During the 1980s, a vast securities industry developed, promising investors high yields at low risk. Many of the investors lured by this promise later came to realize the substantial risks associated with such high-yield securities, particularly in a financial environment characterized by record-high levels of public and private indebtedness, weak economic growth, and the large-scale closing of many of the very cornerstones of the investment industry: local banks and savings and loans.

Amid this setting of turmoil in the nation's financial sector, it is DCCA's responsibility to assist Illinois municipal officials in adopting an investment strategy which accomplishes three vital objectives: low risk, high yield and high liquidity. While the municipal treasurer is assigned the specific statutory task of investing public funds, it is important that a sound investment strategy be developed in close cooperation with other municipal corporate authorities.

Under such a cooperative approach, the municipal treasurer or other designated official makes specific investment decisions within the broader context of a carefully-defined framework developed by the entire board. The official "investment policy" developed by the corporate authorities should be adopted by motion or resolution, and should provide a clear, concise statement of investment objectives, as well as all special restrictions which are to guide the practices of the treasurer.

One increasingly population investment alternative which satisfies all three of the basic investment objectives (risk, yield, liquidity) is the Illinois Public Treasurer's Investment Pool (IPTIP). All investments in the pool are fully collateralized time deposits, full faith and credit securities of the federal government, and repurchase agreements backed by federal securities.

Under IPTIP, interest income is computed daily, and there are no minimum deposit or withdrawal levek. Interest earnings may either be automatically reinvested or redistributed monthly. Deposits and withdrawals may be made by either wire transfer or paper draft. The pool's considerable aggregate balance and diversified portfolio mix offer a combination of higher yield and lower risk to all members.

For those of you who will be making these investment decisions, DCCA offers several suggestions to help maximize interest income:

1. Cash and investments in separate funds may be merged in order to take advantage of the more attractive rates offers by such instruments as the "jumbo" certificate of deposit, which normally requires a minimum investment of $100,000. If this is done, care must be taken to account separately for the principal amount derived from each fund, and the interest accrued to the fund.
2. Many financial institutions offer negotiable rates to large depositors. Contact several banks or savings and loans to inquire whether they are willing to offer above-market rates for large investments.

The most important statutory requirements concerning the investment of public funds may be found in Chapter 85 of the Illinois Revised Statutes, par. 901 et seq. State statutes authorize municipalities to invest only in the following instruments: certificates of deposit, treasury securities, NOW accounts, money market accounts and money market mutual funds, passbook savings accounts, commercial paper, credit union investment accounts, repurchase agreements, banker's acceptances, securities issued by the

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It is important to be aware that some of these instruments carry somewhat more risk than others. For example, commercial paper, which is unsecured short-term debt issued by a private corporation, may be offered at attractive rates by weak companies which offer less than full assurance that all principal and interest payments can be made on a timely basis. The municipal investment policy should provide the treasurer with clear directions as to the suitability of each instrument, and the appropriate mix of the various securities in order to achieve the desired degree of portfolio diversification. In general, the most secure investments are those which are issued by the U.S. Treasury, and those which are collateralized by the issuer.

3. Time the purchase of securities to take advantage of fluctuations in market rates. For example, if you expect interest rates to rise over the coming weeks, you may be well advised to invest initially in short-term instruments, such as treasury bills, and then invest in longer-term securities at such time as you can lock in higher yields. Since many financial institutions now7 offer variable-interest instruments, you may want to watch interest rate trends in order to determine whether a variable-rate security would work to your advantage.

4. It is often desirable to develop an on-going financial relationship with a local institution in order to benefit from the long-term advantages that such a relationship can afford. For example, a local bank which has benefited from your deposits over a period of years may be particularly willing to purchase, under terms attractive to you, a local revenue bond which your municipality seeks to issue in order to provide financing for water or sewer improvements. In addition, the local bank will generally use your deposits to provide financing for local private-sector loans and mortgages, which helps develop the community and provides additional tax base to the municipal government.

The Illinois Comptroller's Office has prepared a helpful publication on this topic entitled, "Investment Guide For Illinois Local Government", which is available by calling (217) 785-0680. If you would like other information or technical assistance on investing public funds, please contact the DCCA Office of Local Government Management Services in Springfield at 1-800-562-4688, or in Chicago at (312) 814-2318. •

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