Policy DFA: Investments

Purpose:

The purpose of this document is to specify the policies and guidelines that provide for the prudent and productive investment of funds.

The Amherst-Pelham Regional School District authorizes the treasurer to act as the custodian and investment officer of district funds and to invest the following funds in accordance with this policy, the provisions of Massachusetts General Laws ("MGL") Chapter 44, Section 55 and other applicable state statutes.

The District Treasurer is the custodian and investment officer for the following funds:

  • General Fund 
  • Special Revenue and Agency Funds
  • Capital Projects and Debt Service Funds
  • State and Federal Grants Fund*
  • Stabilization Funds
  • Trust Funds
  • Any other funds deemed to be public funds for the Amherst-Pelham Regional School District

*The investment procedures of grant funds are subject to grant or contractual terms.

           
Section I: 

Investment of General Funds, Special Revenue and Agency Funds, Debt Service Funds, Grant Funds and Capital Projects Funds

A.  Scope

Section I of the policy applies to short term operating funds such as general funds, special revenue and agency funds, state and federal grant funds, debt service funds (bond proceeds) and capital project funds.  Section II will deal with trust funds, and any other funds with special circumstances such as stabilization funds. 

B.  Objectives

Massachusetts General Laws, Chapter 44, section 55B requires the district treasurer to invest all public funds except those required to be kept un-invested for purposes of immediate distribution.  Modern banking systems enable the treasurer to maintain even these funds in interest bearing form until the date a disbursement order clears through the banking system.

The state law further requires that invested funds are to be placed at the highest possible rate of interest reasonably available, taking account of safety, liquidity and yield.  Therefore, these guidelines are intended to further the objective of securing the highest return that is consistent with safety of principal while meeting the daily cash requirements for the operation of the entity's business.

  • 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 through the mitigation of credit risk and interest rate risk.These risks shall be mitigated by the diversification and prudent selection of investment instruments, and choice of depository.Credit risk is the risk of loss due to the failure of the security issuer or backer.Interest rate risk is the risk that the market value of the security will fall due to changes in general interest rates.
  • Liquidity is the next most important objective.The overall investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated.Since all possible cash demands cannot be anticipated, the treasurer shall carry out investment activities in a manner that provides for meeting unusual cash demands without the liquidation of investments that could result in forfeiture of accrued interest earnings, and loss of principal in some cases.
  • Yield is the third, and last, objective.Investments shall be undertaken so as to achieve a fair market average rate of return, taking into account safety and liquidity constraints as well as all legal requirements.

C.  Investment Instruments

Public investments in Massachusetts are not protected through provisions in State law.  Therefore, they are largely uncollateralized.  Many banking institutions are willing to put up collateral, albeit at a cost to the entity of a lower interest rate.  The treasurer negotiates for the highest rates possible, consistent with safety principles.The treasurer may invest in the following instruments, as defined in MGL Chapter 44 Section 55. Sequence in the list is according to risk level, with the state of Massachusetts pooled funds considered to have the least risk.
  • Massachusetts State pooled fund:  Unlimited amounts
  • U. S. Treasuries that will be held to maturity:  Unlimited amounts (Up to one year maturity from date of purchase)
  • U.S. Agency obligations that will be held to maturity.  Unlimited amounts (Up to one year maturity from date of purchase)
  • Bank accounts or Certificates of Deposit, hitherto termed C.D.'s.  (Up to one year) which are fully collateralized through a third party agreement.  Unlimited amounts
  • Bank accounts and C.D.'s (Up to one year) insured by F.D.I.C. up to $250,000 limit. All bank accounts and C.D.'s in one institution are considered in the aggregate to receive the F.D.I.C. insurance coverage. In some cases, Banking Institutions carry additional insurance, Depository Insurance Fund of Massachusetts (D.I.F.M). 
  • Unsecured bank deposits of any kind such as other checking, savings, money market, or Certificates of Deposit accounts at Banks that do not fit the above categories.  These investments are subject to the following limitations:  These investments will be limited to no more than 5% of an institution's assets and no more than 10% of the District's cash.  Their credit worthiness will be tracked by Veribanc, Sheshunoff, or another bank credit worthiness reporting system.  They will be diversified as much as possible.  C.D.'s will be purchased for no more than three months and will be reviewed frequently.
  • Money Market Mutual Funds that are registered with the Securities and Exchange Commission that have received the highest possible rating from at least one nationally recognized statistical rating organization and as otherwise referenced in the Massachusetts General Law Chapter 44, Section 55.

D.  Risk 

  • Credit Risk

    “Credit Risk” is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

    The District will mitigate credit risk by the diversification and prudent selection of investment instruments. The District may invest in the Massachusetts Municipal Depository Trust (MMDT) with no limit to the amount of funds placed in the fund.

