Published Online:

Schools Turning to 'Sure Bets' In Wake of Business Failures

Article Tools
  • PrintPrinter-Friendly
  • EmailEmail Article
  • ReprintReprints
  • CommentsComments

School districts across New York State have been adopting conservative investment policies and otherwise tempering their use of investment vehicles, particularly repurchase agreements, since the failure last year of two financial institutions in which many of them had invested.

Repurchase agreements involve the sale of securities to a buyer with a pledge from the seller to repurchase them at a specified higher price on a subsequent date. The securities may be held as collateral by the purchaser or placed in trust with a third party, such as a bank or trust company. Investment advisers say "repos" are virtually as secure as a guaranteed loan, provided the lender takes possession of the securities as collateral.

But many districts investing in repurchase agreements have failed to take possession of the collateral. Their losses, incurred last year when Lion Capital Group and RTD Securities collapsed, have made a deep impression on district and state officials, according to James P. Rourke, school-bond adviser for the state department of education.

"There's been an enormous amount of consciousness-raising," concurs Guilbert Hentschke, dean of the school of education at the University of Rochester and a specialist in school investment practices.

New Policies

The Albany school district, for example, has ceased dealing with brokerage firms and now invests only in certificates of deposit, according to Bruce Venter, the district's business manager. Although the district could be earning more elsewhere, "it's definitely worth it" in terms of security, he says.

The district also requires banks it deals with to pledge securities in return for the district's funds and to transfer those securities to a custodial account in the district's name at a trust company. That way, if the district's funds became unsecured, it could sell the securities, Mr. Venter says.

The Bethlehem Central School District, which had $390,000 tied up in Lion Capital, has taken a similar approach. Under guidelines appoved by the school board in January, the district may deal only with banks--generally the biggest banks--that meet certain capital-adequacy guidelines, and the banks have to agree to back the loans with securities equal to the full market value of the issues traded, according to Franz Zwicklbauer, the district's assistant superintendent for business.

The district continues to invest in repurchase agreements, but it only accepts U.S. Treasury bills or notes as collateral, and requires that the collateral be wired to an agent bank before district funds are released, Mr. Zwicklbauer says.

State Action

State officials have also gotten into the act. Last December, the state comptroller's office issued guidelines designed to encourage safer, more conservative investments. And Comptroller Edward Regan is supporting legislation that would consolidate state statutes on investment practices, provide for financial training of district officials, create a short-term capital pool in which districts could invest, and more tightly regulate the use of repurchase agreements.

A commission report issued in March by the Assembly's Committee on Ways and Means called for even tighter restrictions.

The failure of the two securities firms, and the more recent failure of esm Securities, in which the Memphis school district had $8 million invested, have also apparently been noted outside New York.

In Philadelphia, for example, James Rourke, treasury supervisor for the district, reports that before the failures, the district did not take possession of collateral when investing in repurchase agreements. ''We do now," he says.

And Thomas Pape, assistant deputy treasurer for the state of Illinois, reports that districts participating in the state's investment pool have begun asking questions about collateral and the use of repurchase agreements. "Before, we never got questions about that," he says.


Web Only

You must be logged in to leave a comment. Login | Register
Ground Rules for Posting
We encourage lively debate, but please be respectful of others. Profanity and personal attacks are prohibited. By commenting, you are agreeing to abide by our user agreement.
All comments are public.

Back to Top Back to Top

Most Popular Stories