are suitable for entity funds.

    B. Safety — Preservation and safety of principal. All investments shall be of high quality securities with no perceived default risk. Market price fluctuations will occur, however managing the weighted average days to maturity for each fund type as specified will minimize these fluctuations.

    C. Liquidity — To enable the entity to meet operating requirements that might be reasonably anticipated, the entity's investment portfolio must maintain a sufficient level of liquidity. This shall be achieved by matching investment maturities with forecasted cash flow requirements, by maintaining at least 5% of the entity's funds in overnight investments and by investing in securities with active secondary markets. Short-term investment pools and money market mutual funds provide daily liquidity and may be utilized as a competitive yield alternative to fixed maturity investments.

    D. Marketability — Securities with active and efficient secondary markets are necessary in the event of unanticipated cash requirements. Historical market "spreads" between the bid and offer prices of a particular security-type of less than a quarter of a percentage point shall define an efficient secondary market.

    E. Diversification — Investment maturities shall be staggered throughout the budget cycle to provide cash flow based on the anticipated needs of the entity. Diversifying the appropriate maturity structure will reduce market cycle risk. Also, restricting the sum of investments purchased from certain issuers will reduce the credit risk exposure of the portfolio.

    F. Yield — Attaining a competitive market yield for comparable security-types and portfolio restrictions is the desired objective. The yield of an equally weighted, rolling six-month treasury bill portfolio shall be the minimum yield objective or "benchmark". A secondary objective will be to obtain a yield equal to or in excess of a local government investment pool, money market mutual fund or average Federal Reserve discount rate.

    The first measure of success in this area will be the attainment of enough income to offset inflationary increases. Even though steps will be taken to obtain this goal, the Entity's staff shall constantly be cognizant of the standard of care and the investment objectives pursuant to the provisions of the amended Act, Section 2256.006(a).

    The Chief Financial Officer shall avoid any transactions that might impair public confidence in the Entity's ability to govern effectively. The governing body recognizes that in diversifying the portfolio, occasional measured losses due to market volatility are inevitable, and must be considered within the context of the overall portfolio's investment return, provided that adequate diversification has been implemented. The prudence of the investment decision shall be measured in accordance with the tests set forth in Section 2256.006(b) of the Act.

    Sample Language: Investing Strategies
    Each major fund type has varying cash flow requirements and liquidity needs. Therefore specific strategies shall be implemented considering the fund's unique requirements and the following shall be considered separate investment strategies for each of the funds mentioned below. The Entity's funds shall be analyzed and invested according to the following major fund types:

    A. Operating Funds — Investment strategies for operating funds and commingled pools containing operating funds have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. The secondary objective is to structure a portfolio, which will minimize volatility during economic cycles. This may be accomplished by purchasing high quality, short-term securities, which will compliment each other in a laddered maturity structure. A dollar weighted average maturity of 365 days or less will be maintained and calculated by using the stated final maturity date of each security.

    B. Debt Service Funds — Investment strategies for debt service funds shall have as the primary objective the assurance of investment liquidity adequate to cover the debt service obligation on the required payment date. Securities purchased shall not have a stated final maturity date which exceeds the debt service payment date. A dollar weighted average maturity of 365 days or less will be maintained and calculated by using the stated final maturity date of each security.

    C. Debt Service Reserve Funds — Investment strategies for debt service reserve emergency and contingency funds shall have as the primary objective the ability to generate a dependable revenue stream to the appropriate fund from securities with a low degree of volatility. Securities should be of high quality and, except as may be required by the bond ordinance specific to an individual issue, of short to intermediate-term maturities with stated final maturities not exceeding five (5) years and a weighted average maturity not to exceed 730 days. Volatility shall be further controlled through the purchase of securities carrying the highest coupon available, within the desired maturity and quality range, without paying a premium, if at all possible. Such securities will tend to hold their value during economic cycles.

    D. Construction and Special Purpose Funds — Investment strategies for construction projects or special purpose fund portfolios will have as their primary objective to assure that anticipated cash flows are matched with adequate investment liquidity. These portfolios should include at least 10% in highly liquid securities to allow for flexibility and unanticipated project outlays. The stated final maturity dates of securities held should not exceed the estimated project completion date. A dollar weighted average maturity of 180 days or less will be maintained and calculated by using the stated final maturity of each security.

    E. Market prices for all public fund investments will be obtained and monitored through the use of ___________________________.

  4. Delegation of Authority and Training— Unless already specified by law, each entity must select at least one investment officer to be responsible for the investment of that entity’s funds. This must be done by rule, order, ordinance, or resolution, as appropriate. Unless authorized by law, a person may not deposit, withdraw, transfer, or manage in any other manner the funds of the investing entity. Therefore, it is recommended to designate more than one investment officer and to designate as investment officers those positions responsible for making investment decisions. Authority granted is effective until rescinded by the investing entity or until that person’s employment is terminated.

