Investing is a discipline that results from sound policies and practices. Public funds investing has a unique set of needs which GFOA addresses through a number of developed best practices.
An investment policy describes the parameters for investing government funds and identifies the investment objectives, preferences or tolerance for risk, constraints on the investment portfolio, and how the investment program will be managed and monitored. The document itself serves as a communication tool for the staff, elected officials, the public, rating agencies, bondholders, and any other stakeholders on investment guidelines and priorities. An investment policy enhances the quality of decision making and demonstrates a commitment to the fiduciary care of public funds, making it the most important element in a public funds investment program.
Best Practices & Advisories
Investing Policy and Governance
- Collateralizing Public Deposits - GFOA recommends the use of a written agreement with pledging requirements as protection for state or local government's deposits. GFOA encourages governmental entities to establish adequate and efficient administrative systems to monitor such pledged collateral, including state or locally administered collateral pledging or collateral pools.
- Diversifying the Investment Portfolio - GFOA recommends that state and local governments properly manage the risk in their portfolios to achieve their investment objectives and comply with their investment constraints. GFOA further recommends the use of diversification in a portfolio as an important strategy for managing risk.
- Government Relationships with Securities Dealers - GFOA makes the following recommendations to government investors in selecting securities dealers for their approved vendor list, managing the relationships with the broker/dealers, and conducting investment transactions.
- Investment of Bond Proceeds - GFOA recommends that state and local governments develop an understanding of the risks inherent in investing bond proceeds and incorporate steps in their investment strategy for each fund to minimize these risks.
- Investment Policy - GFOA recommends that all governments establish a comprehensive written investment policy, which should be adopted by the governing body.
- Investment Program for Public Funds - GFOA recommends that all governments establish a public funds investment program.
Measuring Investment Performance
Mark-to-Market Reporting for Public Investment Portfolios -GFOA recommends that state and local government officials responsible for investment portfolio reporting determine the market value of all securities in the portfolio on at least a quarterly basis.
- Monitoring the Value of Securities in Repurchase Agreements - GFOA recommends that government entities establish a policy and procedure for monitoring the value of the purchased securities in a repo transaction to ensure that it does not drop below the value of the repo investment plus any required margin percentage.
- Managing Market Risk in Investment Portfolios - State and local governments should comply with state statutes pertaining to investing public funds along with all investment policy parameters. Fixed income investing involves a certain level of market risk. Investors should be aware of their risk tolerance and confirm that the market risk they assume is within this tolerance level.
Using Benchmarks to Assess Portfolio Risk and Return - GFOA recommends that government investors assess their investment portfolio for performance and risk by comparing the total return of the portfolio to carefully selected benchmarks.
Types of Investments
Local Government Investment Pools - GFOA makes the following recommendations to governments that invest in or are considering investing in Local Government Investment Pools (LGIPs).
Establishing a Policy for Repurchase Agreements - GFOA recommends that state and local government finance officers develop policies and procedures to ensure the safety of repos.
Ensuring the Safety of Reverse Repurchase Agreements - GFOA recommends that state and local government finance officers develop policies and procedures to ensure the safety of reverse repos.
Using Commercial Paper in Investment Portfolios - GFOA recommends that if a government chooses to use CP in its investment portfolio, it cautions government investors to: 1) verify whether commercial paper is allowed under state statute and their investment policy and 2) determine whether they have the expertise to understand, evaluate and monitor commercial paper before deciding.
Use of Derivatives and Structured Investments by State and Local Governments for Non-Pension Fund Investment Portfolios - GFOA advises state and local government finance officers to exercise extreme caution in the use of derivatives and structured finance products. Governmental entities must learn about and understand the potential risks and rewards of derivative and structured products, before deciding if they should be used.
Securities Lending Programs for Non-Pension Fund Portfolios -While investment strategies that include securities lending programs are not inherently risky when employed judiciously with appropriate precautions and controls, GFOA urges state and local government officials to exercise caution in their use of securities lending programs.
Selection and Review of Investment Advisors - GFOA recommends that state and local governments exercise caution and prudence in their selection of investment advisers.
Using Safekeeping and Third-Party Custodian Services - GFOA recommends that state and local governments utilize independent third-party custodians to safeguard their investments and protect against safekeeping/custodial risks.
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