2008-33RESOLUTION NO. 2008- 33
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A RESOLUTION AMENDING THE VILLAGE OF BUFFALO GROVE
IINVESTMENT POLICY
WHEREAS, this resolution amends the language in the current policy, dated November 25, 1998, to reflect
recommended practices set forth by the Government Accounting Standards Board (GASB), and;
WHEREAS, a responsibility exists to maintain stewardship over the financial resources that are used to
deliver government services, and;
WHEREAS, the Village needs to ensure addition levels of collateralization and establish performance
benchmarks.
NOW, THEREFORE, BE IT RESOLVED BY THE PRESIDENT AND BOARD OF TRUSTEES OF THE
VILLAGE OF BUFFALO GROVE, COOK AND LAKE COUNTIES, ILLINOIS as follows:
1. The Village of Buffalo Grove does hereby amend the Deposit and Investment Policy, dated October 6,
2008, and attached hereto as Exhibit "A" to reflect guidance provided by GASB to ensure all Village
deposits are protected given the current economic environment.
2. Performance benchmark data will be included in monthly management reports as proscribed by new
policy language.
3. This Resolution repeals Resolution 1998 -46.
AYES: 4 — Braiman, Berman, Trilling, Rubin
NAYES: 0 — None
ABSENT: 2 — Glover, Kahn
PASSED: October 6, 2008 APPROVED: October 6, 2008
ATTEST: APPROVED:
oe
Village erk Village President
EXHIBIT (A)
VILLAGE OF BUFFALO GROVE
INVESTMENT POLICY
I. Policy:
The Villa of Buffalo Grove, as a public agency, has an inherent fiduciary responsibility to properly
account or and manage public funds. Public funds are to be considered current operating funds,
special funds, debt service and other funds of any kind or character belonging to or in the custody
of any public agency (Chapter 30, paragraph 235 /1 through 235/7, Public Funds Investment Act,
Illinois Complied Statutes
II. Scope:
This investment policy applies to all financial assets of the Village of Buffalo Grove except for the
Police and Firefighter s Pension Funds which are subject to those individual fund boards.
1. Pooling of Funds
Except for cash in certain restricted and special funds, the Village of Buffalo Grove will
consolidate and reserve balances from all -funds to maximize investment earnin s and to increase
efficiencies with regard to investment pricing, safekeeping and administration. Investment
income will be allocated to the various funds based on their respective participation and in
accordance with generally accepted accounting principles.
III. General Objectives:
The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield:
1. Safety
Safety of principal is the foremost objective of the investment program. Investments shall be
undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio.
The objective will be to mitigate credit risk and interest rate risk
(a). Credit Risk
The Village of Buffalo Grove will minimize credit risk, which is the risk of loss due to
the failure of the security issuer or backer, by:
• Limiting investment to the types of securities listed in Section VII of this
Investment Policy
• Pre qualifying the financial institutions, broker /dealers, intermediaries, and
adviser with which the Village of Buffalo Grove will do business in accordance
with Section V
• Diversifying the investment portfolio so that the impact of potential losses from
any one type of security or from any one individual issuer will be minimized.
(b). Interest Rate Risk
The Village of Buffalo Grove will minimize interest rate risk, which is the risk that the
marker values of securities in the portfolio will fall due to changes in market interest
rates, by:
• Structuring the investment portfolio so that securities mature to meet cash
requirements for ongoing operations, thereby avoiding the need to sell securities
on the open market prior to maturity
• Investor* operating funds primarily in shorter -term securities, money market
mutual Ends, or similar investment pools and limiting the average maturity of
the portfolio in accordance with this policy (see section VIII).
2. Liquidity
The investment portfolio shall remain sufficiend li quid to meet all operating equirements that
may be reasonably anticipated. This is accomplishedby structurin the portfolio so that securities
mature concurrent with cash needs to meet anticipated demands �staticZiquidity). Furthermore,
since all possible cash demands cannot be anticipated, the portfolio should consist largely of
securities with active secondary or resale markets )dynanuc liquidity). Alternatively, a portion of
the portfolio may be placed in money market mutual funds or local government investment pools
which offer same day liquidity for short -term funds.