    Sample Language: Delegation of Authority and Training
    _____________________ designates the Chief Financial Officer (CFO) as the entity's Treasurer and perform and duties of the entity's treasurer as required by the general laws of the State of Texas.. The CFO shall establish written procedures for the operation of the investment program, consistent with this investment policy. Such procedures shall include explicit delegation of authority to the individual(s) responsible for investment transactions.

    The primary individual who shall be involved in investment activities will be the Assistant Chief Financial Officer (ACFO). The CFO and ACFO are designated as investment officers, pursuant to section 2256.005 subsection f of the Act. Accordingly, the investment officers, who shall be the chief financial officer and the investment officer of the entity for the purposes of Section 2256.008 of the Act, shall receive 10 hours of training relating to their responsibility under the Act within 12 months after assuming duties. In addition, the investment officers are required to receive 10 hours of applicable training every two years. These sessions must be completed no less often than once every two fiscal years commencing September 1, 1997 and the financial officers shall receive not less than 10 hours of instruction relating to investment responsibilities. The training must include education in investment controls, security risks, strategy risks, market risks, diversification and compliance with the Public Funds Investment Act. The investment training session shall be provided by an independent source approved by the investment committee.

    For purposes of this policy, an "independent source" from which investment training shall be obtained shall include a professional organization, an institute of higher learning or any other sponsor other than a Business Organization with whom the entity may engage in an investment transaction. Thus, these independent sources will be training sessions sponsored by Government Treasurer's Organization of Texas (GTOT), University of North Texas (UNT), Government Finance Officers Association of Texas (GFOAT). No persons may engage in investment transactions except as provided under the terms of this policy and the procedures established by the Chief Financial Officer.

  5. Ethics and Conflicts of Interest — The PFIA includes ethics and conflicts of interest provisions. A local entity can require additional criteria for ethical behavior and disclosure of conflicts of interest.

    The following describes what the public funds investment act defines as a "personal business relationship" which must be disclosed to the Texas Ethics Commission and to the entity’s governing body:

    An investment officer has a personal business relationship with a business organization if:

    1. The investment officer owns 10% or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization;
    2. Funds received by the investment officer from the business organization exceed 10% of the investment officer’s gross income for the prior year; or
    3. The investment officer has acquired from the business organization during the prior year investments with a book value of $2,500 or more for the personal account of the investment officer.

    In addition, any investment officer who is related within the second degree by affinity or consanguinity as determined under the Tex. Gov’t. Code Ann. Ch. 573 to an individual seeking to sell an investment to the entity must file a statement disclosing that relationship with the governing body and the Texas Ethics Commission.

    Sample Language: Ethics and Conflicts of Interest
    Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Officers and employees involved in the investment process shall sign annual statements agreeing to abide by this section of the Investment Policy and affirming no known conflicts of interest.

    Officers and employees involved in the investment process must file a disclosure statement with the Texas Ethics Commission and the Governing Body if:

    1. the officer or employee has a personal business relationship with a business organization offering to engage in an investment transaction with the Entity; or

    2. The officer of employee is related within the second degree by affinity or consanguinity, as determined under Chapter 573 of the Texas Government Code, to an individual seeking to transact investment business with the City. An officer or employee involved in the investment process has a personal business relationship with a business organization if:

      1. the officer or employee owns 10 percent or more of the voting stock or shares of the business organization or owns $5,000 or more of the fair market value of the business organization

      2. funds received by the officer or employee from the business organization exceed 10 percent of his/her gross income for the previous year; or

      3. the officer or employee has acquired form the business organization during the previous year investments with a book value of $2,500 or more for his/her personal account.

  6. Authorized Financial Dealers and Institutions (including pools) — The investment policy should require that a set formal process be used to select pools, depositories and broker/dealers. Because the policy is intended to endure, it should not mention specific firms or depositories. Rather, it should provide for a process that will screen out institutions that lack economic viability or whose past practices suggests that the safety of public capital would be impaired if transactions were directed to or through such firms.

    When selecting broker/dealers, look at:

    • Financial conditions, strength and capability to fulfill commitments;
    • Overall reputation with other dealers or investors;
    • Regulatory status of the dealer;
    • Background and expertise of the individual representatives.
    • In addition, in order to use a broker/dealer they have to be included on an annually reviewed authorized broker list for the entity.

