Attachment H MSBA Investment Policy FY25.pdf

MASSACHUSETTS SCHOOL BUILDING AUTHORITY

Investment Management Policy

Policies and Guidelines for Funds and Investments

December 13, 2024

The purpose of this policy (“Policy”) of the Massachusetts School Building Authority (the “Authority”) is to articulate the guidelines for the investment of monies held by the Authority and define the parameters within which funds will be managed.

Governing Law

Investment activity shall be conducted in conformance with federal, state, and other requirements of law.

Under Section 3(s) of Chapter 70B of the Massachusetts General Laws, the Authority may invest its funds in such investments as may be legal investments for the Commonwealth or any fiduciary in the Commonwealth. The Authority has been advised by counsel that this statutory provision essentially authorizes the Authority to invest its funds in accordance with the “prudent investor” rule articulated over the years by the Supreme Judicial Court and recently codified in the Massachusetts Prudent Investor Act (G.L. c. 203C).

Establishment of Funds

The Board of Directors of the Authority has approved a trust agreement to secure the Authority’s bonds dated as of August 1, 2005 (as amended and restated by the Sixth Supplemental Trust Agreement, dated as of June 1, 2010, the “Master Trust Agreement”), between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), as further supplemented and amended by supplemental indentures, (together with the Master Trust Agreement, as amended and supplemented, the “Trust Agreement”), which establishes funds to be held by the Trustee under the Trust Agreement and prescribes permitted investments for such funds. Additionally, the Executive Director of the Authority has been authorized to establish such other funds, as needed, for the investment and disbursal of the monies which are clear of any trust, lien, or pledge or assignment securing bonds issued by the Authority, including: project fund proceeds from the issuance of Authority bonds; monies received by the Authority from the School Modernization and Reconstruction Trust Fund (SMART Fund); and other funds or revenues that the Authority may receive. Unless otherwise defined herein, certain capitalized terms used herein shall have the meanings set forth in the Trust Agreement.

The Authority has established an irrevocable trust for the purpose of holding monies to provide for the Authority’s Other Post-Employment Benefits (OPEB) liability, which is managed pursuant to the OPEB Operating Procedures.

MSBA Investment Management Policy (2024)

The Executive Director has deemed it appropriate to establish, including without limitation, funds for the following purposes:

Operating Fund — for the purpose of holding monies to be used for the ongoing operating expenses of the Authority, including vendor payments; payroll related expenses; and other operational, grant or loan payments to cities, towns, and regional school districts, or fund transfers.

Project Fund — for the purpose of holding bond proceeds or other borrowed monies to be used for: school construction grants to cities, towns, and regional school districts;

vendor payments related to cost of issuance expenses; or vendor payments directly related to the construction of the project.

In connection with the above, the Authority holds funds in debt service and debt service reserve funds, sinking funds and escrows related to the defeasance and refunding of outstanding debt.

Delegation of Investment Authority

The Board authorized the Executive Director on June 20, 2005 to transact investments, to establish such policies and procedures for the investment and disbursal of the monies in such funds, as deemed appropriate for the custody of the proceeds of the Authority’s bonds, other monies received by the Authority from the SMART Fund, and other funds or revenues that the Authority may receive. This authorization was included in the Authority’s initial debt offering.

The Executive Director may delegate investment authority to the Chief Financial Officer, Treasurer and other financial staff. All staff shall observe applicable restrictions imposed by federal and state law, and the provisions of this Policy when making an investment decision.

Investment Objectives

The primary objectives in the investment of Authority funds, in order of priority, shall be:

(i) Safety: Safety of principal is the foremost objective of the investment of Authority funds and investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the investment portfolio;

(ii) Liquidity: The investment portfolio shall be designed to remain sufficiently liquid to meet all reasonably anticipated cash flow requirements;

(iii) Return: The investment portfolio shall be designed with the objective of attaining a reasonable market rate of return throughout budgetary and economic cycles factoring in the nature of funds being invested and the previously stated objectives; and

(iv) ESG: Whenever possible, environmental, social and governance factors (“ESG”) shall be factored into investment decisions.

Standards of Care

The standard of prudence to be used by the Executive Officer and his or her designees shall be the “prudent person” standard for investment and management decisions as defined under Section 3 Chapter 203C of Massachusetts General Laws.

Governing Body

The Authority will retain ultimate fiduciary responsibility for the investment of funds.

Investment Advisor

The Authority may engage the services of one or more external investment advisors to assist in the management of the Authority’s investment portfolio in a manner consistent with the Authority’s objectives and this Policy. Such external advisors may be granted discretion to purchase and sell investment securities in accordance with this Policy. Such advisors must be registered under the Investment Advisors Act of 1940. All investment advisors shall verify in writing that they have received a copy of this Policy. Such written statement shall indicate that they have read and understand this Policy and all applicable statutes related to the Authority’s investments, along with their intent to comply fully with these requirements.