3. Yield
The investment portfolio shall be designed with the objective of attaining a market rate of return
throughout budgetary and economic cycles, taking into account the investment risk constraints
and liquidity needs. Return on investment is of secondary importance compared to the safety and
liquidity objectives described above. The core of investments is limited to relatively low risk
securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall
generally be held until maturity with the followin exceptions:
• A security with declining credit may be sod early to minimize loss of principal.
• A security swap would improve the quality, yield, or target duration in the portfolio.
• Liquidity needs of the portfolio require that the security be sold.
IV. Standards of Care:
1. Prudence
The standard of prudence to be used by investment officials
standard and shall be applied in the context of managing the
officers acting in accordance with written procedures and thi
due diligence shall be relieved of personal responsibility for
market price changes, provided deviations from expectations
the liquidity and the sale of securities are carried out in accor
2. Ethics and Conflicts of Interest
shall be the "prudent person"
overall portfolio. Investment
s investment policy and exercising
an individual security's credit risk or
are reported in a timely fashion and
dance with the terms of this policy.
Officers and employees involved in the investment process shall refrain from personal business
activity that could conflict with the proper execution and management of the investment
program, or that could impair their ability to make impartial decisions. Employees and
investment officials shall disclose any material interests in financial institutions with which they
conduct business. They shall further disclose any personal financial /investment positions that
could be related to the performance of the investment portfolio. Employees and officers shall
refrain from undertaking personal investment transactions with the same individual with whom
business is conducted on behalf of the Village of Buffalo Grove.
3. Delegation ofAuthority
Authority to mange the Village of Buffalo Grove's investment program is derived from the
following:
The establishment of investment policies is the responsibility of the Village Board. Management
and administrative responsibility for the investment program is hereby delegated to the Finance
Director who, under the direction of the Village Manager, shall establish written procedures for
the operation of the investment program consistent with this investment policy. Procedures
should include references to: safekeeping, delivery vs. payment, investment accountin ,
repurchase agreements wire transfer agreements, collateral /depository agreements an� banking
service contracts. Such procedures shall. include xplicit delegation of authority to persons
responsible for investment transactions. No person may engage in an investment transaction
except as provided under the terms of this policy and the procedures established by the Finance
Director. The Finance Director shall be responsible for all transactions undertaken and shall
establish a system of controls to regulate the activities of subordinate officials. The Finance
Director may from time to time amend the written procedures in a manner not inconsistent with
this policy or state statutes.
The responsibility for investment activities of the Police and Firefighter Pension Funds rest with
the trustees of the respective fund boards.
V. Authorized Financial Institutions, Depositories and Broker /Dealers:
The Finance Director will maintain a list of financial institutions authorized to provide investment
services. In addition, a list will be maintained of approved security broker /dealers selected by credit
worthiness. These may include "primary" dealers or regional dealers that qualify under Securities and
Exchange Commission (SEC) Rule 15C3 -1 (uniform net capital rule). No public deposit shall be
made except on qualified public depository as established by state statutes.
All financial institutions and broker /dealers who desire to become qualified become qualified
bidders for investment transactions must supply the Finance Director with the following:
• Audited financial statements demonstrating compliance with state and federal capacity
adequacy �udefines
• Proof of National Association of Security Dealers (NASD) certification (not applicable to
Certificate of Deposit counterparties)
• Proof of state registration
• Completed broker /dealer questionnaire
• Certification of having read the Village's Investment Policy
V1. Safekeeping and Custody:
All trades of marketable securities will be executed by delivery vs. payment (DVP) to ensure that
securities are deposited in an eligible financial institution prior to the release of funds.
Securities will be held by an independent third -party custodian selected by the Village as evidenced
by safekeeping receipts in the Village's name. The safekeeping institution shall annually provide a
copy of their most recent report on internal controls (Statement of Auditing Standard No. 70, or
SAS 70).
1. Internal Controls
The Finance Director is responsible for establishin and maintaining an internal control structure
designed to ensure that the assets of the Village of Ofalo Grove are protected from loss, theft
or misuse. Details of the internal controls system shall be documented in an investment
procedures manual and shall be reviewed and updated annually. The internal control structure
shall be designed to provide reasonable assurance that these objectives are met. The concept of
reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely
to be derived and (2) the valuation of costs and benefits requires estimates and judgments by
management.
