Policy 705 - Investments
Reviewed: October 18, 2016
The purpose of this policy is to establish guidelines for the investment of school district funds.
II. GENERAL STATEMENT OF POLICY
The policy of this school district is to comply with all state laws relating to investments and to guarantee that investments meet certain primary criteria.
This policy applies to all investments of the surplus funds of the school district, regardless of the fund accounts in which they are maintained, unless certain investments are specifically exempted by the school board through formal action.
A. Pooling of Funds. Except for cash in certain restricted and special funds, Princeton Public Schools will consolidate cash and reserve balances from all funds to maximize investment earnings and to increase efficiencies with regard to investment pricing, safekeeping and administration. Investment income will be allocated to the various funds based on their respective participation and in accordance with generally accepted accounting principles.
IV. AUTHORITY; OBJECTIVES
A. The funds of the school district shall be deposited or invested in accordance with this policy, Minn. Stat. Chapter 118A and any other applicable law or written administrative procedures.
B. The primary criteria for the investment of the funds of the school district, in priority order, are as follows
1. Safety. Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.
a. Credit Risk. Princeton Public Schools will minimize credit risk, which is the risk of loss due to the failure of the security issuer or backer, by:
▪ Limiting investments to the types of securities listed in Section IX of this Investment Policy.
▪ Pre-qualifying the financial institutions, broker/dealers, intermediaries, and advisers with which Princeton Public Schools will do business in accordance with Section V.
▪ Diversifying the investment portfolio so that the impact of potential losses from any one type of security or from any one individual issuer will be minimized.
b. Interest Rate Risk. Princeton Public Schools will minimize interest rate risk, which is the risk that the market value of securities in the portfolio will fall due to changes in market interest rates, by:
▪ Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity.
▪ Investing operating funds primarily in shorter-term securities, money market mutual funds, or similar investment pools and limiting the average maturity of the portfolio in accordance with this policy (see section IX).
2. Liquidity. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). Alternatively, a portion of the portfolio may be placed in money market mutual funds or local government investment pools which offer same-day liquidity for short-term funds.
3. Yield. The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be held until maturity with the following exceptions:
a. A security with declining credit may be sold early to minimize loss of principal.
b. A security swap would improve the quality, yield, or target duration in the portfolio.
c. Liquidity needs of the portfolio require that the security be sold.
4. Maintaining the Public’s Trust. The investment officer(s) shall seek to act responsibly as custodians of the public trust and shall avoid any transaction that might impair public confidence in the District, the Board, or the School Board Treasurer.
V. DELEGATION OF AUTHORITY
A. The Director of Business Services and the Assistant Business Affairs Executive of the school district are designated as the investment officers of the school district and is responsible for investment decisions and activities under the direction of the school board. The investment officer(s) shall operate the school district’s investment program consistent with this policy. The investment officer(s) may delegate certain duties to a designee or designees, but shall remain responsible for the operation of the program.
B. All officials and employees that are a part of the investment process shall act professionally and responsibly as custodians of the public trust, and shall refrain from personal business activity that could conflict with the investment program or which could reasonably cause others to question the process and integrity of the investment program. The investment officer(s) shall avoid any transaction that could impair public confidence in the school district.
VI. STANDARD OF CONDUCT
A. The standard of conduct regarding school district investments to be applied by the investment officer(s) shall be the “prudent person standard.” Under this standard, the investment officer(s) shall exercise that degree of judgment and care, under the circumstances then prevailing, that persons of prudence, discretion and intelligence would exercise in the management of their own affairs, investing not for speculation and considering the probable safety of their capital as well as the probable investment return to be derived from their assets. The prudent person standard shall be applied in the context of managing the overall investment portfolio of the school district. The investment officer(s), acting in accordance with this policy and exercising due diligence, judgment and care commensurate with the risk, shall not be held personally responsible for a specific security’s performance or for market price changes. Deviations from expectations shall be reported in a timely manner and appropriate actions shall be taken to control adverse developments.
B. Ethics and Conflicts of Interest. Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Employees and investment officials shall disclose any material interests in financial institutions with which they conduct business. They shall further disclose any personal financial / investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business in conducted on behalf of Princeton Public Schools.
