Summary of Report 96-073

August 1996

Report 96-073

Overall Conclusion
The State Auditor's Office has assessed the risks and benefits generally associated with mutual funds other than money market mutual funds, investment pools that do not function as money market mutual funds, and guaranteed investment contracts as required by statute. However, the evaluation of these risks and benefits should be considered in conjunction with the management controls needed to ensure these types of investments are in the best interest of the governmental entity and the public. The Public Funds Investment Act mandates many of these controls for entities which choose to include these types of investments in their portfolios.

Key Facts and Findings

• Investing in mutual funds other than money market mutual funds involves risks which can include fluctuation in the value of principal , lack of performance guarantees, and loss of control of some decision-making. The benefits include potential enhancement of yield, participation in a professionally managed portfolio, and economies of scale for small local government investors.

• Investing in investment pools that do not function like money market mutual funds involves risks which include fluctuation in the value of principal, lack of performance guarantees, and loss of control of some decision-making. The benefits include potential enhancement of yield, participation in a professionally managed portfolio, and economies of scale for small local government investors.

• Investing in guaranteed investment contracts involves risks which include reliance on the insurance company's (issuer's) ability to repay the investor, limited marketability, and being subject to market risk if interest rates decline. The benefits include the ability to require the insurance company to provide collateral and/or establish a separate account, and to make liquidity arrangements and agree upon a maturity date up front.

• Certain controls are necessary if these types of investments are considered for an investing entity's portfolio. Key controls over the investments function have already been mandated by the Public Funds Investment Act. In addition to these controls, an effective cash management system is needed to distinguish operating funds from those funds available for long-term investment. This cash management system should identify the length of the investment and liquidity requirements so that available funds can be matched to suitable investments.

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