Investment policy and recommended practices.

• Position: Government Finance Officers Association

For many years, the Government Finance Officers Association (GFOA) has undertaken a number of activities to promote good cash management practices. The GFOA has supported model investment legislation for state and local governments, full disclosure for local government investment pools, legislation providing for sales practice rules for brokers and dealers of U.S. government securities, and legislation providing for more frequent inspections and more thorough oversight of investment advisors.

Recommended practices have been adopted and promoted by the GFOA dealing with issues such as collateralization of public funds, precautions to take in investing in mutual funds, selection of investment advisors, and many other aspects of investing public funds. Most recently, the association has released a sample investment policy for state and local governments. Drafted by the GFOA's Committee on Cash Management, the policy responds to requests from GFOA members for more specific guidance on their investments. The purpose of the policy is to aid GFOA members in the preparation of their own jurisdictions' policies governing the investment of short-term operating funds. Entities are encouraged to use this as a model and to customize it to fit their needs and comply with their own state and local laws.

On July 27, 1995, GFOA President Timothy H. Riordan presented a statement on state and local government cash management and debt administration practices to the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises, Committee on Banking and Financial Services, U.S. House of Representatives. In his statement, Riordan responded to a number of questions that the subcommittee had posed to the GFOA about state and local government cash management practices relating to the subcommittee's inquiry into the events and practices involved in the loss of public investment funds by Orange County, California.

This article presents excerpts from the GFOA statement to the subcommittee. Secondly, it summarizes the contents of the GFOA's newly released sample investment policy, highlighting a list of questions that the policy suggests should be considered by any government before entering into an investment pool.

GFOA President's Congressional Testimony

Mr. Chairman and members of the subcommittee: today, I want to highlight several major points that respond to the questions you raised in your letter inviting the GFOA to testify before this subcommittee. First, you asked if the regulatory structure governing cash management and debt administration for state and local governments is adequate. The GFOA believes that the current regulatory framework, which includes local policies, state laws, and federal oversight, has successfully governed these areas and provided adequate investor and taxpayer protection.

You also asked whether Orange County is an isolated case. It is our belief that the problems experienced in Orange County have many causes but are primarily rooted in an investment strategy that was seriously flawed; they do not reflect a national trend.

What can be done to prevent another Orange County? First, GFOA strongly urges "SLY investing" - that is, safety and liquidity must be given priority over yield when investing public funds. Secondly, our association calls upon governments to reaffirm in their debt polices their commitment to full and timely repayment of all debt.

The GFOA is working to facilitate self-regulation of local financial practices. We help governments improve their practices through a variety of approaches: numerous cookbook-type publications, practical training programs, and the adoption and advocacy of recommended practices by our members. The GFOA, in a best practice statement issued more than a year ago, urged its members to use extreme...