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State and Local Laws Concerning Investment Practices

(Replaces 1992 Policy Statement on State Statutes Concerning Investment Practices)
Background

The authority of state and local governments to invest in public funds is derived through the power of state and local legislative bodies and state and local laws that reflect public policies. Some state and local laws and practices may permit investments that are inappropriate for local government, while others may be overly restrictive with regard to permissible instruments or eligible financial entities. Many state and local governments have modified their cash management and investment laws and policies to improve the safety of their investments while obtaining a favorable rate of return on invested public funds.

GFOA Position

The Government Finance Officers Association (GFOA) encourages state and local legislative bodies to remove artificial restrictions upon the efficient investment of public funds by:

1. Amending state and local laws regulating local government investment authority to permit prudent investment of public funds in prime money market instruments and investment securities, such as
  • U.S. government obligations, U.S. government agency obligations, and U.S. government instrumentality obligations, which have a liquid market with a readily determinable market value;
  • Canadian government obligations (payable in local currency)certificates of deposit and other evidences of deposit at financial institutions, bankers= acceptances, and commercial paper, rated in the highest tier (e.g., A1, P1, F1 or D1 or higher) by a nationally recognized rating agency;
  • investment-grade obligations of state, provincial and local governments and public authorities;
  • repurchase agreements whose underlying purchased securities consist of the foregoing; and
  • money market mutual funds regulated by the Securities and Exchange Commission and whose portfolios consist only of dollar-denominated securities.
  • Investment in derivatives of the above instruments shall require authorization by the appropriate governing authority. (See GFOA Recommended Practice on AUse of Derivatives by State and Local Governments,@ 1994.)

 

2. Authorizing and encouraging the efficient, professional investment of public funds in local government investment pools, either state-administered or through joint powers statutes and other intergovernmental agreement legislation, to take advantage of portfolio diversification and liquidity.


3. Authorizing and encouraging professional investments by removing geographical restrictions on eligible financial entities.

Adopted: June 3, 1997