The Need for a Solid Investment Policy

INTRODUCTION
Community associations often have a strong and steady source of assessment cash flow to fund both their operating and reserves accounts. One area that board members seldom have time to focus on is the best way to invest and protect these assets. This article looks at the various investment avenues as well as ideas on how to develop an investment policy for the association.

CATEGORIES OF ASSETS
Most communities have cash assets. These assets can be thought of in three categories: short-term, medium-term, and long-term. Short-term cash is needed to pay normal day-to-day operating expenses for the current month and next few months. Medium-term assets are usually funds for budget deficits, emergencies, or projects funded by a special assessment. Long-term assets are generally funds set aside in a reserve for future capital needs. Associations with any amount of cash assets should have a policy for investing and tracking these assets.

A cash flow analysis is a good starting point in determining what short-term cash assets will be required to pay day-to-day costs. For instance, review how much cash flows in and out on a monthly basis. Use this calculation to determine what your immediate cash on hand should be. If your cash exceeds the amount required to meet the immediate and day-to-day expenses, think about putting that excess amount into a savings or money market account for a short-term certificate of deposit (CDs) where it can generate interest. Another consideration for funds that need to be readily available is to establish a “sweep” account at your bank. A sweep account maintains a balance of working cash in the operating checking account, while the bank automatically transfers (sweeps) anything in excess of that amount at the end of every day into an investment account where the funds earn the market rate of interest. Since this sweep is electronic, the association does not need to do any manual transfers. If funds are needed to cover disbursements, the sweep will automatically cover those checks by sweeping money from the investment account back into the checking account. Excess funds are working in the sweep account earning interest.

Medium-term funds should be maintained in low-risk, liquid investments, as these are usually needed within a few months to a year to pay for special projects or emergencies. Think of investing in low-risk CDs and establishing a “laddering” technique to divide your investment into equal amounts with spaced maturity terms, so funds are always available at regular intervals. For example, divide $20,000 into four equal parts, keeping $5,000 in four different CD accounts. Invest $5,000 each in a 3-, 6-, 9- and 12-month CD. As each CD matures, roll over for another year. This laddering concept matures a CD every three months.

Longer-term funds, such as reserves are usually invested to produce the highest possible return while limiting the risk as defined by the association’s investment policy.

INVESTMENT POLICY
What is an Investment Policy? An Investment Policy defines clear instructions for funds management. With an Investment Policy in place, board members have a consistent method to make decisions and avoid making off-the-cuff decisions in response to economic and market conditions. Or worst yet, making decisions resulting from risk tolerances of board members (some may think it’s appropriate to invest funds in the stock market). The policy determines the investment objectives, such as safety, growth, liquidity, etc. The policy will outline reporting requirements, and duties and oversight responsibilities of internal and external personnel who are part of the investment team.

The board of directors maintains ultimate oversight and decision-making responsibility for investments. However, many associations may designate an investment committee to draft policy, manage investments, and/or review decisions made by a professional investment manager.

HOW TO BEGIN AN INVESTMENT POLICY?
A good beginning is to discuss the situation with the association’s accountant (CPA) or investment manager. The board of directors can assign to the Finance Committee the responsibility to assess risks and opportunities; and assign them the task of developing a simple investment policy that addresses risk tolerance and management responsibility.

General investment principles might include:

1. Investments shall be made solely in the interests of the association
   
   
2. Investments accounts shall minimize risk and protect capital
   
   
3. Investment accounts shall be invested with diligence and due care
   
   
4. Investment in short-term cash equivalents to provides safety, liquidity, and return
   
   
5. No investment in high-risk investments or stocks

The Finance Committee is tasked with regularly reporting the status of all investments to the full board. The Finance Committee shall act in accordance with these Investment Policies and all applicable laws and regulations. The board reserves to itself the exclusive right to revise the Investment Policy.

Patti Jo Lewis
AMS®, CMCA®, PCAM®
Vice President - Systems and Logistics
Associa
Tucson, AZ