Small Districts Join Investment Pools

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

Because their reserves are typically small and they usually lack administrators with investment expertise, small districts have tended to benefit least from the burgeoning range of investments available.

But the recent development of private statewide investment pools, managed by the financial firm of E.F. Hutton, has made it possible for smaller districts to share in the rewards of investing.

"Under this concept, the district that has a million dollars invested doesn't get any more of a rate of return than the one that invests one dollar," says James Jacobs, associate executive director of the Minnesota School Boards Association.

Such pools, known as "liquid asset funds," now operate in three states--Pennsylvania, Illinois and, Minnesota--and efforts are under way to start another in Michigan. William Sullivan, a financial consultant who administers the pools, predicts that within a few years 10 states will have them.

The prototype--the Pennsylvania School District Liquid Asset Fund--was started in 1983. Its performance attracted the attention of the National School Boards Association, which helped establish the others last year.

Nearly half of Pennsylvania's roughly 500 districts now participate in the liquid asset fund, according to Mr. Sullivan. About $200 million is pooled in short-term investments, and another $400 million is invested separately on behalf of individual districts in longer-term certificates of deposit.

All investors, large and small, re-ceive the same rate of return on the pooled funds, a rate much higher than most small districts could obtain on their own. (The pool currently offers a net yield of 8.48 percent.)

Subject to limitations of state law, E.F. Hutton, the fund manager, invests district funds in a variety of instruments, from certificates of deposit to repurchase agreements. Because the pool is so large, investments are not tied to the dates on which districts have to make payments, freeing the fund to maintain a diversified portfolio.

(E.F. Hutton pleaded guilty this month to fraudulently manipulating large sums in a way that allowed the company to use the funds without paying interest. Company and federal officials said Hutton's customers were not hurt by the practice. "That had nothing to do with us," Mr. Sullivan said of the fraud.)

According to Guilbert Hentschke, dean of the school of education at the University of Rochester, the main advantage of the pools is that they take advantage of economies of scale, in terms of both capital and investment expertise.

"No school district can have someone assigned to investments only," says Thomas Wolsiffer, treasurer of the State College, Pa., school district, which participates in the fund.

The fund also offers higher yields--"at least 1-percent better" than the district was getting on its own, he says--and reduces its administrative costs. According to Ralph Moyer, the district's business manager, the district could earn $950,000 this year in interest, nearly 5 percent of its $21-million budget.

"You get more clout," he says. "If you have bigger numbers, people are more interested in you."

The pool also offers its members added cash-management flexibility. Districts can write checks against the fund and earn interest on all transactions until they are cleared.

The concept of pooling public resources is not a new one. Some 18 states operate some form of investment pool for municipal authorities, including school districts.

But the private pools are specifically tailored to the needs of school districts and offer a wider range of services. And in Illinois, the one state with both public and private pools, the private pool reports a higher yield.--jrs

Vol. 04, Issue 34

Notice: We recently upgraded our comments. (Learn more here.) If you are logged in as a subscriber or registered user and already have a Display Name on, you can post comments. If you do not already have a Display Name, please create one here.
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