    When selecting Banks and other depository institutions, look at:

    • Collateral — what types
    • Security Interest Perfected — Does it belong to me?
    • Rates

    When selecting a Local Government Investment Pool, the law requires the pool to supply the following information to any entity seeking to join the pool:

    • the types of investments in which money is allowed to be invested;
    • the maximum average dollar-weighted maturity allowed, based on the stated maturity date, of the pool;
    • the maximum stated maturity date any investment security within the portfolio has;
    • the objectives of the pool;
    • the size of the pool;
    • the names of the members of the advisory board of the pool and the dates their terms expire;
    • the custodian bank that will safekeep the pool’s assets;
    • whether the intent of the pool is to maintain a net asset value of one dollar and the risk of market price fluctuation;
    • whether the only source of payment is the assets of the pool at market value or whether there is a secondary source of payment, such as insurance or guarantees, and a description of the secondary source of payment;
    • the name and address of the independent auditor of the pool;
    • the requirements to be satisfied for an entity to deposit funds in and withdraw funds from the pool and any deadlines or other operating policies required for the entity to invest funds in and withdraw funds from the pool; and
    • the performance history of the pool, including yield, average dollar-weighted maturities, and expense ratios.

    To maintain eligibility to receive funds from and invest funds on behalf of an entity under this chapter, an investment pool must furnish to the investment officer or other authorized representative of the entity:

    1. investment transaction confirmations; and
    2. a monthly report that contains, at a minimum, the following information:
      • the types and percentage breakdown of securities in which the pool is invested;
      • the current average dollar-weighted maturity, based on the stated maturities of the pool;
      • the current percentage of the pool’s portfolio in investments that have stated maturities of more than one year;
      • the book value versus the market value of the pool’s portfolio, using amortized cost valuation;
      • the size of the pool;
      • the number of participants in the pool;
      • the custodian bank that is safekeeping the assets of the pool;
      • a listing of daily transaction activity of the entity participating in the pool;
      • the yield and expense ration of the pool;
      • the portfolio managers of the pool; and
      • any changes or addenda to the offering circular.

  7. Certification required from banks, brokers and pools — A qualified representative from any firm offering to engage in investment transactions with the entity is required to sign a written instrument that certifies that they have received and reviewed a written copy of the entity’s Investment Policy. The firm must acknowledge that it has implemented reasonable procedures and controls in an effort to preclude investments between the entity and the firm that are not authorized by the entity’s investment policy. The Entity’s investment officer(s) may not transact business from a person who has not delivered the required written instrument to the entity.

  8. Authorized and Suitable Investments — It is important to ensure that the list of instruments includes only those suitable for your organization.

  9. Collateralization — Required for certificates of deposit over the $100,000 insurance limit and for repurchase agreements and reverse repurchase agreements. The policy should address such points as market valuation responsibility and timing, safekeeping by a third party and evidence of ownership.

    Sample Language: Collateralization
    All banks' and savings and loan associations' deposits and investments of City funds shall be secured by pledged collateral with a market value equal to no less than 102 percent of the principal plus accrued interest less an amount insured by FDIC or FSLIC. Evidence of proper collateralization in the form of original safekeeping receipts held in institution's trust department or at a third party institution not affiliated with the bank or bank holding company will be maintained in the office of the Chief Financial Officer at all times. The Chief Financial Officer or other authorized Entity Representative will approve and release all pledged collateral. Collateral will be reviewed monthly to assure the market value of the securities pledged exceeds investments and/or the related bank balances. The Committee shall request additional collateral in the event they deem that their deposits and investments are not sufficiently protected by the pledged collateral.

  10. Safekeeping and Custody — The investment policy must contain a statement that all investments, with the exception of investment pools and mutual funds, must be settled on a delivery versus payment basis. It is strongly recommended to have investments safekept with a third party institution, not the organization which sold the investment to the government entity. (See GASB 3)

    Sample Language: Safekeeping and Custody
    All transactions will be executed with authorized security dealers and financial institutions on a delivery-versus-payment (DVP) basis. That is, funds shall not be wired or paid until verification has been made that the Trustee received the collateral. The collateral shall be held in the name of the entity or held on behalf of the entity. The Trustee's records shall assure the notation of the entity's ownership of or explicit claim on the securities. The original copy of all safekeeping receipts shall be delivered to the entity. Securities will be held by the entity's safekeeping agent, which shall be selected through a competitive process (RFP) or that agent's representative in New York City, or in its account at the Federal Reserve Bank.

  11. Diversification — Diversification should be conceptualized in terms of maturity as well as instrument type and issuer. Thus, the diversification concept in an operating fund should include prohibition against over concentration in a specific maturity sector, as well as constraining the reliance on specific risky instruments and issuers.

