DFA Cash & Investment
File: DFA
CASH & INVESTMENT
Statement of Purpose:
The purpose of this document is to specify the policies and guidelines that provide for the prudent and productive investment of District funds.
The Hamilton-Wenham School District authorizes the Treasurer to act as the custodian and investment officer of District funds and to invest the following funds in accordance with this policy, and the provisions of applicable Massachusetts General Laws ("MGL").
The District Treasurer is the custodian and investment officer for the following funds:
•General Fund
•Special Revenue and Agency Funds
•Capital Projects and Debt Service Funds
•State and Federal Grants Fund*
•Scholarship Funds
•Trust Funds
•Any other funds deemed to be public funds for the Hamilton-Wenham Regional School District
*The investment procedures of grant funds are subject to grant or contractual terms.
Section I.
The Investment of General Funds, Special Revenue Funds, and Capital Projects Funds
A. Scope
This section of the policy applies only to short term operating funds such as general funds, special revenue funds, bond proceeds and capital project funds. Section two will deal with any other funds with special circumstances such as scholarship funds.
B. Objectives
District Treasurer will invest all public funds except those required to be kept uninvested for purposes of immediate distribution. Modern banking systems enable the District Treasurer to maintain even these funds in interest bearing form until the date a disbursement order clears through the banking system.
The state law further requires that invested funds are to be placed at the highest possible rate of interest reasonably available, taking into account the acceptable levels of safety, liquidity and yield. Therefore, these guidelines are intended to further the objective of securing the highest reasonable return available that is consistent with safety of principal while meeting the daily cash requirements for the operation of the District.
- Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that requires the preservation of capital through the mitigation of credit risk and interest rate risk. These risks shall be mitigated by the diversification and prudent selection of investment instruments, and choice of depository. Credit risk is the risk of loss due to the failure of the security issuer or backer. Interest rate risk is the risk that the market value of the security will fall due to changes in general interest rates.
- Liquidity is the next most important objective. The overall investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. Since all possible cash demands cannot be anticipated, the Treasurer shall attempt to carry out investment activities in a manner that provides for meeting unusual or unexpected cash demands without requiring the liquidation of investments that could result in forfeiture of accrued interest earnings, and loss of principal in some cases.
- Yield is the third, and last, objective. Investments shall be undertaken so as to achieve a fair market average rate of return, taking into account safety and liquidity constraints as well as all legal requirements.
C. Investment Instruments
Public investments in Massachusetts are not protected through provisions in State law. Therefore, they are largely uncollateralized. Many banking institutions are willing to put up collateral, albeit at a cost to the entity resulting in a lower interest rate. The Treasurer negotiates for the highest rates possible, consistent with safety principles. All investments must be included in the Massachusetts List of Legal Investments pursuant to M.G.L. Chapter 167, Section 15A.
The Treasurer may invest in the following instruments:
- Massachusetts State pooled fund: Unlimited amounts (Pool is liquid)
- U. S. Treasuries that will be held to maturity: Unlimited amounts (Up to one year maturity from date of purchase)
- U.S. Agency obligations that will be held to maturity. Unlimited amounts (Up to one year maturity from date of purchase)
- Bank accounts or Certificates of Deposit (“CDs”) (Up to one year) which are fully collateralized through a third party agreement: Unlimited Amounts
- Bank accounts and CDs (Up to one year) insured by F.D.I.C. up to the coverage limit. All bank accounts and CDs in one institution are considered in the aggregate for the insurance coverage limit. In some cases Banking Institutions carry additional insurance, Depository Insurance Fund(D.I.F.): Contact banking representative for amounts of coverage.
- Unsecured bank deposits of any kind such as other checking, savings, money market, or Certificates of Deposit accounts at Banks that do not fit the above categories. These investments are subject to the following limitations: No more than 5% of an institution's assets and no more than 25% of the District’s cash may be comprised of unsecured bank deposits. This percentage may be increased for not more than 30 days during times of heavy collection or in anticipation of large payments that will be made by the District in the near future. These payments may be for such items as debt service payment or regional school assessments. Their credit worthiness will be tracked by Veribanc, or other bank credit worthiness reporting systems. They will be diversified as much as possible. CDs will be purchased for no more than one year and will be reviewed frequently.
- Money Market Mutual Funds that are registered with the Securities and Exchange Commission that have received the highest possible rating from at least one nationally recognized statistical rating organization and as otherwise referenced in the MGL, Chapter 44 Section 55.
