Developing an investment policy.

• Author: Andrews, Sonia

A detailed, up-to-date investment policy is a vital tool for every government. Every investment policy is unique, so the format, language, and content may differ among jurisdictions, even those that are very similar, because of state laws, the size of the organization, risk tolerance, and a variety of other reasons. Even the structure of the policy may vary This article describes a few of the most common sections within public funds investment policies and strategies for implementing the policy after it has been created.

THE COMPONENTS

Statement of Scope. When defining the scope of the investment policy, a jurisdiction needs to identify the specific funds that will be governed. Specifying the types of funds that will be excluded can also be beneficial. Public entities include many types of funds, including operations, reserves, enterprise funds, bond proceeds, capital project funds, and pension funds, to name a few. Pension funds usually permit an allocation to equities, for example, while other funds may not; in these cases, separate investment policies may be required. (1)

An investment policy may include provisions for investing bond issuance proceeds. If so, it should refer to and incorporate the specific bond documents that comprise permitted investments. This section should also specifically refer to state laws that authorize and govern investments for the jurisdiction.

Investment Objectives. Investment objectives for public funds are primarily designed to protect taxpayer money from the risk of loss. The most common objectives are, in this order:

1. The safety of principal.

2. Liquidity.

3. Yield, or a competitive rate of return without incurring undue risk.

4. Transparency, or the ability of interested parties to review investment information like portfolio holdings and transaction information in real time.

5. Compliance, or the assurance that the investment portfolio is within all the parameters set forth in the policy (such as credit ratings, asset allocation, maturity limits or self-imposed restrictions).

Allocations of Authority and Responsibility. The responsibility and authority for each person involved in managing an organization's public funds should be specifically detailed. The appropriate level of authorization must be provided to relevant staff members, allowing them to efficiently manage the investment program internally; otherwise, that task should be delegated to an outside investment firm.

This section should also refer to the entity's internal controls document, which is designed to minimize the risk of losses from fraud, employee error, or misrepresentation. Confirm titles and the associated responsibilities for the designated individuals to ensure compliance with the organization's policy and to prevent unauthorized transactions.

Ethics and Conflicts of Interest. An organization's investment policy should require the standard of prudence to be applied in managing the portfolio. The policy should also specifically address potential conflicts of interest vis-a-vis public officials...