Beyond the headlines: the reality of public investing.

How do state and local governments invest their funds? Have their practices changed since the Orange County investment pool filed for bankruptcy? According to a new survey, the large majority of investment managers are conservative in their choice of investment instruments and have not found it necessary to modify their practices since Orange County's difficulties came to light.

Officials from more than 1,300 governmental units across the United States and Canada responded to the early 1995 survey sponsored by the Government Finance Officers Association and MBIA Insurance Corporation. The distribution of survey respondents by type and government is shown in Exhibit 1. This survey comes at a critical time, as investment practices of state and local government have been under intense scrutiny following highly publicized losses in a few large investment portfolios - losses resulting from government managers attempting to achieve higher yields through the use of risky investment practices such as leveraging and/or investing in volatile derivative instruments.

The GFOA/MBIA survey findings cover investment of all kinds of governmental funds except pension funds. More than one-half of the respondents manage investment portfolios of less than $25 million (excluding pension funds). The data show that most investment officials follow a conservative approach and do not support the use of derivatives or leveraging for the investment of public funds. A summary of the survey's findings is presented below.

Prudent, Conservative Practices

Despite the headlines of investment losses, the vast majority of government investment managers are prudent in their choice of investment instruments. Exhibit 2 indicates substantial diversification of assets over a range of conservative investments, including U.S. Treasury securities, certificates of deposit, and state-run pools. Typically any one class of investment does not constitute more than 30 percent of the portfolio. Furthermore, although a small number of respondents concentrate more than 70 percent of their assets in a single investment class, the class is typically a conservative vehicle such as certificates of deposit or state-run pools.

Many governments participate in investment pools, with state-run pools being the most commonly used: 56 percent of the respondents place some of their funds in state investment pools, 12 percent place some funds in pools run by other local governments, and 14 percent place...