The Authority shall require all investment advisors to submit a current SEC Form ADV Part II prior to engagement by the Authority and upon request.

Permitted Investments

Except for the investment of funds in escrow accounts related to the defeasance or refunding of the Authority’s outstanding debt, the following investments shall be permitted for monies in the foregoing Funds, with the stated objective of preserving the corpus of the fund while maintaining appropriate liquidity and earning a reasonable rate of return:

(i) Shares in the Massachusetts Municipal Depository Trust (MMDT);

(ii) Government Obligations;

(iii) Certificates or receipts representing direct ownership of future interest or principal payments on Government Obligations or any obligations of agencies or instrumentalities of the United States of America which are backed by the full faith and credit of the United States, which obligations are held by a custodian in safekeeping on behalf of the registered owners of such receipts;

(iv) Agency Obligations;

(v) Obligations of, or obligations unconditionally guaranteed by, the World Bank

(International Bank for Reconstruction and Development and International Finance Corporation), European Bank for Reconstruction and Development, European Investment Bank, Asian Development Bank, Inter-American

Development Bank, African Development Bank and the Nordic Investment Bank, provided that such obligations are rated at the time of purchase hereunder in one of the two highest rating categories by each rating agency;

(vi) Interest-bearing time or demand deposits, certificates of deposit, or other similar banking arrangements with any government securities dealer, bank, trust company, savings and loan association, national banking association or other savings institution provided that such deposits, certificates, and other arrangements are (a) fully insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or (b) if the institution enters into a collateral agreement with the MSBA which maintains collateral in U.S. government securities, agencies of the U.S. government, or corporate and municipal securities with an AA or higher rating by at least two of the three rating agencies then maintaining a rating on any of the bonds outstanding of the Authority, equal to 102% of the MSBA’s deposits with the institution;

(vii) Repurchase agreements collateralized by securities described in subparagraphs

(ii), (iii) or (iv) above with any registered broker/dealer or with any commercial bank, provided that (a) a specific written repurchase agreement governs the transaction, (b) the securities are held, free and clear of any lien, by an independent third party acting solely as agent for the Authority, and such third party is (1) a Federal Reserve Bank, or (2) a bank which is a member of the Federal Deposit Insurance Corporation and which has combined capital, surplus and undivided profits of not less than $25 million, and the Authority shall have received written confirmation from such third party that it holds such securities, free and clear of any lien, (c) the repurchase agreement has a term of thirty days or less, or the third-party custodian will value the collateral securities no less frequently than weekly and will liquidate the collateral securities if any deficiency in the required collateral percentage is not restored within five business days of such valuation, and (d) the fair market value of the collateral securities in relation to the amount of the repurchase obligation, including principal and interest, is equal to at least 102%;

(viii) Forward purchase agreements providing for delivery of securities described in subparagraphs (ii), (iii) or (iv) above or subparagraph (x) below with banks or other financial institutions whose long-term unsecured debt or claims-paying ability is rated in one of the two highest rating categories by each rating agency then maintaining a rating on any of the bonds of the Authority outstanding, provided that any such agreement must be accompanied by an opinion of counsel to the effect that the securities delivered will not be considered a part of the estate of such bank or other financial institution in the event of a declaration of bankruptcy or insolvency by such bank or institution;

(ix) Money market funds rated in the highest short term rating category by each rating agency then maintaining a rating on any bonds outstanding of the Authority, or any other mutual fund rated in the highest short term rating category by each rating agency then maintaining a rating on any bonds of the Authority outstanding.

(x) Commercial paper rated in the highest short term rating category by each rating agency then maintaining a rating on any bonds of the Authority outstanding;

(xi) Advanced-Refunded Municipal Bonds which shall mean any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state (a) which are not callable at the option of the obligor or otherwise prior to maturity or as to which irrevocable notice has been given by the obligor to call such bonds or obligations on the date specified in the notice, (b) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash, Government Obligations or Agency Obligations which fund may be applied only to the payment of interest when due, and the principal of and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable notice, as appropriate, and (c) as to which the principal of and interest on the Government Obligations or Agency Obligations which have been deposited in such fund along with any cash on deposit in such fund is sufficient to pay all interest when due, and all principal of and redemption premium, if any, on the bonds or other obligations described in this definition on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable notice referred to in subclause (a) above, as appropriate;

(xii) Short-term or long-term obligations, whether tax exempt or taxable, of any state or local government or authority or instrumentality thereof or any other entity that has the ability to issue obligations the interest on which is excludable from gross income for federal income tax purposes, provided that any such obligations are rated at the time of purchase in one of the two highest rating categories by each rating agency then maintaining a rating on any bonds of the Authority outstanding; and

(xiii) Investment contracts with banks or other financial institutions whose long-term unsecured debt or claims-paying ability is rated in one of the two highest rating categories by each rating agency then maintaining a rating on any of the bonds of the Authority outstanding.

