Translate

DFA - Investment of Funds

Code: DFA
Readopted:  2/3/20, 5/15/17
Adopted: 3/12/07
Orig. Code(s): DFA
1.      Scope and Pooling of Funds
This policy applies to the investment of short-term operating funds and capital project funds (including bond proceeds and bond reserve funds) held by the district.  Investments of employees’ retirement funds, deferred compensation plans, and funds held and invested by trustees, escrow agents or fiscal agents are not covered by this policy.  This policy does not apply to the district’s checking account.
 

Except where legally required to hold separate funds, the district will consolidate cash balances from all funds to maximize investment earnings.  Investment income will be allocated to the various funds monthly based on their respective cash balances.

2.      General Objectives
The primary objectives for this investment policy, in priority order, shall be: preservation of capital; maintenance of a liquid position; and maximum yield.
 
a.      Safety
Safety of principal is the foremost objective of the investment program.  Investment decisions 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.

 

(1)  Credit Risk: The district will minimize credit risk, the risk of loss due to the
       financial failure of the security issuer or backer, by:

(a)  Limiting exposure to poor credits and concentrating the investments in the
       safest types of securities.

(b) Diversifying the investment portfolio so that potential losses on individual
      securities will be minimized.

(c)  Monitoring the investment portfolio holdings for rating changes, changing
      economic/market conditions, etc.

(2) Interest Rate Risk: The district will minimize the price risk, due to changes in
      general market interest rates, associated with the sale of securities prior to
      maturity, by

(a)  Structuring the investment portfolio so that securities mature to meet cash
       requirements for ongoing operations and/or capital projects, thereby
       avoiding the need to sell securities on the open market prior to maturity.

(b) Investing operating funds primarily in shorter-term securities or local
     government investment pool.

b.       Liquidity
The investment portfolio shall remain sufficiently liquid to meet all operating, capital and construction requirements that may be reasonably anticipated.  This is accomplished by structuring the portfolio so that securities mature concurrent with anticipated cash needs. In addition, a portion of the portfolio should also be placed in the Oregon Local Government Investment Pool (LGIP), or a similar investment vehicle, to provide immediately available funds.

 

c.       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 lesser importance compared to the safety and liquidity objectives described above.  The portfolio investments are limited to highly rated/low risk securities in anticipation of earning a fair return relative to the risk being assumed.
 

Securities shall not be sold prior to maturity with the following exceptions:

(1)  A security with declining credit may be sold early to minimize loss of principal.
(2)  A security swap that would improve the quality, yield, or target duration in the
      portfolio.
(3)  Liquidity needs of the portfolio require that the security be sold.
(4)  To liquidate a security purchased in error that violates state law or this policy.

 

3.       Standards of Care

a.       Prudence
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 this 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 to the School Board in a timely fashion, and the liquidation and/or sale of securities are carried out in accordance with the terms of this policy.
 

Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived.

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, officers and their families shall not undertake personal investment transactions with the same individual with whom business is conducted on behalf of the district.  Officers and employees shall, at all times, comply with the state of Oregon Government Ethics Commission set forth in Oregon Revised Statute (ORS) Chapter 244.
 
c.       Delegation of Authority
The chief finance officer (CFO) shall manage the district’s investment program and ensure compliance with the investment policy, designate eligible investment institutions, review periodic investment reports and monitor investment transactions.
 
The CFO will designate the cash manager under his/her supervision to administer the policy, place investments, maintain accounting records and prepare investment reports.

 

4.       Authorized Financial Dealers and Institutions
A list will be maintained of financial institutions authorized to provide investment and safekeeping services.  In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness and other factors considered relevant by the district.  These may include primary dealers or regional dealers that qualify under Securities and Exchange Commission (SEC) Rule 15C3-1 (uniform net capital rule).

 

Regional brokers and dealers must have an office in Pacific Northwest in order to be considered for doing business with the district.  The district will limit all security purchases to institutions on the approved lists.