D. Risk Tolerance
- Credit Risk
Credit risk” is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.
The District will manage credit risk several ways. There will be no limit to the amount of United States Treasury and United States Government Agency obligations.
In regards to other investments, the District will only purchase investment grade securities with a high concentration in securities rated A or better.
The District may invest in the Massachusetts Municipal Depository Trust (MMDT) with no limit to the amount of funds placed in the fund.
Custodial Risk
The “custodial credit risk” for deposits is the risk that, in the event of the failure of a depository financial institution, the District will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, the District will not be able to recover the value of investment or collateral securities that are in the possession of an outside party.
The District will review the financial institution’s financial statements and the background of the brokerage house and broker/dealer (Advisor). The intent of this qualification is to limit the District’s exposure to only those institutions with a proven financial strength, capital adequacy of the firm, and overall affirmative reputation in the municipal industry.
- Concentration of Credit Risk
“Concentration of credit risk” is the risk of loss attributed to the magnitude of a government’s investment in a single issuer.
The District will minimize concentration of credit risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized.
- Interest Rate Risk
“Interest rate risk” is the risk that changes in interest rates will adversely affect the fair value of an investment.
The District will manage interest rate risk by managing duration in the account.
- Foreign Currency Risk
“Foreign currency risk” is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit.
The District will not invest in any instrument exposed to foreign currency risk.
E. Diversification
Diversification should be interpreted in two ways: in terms of maturity as well as instrument type and issuer. The diversification concept should include prohibition against over concentration of maturities, as well as concentration in a specific institution. With the exception of U.S. Treasury obligations or investments fully collateralized by U.S. Treasuries or agencies, and State pools (MMDT), no more than 10% of the District's investments shall be invested in a single financial institution.
F. Authorization
The Treasurer has authority to invest District funds, subject to the statutes of the Commonwealth Massachusetts General Law Chapter 44 Section 55,55A, & 55B.
G. Ethics
The Treasurer shall refrain from any personal activity that may conflict with the proper execution of the investment program or which could impair or appear to impair ability to make impartial investment decisions. The Treasurer shall disclose to the School Committee any material financial interest in financial institutions that do business with the District. The Treasurer shall also disclose any large personal financial investment positions or loans that could be related to the performance of the District's investments.
H. Relationship with Financial Institutions
Financial institutions should be selected first and foremost with regard to their financial soundness and stability. Brokers should be recognized, reputable dealers and members of the Financial Industry Regulatory Authority (FINRA).
The Treasurer should request the banking institution’s Veribanc rating from all of the banking institutions that are working with the District on a semi-annual basis.
When using the Veribanc Rating Service the Treasurer may invest in such banks that show a green rating in a particular report. If a rating is yellow the Treasurer should contact the appropriate banking institution and request in writing an explanation of the change in rating and the expected time table for it to be changed to green.
If for a second report such rating is not green, the Treasurer should consider removing all funds that are not collateralized, or carries y some form of depositors insurance.
If a rating moves to red all money should be immediately collateralized or covered by some form of depositors insurance or be removed from the banking institution.
The Treasurer shall require any brokerage houses and broker/dealers wishing to do business with the District to supply the following information to the Treasurer on an annual basis:
- Audited financial statements
- If acting as a Registered Investment Advisor, copy of their Form ADV Part II
- Proof of FINRA membership
- A statement that the Advisor has read the District’s Investment Policy and will comply with it on an annual basis
- Proof of credit worthiness (minimum standards: at least five years in operation and a minimum capital of 10 million dollars)
I. Reporting Requirements
On a semi-annual basis, a report containing the following information will be prepared by the Treasurer and distributed to the Superintendent, the Assistant Superintendent for Finance and Administration, and the Director of Accounting. The report will include the following information, as a minimum requirement:
- A listing of the individual accounts and individual securities held at the end of the reporting period.
- A listing of the short-term investment portfolio by security type and maturity to ensure compliance with the diversification and maturity guidelines established in the "Diversification" section of this Policy.
- A summary of the income earned on a monthly basis and year-to-date basis shall be reported.
- The Treasurer shall include in the report a brief statement of general market and economic conditions and other factors that may affect the District's cash position.
- The report should demonstrate the degree of compliance with the tenets set forth in this Policy.
J. Restrictions
There are several restrictions that the Treasurer must be aware of when making investment selections.
