Investment Policies

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

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 purpose of investing is to generate an increase in funds, but investments should not be made at the expense of liquidity and safety. Typically, a greater return requires a longer commitment to the investment type (bonds, for example); these time constraints reduce liquidity. Consider the length of the investment to maturity and whether the fund can restrict access until that time. Building these concepts into your 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 will need funds.

Key questions to consider:

• Who is the designated investment officer? The designated officer is responsible for carrying out the policy's objectives. 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 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 to 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? It can take time to find a qualified replacement, so make sure you have someone designated as an alternate.
• Are there any types of investments that require special authorization? Depending on the size of the entity, investments in longer-term bonds, certificates of deposit, or other more sophisticated instruments may require additional levels 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 when considering investments of three years or more.

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 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).

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, if liquidity is your 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 your investment officer's expertise. Your policy should provide a level of flexibility for those purchases that will incorporate a level of internal control (oversight) to ensure compliance with the objectives.

Key questions to consider:

• What should the diversification requirements be? Diversification discussions should include if you will invest funds in areas other than the LGIP or money market bank accounts through your 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 investment, 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 (see the LGIP annual reports) 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 five years? 10 years?

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 fair market value and the cost be reported to provide the reader with an understanding of the investment activity.