All financial institutions and broker/dealers who desire to become qualified for investment transactions must supply the following, as appropriate:

a.   Audited financial statements;
b.   Proof of National Association of Securities Dealers (NASD) certification;
c.   Proof of state registration;
d.   Completed broker/dealer questionnaire;
e.   Certification of having read and understood the district’s investment policy;
f.    References from other Oregon local government clients.
 

A review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by the CFO at least every five years.  Additions and deletions to the list may be made at the discretion of the CFO.

5.       Internal Controls
The CFO, in cooperation with the Financial Reporting staff and the external auditor, will establish and maintain an adequate internal control structure designed to reasonably protect the investments of the district from loss, theft or misuse.  The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by the CFO.
 
The district shall establish a process for an annual independent review by an external auditor to assure adequate internal controls, as well as compliance with policies and procedures.  In addition, the internal controls may be tested by an external auditor upon any extraordinary event, such as turnover of key personnel.
 
6.       Accounting Method
The district shall comply with all required legal provisions and Generally Accepted Accounting Principles (GAAP) relating to investment accounting.  The accounting principles are those contained in the pronouncements of authoritative bodies including but not necessarily limited to, the Governmental Accounting Standards Board (GASB); the American Institute of Certified Public Accountants (AICPA); and the Financial Accounting Standards Board (FASB).
 
7.       Delivery, Safekeeping and Collateral
a.   Delivery and Safekeeping
 
Prior to sending funds to a broker/dealer for an investment purchase, the cash manager will require a trade ticket listing the details of the transaction.  Securities may be held by the broker/dealer in the district’s name in the broker/dealer’s account or they may be held by a third-party safekeeping agent.
 

The purchase and sale of securities, repurchase agreement and guaranteed investment contract transactions shall be settled on a delivery versus payment basis in accordance with Oregon Revised Statute (ORS) 294.145(4) and (5).  It is the intent of the district that all purchased securities shall be perfected in the name of the district.

Sufficient evidence to title shall be consistent with modern investment and commercial practices.

b.       Collateral
Cash management tools, defined as bank deposits, time deposits, certificates of deposit and savings accounts, shall be held in qualified Oregon depositories and collateralized in accordance with ORS Chapter 295.
 

ORS 294.035(3)(j) requires repurchase agreement collateral to be limited in maturity to three years and priced according to percentages prescribed by written policy of the Oregon Investment Council or the Oregon Short-Term Fund Board.

On March 12, 1996, the OSTF Board adopted the following margins:

(1)  U.S. Treasury securities: 102%;
(2)  U.S. Agency discount and coupon securities: 102%;
(3)  Mortgage backed securities, although allowed by ORS Chapter 294, are not allowed as
       repurchase agreement collateral under this policy.
 

A signed Master Repurchase Agreement must be in place between the district and the securities dealer, prior to entering into any repurchase agreement with that dealer.

At the minimum, the district will monitor the collateral requirements weekly for guaranteed investment contracts.

8.       Authorized Investments
The following investments will be permitted by this policy and are authorized for investment under ORS 294.035, ORS 294.052 and 294.810:
 
a.    U.S. Treasury securities and other lawfully issued general obligations of the United
       States, including general obligations of agencies and instrumentalities of the United
       States or enterprises sponsored by the United States government;
b.    Debt of the agencies and instrumentalities of the states of Oregon, California, Idaho and
       Washington and their political subdivisions;
c.    Time deposit open accounts, certificates of deposit, bank deposit, and savings
       accounts;
d.    Bankers acceptances;
e.    Corporate indebtedness;
f.     Repurchase agreements;
g.    Oregon Short-Term Fund (OSTF) (also known as the Local Government Investment
       Pool – LGIP);
h.    For investment of bond proceeds only and with Board approval: various investment
       agreements that meet the requirements of ORS 294.052 and the collateral
       requirements;
   
 
9.       Investment Parameters
a.  Diversification
 

The investments shall be diversified by:

(1)  Limiting investments to avoid over-concentration in securities from a specific issuer or
       business sector (excluding U.S. Treasury securities);
(2)   Investing in securities that have high credit quality;
(3)  Limiting investments in high interest rate risk, such as variable rate securities;
(4)  Investing in securities with varying maturities; and
(5)  Continuously investing a portion of the portfolio in readily available funds such as the
       Oregon Short-Term Fund (or LGIP).
 