- A Treasurer shall not at any one time have on deposit in a bank or trust company an amount exceeding 60% of the capital and surplus of such bank or trust company, or banking company, unless satisfactory security is given to it by such bank or trust company, or banking company for such excess.
- The Treasurer shall not make a deposit in any bank, trust company or banking company with which he is, or for any time during the three years immediately preceding the date of any such deposit was associated as an officer or employee.
- All securities shall have a maturity from date of purchase of one year or less.
- Purchases under an agreement with a trust company, national bank or Banking Company to repurchase at not less than original purchase price of said securities on a fixed date shall not exceed ninety days.
Section II
The Investment of Trust Funds and Stabilization Funds
A. Scope
This Policy applies to all accounts that are designated as Scholarship or Trust Funds. These funds include all accounts that are received as scholarships and perpetual care receipts.
All accounts will be maintained separately receiving their proportionate interest and any realized and unrealized gains or losses. The account will be established as a pooled investment portfolio unless otherwise stated. Any additional accounts will be maintained in this same manner.
B. Authority
MGL Chapter 44, section 54 pertains to the investment of Trust Funds. All trust funds shall fall under the control of the District Treasurer unless otherwise provided or directed by the donor.
C. Objective
MGL, Chapter 44, section 55B requires the District Treasurer to invest all public funds except those required to be kept un-invested for purposes of immediate distribution.
This section also requires that invested funds are to be placed at the highest possible rate of interest reasonably available, taking into account the acceptable levels of safety, liquidity and yield. Therefore, these guidelines are intended to further the objective of securing the highest reasonable return available that is consistent with the safety of principal while meeting the daily cash requirements for the operation of the District.
Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that requires the preservation of capital through the mitigation of credit risk and interest rate risk. These risks shall be mitigated by the diversification and prudent selection of investment instruments, and choice of depository. Credit risk is the risk of loss due to the failure of the security issuer or backer. Interest rate risk is the risk that the market value of the security will fall due to changes in general interest rates.
Liquidity is the next most important objective. The overall investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. Since all possible cash demands cannot be anticipated, the treasurer shall attempt to carry out investment activities in a manner that provides for meeting unusual or unexpected cash demands without requiring the liquidation of investments that could result in forfeiture of accrued interest earnings, and loss of principal in some cases.
Yield is the third, and last, objective. Investments shall be undertaken so as to achieve a fair market average rate of return, taking into account safety and liquidity constraints as well as all legal requirements.
D. Investment Instruments
District funds should be deposited into savings banks or trust companies incorporated under the laws of the Commonwealth, banking companies incorporated under the laws of the Commonwealth which are members of the Federal Deposit Insurance Corporation, or national banks, or invested in participation units in a combined investment fund under section thirty-eight A of chapter twenty-nine, or in paid–up shares and accounts of and in co-operative banks, or in shares of savings and loan associations or in share or savings deposits of federal savings and loan associations doing business in the commonwealth.
Additionally, the District may invest such funds in securities, other than mortgages or collateral loans, which are legal for the investment of funds of savings banks under the laws of the commonwealth; provided, that not more than fifteen percent (15%) of any such trust funds shall be invested in bank stocks and insurance company stocks, nor shall more than one and one-half percent (1 ½%) of such funds be invested in the stock of any one bank or insurance company. All investments must be represented by the Massachusetts List of Legal Investments pursuant to M.G.L. Chapter 167, Section 15A.
The Treasurer may invest in the following instruments:
- U. S. Treasuries that may be sold prior to maturity: Unlimited amounts (With no limit to the length of maturity from date of purchase)
- U.S. Agency obligations that may be sold prior to maturity. Unlimited amounts (With no limit to the length of maturity from date of purchase)
- Bank accounts or Certificates of Deposit (“CDs”) Unlimited amounts (With no limit to the length of maturity from date of purchase), which is fully collateralized through a third party agreement:
- Bank accounts and CDs (With no limit to the length of maturity from date of purchase) fully insured by F.D.I.C. and in some cases also Depository Insurance Fund of Massachusetts (D.I.F.):All bank accounts and CDs in one institution are considered in the aggregate to receive the insurance coverage limit.
- Unsecured bank deposits of any kind such as other checking, savings, money market, or Certificates of Deposit accounts at Banks that do not fit the above categories. These investments are subject to the following limitations: These investments will be limited to no more than 5%of an institution's assets and no more than 25% of the District's cash. Their credit worthiness will be tracked by Veribanc, or other bank credit worthiness reporting systems. They will be diversified as much as possible. CDs will be purchased with no limit to the length of maturity from the date of purchase and will be reviewed frequently.
