9.1 A Team Approach to Investing Bond Funds

California Government Code Section 53600.3 provides that with respect to the investment of public funds, public officials are fiduciaries subject to the prudent investor standard. While a local agency’s fiduciary responsibilities cannot be delegated regardless of the fiduciary standards imposed on other municipal professionals, a team approach may help to ensure that an agency’s investment objectives are achieved.

The framework for investing and administering investments differs between agencies, the type of debt issued, and purpose for which it was issued. These differences are the product of several factors, including the following:

Expertise. Some public agencies have the investment expertise in house, or they have access to external resources such as investment advisors or investment services provided by another public agency.
Cash Flow Needs. The purpose for which the debt was issued is an essential consideration in selecting an appropriate investment strategy. Capital improvement projects are driven by a project schedule that relies on cash being available to pay for materials and labor, and debt service fund (DSF) investments must mature or be redeemable before debt service payments are due.
Investment Policies. Public agencies are provided broad authority when investing bond proceeds. Their decision, however, may be subject to policies written to limit risk or to reflect other social or political objectives.
Type of Debt Issued. The type of debt may dictate the investment strategy. Investment of the proceeds of refunding bonds held in trust to meet the debt service obligations on the refunded bonds, for example, may be limited to obligations issued or guaranteed by the United States government.

Weighing the relevance of each of these factors is beyond the scope of this guidebook. Public agencies should, however, undertake the work needed to appropriately manage their bond funds. This management starts with the formation of a working group composed of agency staff and consultants responsible for investment decisions, including at a minimum the following roles:

Debt Managers – who are responsible for administering the bonds, including post issuance reporting and tax compliance
Bond Counsel – who have prepared bond documents and are aware of the covenants and other terms regulating the use of the proceeds
Project or Program Staff – who manage expenditures and know when funds need to be available and in what amount
Investment Staff (internal) or Registered Investment Advisors (external) – who provide guidance on the risk, liquidity, and return of different investment alternatives
Municipal Advisors – who have participated in the bond sale and understand the timing of disbursements and the debt service schedule
Trustees – who may be administratively or statutorily assigned responsibility over the bond funds

As a team, these and others may devise an appropriate system for investing bond funds that considers the public agency’s investment authority, its administrative structure, its expertise, and its policies.