The internal controls structure shall address the following points:
• Control of collusion
• Separation of transaction authority from accounting and recordkeeping
• Custodial safekeeping
• Avoidance of physical delivery securities
• Clear delegation of authority to subordinate staff members
• Written confirmation of transactions for investments and wire transfers
• Dual authorizations of wire transfers
• Development of a wire transfer agreement with the lead bank and third -party custodian
Accordingly, the Finance Director shall establish a process for annual independent review by an
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external auditor to assure compliance with policies and procedures.
VII. Suitable and Authorized Investments:
The Village may invest in any type of the security allowed for in Illinois Compile Statutes (30 ILCS
235/2) regarding the investment of public funds. Approved investments include:
• Bonds, notes, certificates of indebtedness, treasury bill, or any other securities now or
hereafter issued, which are guaranteed by the full faith and credit of the United States of
American as to principal and interest;
• Bonds, notes, debentures or other similar obligations of the United States of America or its
agencies;
• Interest - bearing savings accounts, interest- bearing certificates of deposit or interest- bearing
time deposits or any other investments constituting direct obligations of any bank as defined
by the Illinois Banking Act; and is insured by the Federal Deposit Insurance Corporation;
• Short -term obli ations of corporations organized in the United States with assets exceeding
$500,000,000 if (i) such obli gations are rated at the time of purchase at one of the three
highest classifications established by at least two standard rating services and which mature
not later than 180 days for the date of purchase, (ii) such purchases do not exceed 10% of
the corporation's outstanding obligations and (iii) no more than 25% of the Village's funds
may be investing in short -term obligations of corporations;
• Illinois Public 'I Treasurer's Investment Pool (Illinois Funds);
• Consistent with the GFOA Recommended practice on Use of Derivatives by State and
Local Governments (attachment #1), extreme caution should be exercise in the use of
derivative instruments.
1. Collaterali�Zation:
It is the policy of the Village of Buffalo Grove and in accordance with the GFOA's
Recommended Practices on the Collateralization of Public Deposits (attachment #2), the Village
requires that funds on deposit in excess of FDIC limits be secured with some form of collateral.
The Village will accept any of the following assists as collateral:
• Government Securities
• Obligations of Federal Agencies
• Obligations of Federal Instrumentalities
• Obligations of the State of Illinois
(The Village reserves the right to accept /reject any form of the above named securities.)
The amount of collateral provided will not be less than 110% of the fair market value of the net
amount of public funds secured. The ratio of fair market value of collateral to the amount of
funds secured will be reviewed monthly, and additional collateral will be required when the ratio
declines below the level required and collateral will be released if the fair market value exceeds
the required level. Pledged collateral will be held in safekeeping by an independent third party
depository designated by the Village of Buffalo Grove and evidenced by a safekeeping agreement.
Collateral agreements will preclude the release of the pledged assets without an authorized
signature from the Village of Buffalo Grove. The Village realizes that there is a cost factor
involved with collateralization and the Village will pay any reasonable and customary fees related
to collateralization.
VIII. Investment Parameters:
1. Diversification
In order to reduce the risk of default, the investment portfolio of the Village of Buffalo Grove
shall be diversified by:
Limiting investments to avoid over - concentration in securities from a specific issuer or
business sector (U.S. Treasury and Agency securities),
- No financial institution shall hold more than 40% of the Village's investment
portfolio
- Monies deposited at a financial institution shall not exceed 75% of the capital
stock and surplus of that institution.
- Commercial paper shall not exceed 10% of the Village's investment portfolio.
- Brokered certificates of deposit shall not exceed 25°` of the Village's investment
portfolio.
Investing in securities with varying maturities, and
Continuously investing a portion of the portfolio in readily available funds such as local
government investment pools (LGIPs), money market funds or overnight repurchase
agreements to ensure that appropriate liquidity is maintained in order to meet ongoing
obligations.
2. Maximum Maturities
To the extent possible, the Village of Buffalo Grove will attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the Village will not
directly invest in securities maturing more than three years from the date of purchase.
