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Investment Policies

This page provides guidance to help local governments in Washington State develop and adopt investment policies, including key questions to consider and sample policies.

It is part of MRSC’s Financial Management Resources project, funded through a partnership with the State Auditor’s Office Local Government Performance Center.


Why Develop an Investment Policy?

Every city and county that invests its excess funds has an investment policy, but some are more formal and well-developed than others. Even if your jurisdiction has not developed and adopted a written policy, it still has an ad hoc policy resulting from the individual investment decisions made in the past. Those decisions have resulted in a portfolio with certain maturities, yields, liquidity, safety, etc. However, that portfolio might not be what your jurisdiction would choose if it looked at the overall picture.

Establishing and adopting a written investment policy is a good financial practice and can help your jurisdiction improve its financial security. It also provides protection for elected officials and staff by spelling out your jurisdiction’s investment goals and responsibilities.

Note: Most special purpose districts do not have their own treasurer and rely on the county treasurer instead. These jurisdictions do not need an investment policy, since the county manages investments on their behalf and the investments are subject to the county’s investment policy.


Key Components of an Investment Policy

There are many components of a successful investment policy. The Washington Public Treasurers Association (WPTA) and Government Finance Officers Association (GFOA) provide lists of recommended areas, which include:

  • Scope and investment objectives
  • Delegation of authority and responsibilities
  • Authorized financial dealers and institutions
  • Authorized investments
  • Investment diversification
  • Performance standards
  • Reporting and oversight

Within these components, there are several critical decisions to make to ensure accountability and help your jurisdiction achieve its financial goals, as discussed below.


Scope and Investment Objectives

The purpose statement is the opening statement of the investment policy. It should set a clear and concise picture of the goals of your jurisdiction. For example, Port Angeles and Poulsbo state:

The purpose of this document is to identify those funds that are considered available for investment, to invest funds to the fullest extent possible, and to formalize the investment-related activities to assure the highest return with maximum security.

Tailor the scope and investment objectives to the type of investment being made. There may be different objectives for investing excess operating funds (liquidity), bond reserves (return), and capital reserves (safety).

Key questions to consider:

  • Which funds will be invested? Define the funds that will be included within the investment policy. For example, the policy might apply to all funds with excess cash available for investment, or the policy could specifically exclude fiduciary funds.
  • What are your overall objectives, and in what order? The objectives typically speak to safety, liquidity, and return on investment (yield). Each of these areas should be discussed and ranked in priority order based on your purpose and objectives.
    • Liquidity: The ability to access funds when needed without penalty (or loss) should always be first or second priority.
    • Safety: The excess funds that are being invested are taxpayer dollars and therefore a good investment policy should always have safety as the first or second priority.
    • Return on investment (yield): The entire purpose of investing is to generate an increase in funds, but it should not be done at the expense of liquidity and safety. Typically, a greater return requires a longer commitment to the investment type (bonds, for example) which immediately reduces liquidity. Consider the length of the investment to maturity and whether the fund has the ability to restrict access for that length of time. Building these concepts into the investment policy will reduce the possibility of an investment loss.
  • Should you consider different objectives for different types of investments? For instance, investments for excess operating funds will need to be more liquid than those for bond reserves, while capital reserve investments must be mindful of when each project is going to need funds.

Delegation of Authority and Responsibilities

It is important to clearly identify the person or people empowered to make investment decisions on behalf of your jurisdiction by title and responsibility. The delegation of authority section should define the level of authority granted and the requirement for the officer to establish an appropriate internal control system to regulate the activities of subordinates.

Key questions to consider:

  • Who is the designated investment officer? The designated officer will be responsible for carrying out the objectives of the policy. Select a position rather than a specific individual. Possible investment officers include (but are not limited to) the finance director or the clerk/treasurer.
  • How much authority and discretion should the investment officer have? Is the officer expected to have special investment knowledge? Or should the authority granted be limited to certain types of investments? More sophisticated investment types will require greater levels of investment knowledge. To ensure accountability and safeguard the investments, the investment officer should regularly answer to management (mayors, city managers, city administrators, and/or a finance committee) as well as the legislative body.
  • Who is the alternate investment officer? What happens if the investment officer leaves for another job, retires, or is unable to carry out their duties for an extended time? It can take time to find a qualified replacement, so make sure you have someone designated as the alternate.
  • Are there any types of investments that require special authorization? Depending upon the size of the entity, investments in longer-term bonds, certificates of deposit, or other more sophisticated instruments may require another level of internal control. Consider defining the length of the investment when delegating investment authority to the investment officer. For example, smaller jurisdictions with little expertise in investing might require additional approval from management or the finance committee for investments of 3 years or more.

Authorized Financial Dealers and Institutions

The investment policy should consider what dealers and/or financial institutions are authorized to be used, establish criteria for evaluating them, and designate oversight. For example, all authorized broker/dealers and financial institutions must provide a statement of qualifications that will include financial statements or consolidated reports of condition.

It is important to include the requirement that “No public deposit shall be made except in a qualified public depository as provided in RCW 39.58.080.”

Key questions to consider:

  • How will you evaluate authorized financial dealers and institutions? A written procedure should be developed for selecting financial dealers and institutions and referenced as part of the policy statement. Selection criteria may consider factors such as creditworthiness, authorization to provide investment services in the State of Washington, SEC qualifications, and current financial statements or consolidated reports on file.
  • Should you solicit a minimum number of bids? Obtaining multiple bids can help your jurisdiction get the best return on investment, so some cities and counties require a minimum number of quotes or bids (generally three).

