It is the policy of the System to establish and maintain well defined debt management guidelines for issuing new debt as well as managing outstanding debt to sustain a strong debt management program providing the lowest available borrowing costs and greatest management flexibility. The Vice Chancellor Administration and Finance/CFO is responsible for establishing and maintaining Debt Management Procedures for the System.
The System's Debt Management Procedures apply to all debt instruments issued by the System regardless of the purpose for which issued or the funding source for repayment including but not limited to main funding sources:
The System will not use alternative methods of financial management products such as interest rate swaps, derivatives, etc. in connection with the outstanding debt and bonds issued under the System's Debt Management Procedures.
The term of debt shall not exceed 30 years. The average (weighted) bond maturities shall be kept at or below 25 years.
The System shall maintain an unrestricted operating fund balance. The fund balance shall be a reserve fund to enable the System to respond positively to unexpected variations in cash flow, financial emergencies, and expenditures deemed to be critical to the mission and purposes of the System. All expenditures from operating fund balances must be approved by the Board of Trustees. The range of fund balance to be maintained shall be determined annually by the Board with consideration given the guidelines promulgated by credit rating agencies (e.g. Moody's, Standard & Poor's) to ensure the System's favorable credit ratings.
Operating fund balances derived from savings realized at the end of each fiscal year may be established for individual colleges at the end of each fiscal year. Items for which the colleges may expend from fund balances must be reviewed in advance by the Chancellor, and approved by the Board of Trustees. Expenditures may only be made if the System operating fund balance is at the funding level designated by the Board of Trustees.
LSCS Policy Manual Section adopted by the Board of Trustees on June 3, 2010
It is the policy of the System that after allowing for the anticipated cash flow requirements of the System and giving due consideration to the safety and risk of investment, all available funds as reported in the System's annual financial report, shall be invested in conformity with this Investment Policy and governing statutes, seeking to safeguard assets, maintain liquidity and optimize interest earnings.
Effective cash management is recognized as essential to good fiscal management and investment interest serves as a source of revenue to the System. The System’s investment portfolio shall be designed and managed in a prudent manner to obtain reasonable revenue within the limitations of the System's cash flow needs, to be responsive to public trust, and to be in compliance with legal requirements and limitations.
Investments shall be made with the following objectives in priority order: a. Safety and preservation of principal b. Maintenance of sufficient liquidity to meet operating needs c. Diversification d. Public Trust, and e. Optimization of earnings in the portfolio This Investment Policy extends to all financial assets under the direct control of the System.
The purpose of this Investment Policy is to comply with the Public Funds Investment Act Chapter 2256 of the Texas Government Code (the “Act”), which requires that the System annually adopt a written investment policy regarding the investment of its funds and funds under its control. This Investment Policy addresses the methods, procedures and practices that must be exercised to ensure effective and judicious fiscal management of the System’s funds.
The overall objective of the Investment Policy is to ensure that System financial assets are properly safeguarded, provide sufficient liquidity, diversification and produce a reasonable rate of return while enabling the System to react to changes in economic and market conditions. The longer the maturity of investments, the greater the price volatility. Therefore, the System concentrates its investment portfolio in short and intermediate term investments to limit market risk caused by changes in interest rates. The System attempts to match its investments with anticipated cash flow requirements. Cash flow requirements generally divide the portfolio into four major parts: liquidity needs, short term needs, intermediate term needs, and longer term, core investment. The System will not invest in investments maturing more than three (3) years from the date of purchase. The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. "Weighted Average Yield to Maturity" shall be the standard for calculating portfolio rate of return. The System commingles its operating, reserve and trust and agency funds into one investment portfolio for investment purposes of efficiency, accurate distribution of interest, and maximum investment opportunity. Although commingled, the System recognizes the unique characteristics and needs of the individual funds in its strategy statement and in the management of the funds. The maximum dollar weighted average maturity (WAM) of the entire commingled portfolio reflecting cash flow needs shall be no greater than one (1) year and the corresponding benchmark for the commingled portfolio shall be the comparable one year US Treasury security. Capital projects are managed separately in accordance with their anticipated expenditure schedules and bond document requirements.