VII. MONITORING AND ADJUSTING INVESTMENTS
The investment officer(s) shall routinely monitor existing investments and the contents of the school district’s investment portfolio, the available markets and the relative value of competing investment instruments.
VIII. INTERNAL CONTROLS
The investment officer(s) shall establish a system of internal controls which shall be documented in writing. The internal controls shall be reviewed by the school board and shall be annually reviewed for compliance by the school district’s independent auditors. The internal controls shall be designed to prevent and control losses of public funds due to fraud, error, misrepresentation, unanticipated market changes or imprudent actions by officers, employees or others. The internal controls may include, but shall not be limited to, provisions relating to controlling collusion, separating functions, separating transaction authority from accounting and record-keeping, custodial safekeeping, avoiding bearer form securities, clearly delegating authority to applicable staff members, limiting securities losses and remedial action, confirming telephone transactions in writing, supervising and controlling employee actions, minimizing the number of authorized investment officials, and documenting transactions and strategies.
IX. PERMISSIBLE INVESTMENT INSTRUMENTS
The school district may invest its available funds in those instruments specified in Minn. Stat. §§ 118A.04 and 118A.05, as these sections may be amended from time to time, or any other law governing the investment of school district funds. The school district may invest in any type of security allowed by Minnesota statute, as may be amended to those instruments listed below:
A. Bonds, notes, certificates of indebtedness, treasury bills or other securities now or hereafter issued by the United States of America, its agencies and allowable instrumentalities;
B. Interest bearing savings accounts, interest bearing certificates of deposit or interest bearing time deposits, or any other investments constituting direct obligations of any bank;
C. Certificates of deposit with federally insured institutions that are collateralized or insured in excess of the $100,000 provided by the Federal Deposit Insurance Corporation coverage limit;
D. Collateralized repurchase agreements, which conform to the requirements stated in 118A.05, sub.2 of the statutes;
E. Commercial paper meeting the following requirements:
1. The corporation must be organized in the United States or be a Canadian subsidiary.
2. The corporation’s assets must exceed $500,000,000.
3. The obligations at the time of purchase must be rated at the highest classifications by at least two of the four standard rating services (Standard and Poor’s, Duff and Phelp’s, Moody’s and Fitch Investors Service).
4. The obligations cannot have a maturity longer than 270 days.
5. The school district’s goal shall be not more than 50% of the total investment fund can be invested in commercial paper at any time.
6. The total investment in any one corporation should not exceed 10% of the corporation’s outstanding obligations.
7. The total investment in any one corporation cannot be more than $10 million.
F. Investments may be made only in those savings banks or savings and loan associations the shares, or investment certificates of which are insured by the Federal Deposit Insurance Corporation.
G. Investment products that are considered as derivatives are specifically excluded from approved investments.
X. PORTFOLIO DIVERSIFICATION; MATURITIES
A. Limitations on instruments, diversification and maturity scheduling shall depend on whether the funds being invested are considered short-term or long-term funds. All funds shall normally be considered short-term except those reserved for building construction projects or specific future projects and any unreserved funds used to provide financial-related managerial flexibility for future fiscal years.
B. The school district shall diversify its investments to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturities.
1. The investment officer(s) shall prepare and recommend to the Superintendent annually for presentation to the school board for review and approval. The table shall specify the maximum percentage of the school district’s investment portfolio that may be invested in a single type of investment instrument, such as U.S. Treasury Obligations, certificates of deposit, repurchase agreements, banker’s acceptances, commercial paper, etc. The approved table shall be attached as an exhibit to this policy and shall be incorporated herein by reference.
2. Investment maturities shall be scheduled to coincide with projected school district cash flow needs, taking into account large routine or scheduled expenditures, as well as anticipated receipt dates of anticipated revenues. Maturities for short-term and long-term investments shall be timed according to anticipated need. Within these parameters, portfolio maturities shall be staggered to avoid undue concentration of assets and a specific maturity sector. The maturities selected shall provide for stability of income and reasonable liquidity.
