9.4.1 Permitted Investments

9.4.1 Permitted Investments

Under California Government Code Section 53601(m), bond proceeds may be invested in investment vehicles set forth in the bond documents. For most bond issues, these include the following.

INDIVIDUAL FIXED INCOME SECURITIES – Generally, individual fixed income securities permitted for bond funds are limited to direct obligations of the U.S. Treasury, obligations of federal agencies, and debt obligations of other entities, including municipal and corporate debt securities, that are of high credit quality and relatively short duration.

While investment opportunities relating to individual securities may provide an issuer with flexibility to meet specific investment objectives, managing a portfolio of individual securities requires expertise to analyze credit and other risks and implement strategies that may affect the balance between safety, liquidity, and yield. See Section 9.4.2, Investments Specific to Bond Funds.

Equity or stock investments by public agencies are generally prohibited under Article XVI, Section 6 of the California Constitution and, because they are subject to substantial market volatility, are seldom permitted for bond fund investments.

POOLED INVESTMENT FUNDS – Pooled investment funds include governmental pools and commercial, for profit mutual funds or money market funds. Pooled investment funds relieve agencies of the work of managing their investments and offer higher than average yields and liquidity. These pooled investment funds do so by leveraging the economies of scale in professional management, purchasing power, transaction costs, credit risk diversification, and liquidity requirements to improve upon what a smaller or less experienced investor could accomplish through purchases of individual securities.

PUBLIC INVESTMENT FUNDS – Public Investment Funds (also referred to as Local Government Investment Pools) are liquidity pools established by state or local governmental entities that provide eligible public agency investors with convenient, low cost methods to pool their funds for investment meet their liquidity needs. Government Code Section 53684 also provides local government agencies authority to invest funds in a “local pool” managed by the treasurer of the local jurisdiction. Some agencies, such as schools, may be required to invest their bond funds with their county treasurer, while other agencies may be authorized to invest in their local pools. For public agency investors that can participate in their local pool, investment portfolios may vary by liquidity, yield, weighted average maturity (i.e., risk tolerance), and credit ratings (if rated). Other considerations may include the terms for the withdrawal of funds and how the principal value or base unit is priced for withdrawal e.g., fixed at $1 or fluctuating, with the unit price based on net asset value (NAV) of the pool.

MULTI JURISDICTIONAL GOVERNMENT INVESTMENT POOLS – STATEWIDE ELIGIBILITY – California statutes also allow public agencies to invest in public investment funds available for voluntary participation on a statewide jurisdictional basis (referred to as Multi Jurisdictional Government Investment Pools).

• Local Agency Investment Fund (LAIF). Under California Government Code Section 16429, LAIF, established in 1977, is a voluntary investment program for local government, including special districts. As a component of the State’s Pooled Money Investment Account, the LAIF program offers local agencies the opportunity to participate in a major fixed income portfolio managed by the State Treasurer with oversight provided by the Pooled Money Investment Board. See www.treasurer.ca.gov/pmia-laif/laif/index.asp.
  
  
• California Asset Management Program (CAMP). Established in 1989, CAMP is a California JPA created to provide public agencies with professional investment services. The CAMP Pool is a permitted investment for all local agencies under California Government Code Section 53601(p). CAMP is directed by a Board of Trustees, which is made up of experienced local government finance directors and treasurers and managed by the financial advisory firm of PFM Asset Management LLC. See www.camponline.com.
  
  
• CalTRUST. Created by public agencies in 2005, CalTRUST is a JPA that allows public agencies to pool their assets according to California Government Code Sections 6500 and 6509.7. CalTRUST is governed by a Board of Trustees made up of experienced local agency treasurers and investment officers. See http://caltrust.biz/.

Figure 9-1 compares multi jurisdictional government investment pools that offer statewide eligibility to local agencies.

PRIVATE INVESTMENT FUNDS – Public agencies have the authority to invest in shares of mutual funds and money market funds as described in Government Code Sections 53601(l) and 53601.6(b). These investment products are investment funds privately run by money managers and regulated under the Investment Company Act of 1940.

Source: LAIF, CAMP and CalTRUST websites.

NAV = net asset value, JPA = joint powers authority

In general, to be a permitted investment, a mutual fund or money market fund should meet the following statutory conditions (see CDIAC’s Local Agency Investment Guide, Update for 2018 – CDIAC 18.02):

• Must receive the highest ranking or the highest letter and numerical rating by no less than two Nationally Recognized Statistical Rating Organizations

     OR

Must retain an investment advisor who is registered or exempt from registration with the SEC and has at least 5 years’ experience investing in specified securities and managing assets in excess of $500 million

• Mutual Funds must abide by the same investment restrictions and regulations that apply to public agencies in California (see California Government Code Section 53601).
  
  
• Money Market Funds must follow regulations specified by the SEC under the Investment Company Act of 1940 (15 U.S.C. Section 80a-1 et seq.)

Bond documents may permit the investment of bond proceeds in non rated mutual funds and money market funds. While a mutual fund or money market fund tailored to the institutional or governmental investor may not carry a rating, to be eligible as a permitted investment the fund should primarily be invested in asset classes that would otherwise be a permitted investment under Government Code Section 53601. A mutual fund’s investment holdings, for example, should not include equities. Equity investments are not a permitted investment, because they do not allow public agencies to meet the requirements of safety, liquidity, and yield when investing public funds.