The General Fund includes all operating funds of the System including, but not limited to, the general fund, payroll fund, technology fund, student activity fee fund, repair and replacement fund, and the auxiliary fund. The primary investment strategy for this fund is to assure the preservation and safety of principal; and, secondly, that anticipated cash flows are matched with adequate investment liquidity. These objectives shall be accomplished by purchasing high credit quality, short- to intermediate term investments matching cash flow requirements. All investments authorized by the Investment Policy are suitable. Funds not needed for short-term cash flow requirements will be invested in diversified instruments with diversified maturities and be readily marketable in the secondary market or, in the case of Certificates of Deposit, redeemable with or without penalty. Yield will be enhanced by the use of maturity extensions available within the confines of accurate cash flow projections and market cycle timing. Based on ongoing cash flow needs, the maximum weighted average maturity shall be one year. The maximum stated maturity will be three years.
The Restricted Fund includes local, state and federal grant funds as well as funds from other sources that are restricted for instructional use. The primary objectives are safety and liquidity sufficient to meet anticipated cash flow requirements as well as yield optimization. These objectives shall be accomplished by purchasing high-credit quality, short-term investments, diversified by instrument and maturity, and matching the maturity of the investments with anticipated liabilities. Funds not needed for short-term cash flow requirements will be invested in diversified instruments with diversified maturities and be readily marketable in the secondary market or, in the case of Certificates of Deposit, redeemable with or without penalty. All investments authorized by the Investment Policy are suitable. A ladder of short-term investments with sufficient liquidity from cash equivalent investments may be used to maintain a maximum weighted average maturity of one year. The maximum stated maturity will be two years.
The primary investment objective for the Capital Projects Fund is preservation and safety of principal. In addition, the System will seek to match cash flows from maturities and earnings of diversified investments to anticipated needs while obtaining a reasonable market yield. Investments will be made in an attempt to attain a rate equal to or above the arbitrage yield in order to avoid negative arbitrage, considering the appropriate risk constraints. These objectives shall be accomplished by purchasing high-credit quality, short and intermediate-term investments with maturities closely matching the projected cash flow schedules. Funds not needed for short-term cash flow requirements will be invested in diversified instruments with diversified maturities and be readily marketable in the secondary maket or, in the case of Certificates of Deposit, redeemable with or without penalty. All investments authorized by the Investment Policy are suitable. The maximum maturity of an individual security shall not exceed the expenditure plan of the funds.
The investment strategy for the Debt Service Fund has as its primary objective the preservation and safety of capital while optimizing yield in order to fund debt service payments in accordance with provisions in the bond documents. Funds not required for immediate liquidity shall be invested in diversified instruments. All investments authorized by the Investment Policy are suitable. Each successive debt service payment shall be fully funded before extensions are made. The maximum maturity of an individual security shall not exceed three years and the maximum weighted average maturity of one year.
The Trust and Agency Fund is comprised of local scholarship funds, club funds, and other funds for which the System acts as fiduciary and which have short average lives and high liquidity needs. The primary objectives are safety, liquidity, diversification and yield. These objectives shall be accomplished by purchasing high credit quality, short-term investments and utilizing cash equivalent investment for liquidity. All investments authorized by the Investment Policy are suitable. The maximum maturity shall be one year and the maximum weighted average maturity six months.
Investments shall be made, considering prevailing internal and market circumstances, which persons of prudence, discretion, and intelligence would exercise in the management of their own affairs not for speculation, but for investment, and considering the probable safety of capital as well as probable income from an investment decision. In determining whether an Investment Officer has exercised prudence with respect to an investment decision, the determination shall take into account the investment of all funds rather than a single investment, and, whether the investment decision was consistent with the System's Investment Policy.
Not less than quarterly, the Investment Officers will obtain from a reliable source the current credit rating for each held investment that has a PFIA-required minimum rating. The Investment Officers will meet to discuss any investment which has been downgraded or placed on credit-watch to evaluate and take any necessary and prudent measures to assure the safety of System funds. It is the policy of the System to liquidate as quickly as is prudently possible any investment that becomes unauthorized or loses its required credit rating while held in the System's portfolio.