3. Maximum Maturities. To the extent possible, Princeton Public Schools shall attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, Princeton Public Schools will not directly invest in securities maturing more than five (5) years from the date of purchase or in accordance with state and local statutes and ordinances. Princeton Public Schools shall adopt weighted average maturity limitations (which often range from 90 days to 3 years), consistent with the investment objectives. Reserve funds and other funds with longer-term investment horizons may be invested in securities exceeding five (5) years if the maturities of such investments are made to coincide as nearly as practicable with the expected use of funds. The intent to invest in securities with longer maturities shall be disclosed in writing to the legislative body (see the GFOA Recommended Practice on “Maturities of Investments in a Portfolio” in Appendix).
XI. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
Before the school district invests any surplus funds in a specific investment instrument, a competitive bid or quotation process shall be utilized. If a specific maturity date is required, either for cashflow purposes or for conformance to maturity guidelines, quotations or bids shall be requested for instruments which meet the maturity requirement. If no specific maturity is required, a market trend analysis, which includes a yield curve, will normally be used to determine which maturities would be most advantageous. Quotations or bids shall be requested for various options with regard to term and instrument. The school district will accept the quotation or bid which provides the highest rate of return within the maturity required and within the limits of this policy. Generally all quotations or bids will be computed on a consistent basis, i.e., a 360-day or a 365-day yield. Records will be kept of the quotations or bids received, the quotations or bids accepted and a brief explanation of the decision that was made regarding the investment. If the school district contracts with an investment advisor, bids are not required in those circumstances specified in the contract with the advisor.
XII. QUALIFIED INSTITUTIONS AND BROKER-DEALERS
A. The school district shall maintain a list of the financial institutions that are approved for investment purposes.
B. Prior to completing an initial transaction with a broker, the school district shall provide to the broker a written statement of investment restrictions which shall include a provision that all future investments are to be made in accordance with Minnesota statutes governing the investment of public funds. The broker must annually acknowledge receipt of the statement of investment restrictions and agree to handle the school district’s account in accordance with these restrictions. The school district may not enter into a transaction with a broker until the broker has provided this annual written agreement to the school district. The notification form to be used shall be that prepared by the State Auditor. A copy of this investment policy, including any amendments thereto, shall be provided to each such broker.
XIII. SAFEKEEPING AND COLLATERALIZATION
A. All investment securities purchased by the school district shall be held in third-party safekeeping by an institution designated as custodial agent. The custodial agent may be any Federal Reserve Bank, any bank authorized under the laws of the United States or any state to exercise corporate trust powers, a primary reporting dealer in United States Government securities to the Federal Reserve Bank of New York, or a securities broker-dealer defined in Minn. Stat. § 118A.06. The institution or dealer shall issue a safekeeping receipt to the school district listing the specific instrument, the name of the issuer, the name in which the security is held, the rate, the maturity, serial numbers and other distinguishing marks, and other pertinent information.
B. Deposit-type securities shall be collateralized as required by Minn. Stat. § 118A.03 for any amount exceeding FDIC, SAIF, BIF, FCUA, or other federal deposit coverage, as follows:
Subd. 1. For deposits beyond insurance. To the extent that funds on deposit at the close of the financial institution's banking day exceed available federal deposit insurance, the government entity shall require the financial institution to furnish collateral security or a corporate surety bond executed by a company authorized to do business in the state. For the purposes of this section, "banking day" has the meaning given in Federal Reserve Board Regulation CC.
Subd. 2. In lieu of surety bond. The following are the allowable forms of collateral in lieu of a corporate surety bond: (1) United States government Treasury bills, Treasury notes, Treasury bonds; (2) issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity; (3) general obligation securities of any state or local government with taxing powers which is rated "A" or better by a national bond rating service, or revenue obligation securities of any state or local government with taxing powers which is rated "AA" or better by a national bond rating service; (4) unrated general obligation securities of a local government with taxing powers may be pledged as collateral against funds deposited by that same local government entity; (5) irrevocable standby letters of credit issued by Federal Home Loan Banks to a municipality accompanied by written evidence that the bank's public debt is rated "AA" or better by Moody's Investors Service, Inc., or Standard & Poor's Corporation; and (6) time deposits that are fully insured by any federal agency.
Subd. 3. Amount. The total amount of the collateral computed at its market value shall be at least ten percent more than the amount on deposit plus accrued interest at the close of the financial institution's banking day, except that where the collateral is irrevocable standby letters of credit issued by Federal Home Loan Banks, the amount of collateral shall be at least equal to the amount on deposit plus accrued interest at the close of the financial institution's banking day. The financial institution may furnish both a surety bond and collateral aggregating the required amount.