Investment of funds in escrow accounts established for the purpose of the defeasance or refunding of outstanding debt are to be in compliance with the requirements as set out in GASB 86, with the express purpose of permitting the Authority to account for the reduction of outstanding debt by such amounts defeased or refunded. As of the date of this Policy, GASB 86 defines such permitted investments as:

• Direct obligations of the U.S. government

• Obligations guaranteed by the U.S. government

• Securities backed by U.S. government obligations as collateral and for which interest and principal payments on the collateral generally flow immediately through to the security holder.

In addition, investments held in the escrow account, plus any cash, are required to produce a cash flow sufficient in timing and amounts to pay the interest and principal payments of the defeased or refunded debt.

Due Diligence on Investment Providers

Prior to making an investment, the Authority shall review the qualifications, financial strength, experience and expertise of the investment provider. The review is intended to avoid doing business with a firm that is financially weak, has limited experience in providing the investment instrument being purchased, lacks general financial expertise or is otherwise unsuitable for the investment of Authority funds. This review may include, but shall not be limited to, the following:

information on the financial condition of the provider, recent financial statement, credit rating reports, a summary of the volume of securities (by investment instrument) traded or sold by the firm, the experience of the account officer(s) handling Authority’s investments and any other information deemed appropriate.

Investment Process

The Authority recognizes that the appropriate investment process varies depending upon the characteristics of the specific instrument. Listed below is the process to be followed for the significant investment of funds in the following types of instruments.

(i) The Authority or investment advisor shall seek to obtain competitive bid information on all investment instruments purchased on the secondary market 1. A competitive bid can be executed through a bidding process using best efforts to obtain bids from at least three separate brokers/financial institutions or by using a nationally recognized trading platform. The Authority or investment advisor will accept the bid that offers the highest rate of return within the maturity required. When selling a security, the Authority will select the bid that generates the highest sale price.

(ii) If the Authority is offered a security for which there is no readily available competitive offering on the same specific issue, then the Authority or investment advisor shall document quotations for comparable or alternative securities. When purchasing original issue securities, no competitive offerings will be required if all dealers in the selling group offer those securities at the same original issue price.

(iii) For Guaranteed Investment Contracts (GICs), investments shall be made after the receipt of at least three bids or efforts to obtain bids from at least three qualified institutions. The request for bids may specify differing amounts of collateral, if required, depending upon the bidder’s credit rating.

1 A marketable security for the purpose of this paragraph shall include treasuries, agencies, commercial paper, certificate of deposits and similar financial instruments. Money markets, demand deposits, auction rates and guaranteed investment contracts are not to be considered marketable securities.

Rebate

The Authority recognizes that under certain circumstances investment earnings in excess of the “Arbitrage yield” will need to be rebated to the Federal Government. Therefore, the Authority shall be diligent in complying with all regulations concerning the investment of bond proceeds.

Prior to investing bond proceeds, the Authority shall consult with bond counsel to ensure that the bidding and other investment procedures conform to current IRS regulations.

The Treasurer shall maintain records to record the expenditure of bond proceeds, investment earnings and determination of any rebate liability. All investment providers must be required to provide appropriate reports and certifications. The Treasurer shall determine that an investment will comply with IRS regulations and provide sufficient data to perform rebate calculations.

Reporting

The Treasurer may from time to time prepare a report on the composition and results of the investment portfolio. The report shall list by type of investment instrument the following: issuer, par amount, purchase price, market value, coupon or yield of each investment and maturity.

Internal Controls

The Chief Financial Officer shall establish a system of internal controls, which shall be documented in writing. Internal controls shall address the following: clear delegation of authority to staff members, separation of transaction authority from financial reporting, prohibition on a unilateral wire transfer authority, timely reconciliation of transactions and other controls deemed appropriate. The Chief Financial Officer may from time to time test the internal control system.

Conflict/Ethics

All participants in the investment process shall act responsibly and professionally. Authority employees involved in the investment process shall refrain from personal business activity that could conflict with the operation of the investment program or impair their ability to make impartial decisions and shall disclose any relationship that may give an appearance of impropriety.

Authority employees involved in final investment decisions shall file a Statement of Financial Interests with the State Ethics Commission annually.