(Texas State Comptroller)
School district funds are a valuable asset, which must be invested wisely in order to earn interest and protect the publics investment in their local schools.
All investments must be made consistently with state law (the Public Funds Investment Act and Texas Education Code, see Section IV, Legal Basis for ISD Investing). The primary objectives of a school districts investments should be safety, liquidity, and yield.
The safety of principal should be the foremost objective of a school districts investment program. Investments should be made in a manner that ensures the preservation of capital in the overall investment portfolio. The objective should be to mitigate both credit risk and interest rate risk. Safety and preservation of capital are addressed by purchasing the highest quality, most creditworthy investments.
Minimizing Credit Risk: The school district should minimize credit risk, which is the risk of loss due to the failure of a security issuer or backer, by: (1) limiting investments to the safest types of securities; (2) pre-qualifying the financial institutions, brokers/dealers, intermediaries, and advisors with which the school district does business; and (3) diversifying the investment portfolio so that potential losses on individual securities are minimized.
Minimizing Interest Rate Risk: The school district should minimize the risk that the market value of the securities in its investment portfolio will fall due to changes in general interest rates by: (1) structuring the investment portfolio so that securities mature to meet cash requirements for ongoing district operations, thereby avoiding the need to sell securities on the open market prior to maturity; and (2) investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools.
A school districts investment portfolio should remain sufficiently liquid to meet all operating requirements that can be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs in order to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the investment portfolio should consist primarily of securities with active secondary or resale markets (dynamic liquidity). A portion of the school districts investment portfolio may also be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds.
The school district investment portfolio should be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the school districts investment risk constraints and liquidity needs. Return on investment is of secondary importance when compared to the safety and liquidity objectives described above. The core of the school districts investments should be limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities should not be sold prior to maturity with the following exceptions:
- a security with declining credit may be sold early in order to minimize loss of principal;
- a security swap would improve the quality, yield, or target duration in the investment portfolio; or
- liquidity needs of the investment portfolio require that the security be sold.
Investment of school district funds should always be made with judgment and care, under the prevailing circumstances, which persons of prudence, discretion, and intelligence would exercise in the management of their own financial affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. The Prudent Person Standard should be applied to the management of all public funds, including school district monies.