Subd. 4. Assignment. Any collateral pledged shall be accompanied by a written assignment to the government entity from the financial institution. The written assignment shall recite that, upon default, the financial institution shall release to the government entity on demand, free of exchange or any other charges, the collateral pledged. Interest earned on assigned collateral will be remitted to the financial institution so long as it is not in default. The government entity may sell the collateral to recover the amount due. Any surplus from the sale of the collateral shall be payable to the financial institution, its assigns, or both.
Subd. 5. Withdrawal of excess collateral. A financial institution may withdraw excess collateral or substitute other collateral after giving written notice to the governmental entity and receiving confirmation. The authority to return any delivered and assigned collateral rests with the government entity.
Subd. 6. Default. F or purposes of this section, default on the part of the financial institution includes, but is not limited to, failure to make interest payments when due, failure to promptly deliver upon demand all money on deposit, less any early withdrawal penalty that may be required in connection with the withdrawal of a time deposit, or closure of the depository. If a financial institution closes, all deposits shall be immediately due and payable. It shall not be a default under this subdivision to require prior notice of withdrawal if such notice is required as a condition of withdrawal by applicable federal law or regulation.
Subd. 7. Safekeeping. All collateral shall be placed in safekeeping in a restricted account at a Federal Reserve bank, or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral. The selection shall be approved by the government entity.
C. Repurchase agreements shall be secured by the physical delivery or transfer against payment of the collateral securities to a third party or custodial agent for safekeeping. The school district may accept a safekeeping receipt instead of requiring physical delivery or third-party safekeeping of collateral on overnight repurchase agreements of less than $1,000,000.
D. Collateralization. Where allowed by state law and in accordance with the GFOA Recommended Practices on the Collateralization of Public Deposits, full collateralization will be required on all demand deposit accounts, including checking accounts and non-negotiable certificates of deposit (see GFOA Recommended Practices in Appendix).
XIV. REPORTING REQUIREMENTS
A. The Investment Officers shall submit to the Finance Committee and the Superintendent an annual investment report which shall include information regarding securities in the portfolio by class or type, book value, income earned, and market values as of the report date. Generally accepted accounting principles shall be used for valuation purposes. The report shall indicate any areas of policy concern and planned revision of investment strategies.
B. If necessary, the investment officer(s) shall establish systems and procedures to comply with applicable federal laws and regulations governing the investment of bond proceeds and funds in a debt service account for a bond issue. The record keeping system shall be reviewed annually by the independent auditor or by another party contracted or designated to review investments for arbitrage rebate or penalty calculation purposes.
The school board shall annually designate one or more official depositories for school district funds. The treasurer or the Director of Business Services of the school district may also exercise the power of the school board to designate a depository. The school board shall be provided notice of any such designation by its next regular meeting. The school district and the depository shall each comply with the provisions of Minn. Stat. § 118A.03 and any other applicable law, including any provisions relating to designation of a depository, qualifying institutions, depository bonds, and approval, deposit, assignment, substitution, addition and withdrawal of collateral.
XVI. ELECTRONIC FUNDS TRANSFER OF FUNDS FOR INVESTMENT
The school district may make electronic fund transfers for investments of excess funds upon compliance with Minn. Stat. § 471.38.
- Minn. Stat. § 118A.01 (Public Funds; Depositories and Investments)
- Minn. Stat. § 118A.02 (Authorization for Deposit and Investment)
- Minn. Stat. § 118A.03 (Depositories and Collateral)
- Minn. Stat. § 118A.04 (Investments)
- Minn. Stat. § 118A.05 (Contracts and Agreements)
- Minn. Stat. § 118A.06 (Delivery and Safekeeping)
- Policy 703 (Annual Audit)
- MSBA Service Manual, Chapter 7, Education Funding
- Minnesota Legal Compliance Audit Guide Prepared by the Office of the State Auditor
Adopted: April 25, 2006
Revised: March 25, 2008
Revised: October 26, 2010
Reviewed: April 19, 2016
Reviewed: October 18, 2016