  • Custodial Risk

    The “custodial credit risk” for deposits is the risk that, in the event of the failure of the depository financial institution, a municipality/district will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to the transaction, a municipality/district will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party.

    The School District will review the financial institution’s financial statements and the background of the advisor. The intent of this qualification is to limit the School District’s exposure to only those institutions with a proven financial strength, Capital adequacy of the firm, and overall affirmative reputation in the municipal industry.

    Further, all securities not held directly by the School District, will be held in the School District’s name and tax identification number by a third-party custodian approved by the Treasurer and evidenced by safekeeping receipts showing individual CUSIP numbers for each security.

  • Concentration of Credit Risk

    “Concentration of credit risk” is the risk attributed to the magnitude of a government’s investment in a single issuer. The School District will minimize concentration risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized. A treasurer shall not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of such bank or trust company, or banking company, unless satisfactory security is given to it by such bank or trust company, or banking company for such excess.

  • Interest Rate Risk

    “Interest rate risk” is the risk that changes in interest rates will adversely affect the fair value of an investment. The School District will manage interest rate risk by managing duration in the account. 

  • Foreign Currency Risk

    “Foreign currency risk” is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit. The School District will not invest in any instrument exposed to foreign currency risk.

    E.  Diversification 

    Diversification should be interpreted in three ways: maturity date diversity to minimize interest rate risk and to match planned liquidity, instrument type diversity for planned liquidity, and issuer diversity to minimize credit risk and custodial credit risk.

    F.  Authorization

    The District Treasurer has authority to invest district funds, subject to the statutes of the Commonwealth Massachusetts General Law Chapter 44, Section 55, 55A, & 55B.

    G. Relationship with Financial Institutions

    Financial institutions should be selected first and foremost with regard to safety.  The treasurer’s office shall subscribe to and use one or more of the recognized bank rating services, such as Veribanc or Sheshunoff.  Brokers should be recognized, reputable dealers.  When using the Veribanc rating service the treasurer may invest in such banks that show a green rating in a particular quarter. If a rating is yellow the treasurer should contact the appropriate banking institution and request in writing an explanation of the change in rating and the expected time table for it to be changed to green.

    If for a second quarter such rating has not been corrected, the treasurer should consider removing all funds that are not collateralized, or carries some form of depositors insurance.

    If a rating moves to red all money should be immediately collateralized or covered by some form of depositors insurance or be removed from the banking institution.

    Any brokerage houses and broker/dealers, wishing to do business with the district, are to supply the following information to the treasurer upon request: 

    • Audited financial statements
    • If acting as a Registered Investment Advisor, a copy of their Form ADV Part II
    • Proof of FINRA membership
    • A statement that the Advisor has read the district’s investment policy statement  and will comply with it
    • Proof of credit worthiness  (minimum standards:  at least five years in operation and a minimum capital of 10 million dollars)
    • A treasurer shall not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of such bank or trust company, or banking company, unless satisfactory security is given to it by such bank or trust company, or banking company for such excess.
    • The treasurer shall not make a deposit in any bank, trust company or banking company that he/she is associated as an officer or employee or has been the same for any time during the three years immediately preceding the date of any such deposit.
    • All securities shall have a maturity from date of purchase of one year or less.
    • Purchases under an agreement with a trust company, national bank or banking company to repurchase at not less than original purchase price of said securities on a fixed date shall not exceed ninety days.

  • Credit Risk

    “Credit Risk” is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

    The District will mitigate credit risk by the diversification and prudent selection of investment instruments. The District may invest in the Massachusetts Municipal Depository Trust (MMDT) or the Pension Reserves Investment Trust Fund (PRIT) with no limit to the amount of funds placed in the fund.

  • Custodial Risk

    The “custodial credit risk” for deposits is the risk that, in the event of the failure of the depository financial institution, a municipality/district will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to the transaction, a municipality/district will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party.

    The School District will review the financial institution’s financial statements and the background of the advisor. The intent of this qualification is to limit the School District’s exposure to only those institutions with a proven financial strength, Capital adequacy of the firm, and overall affirmative reputation in the municipal industry.

    Further, all securities not held directly by the School District, will be held in the School District’s name and tax identification number by a third-party custodian approved by the Treasurer and evidenced by safekeeping receipts showing individual CUSIP numbers for each security.

  • Concentration of Credit Risk

    “Concentration of credit risk” is the risk attributed to the magnitude of a government’s investment in a single issuer. The School District will minimize concentration risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized. A treasurer shall not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of such bank or trust company, or banking company, unless satisfactory security is given to it by such bank or trust company, or banking company for such excess.

  • Interest Rate Risk

    “Interest rate risk” is the risk that changes in interest rates will adversely affect the fair value of an investment. The School District will manage interest rate risk by managing duration in the account. 

  • Foreign Currency Risk

“Foreign currency risk” is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit. The School District will not invest in any instrument exposed to foreign currency risk.

