In New York State, school districts have specific authority under General Municipal Law §11 to invest public funds that are not immediately needed for operational expenses. This authority ensures that taxpayer dollars are managed prudently while maximizing safe returns for the benefit of the community. However, the law also establishes firm boundaries to ensure that investments remain secure, liquid, and legally compliant.
New York State law restricts school district investments to conservative, highly secure financial vehicles designed to protect public funds. These include:
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Special Time Deposit Accounts: Offered by banks or trust companies authorized to operate in New York State.
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Certificates of Deposit (CDs): Fixed-term deposits with a guaranteed interest rate from New York State banks.
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Repurchase Agreements (Repos): Agreements where the district purchases government securities with a commitment that the seller will repurchase them at a later date. School districts’ authority to engage in these transactions is limited and typically incidental to other investment activities.
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Treasury Bills: Short-term securities issued by the U.S. Department of the Treasury, backed by the full faith and credit of the federal government.
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Savings Accounts: Standard interest-bearing accounts maintained at authorized financial institutions.
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Cooperative Investments: School districts may pool idle funds with other local governments through programs like the New York Cooperative Liquid Assets Securities System (NYCLASS), potentially gaining higher returns by leveraging a larger combined principal.
While New York law provides school districts with investment opportunities, it also imposes critical safeguards:
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Board Adopted Investment Policy: Each Board of Education must adopt a formal investment policy. This policy defines the objectives, delegation of authority, and operational procedures for investing district funds.
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Four Core Principles: Investments must prioritize legality, safety (protection of principal), liquidity (ready access to cash when needed), and yield (reasonable interest earnings).
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Maturity Limits: Most investments must have maturities of twelve months or less to ensure funds are readily available if needed.
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Cash Flow Analysis: Before investing, districts must carefully assess their cash flow needs to determine the amount and duration of funds that can safely be invested.
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Prudent Judgment: All investment decisions must be made with caution and fiduciary responsibility, prioritizing the safeguarding of public resources.
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Ongoing Monitoring: Districts must regularly monitor both cash flow projections and investment performance, adjusting strategies as needed to protect funds and maintain liquidity.
School districts are not permitted to engage in speculative arbitrage activities (The term “arbitrage” often refers to exploiting price differences across markets to earn profits). However, a related issue arises when districts issue tax-exempt bonds. Federal tax law prohibits districts from investing bond proceeds at a yield higher than the interest rate paid on the bonds without limitations. If they do earn such “arbitrage profits,” the excess must generally be rebated to the federal government.
To stay compliant:
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Districts must carefully track how bond proceeds are invested.
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Excess earnings must be calculated and, if necessary, rebated to the IRS.
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Districts must document these efforts to demonstrate compliance during audits.
By adhering to state laws, locally adopted investment policies, and federal regulations, New York school districts can responsibly manage taxpayer dollars, ensuring funds are available when needed while maximizing secure returns. While sophisticated arbitrage strategies are not permitted, careful management of bond proceeds remains an essential financial responsibility.