Authorized Investments

All municipal corporations in Washington State are empowered to invest in certain types of securities. Eligible investments are provided for in chapter 39.58 RCW and chapter 39.59 RCW. The authority to invest in the Washington State Treasurer’s Local Government Investment Pool (LGIP) is found in chapter 43.250 RCW.

The investment policy should confirm which types of securities your entity is comfortable investing in.

Key questions to consider:

  • What are the objectives of the investment? Liquidity? Safety? Return on investment? Your jurisdiction’s objectives and priorities will help you decide on the appropriate authorized investments. For instance, for smaller jurisdictions where liquidity is the primary objective, the LGIP (which has lower yield but higher liquidity) may be the appropriate investment.
  • How much flexibility does your jurisdiction need? When authorizing investments, consider potential changes in the economy and market conditions, as well as any areas of expertise of the investment officer. Your policy should provide a level of flexibility for those purchases that will incorporate a level of internal control (oversight) to assure compliance with the objectives.

Investment Diversification

Developing a diversification strategy, which sets maximum limits on the amount of funds that can be invested in a given type of instrument (and often sets limits on individual issuers too), is key to achieving your investment objectives. By eliminating the risk of over-concentration in any specific area, diversification can help maximize revenue, minimize risk, and ensure enough liquidity in case you need to access the money.

Key questions to consider:

  • What should the diversification requirements be? Diversification discussion should include whether or not the entity is going to invest its funds in areas other than LGIP or a money market bank account through its local bank. What percentage of the portfolio should be in the LGIP? 100%? Consider the various security types and establish a maximum limit on the type. For example:
    • WA State LGIP – max of 100%
    • U.S. Treasury bills, notes & bonds – max of 100%
    • Certificates of Deposit (CDs) – max of 30%
    • WA State and Local Bonds – max of 20%
    • Bonds of other states or local governments other than the State of WA – max of 15%
  • What is your desired return on investments, and is that a reasonable goal given your desired diversification, maturity, and liquidity? For smaller jurisdictions in particular, LGIP may make the most sense: the rate of return is very low, but it also provides the most liquidity. Higher-yield investments may generate more revenue, but they have much lower liquidity.
  • What is the desired maximum and average maturity? Consideration should be given to the funds being invested. Debt reserves will have restrictive covenants, and determining the payoff date of the debt will assist in establishing maximum maturity for debt reserves. Maximum maturity should also speak to market conditions: What is the current economic climate? Does it make sense to invest in instruments with maturities in excess of 5 years? 10 years?

Performance Standards

To meet these goals, your investment policy should also establish performance standards comparing the yield to other key indexes. Some policies tie their performance to the federal level, typically Treasury bills or federal fund rates, while others tie their performance to the Washington State Local Government Investment Pool (LGIP).

Key question to consider:

  • What is your desired return on investments, and is that a reasonable goal given your desired diversification, maturity, and liquidity? For smaller jurisdictions in particular, LGIP may make the most sense: the rate of return is very low, but it also provides the most liquidity. Higher-yield investments may generate more revenue, but they have much lower liquidity.

Reporting and Oversight

Good internal controls are key to ensuring your jurisdiction’s financial health and making sure the investment policy is followed. To ensure accountability and safeguard the investments, the investment officer should regularly answer to both management (your administration and/or finance committee) and your legislative body.

The investment officer should report at least once per quarter, and depending on the circumstances and market conditions they should report more frequently.

Key questions to consider:

  • Who will provide oversight? If your jurisdiction is relatively small, you may want to incorporate investment oversight into your existing finance committee. In very small cities and towns, the investment officer might report directly to the mayor. If your jurisdiction is large enough, you may want to establish a separate investment committee, in which case you will have to think about how many members there should be and who should serve on the committee. The investment committee should never constitute a quorum of the legislative body. The full legislative body should also receive regular investment reports.
  • How often should each body receive reports? For instance, the investment officer might submit a monthly report to the mayor and quarterly reports to the investment committee, or monthly reports to the investment committee and quarterly reports to the full council.
  • What information should be included in each report? At a minimum, the reports should discuss recent market conditions, economic developments, security types, investment transaction details, and perhaps anticipated investment strategies. The most effective reports will also compare the return on investments to the desired benchmarks established in the policy.
  • How should investment values be reported? The report should clarify whether the values being reported are "fair market" or "cost." It is recommended that both the cost and fair market value be reported to provide the reader with an understanding of the investment activity.

Investment Policy Certification

The Washington Public Treasurers Association (WPTA) provides a useful Investment Policy Certification Program for members. A WPTA policy review committee will go over your investment policy to make sure it adequately addresses the core policy areas and, if so, certify the policy. Certification provides useful guidance to protect your jurisdiction, as well as reassuring your elected officials and members of the public.

Certification is valid for five years and may be renewed after that. WPTA strongly recommends certifying the policy before submitting it to your governing body for adoption. For an example of the feedback WPTA provides, see:

The Association of Public Treasurers of the United States and Canada (APTUSC) also offers a higher-level investment policy certification program that might interest larger jurisdictions.


Examples of Investment Policies & Reports

Below are some useful investment policies, reports, and related documents, focusing particularly on small and mid-sized jurisdictions.

Investment Policy Template

Cities

Counties

Special Purpose Districts

Investment Reports

Other Investment Documents


Recommended Resources

Below are some useful resources from state agencies, the Government Finance Officers Association (GFOA), and other sources to help you develop an investment policy.


Last Modified: June 20, 2017