    Sample Language: Diversification
    Diversification — It is the policy of the entity to diversify its investment portfolios. The diversification will protect interest income from the volatility of interest rates and the avoidance of undue concentration of assets in a specific maturity sector; therefore, portfolio maturities shall be staggered. Securities shall also be selected and revised periodically by the Investment Committee. In establishing specific diversification strategies, the two (2) following general policies and constraints shall apply:

    1. Risk of market price volatility shall be controlled through maturity diversification and by controlling unacceptable maturity extensions and a mismatch of liabilities and assets. The maturity extension will be controlled by limiting the weighted average maturity of the entire portfolio to 365 days. All long-term maturities will be intended to cover long-term liabilities. In addition, five (5%) percent of the funds in the portfolio will be liquid at all times.

    2. The Investment Committee shall establish strategies and guidelines for the percentage of the total portfolio that may be invested in U.S. Treasury Securities, federal agency instrumentalities, repurchase agreements, and insured/collaterlized certificates of deposit and other securities or obligations. The Investment Committee shall conduct a quarterly review of these guidelines, and shall evaluate the probability of market and default risk in various investment sectors as part of its considerations.

    3. Risk of principal loss in the portfolio as a whole shall be minimized by diversifying investment types according to the following limitations.

    Investment Type % of Portfolio

    • U.S. Treasury Notes/Bills 100%
    • U.S. Agencies & Instrumentalities 100%
    • State of Texas Obligations & Agencies 15%
    • Local Government Investment Pools 50%
    • Local Government Obligations (AA) 10%
    • Repurchase Agreements 25%
    • Certificates of Deposit 100%
    • U.S. Government Money Market Funds 50%

    By Institution:
    Repurchase Agreements No more than 10%
    All Other No more than 40%
    Investment Pools No more than $10,000,000

  12. Maximum Maturities — the maximum allowable stated maturity for an individual investment as well as the maximum dollar-weighted average maturity allowed for the fund or pooled group of funds needs to be stated in the investment policy.

  13. Internal Controls — The development of internal controls remains a management function. A statement of investment policy therefore should avoid specific internal control measures. Instead, policy makers should require that a system of internal controls be established. The policy also can provide for periodic reviews and monitoring of the controls. The review of internal controls might be assigned to a committee or to the independent auditor.

    Sample Language: Internal Controls
    The Chief Financial Officer, or designee, shall establish a system of internal controls, which shall be reviewed by an independent auditor. The controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation by third parties, unanticipated changes in financial markets, or imprudent actions by employees or Investment Officers of the Entity.

    Examples of controls and managerial emphasis deemed important include the following:

    • All appropriate investment transactions settled delivery versus payment (DVP)
    • Investments safekept at a third party in the entity’s name
    • Annual compliance audit by independent auditor
    • Custodian safekeeping receipts maintained
    • Use of competitive bidding for investments
    • Avoidance of bearer-form securities
    • Documentation of investment bidding events
    • Written confirmation of telephone transactions
    • Reconcilement’s and comparisons of security receipts with the investment subsidiary records, including custodian bank.
    • Compliance with investment policies
    • Verification of all interest income and security purchase and sell computations
    • Control of Collusion
    • Separation of duties
    • Separation of transaction authority from Accounting and Record-keeping
    • Clear delegation of authority
    • Accurate and timely reports
    • Validation of investment maturity decisions with supporting cash flow data
    • Adequate training and development of Investment Officers
    • Review of financial conditions of all brokers, dealers, and depository institutions (where practical)
    • Staying informed about market conditions, changes and trends that require adjustments in investment strategies.
    • Monitoring market values at least monthly
    • Written procedures documentation

  14. Performance Standards — Performance standards provide a measure for determining the effectiveness of portfolio management.

    Sample language: Performance Standards
    The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs.

  15. Reporting — Regular investment reports to policy makers and elected officials provide necessary written communication regarding investment performance, risk analysis, adherence to policy provisions and other pertinent information.

    The following elements are required by Texas State law concerning investment reports:

    • Must be prepared quarterly
    • Must include a report of investment transactions for all funds
    • Must describe the investment position
    • Must be prepared jointly and signed by all investment officers
    • Must contain a summary statement that provides the following information:
    • Beginning and ending market values for the period
    • Additions and changes to the market value during the period
    • Fully accrued interest for the period
    • Must contain the book and market value for each investment at the beginning and ending of the reporting period
    • List by type of asset and fund type invested
    • Must list the maturity date (for all investments that have one) for each individual investment
    • Must assign each investment to the account or fund or pooled group fund for which it was acquired
    • Must provide a statement that the investment portfolio is in compliance with PFIA and with the entity’s investment strategy

  16. Investment Policy Adoption and Annual Review

    The investment policy must be formally reviewed annually. This means that an official action, such as an ordinance, resolution, rule or order must be approved by -to the policy and state that the policy has been read, reviewed and approved by the governing body.

  17. Quality and Capability of Investment Management