Each city must name one individual, usually the city clerk or finance officer, as the prudent finance officer, whose responsibility it is to invest city funds. Their duties are governed by the Code of Iowa Chapters 12B and 12C and the local investment policy. Two investment categories are most common for cities: the investment of idle funds and the investment of reserve funds. Idle funds are available when the collection of revenues varies from the time the funds are needed for expenses.
For example, the property taxes are remitted to the city monthly; however, the bulk of them are received in October and April. For this reason, cities frequently accumulate significant revenue balances in various funds that may not be immediately needed for current operations. The second category is the investment of reserves, funds that the city has set aside for a particular need in the future.
Iowa law requires that each city have an investment policy which lists the guidelines for the investment of public funds. It includes compliance with state law, diversification for the type of instrument and length of maturities, quality and capability of the investing officer (clerk or finance officer). Cities should review and approve the policy by resolution annually. The copy of the investment policy must be delivered to all of the following:
- The governing body or officer of the public entity to which the policy applies
- All depository institutions or fiduciaries for public funds of the city
- The city’s auditor
The major goals of the investment policy are:
- Safety of principal
- Understanding and maintaining liquidity as needed
- A reasonable return
The city investment policy may be more restrictive than what is allowed in Code of Iowa Chapter 12B and 12C as long as there are no conflicts. The state has determined that cities may invest in only certain instruments and limits the ratio of certain investments in a city’s portfolio. The city cannot allow investments with a higher risk even if the rate of return is more advantageous. It is very common for a city’s investment policy to distinguish the length of maturities for an investment between operating and reserve funds as long as they are more restrictive than the Code of Iowa.
Public funds must be deposited in financial institutions, such as banks or credit unions, that have been approved by the city council with a depository resolution. The resolution must include the name of each depository and the maximum amount that may be kept on deposit in each depository. Code of Iowa Section 12C.4 requires these depositories to be located in the county or in an adjoining county. Only deposits for the payment of bonds and interest can be made outside the state of Iowa. In each of these institutions, city funds are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. State law also requires the institutions to “collateralize” or set aside assets to protect the city’s funds. If public funds are in jeopardy, due to a bank failure for example, the State Treasurer has the authority to assess a fee to all financial institutions in the state that have public funds to recoup any loss of public money.
Cities are often approached about investing public funds in various financial products such as money market accounts. Under Iowa law, a public entity may only invest in a money market fund that is registered with the federal Securities and Exchange Commission under the federal Investment Company Act of 1940, 15 U.S.C. § 80(a), and operated in accordance with 17 C.F.R. § 270.2a-7. The city must verify that a financial product, such as a money market account, qualifies under state code and the local investment policy in writing before depositing any funds.
In 1987, Code of Iowa Chapter 28E gave cities another investment option with the Iowa Public Agency Investment Trust (IPAIT). Various investment options are available through IPAIT from checking deposits to certificates of deposits. Participants also have the ability to invest or withdraw funds on a daily basis with no money movement charges from IPAIT, check balances or view transaction history, create individual sub-accounts that post interest separately, and IPAIT has no minimum balance requirement. This program is managed by city staff through an internet-based accounting system that allows real-time account inquiry and the ability to pay vendors directly from your IPAIT accounts through Vendor Pay.