E.  Diversification

Diversification should be interpreted in three ways: maturity date diversity to minimize interest rate risk and to match planned liquidity, instrument type diversity for planned liquidity, and issuer diversity to minimize credit risk and custodial credit risk. 

F.  Authorization

The Treasurer has authority to invest district funds, subject to the statutes of the Commonwealth Massachusetts General Law Chapter 44, Section 55, 55A, & 55B. All trust funds shall fall under the control of the District Treasurer unless otherwise provided or directed by the donor.

G.  Relationship with Financial Institutions

Brokers working on behalf of the District should be recognized, reputable dealers. The District Treasurer shall require any brokerage houses and broker/dealers, wishing to do business with the District, to supply the following information to the Treasurer upon request:

  • Audited financial statements
  • If acting as a Registered Investment Advisor, a copy of their Form ADV Part II
  • Proof of FINRA membership
  • A statement that the Advisor has read the district’s investment policy statement  and will comply with it
  • Proof of credit worthiness  (minimum standards:  at least five years in operation and a minimum capital of 10 million dollars)
  • Proof of adequate insurance coverage.

An annual review of the financial condition and registration of qualified financial institutions and broker/dealers will be conducted by the investment officer.

H.  Restrictions

Chapter 44, Section 55 sets forth the several restrictions that the treasurer must be aware of when making investment selections.

  • A treasurer shall not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of such bank or trust company, or banking company, unless satisfactory security is given to it by such bank or trust company, or banking company for such excess.
  • The treasurer shall not make a deposit in any bank, trust company or banking company that he/she is associated as an officer or employee or has been the same for any time during the three years immediately preceding the date of any such deposit.
  • All securities shall have a maturity from date of purchase of one year or less.

Purchases under an agreement with a trust company, national bank or banking company to repurchase at not less than original purchase price of said securities on a fixed date shall not exceed ninety days.

I.  Legal References

Massachusetts General Law Chapter 32A, Section 24
Massachusetts General Law Chapter 44, Section 55

Massachusetts General Law Chapter 44, Section 55A

Massachusetts General Law Chapter 44, Section 55B

Massachusetts General Law Chapter 203C

 

III. Reporting Requirements

On a quarterly basis a report containing the following information will be prepared by the treasurer and made available for review:

  • A report of the account types (i.e. general fund, trust funds, stabilization) including fund balances, investment return information and summary of income received as of the end of the reporting period.
  • A listing of the individual accounts and individual securities held at the end of the reporting period
  • A listing of the short-term investment portfolio by security type and maturity to ensure compliance with the diversification and maturity guidelines established in the “Diversification” section of the Investment Policy Statement.
  • A summary of the income earned on a monthly basis and year-to-date basis shall be reported.
  • The district treasurer shall include in the report a brief statement of general market and economic conditions and other factors that may affect the district's cash position.
  • The report should demonstrate the degree of compliance with the tenets set forth in the Investment Policy. 


IV. Internal Controls: 

The business administrator is responsible for establishing and maintaining an internal control system designed to ensure that the assets of the district are protected from loss due to employee error, fraud, and misrepresentation by third parties or imprudent actions by employees and officers. The internal control structure shall be designed to provide reasonable assurance that these objectives are met.

Accordingly, the business administrator shall establish a process for an annual independent review by an external auditor to assure compliance with policies and procedures. The internal controls shall address the following points:

  • Control of collusion
  • Separation of transaction authority from accounting and recordkeeping
  • Custodial safekeeping of all funds received.
  • Avoidance of physical delivery securities
  • Clear delegation of authority to subordinate staff members
  • Written confirmation of transactions for investments and wire transfers
  • Development of a wire transfer agreement with the lead bank and third-party custodian

A. Delegation of Authority

Management responsibility for the investment program is hereby delegated to the District Treasurer, who shall establish written procedures for the operation of the investment program consistent with this investment policy. Procedures should include references to custody, repurchase, wire transfer, bank security agreements, and banking service contracts. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the treasurer. The treasurer shall be responsible for all transactions undertaken and shall establish a system of controls.

V. Ethics:

The treasurer and assistant treasurer shall refrain from personal business activity that could conflict with proper execution of the investment policy, or which could impair their ability to make impartial investment decisions. The treasurer and assistant treasurer shall disclose in writing, to the business administrator and the Amherst Pelham Regional School Committee, any material financial interests in financial institutions with whom they conduct business. They shall further disclose any large personal financial/investment positions that could be related to the performance of the investment portfolio, particularly with regard to the time of purchase and sales.

A.  Standards of Care

The standard of prudence to be used by the treasurer shall be the “Prudent Person” standard and shall be applied in the context of managing an overall portfolio. The treasurer 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 the purchases and sale of securities is 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.

In addition this section would also apply to M.G.L. Chapter 44 Section 55A which refers to the liability of the treasurer for losses due to bankruptcy.

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