Authority to manage the System's investment program is derived from and delegated pursuant to provisions of the Act.
The Board designates the Vice Chancellor for Administration and Finance/CFO, and the Associate Vice Chancellor for Administration and Finance as the System’s Investment Officers. Management responsibility for the investment program is hereby delegated to the Investment Officers. The Investment Officers shall exercise judgment and care, under prevailing circumstances, which a prudent person would exercise in the management of the person’s own affairs, but the Board retains ultimate fiduciary responsibility. The Investment Officers shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinates. The Officers will report quarterly to the Board on investment results and annually on counter-parties used in the process. No person may engage in an investment transaction except as provided under the terms of this Policy and the procedures established by the Investment Officers. Investment Officers acting in good faith and in accordance with these Policies and Procedures shall be relieved of personal liability.
The System shall provide access to periodic training in investments for Trustees and Investment Officers and other investment personnel through courses and seminars offered by professional organizations, associations, and other independent sources in compliance with the Act to insure the quality and capability of investment management.
Members of the Board of Trustees and Investment Officers shall acquire at least the minimum hours of investment training required by the Texas Higher Education Coordinating Board within 6 months after taking office or assuming duties. Training must include education in investment controls, security risks, strategy risks, market risks, diversification of investment portfolio, and compliance with the Act. Thereafter, Investment Officers shall additionally complete at least the minimum required hours of training not less than once each state fiscal biennium. Training must be obtained from an independent source approved by the Board. The Investment Officer shall prepare a report on the provisions of the Act and deliver it to the Board no later than the 180th day after the 1st day of each regular session of the Legislature.
Investment Officers and employees of the System involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program or which could impair their ability to make impartial investment decisions. All Investment Officers shall provide complete disclosure related to potential conflicts of interest annually or as conditions change.
Investment Officers must file a disclosure statement with the Texas Ethics Commission and the Board if:
The Investment Officers shall obtain and maintain information on all financial institutions and brokers/dealers authorized to transact financial transactions with the System.
The information shall include the following, as applicable:
All investment providers (including but not limited to, financial institutions, broker/dealers, investment pools, mutual funds, and investment advisors) shall provide a certification that the authorized representative of the firm has received and thoroughly reviewed the System's current Investment Policy. The certification will be maintained in the treasury department. This statement shall certify that the firm has implemented reasonable procedures and controls in an effort to preclude transactions conducted with the System not authorized by the Investment Policy except to the extent that this authorization is dependent on the analysis of the makeup of the System's entire portfolio or requires interpretation of subjective investment standards.
The Investment Officers shall annually submit a list of brokers/dealers for Board approval. These institutions shall be selected for service, market involvement, and credit worthiness and be authorized to provide brokerage services. These may include primary dealers and regional dealers that qualify under the Securities and Exchange Commission uniform net capital rule (Rule 15C3-1). The Investment Officers shall annually review and evaluate the firms authorized to enter into investment transactions with the System.
The following minimum criteria may be included in the review and evaluation:
Subsequent to the review and evaluation, the Investment Officers shall recommend to the Board a list of firms to be authorized to enter into investment transactions with the System for the following year.
The following are authorized investments:
Consistent with the requirements of the Public Funds Collateral Act (Texas Government Code §2257), it is the policy of the System to require full collateralization of all uninsured System financial institution deposits. In order to anticipate market changes and provide a level of security for all funds, the collateralization level will be 102% of market value of principal and accrued interest on the deposits less an amount insured by the FDIC. Securities pledged as collateral shall be held by an independent third party bank outside the holding company of the pledging bank, approved by the System, and under a mutually agreeable custodial agreement. The Vice Chancellor for Administration and Finance/CFO is authorized to execute depository and/or collateral agreements. The agreements shall specify the acceptable securities for collateral, including provisions relating to possession of the collateral, the substitution or release of securities with prior System approval, documentation of the pledge of securities, and the monthly reporting on the valuation of collateral. Original evidences of ownership (safekeeping receipt) must be supplied to the System and retained. The financial institution shall be contractually liable for monitoring and maintaining the required collateral and collateral margins at all times.
