Do You Know What Your Money Is Doing?

School districts and intermediate school districts may invest school funds, but Revised School Code Sections 1223 and 622 limit the types of investments. School officials should be familiar with the applicable provisions of the RSC and their school’s investment and deposit policies to ensure statutory compliance. Importantly, not every investment opportunity your bank or an investment advisor recommends is authorized by the RSC or board policy. This article highlights common investment issues and practical steps to address them.

The RSC authorizes the board treasurer to deposit school funds in a financial institution or in a joint investment authorized by law. The deposit must be made in the treasurer’s name as an officer of the school district, and the board must designate each financial institution used. This is commonly done at an annual organizational meeting, but keep in mind that the board must approve each financial institution at which a school district opens an account.

A “financial institution” is a state or nationally/federally chartered bank, savings and loan association, savings bank, or credit union (1) whose deposits are insured by an agency of the United States government, and (2) which maintains a principal office or branch office located in Michigan. Given the rise in employees working from home, some financial institutions no longer have physical locations in Michigan. School officials must ensure that these entities have a designated principal or branch office in Michigan to comply with the RSC. Branch offices where a bank receives deposits are the easiest to spot.

In the February 2023 edition of School Law Notes, we discussed the establishment of common debt funds for investment purposes. Please consult that article for more information about establishing and maintaining common debt funds. As it relates to the types of investments for school funds, the RSC provides a list of permissible investments. School officials are most likely to encounter one of the following:

• Bonds, bills, or notes of the United States or other obligations fully guaranteed by either the United States or the State of Michigan.
• Certificates of deposit issued by a financial institution – remember to confirm that the institution meets the statutory definition of a “financial institution.”
• Securities issued or guaranteed by agencies or instrumentalities of the United States government.
• United States government or federal agency obligation repurchase agreements.
• Investment pools, as authorized by Michigan’s Surplus Funds Investment Pool Act and composed entirely of instruments that are legal for direct investment by a school.
• Mutual funds that are composed entirely of instruments that are legal for direct investment by a school.
• Certificates of deposit held in a financial institution other than the one in which an initial deposit is made, provided that specific statutory requirements are met (e.g., principal and interest are insured by a United States agency and the financial institution acts as a custodian for the school).

This is not an exhaustive list of authorized investments.

Investments in stocks, Bitcoin, and precious metals are not authorized by law. As discussed in the September 2022 edition of School Law Notes, any donations of these assets accepted by a school must be liquidated immediately.

In these volatile times, it is important to understand where your school’s funds are held, how they can be used to meet your school’s needs, and whether investments of those funds comply with Michigan law. School officials also should look to their school’s policies on deposits and investments. For Thrun Policy Service Subscribers, these are Policies 3203 (Deposits) and 3204 (Investment of Funds). School officials must ensure that these policies are up-to-date and verify that they are being followed.

For schools that utilize investment advisors (e.g., for the investment of bond proceeds), it is recommended that engagement agreements, as well as any related custodial banking contracts, be reviewed by legal counsel before being executed initially or renewed for another term.

While Thrun Law Firm does not give investment advice, given recent banking volatility, school officials should be aware that if a school has a total amount of funds on deposit with a single financial institution in excess of $250,000, that excess is not protected by current FDIC guarantees. School officials should carefully weigh the risk of such unprotected deposits against the practicality of spreading deposits among multiple financial institutions to reach a business decision on how to allocate such deposits.