Maximum Maturities and Percentage of Investments by Type
The maximum percentages for direct investments of surplus funds are as shown in the chart below.  Surplus funds are defined as the sum of all investments, cash balances, deposit balances of all types and LGIP balances.  The maximum maturity is measured from the settlement date of the investment transaction.
 

Capital project funds are funds specifically dedicated to capital projects, and will typically include proceeds from the district’s bond sales.  All bond fund reserve requirements will be considered to be capital project funds.  The district may designate (upon approval by the Board) other funds as capital project funds.  Operating funds are all surplus funds that are not capital project funds.

Security

U.S. Treasury Bills, Notes and Bonds and obligations secured by the U.S. Treasury

Maximum % of total Portfolio 

100%

Maximum Maturity

18 months for operating funds, and 3 years for capital project funds


 

Security

State and Local Government Securities

Maximum % of total Portfolio 

30%

Maximum Maturity

18 months for operating funds, and 3 years for capital project funds


 

Security

Repurchase Agreements

Maximum % of total Portfolio 

25%

Maximum Maturity

30 days


 

Security

Corporate Indebtedness (commercial paper and bonds)

Maximum % of total Portfolio 

35%

Maximum Maturity

18 months 

 

Security

Time Deposit Open Accounts, Bank Deposit and Savings Accounts

Maximum % of total Portfolio 

10%

Maximum Maturity

N/A

Security

U.S. Government Agencies and Instrumentalities, including Government Sponsored Enterprises

Maximum % of total Portfolio

100%

Maximum Maturity

18 months for operating funds, and 3 years for capital project funds


 

Security

Time Certificates of Deposit

Maximum % of total Portfolio 

50%

Maximum Maturity

18 months


 

Security

Banker’s Acceptances

Maximum % of total Portfolio 

25%

Maximum Maturity

6 months


 

Security

OSTF - Local Government Investment Pool

Maximum % of total Portfolio 

Statutory Limit

Maximum Maturity

N/A

 

In addition to the above, the district may invest up to 100 percent of the proceeds from any bond issue in investment agreements that meet the requirements of ORS 294.052 and the repurchase agreement collateral requirements and restrictions of this policy.

In order to achieve issuer diversification, this policy sets limits on the maximum holdings by issuer for certain investment types.

(6)     There shall be a limit of 35 percent of the portfolio held in securities issued by any single US government agency.

(7)     Time certificates of deposit and banker’s acceptances can all be issued by a single banking institution.  In order to avoid over-concentration in a single banking institution, there shall be a limit of 10 percent for overall holdings of one institution.

In addition to this policy, ORS 294.035 limits investment in a single corporate entity to no more than 5 percent of total surplus funds.

Due to fluctuations in the aggregate surplus funds balance, maximum percentages for a particular issuer or investment type may be exceeded at a point in time subsequent to the purchase of a particular security.  Securities need not be liquidated to realign the portfolio, but consideration should be given to this matter when future liquidations are made or when reinvestment occurs.  Portfolio percentage limits are in place to ensure diversification in the investment portfolio; a small, temporary imbalance will not significantly impair that strategy.

Liquidity of Funds
Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the portfolio should be continuously invested in readily available funds, such as the OSTF or overnight repurchase agreements, or held in bank balances to ensure that appropriate liquidity is maintained to meet on-going obligations.
 

Maturity limitations will depend upon whether the funds being invested are considered short-term or long-term funds.  All funds will be considered short-term except those reserved for capital projects.  Except for special situations, as directed by the investment officer, investments will be limited to maturities not exceeding 18 months.