Reserve funds and other funds with longer. term investment horizons may be invested in
securities exceeding three year if the maturities of such investments are made to coincide as
nearly as practicable with the expected use of funds.
Because of inherent difficulties in accurately forecasting cash flow requirements, a portion of the
pportfolio should be continuously invested in readily available funds such as LGIPs, money market
funds, or overnight repurchase agreements to ensure that appropriate liquidity is maintained to
meet ongoing obligations.
IX. Reporting:
The Finance Director shall prepare as investment report at least monthly, including a management
summary that provides an analysis of the status of the current investment portfolio and the
individual transactions executed over the month. This management summary will be prepared in a
manner which will allow the Village to ascertain whether investment activities during the reporting
period have conformed to the investment policy. This report should be provided to the Village
Manager and Village Board. The report win include the following:
• Listing of individual securities held
• Average weighted yield to maturity
• Listing of investments by maturity
• Percentage of total portfolio whic
1. Per Standards
hby fund, at the end of the reporting period.
of portfolio.
date.
each type of investment represents.
The investment ortfolio will be managed in accordance with the parameters specified within this
policy. The portfolio should obtain a market average rate of return during a market /economic
environment of stable interest rates. Portfolio performance should be compared to appropriate
benchmarks on a regular basis. The benchmarks shall be reflective of the actual securities being
purchased and risks undertaken, and the benchmark shall have similar weighted average as the
portfolio.
2. Market Yield
The Village's investment strategy is passive. Given this strategy, the basis used by the Finance
Director to determine whether market yield are being achieved shall be the six -month U.S.
Treasury Bill.
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3. Marking to Market
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The market value of the portfolio shall be calculated at least quarterly and a statement of the
market value of the portfolio shall be issued at least quarterly. This will ensure that review of the
investment portfolio, in terms of value and price volatility, has been performed consistent with
the GFOA recommended Practices on "Mark -to- Market Practices for State and Local
Government Investment Portfolios and Investment Pools" (attachment #3). In defining market
value, considerations should be given to the GASB Statement 31 pronouncement.
X. Investment Policy Adoption:
The Village of Buffalo Grove's investment policy shall be adopted by resolution of the Village
Board of Trustees. This policy shall be reviewed on an annual-basis by the Finance Director and any
modifications thereto must be approved by the Village Board of Trustees.
Dated November 25, 1998
Amended October 6, 2008
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Attachment #1
GFOA Recommended Practice
Use of Derivatives by State and Local Governments for Cash Operating and
Reserve Portfolios (1994 and 2002)
Background. Derivative products are financial instruments created from or whose value
depends on (is derived from) the value of one or more underlying assets or indexes of asset
values. Derivatives include instruments or features such as collateralized mortgage
obligations (CMOs), interest -only (IOs) and principal -only (POs) securities, forwards,
futures, currency and interest rate swaps, options, floaters /inverse floaters, and
caps /floors /collars. It still remains the responsibility of each government to determine what
constitutes a derivative product and what is allowable by policy and statute.
Recommendation. The Government Finance Officers Association (GFOA) urges state and
local government finance officers to exercise extreme caution in the use of derivatives and to
consider their use only when they have developed a sufficient understanding of the products
and the expertise to manage them. Because new derivative products are increasingly complex,
state and local governments should use these instruments only if they can evaluate the
following factors, among others, to determine their appropriateness:
1. Governmental entities must observe the objectives of sound asset and liability
management policies that ensure safety, liquidity, and yield within legally allowable
investments. Because of the risks involved, the use of derivatives by governmental entities
should receive particular scrutiny. Certain derivative products may not be appropriate for
all governmental investors. Characteristics of such products can include high price
volatility, illiquid markets, products that are not market - tested, highly leveraged products,
products requiring a high degree of sophistication to manage, and products that are
difficult to value.
2. Governmental entities should understand that state and local laws may not specifically
address the use of derivatives and examine such considerations as
• the constitutional and statutory authority of the governmental entity to execute
derivative contracts,
the potential for violating constitutional or statutory provisions limiting the
entity's authority to incur debt resulting from the transaction, and
the application of the governmental entity's procurement statutes to derivative
transactions.