- Common and preferred stock that are listed in the List of Legal Investments.
- Investment Funds that are listed in the List of Legal Investments.
- All other items not separately identified here that are listed in the List of Legal Investments.
E. Risk Tolerance
- Credit Risk
Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.
The District will manage credit risk several ways. There will be no limit to the amount of United States Treasury and United States Government Agency obligations.
In regards to other investments the District will only purchase investment grade securities with a high concentration in securities rated A or better.
The District may invest in the Massachusetts Municipal Depository Trust (MMDT) with no limit to the amount of funds placed in the fund.
The District may place funds in banking institutions as stated in Section D of this Cash and Investment Policy.
- Custodial Risk
The custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party.
The District will review the financial institution’s financial statements and the background of the sales representative. The intent of this qualification is to limit the District’s exposure to only those institutions with a proven financial strength, capital adequacy of the firm, and overall affirmative reputation in the municipal industry.
- Concentration of Credit Risk
“Concentration of credit risk” is the risk of loss attributed to the magnitude of a government’s investment in a single issuer.
The District will minimize concentration of credit risk by diversifying the investment portfolio so that the impact of potential losses from any one type of security or issuer will be minimized.
- Interest Rate Risk
“Interest rate risk” is the risk that changes in interest rates will adversely affect the fair value of an investment.
The District will manage interest rate risk by managing duration in the account.
- Foreign Currency Risk
“Foreign currency risk” is the risk that changes in foreign monetary exchange rates will adversely affect the fair value of an investment or a deposit.
The District will not invest in any instrument exposed to foreign currency risk.
F. Standards of Care
The standard of prudence to be used by the Treasurer shall be the “Prudent Person” standard and shall be applied in the context of managing an overall portfolio. The Treasurer acting in accordance with written procedures and this Policy, and exercising reasonable due diligence, shall be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided the purchases and sale of securities is carried out in accordance with the terms of this Policy.
Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs; not for speculation, but for investment considering the probable safety of their capital as well as the probable income to be derived. Compliance by the Treasurer with the terms of this Policy shall constitute “good faith” and the “exercise of care” within the meaning of
MGL Chapter 44 Section 55A, which refers to the liability of the Treasurer for losses due to bankruptcy.
MGL Chapter 44 Section 55A, which refers to the liability of the Treasurer for losses due to bankruptcy.
G. Diversification
Diversification should be interpreted in two ways: in terms of maturity as well as instrument type and issuer. The diversification concept should include prohibition against over concentration of maturities, as well as concentration in a specific institution, with the exception of U.S. Treasury obligations or investments fully collateralized by U.S. Treasuries or agency obligations.
H. Ethics
The Treasurer shall refrain from any personal activity that may conflict with the proper execution of the investment program or which could impair or appear to impair his/her ability to make impartial investment decisions. The Treasurer shall disclose to the School Committee any material financial interest in financial institutions that do business with the District. The Treasurer shall also disclose any large personal financial investment positions or loans that could be related to the performance of the District's investments.
I. Relationship with Financial Institutions
Financial institutions should be selected first and foremost with regard to their financial soundness and stability. Brokers should be recognized, reputable dealers.
The Treasurer shall require any brokerage houses and broker/dealers, wishing to do business with the District, to supply the following information to the Treasurer:
- Audited financial statements
- If acting as a Registered Investment Adviser, yearly copy of their SEC Form ADV Part II
- Proof of FINRA membership
- A statement that the Advisor has read the District Cash and Investment Policy and will comply with it on an annual bas
J. Reporting Requirements
- On a semi-annual basis, a report containing the following information will be prepared by the Treasurer and distributed to the Superintendent, and/or Business Manager, as appropriate. The report will include the following information, as a minimum requirement:
- A listing of the individual accounts and individual securities held at the end of the reporting period.
- A listing of the short-term investment portfolio by security type and maturity to ensure compliance with the diversification and maturity guidelines established in the "Diversification" section of this Policy.
- A summary of the income earned on a monthly basis and year-to-date basis shall be reported.
- The Treasurer shall include in the report a brief statement of general market and economic conditions and other factors that may affect the District's cash position.
- The report should demonstrate the degree of compliance with the tenets set forth in the Policy.
LEGAL REFS.:
Adopted: 1/5/2023