There is no “one size fits all” for investing bond proceeds. Like any other investment, it needs to be guided by both the needs of the underlying public entity and the complexities of the investment marketplace. The only thing that is true for all situations is that one wrong move could violate the public trust that is bestowed upon you. Public Trust implements a comprehensive investment solution for managing bond proceeds that is anchored in the key tenants of public funds investing: safety, liquidity, and yield.
Five things you should consider when investing bond proceeds:
1. Waiting for a draw schedule from the construction manager may reduce interest income.
While having an accurate draw schedule is important, entities may begin investing a portion of their construction funds utilizing the “completion date” method and working backwards to build an investment ladder with a portion of the funds. Once the construction manager provides the official draw schedule, one can put remaining funds to work along the investment ladder accordingly. Even when you receive a copy of the official draw schedule, rest assured that it will change. Large construction projects are too complex to predict. Among other factors, they are attempting to predict weather, material costs, soil samples, and future presidents so it’s no surprise they are not always correct!
2. Too much liquidity can be inefficient.
Many entities tend to keep too much liquidity on hand. This problem becomes compounded when securities mature from the investment ladder and are not needed to fund current expenses. It can be beneficial to pay construction expenses twice monthly. This will allow the entity to better time and plan for checks leaving the building for the construction project. If you are constantly paying expenses, things can get complicated.
3. Don’t just focus on today. Focus on maximizing interest income over the life of the construction program.
Many entities focus on today’s “best rate” and fail to adequately search for the best rates over the life of the construction program. This is especially important when securities mature and the proceeds are not needed.
Investors often let the funds sit in cash, earning nearly zero, when the funds could be redeployed further out in maturity structure potentially earning additional yield.
4. Should I hire an investment advisor to help invest the proceeds?
A registered investment advisor can bring a lot to the table when it comes to managing bond proceeds. Because the construction program is dynamic and constantly changing, an advisor can be continually scouring the investment marketplace for investment opportunities that may fit into the investment program.
If an entity has a full-time staff professional dedicated exclusively to investing, the entity can certainly invest the bond proceeds without an investment advisor. Sometimes, public entities use both internal professionals and external experts, especially on large, sophisticated projects.
5. What is important when investing bond proceeds?
We often joke that investing is the easiest thing to do when investing bond proceeds; it can be more important to develop accurate and in-depth reports that can be shared with the school board or governing body.