3. Governmental entities should be aware of all the risks associated with use of derivatives,
including counterparty credit, custodial, market, settlement, and operating risk.
4. Governmental entities should establish internal controls for each type of derivative in use
to ensure that these risks are adequately managed. For example,
• the entity should provide a written statement of purpose and objectives for
derivative use;
• written procedures should be established that provide for periodic monitoring
of derivative instruments;
• managers should receive periodic training and have sufficient expertise and
technical resources to oversee derivative programs;
• recordkeeping systems should be sufficiently detailed to allow governing
bodies, auditors, and examiners to determine if the program is functioning in
accordance with established objectives; managers should report regularly on
the use of derivatives to their governing body and appropriate disclosure
should be made in official statements and other disclosure documents; and
• reporting on derivative use should be in accordance with generally accepted
accounting principles, and because use of these instruments is a complex
matter, early discussion with public accountants is essential to determine if
specialized reporting may be required.
5. Governmental entities should be aware if their broker /dealer is merely acting as an agent
or intermediary in a derivatives transaction or is taking a proprietary position. Possible
conflicts of interest should be taken into consideration before entering into a transaction.
6. Governmental entities should be aware that there may be little or no pricing information
or standardization for some derivatives. Competitive price comparisons are
recommended before entering into a transaction.
7. Governmental entities should exercise caution in the selection of broker /dealers or
investment managers and ensure that these agents are knowledgeable about, understand
and provide disclosure regarding the use of derivatives, including benefits and risks. The
entity should secure written acknowledgment from broker /dealers that they have
received, read, and understood the entity's debt and investment policies, including
whether derivatives are currently authorized under the entity's investment policy and
that the broker /dealer or investment manager has ascertained that the recommended
product is suitable for the governmental entity.
Governmental entities are responsible for ensuring this same level of safeguards when
derivative transactions are conducted by a third party acting on behalf of the govern-
mental entities.
9. Government Entities should analyze the materiality of a transaction closely to determine
if it might affect a bond or other credit — related rating of such entity. Rating agencies
should be notified at the appropriate time, before a transaction is completed.
References
• A Public Investor's Guide to Money Market Instruments, Second Edition, edited by M.
Corinne Larson, GFOA, 1994.
• An Elected Official's Guide to Investing, M. Corinne Larson, GFOA, 1995.
Approved by the Committee on Cash Management, June 15, 2002
Approved by the Executive Committee, October 25, 2002.
Attachment #2
Collateralization of Public Deposits (1984, 1987, 1993, and 2000)
Background. The safety of public funds should be the foremost objective in public fund
management. Collateral ization of public deposits through the pledging of appropriate
securities or surety bonds by depositories is an important safeguard for such deposits.
State programs pertaining to the collateralization of public deposits have generally proven
to be beneficial for both the public sector and its depositories.
However, federal law imposes certain limitations on collateral agreements between
financial institutions and public entities in order to secure public entity deposits. Under
certain circumstances, the Federal Deposit Insurance Corporation (FDIC) may be able to
avoid a perfected security interest and leave the public depositor with only the right to
share with other creditors in the pro rata distribution of the assets of a failed institution.
Recommendation. The Government Finance Officers Association (GFOA) favors the
use of pledging requirements as protection for state or local government's deposits. GFOA
further favors and encourages state and local governments to establish adequate and
efficient administrative systems to maintain such pledged collateral, including state or
locally administered collateral pledging or collateral pools. To accomplish these goals,
GFOA recommends the following:
1. Public entities should implement programs of prudent risk control. Such programs
could include a formal depository risk policy, credit analysis, and use of fully secured
investments. In the absence of an effective statewide collateralization program, local
officials should establish and implement collateralization procedures.
2. State and local government depositors should take all possible actions to comply with
federal requirements in order to ensure that their security interests in collateral
pledged to secure deposits are enforceable against the receiver of a failed financial
institution. Federal law provides that a depositor's security agreement, which tends to
diminish or defeat the interest of the FDIC in an asset acquired by it as receiver of an
insured depository, shall not be valid against the FDIC unless the agreement.