Short-term portfolio – Investment maturities for operating funds shall be scheduled to coincide with projected cash flow needs.  In addition, the following maturity limits are designed to ensure liquidity in the portfolio:

Length of Maturity: Under 30 Days
Minimum % of Total Portfolio: 10%
 
Length of Maturity: Under 90 Days
Minimum % of Total Portfolio: 25%
 
Length of Maturity: Under 180 Days
Minimum % of Total Portfolio: 50%
 
Length of Maturity: Under 360 Days
Minimum % of Total Portfolio: 90%
 
Length of Maturity: Under 18 Months 
Minimum % of Total Portfolio: 100%

If these maturity limits are inadvertently exceeded at the time of a specific investment, the purchase does not need to be liquidated.  Future investments must not be made to longer maturity dates until the limits will be met, however.

Long-term portfolio – Instruments and diversification for the long-term portfolio shall be as for the short-term portfolio.  Long-term portfolio is defined as “maturities over 18 months and maximum of 36 months”.  Maturity scheduling shall be timed according to anticipated need. For example, investment of capital project funds shall be timed to meet projected contractor payments.

The investments of bond proceeds are restricted under bond covenants that may be more restrictive than the investment parameters included in this policy.  Bond proceeds shall be invested in accordance with the most restrictive parameters of this policy and the applicable bond covenants and tax laws.

This investment policy has been submitted for review by the OSTF Board as specified above and in accordance with ORS 294.135(1)(a).

c.       Credit Ratings
The minimum credit rating levels for the permissible investments are set out in ORS 294.035. These credit rating levels apply to the security at the transaction settlement date. If the credit rating of a security is subsequently downgraded below the minimum rating level for a new investment of that security, the CFO shall evaluate the downgrade on a case-by-case basis in order to determine if the security should be held or sold.  The CFO will notify the School Board about the credit rating downgrade and whether the decision was made to sell or hold the security.
 
d.       Securities Lending and Reverse Repurchase Agreements
The district will not lend securities nor directly participate in a securities lending or reverse repurchase program.
 
e.       Competitively Priced Securities
Before any security purchase or sale is initiated, the cash manager shall gather information about current market interest rate levels from various sources, including investment dealers, internet financial websites, financial publications and other sources.  Each security purchase shall be made at competitive market interest rate levels.  The cash manager shall use their discretion in determining whether to seek competitive bids or offers.
 
10.       Reporting
a.       Methods
 
The cash manager shall prepare an investment report monthly including a management summary that provides an analysis of the status of the current investment portfolio and transactions made over the previous month.  The report will be submitted to the CFO for review.  This management summary will be prepared in a manner that will allow the CFO to ascertain whether investment activities during the reporting period have conformed to the investment policy.  In addition, the cash manager will prepare a regular monthly board report.  At a minimum, this report will include the following:
 
(1)     Listing of individual securities held at the end of the reporting period;
(2)     Average weighted yield to maturity of portfolio on investments as compared to applicable benchmark(s);
(3)     Listing of investments by maturity date, call date, cost and current fair value;
(4)     Percentage of the total portfolio that each type of investment represents along with the percentages authorized in this policy.
 
b.       Performance Standards
The investment portfolio will be managed in accordance with the parameters specified within this policy.  The appropriate benchmark will be the monthly yield for the LGIP.  Because bond proceeds are expected to be invested at the time they are received, and are therefore invested in an interest rate environment that exists at that point in time, that portion of the portfolio will be excluded from ongoing benchmark performance measurement.
 
c.       Marking to Market
The market value of the portfolio shall be calculated at least annually and a statement of the market value of the portfolio shall be issued at fiscal year-end.
 
3.       Policy Adoption and Re-Adoption
The CFO shall annually review the investment policy and submit the policy and revisions to the OSTF if required.  The policy and any revisions shall be presented annually to the Board.  The Board will approve all revisions to the policy.
 
END OF POLICY

 

Legal Reference(s):

 

ORS 294.033

ORS 294.035

ORS 294.125

ORS 294.135

ORS 294.145

ORS 294.155