Additionally, a depository agreement shall define the System's rights to the collateral in case of default, bankruptcy, or closing and shall establish a perfected security interest in compliance with Federal and State regulations, specifically:
The System authorizes only the following types of collateral:
All collateral shall be subject to inspection and audit by the System’s internal audit staff or by its independent auditors on a reasonable basis.
All securities owned by the System and collateral pledged to the System shall be held by independent third party custodians approved by the System and held in the System’s name as evidenced by original safekeeping receipts of the institution with which the securities are deposited.
All security transactions, including repurchase agreements, shall be executed on a delivery versus payment basis.
A competitive environment shall be established for all investment activities, including but not limited to, analysis of implemented strategies, review of investment alternatives, monitoring of market conditions, solicitation from multiple investment providers, adherence to applicable "bona fide solicitation" rules, and overall performance evaluation.
Comparison and evaluation of comparables, but not formal bidding, may be used to invest in financial institution deposits, money market mutual funds or local government investment pools. Bids/offers may be solicited orally, in writing, or electronically for securities and Certificates of Deposit. Records shall be kept of the prices/levels (bid and/or offered and accepted).
The System recognizes that investment risks can result from issuer defaults, market price changes, or various complications leading to temporary illiquidity. Market risks are managed through portfolio diversification that shall be achieved within the following general guidelines:
To assure diversification of the portfolio and reduce market risk, the following maximum limits (at time of purchase), by instrument, are established for the System’s total portfolio:
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100% of bond proceeds
The internal control structure shall be designed to provide reasonable assurance that System funds are protected from loss, theft, or misuse. The concept of reasonable assurance recognizes that
The internal controls established for the cash management and investment process shall address the following points at a minimum:
In conjunction with the audit, the Vice Chancellor for Administration and Finance/CFO shall establish a process for independent review at least once every two years by an external auditor to assure compliance with policies and procedures.
The Investment Officers shall prepare a monthly report on all investment positions as of the close of business for the prior month. The report shall be provided to the board as an integral part of the monthly financial reports.
The Investment Officers shall prepare, sign and present an investment report to the Board on a quarterly basis that summarizes investment strategies employed in the most recent quarter, details the portfolio in terms of investment and earnings, and summarizes the overall strategy for the period. The quarterly investment report shall include a summary statement of investment activity prepared in compliance with the Act. The reports will be prepared in a manner that will allow the reader and the System to ascertain whether investment activities during the reporting period have conformed to the Investment Policy.
The report will include the following at a minimum:
Market values used in the monthly and quarterly reports will be obtained from reputable and independent sources. Information sources may include: financial/investment publications and electronic media, available software for tracking investments, depository banks, commercial or investment banks, financial advisors, and representatives/advisors of investment pools or money market funds.
The Board of Trustees shall, not less than annually, adopt by resolution the System's Investment Policy and incorporated investment strategy. The adopting resolution shall state any changes made to either the Investment Policy or strategies. Material changes to the Investment Policy will require re-certification by financial firms.
LSCS Policy Manual Section adopted by the Board of Trustees on June 7, 2012
The System elects, consistent with the Public Funds Collateral Act (Texas Government Code Section 2257) to have depository institutions pledge eligible securities, as defined by the System’s Investment Policy, as collateral for deposits, rather than surety bonds.
All approved securities provided as security will be held by a Federal Reserve Bank or a federally insured financial institution acceptable to the System and the Depository as a third party custodian, subject to a written tri-party agreement. Depository institutions may also use a custody agreement with the Federal Reserve Bank as defined in Operating Circular 7.
The System may include in the contract for depository services provisions for the depository institution to provide services other than traditional demand deposit services. The System may allow the Depository institution to provide services such as provision of Automatic Teller Machines (ATM’s) on System premises; electronic check conversion services; merchant processing services; provision of declining balance debit cards to augment System programs to expand electronic funds transfers; courier or armored car services; remote check acceptance services, or any other service as deemed appropriate by the System.
LSCS Policy Manual Section adopted by the Board of Trustees on June 3, 2010