• is in writing;
• was approved by the board of directors of the depository or its loan committee;
and
• has been, continuously, from the time of its execution, an official record of the
depository institution.
3. Public entities should have all pledged collateral held at an independent third -party
institution, and evidenced by a written agreement in an effort to satisfy The Uniform
Commercial Code (UCC) requirement for control. The UCC states that the depositor
does not have a perfected interest in a security unless the depositor controls it. Control
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means that swaps, sales, and transfers cannot occur without the depositor's written
approval.
• The value of the pledged collateral should be marked to market monthly, or
more frequently depending on the volatility of the collateral pledged. If state
statute does not dictate a minimum margin level for collateral based on deposit
levels (e.g., Georgia statute requires 110 percent), the margin levels should be
at least 102 percent, depending on the volatility of the collateral pledged.
• Substitutions of collateral should meet the requirements of the collateral
agreement, be approved in writing prior to release, and the collateral should
not be released until the replacement collateral has been received.
4. The pledge of collateral should comply with the investment policy or state statute,
whichever is more restrictive.
The use of surety bonds and other appropriate types of insurance in lieu of collateral
could be reviewed as an alternative to collateralization. If a public entity agrees to the
us of surety bonds and other types of insurance in lieu of collateral, only insurers of
the higher credit quality as determined by a nationally recognized insurance rating
agency should be used.
Note: As a result of the court case North Arkansas Medical Center v. Barrett, 963 F.2d
780 (8th Cir. 1992), the FDIC issued a policy statement in March 1993 indicating that it
would not seek to void a security interest of a federal, state, or local government entity
solely because the security agreement did not comply with the contemporaneous
execution requirement set forth in Section 13(e) of the Federal Deposit Insurance Act 12
U.S.C. 1823(e). The policy statement was officially enacted by Section 317 of the Riegle
Community Development and Regulatory Improvement Act of 1994 (Public Law 103-
325). Because of this change, the bullet item "was executed by the depository institution
and any person claiming an adverse interest, contemporaneously with the acquisition of
the asset by. the depository institution" that appeared in previous versions of this
recommended practice has been removed from this version.
References
• GFOA Sample Security Agreement, 1995.
• GFOA Sample Custodial Trust Agreement, 1995.
• An Introduction to Collateralizing Public Deposits for State and Local
Governments, M. Corinne Larson, GFOA, 1996.
• Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson
and W. Paul Zorn, GFOA, 1998.
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Attachment #3
GFOA Recommended Practice
Mark -to- Market Practices for State and Local Government Investment
Portfolios and Investment Pools (1995, 2000, and 2003)
Background. As the investment portfolios of state and local governments are subjected to
increased scrutiny, it is essential that reporting standards be enhanced so that investors,
governing bodies, and the public remain informed of the current market value of the portfolio.
Regular disclosure of the value of a governmental entity's investments is an important step to
furthering taxpayer and market confidence in state and local government investment
practices. The Governmental Accounting Standards Board (GASB) has also recognized in
GASB Statement 31 the need to report investments at fair value at fiscal year end.
Government officials should be aware of state, local, accounting, and rating agency
requirements regarding mark to market practices.
Recommendation. The Government Finance Officers Association (GFOA) recommends that
state and local government officials responsible for investment portfolio reporting determine
the market value of all securities in the portfolio on at least a quarterly basis. These values
should be obtained from a reputable and independent source and disclosed to the governing
body or other oversight body at least quarterly in a written report. It is recommended that the
report include the market value, book value, and unrealized gain or loss of the securities in the
portfolio.
Many state and local government officials are allowed to invest in various state and local
government investment pools available in their state or region. GFOA recommends that pool
administrators, on a daily basis, determine the market value of all securities in the pool and
report this information to all pool participants on at least a monthly basis. These values should
be obtained from a reputable and independent source. This information should be included in
the report to the governing body prepared on at least a quarterly basis.
References
• An Elected Official's Guide to Investing, M. Corinne Larson, GFOA, 1996.
• GASB Statement 31 and Implementation Guide.
• Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson and
W. Paul Zorn, GFOA, 1998.
Recommended for Approval by the Committee on Cash Management, January 23,
2003.
Approved by the GFOA's Executive Committee, February 28, 2003.