Texas Public Funds Investment Act: Policy, Officer, and Reporting Rules

Complying with the Texas Public Funds Investment Act compliance requirements means doing seven things and keeping records that prove you did them: adopting a written investment policy and strategy by formal action of the governing body, designating an investment officer, completing statutory training, investing only in what the Act authorizes, filing quarterly reports, collateralizing deposits above the FDIC insured amount, and submitting to the required audits. The Act is codified as Chapter 2256 of the Texas Government Code, and it ranks investment priorities in a fixed order — suitability, safety of principal, liquidity, marketability, diversification, and yield.¹ Auditors judge every decision against that hierarchy.

Who the Act Covers

The PFIA applies to any Texas governmental body that invests public funds: municipalities, counties, school districts, special-purpose districts such as water and hospital districts, state agencies, and public higher education institutions. Inside each entity, direct responsibility falls on the treasurer, the chief financial officer (if that is a separate position), the designated investment officer, and the members of the governing body that approves investment policy.

Brokers, dealers, and financial institutions that transact with these entities operate inside the same framework. Before any investment transaction, they must acknowledge the entity’s written investment policy and provide the required disclosures. Informal broker relationships are a common source of compliance failures, so the acknowledgment needs to be on paper and on file.

The Written Investment Policy and Strategies

Every covered entity must adopt a written investment policy through a formal action of its governing body — a rule, order, ordinance, or resolution, depending on entity type.¹ The policy is the controlling document against which auditors measure every investment decision. A missing or vague policy creates liability for the entire governing body.

At minimum, the policy must include:

The specific types of instruments in which the entity’s funds may be placed, drawn from the PFIA’s authorized list.
The maximum stated maturity for any individual investment, plus a maximum dollar-weighted average maturity for pooled fund groups.
Methods for monitoring the current market value of investments already in the portfolio.
A requirement that transactions settle on a delivery-versus-payment basis, so the entity never pays for a security it hasn’t received. Investment pool funds and mutual funds are excepted.
Procedures for monitoring credit rating changes on existing holdings and for liquidating investments when ratings deteriorate below acceptable levels.¹

The policy is one document. Separately, the governing body must adopt a written investment strategy for each fund or group of funds it controls. Each strategy describes the objectives for that specific fund, applying the statutory priority order of suitability, safety, liquidity, marketability, diversification, and yield.¹ A general operating fund with near-term spending obligations and a capital project reserve should have visibly different strategies.

Designating and Training the Investment Officer

The governing body must designate one or more investment officers to carry out the policy. In most entities this is the treasurer, the chief financial officer, or both. The officer is held to a prudent-person standard: the judgment and care a prudent person would use in managing their own affairs under the prevailing circumstances.¹ That standard protects officers who make reasonable decisions that turn out badly, and it exposes officers who ignore their own entity’s policy. The governing body keeps ultimate fiduciary responsibility even after delegating.

Training is mandatory and specific. The treasurer, the chief financial officer if that is a separate role, and the designated investment officer must each complete at least 10 hours of investment training within 12 months of taking office.² The initial training must cover investment controls, security risks, strategy risks, market risks, portfolio diversification, and PFIA compliance.

Continuing education runs on a two-year cycle tied to the entity’s fiscal year. Most local governments must complete 10 hours every two fiscal years; school districts and municipalities have an eight-hour threshold.² Small entities created under certain constitutional provisions that contract with an investment management firm and have fewer than five full-time employees can satisfy the continuing requirement with four hours for an officer of the governing body.

Training must come from an independent source approved by the governing body or its investment committee. The Government Treasurers’ Organization of Texas and the Texas Government Finance Officers Association are commonly approved providers, but the statute names no required organization. Keep the completion records. An officer who cannot document training is, to an auditor, an untrained one.

What the Entity Can Invest In

The PFIA limits public entities to a defined menu of low-risk instruments. Anything not on the list is off-limits unless another Texas statute permits it. The entity’s own policy can restrict the statutory menu further but cannot expand it.

Government Securities and Repurchase Agreements

Direct obligations of the United States, Texas state and local government obligations, and securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac are permitted. Fully collateralized repurchase agreements are authorized when they have a defined end date, are secured by approved obligations, and are placed through a primary government securities dealer or a financial institution doing business in Texas.

Certificates of Deposit

Certificates of deposit qualify when issued by a depository institution with its main office or a branch in Texas. The certificate must be insured by the FDIC or the National Credit Union Share Insurance Fund, or secured by pledged collateral of at least equal market value.³ Entities can also invest through a Texas-based broker or depository that spreads the funds across multiple federally insured institutions, as long as full principal and accrued interest on every certificate stays insured.

Commercial Paper

Commercial paper is permitted if it has a stated maturity of 365 days or fewer and carries a rating of at least A-1 or P-1 from at least two nationally recognized rating agencies. A single rating is acceptable only when the paper is fully backed by an irrevocable letter of credit from a U.S.-chartered bank.⁴

Money Market and Bond Mutual Funds

No-load money market mutual funds are authorized if they are SEC-registered and comply with SEC Rule 2a-7. No-load bond mutual funds with an average weighted maturity under two years are also allowed, but the entity cannot place more than 15 percent of its monthly average fund balance (excluding bond proceeds and debt service reserves) in these non-money-market funds. Regardless of type, an entity cannot own more than 10 percent of any single mutual fund’s total assets.³

Investment Pools

Local government investment pools must maintain a continuous credit rating of at least AAA or AAA-m from a nationally recognized rating agency. A pool that loses that rating becomes ineligible to receive additional funds. Before an entity places funds in a pool, the pool must provide an offering circular disclosing the types of securities it holds, its maximum average maturity, expense ratios, and performance history. Monthly reports on the percentage breakdown of holdings, yield, and expenses must follow.⁵ Pools that maintain a $1.00 net asset value must mark their portfolio to market daily.

What Is Off the Menu

Most corporate bonds, equities, and derivative instruments are not authorized unless a specific provision of the PFIA or another Texas statute permits them. If the entity’s own written policy excludes an instrument, the officer cannot buy it even when the statute would allow it.

Quarterly Reports and the Annual Audit

At least once per quarter, the investment officer must prepare and submit a written report on all investment transactions to the governing body.⁶ If more than one officer is designated, they prepare and sign jointly. The report must contain:

A detailed description of the portfolio’s investment position as of the report date.
Beginning and ending market values for each pooled fund group, plus fully accrued interest for the period.
Book value and market value of each separately invested asset, broken out by asset type and fund.
The maturity date of each investment that has one.
A statement on whether the portfolio complies with the entity’s investment strategy and with the PFIA itself.

The report goes to both the governing body and the chief executive officer within a reasonable time after the quarter closes. Entities that invest in anything beyond money market mutual funds, investment pools, CDs, or depository bank money market accounts must also have their investment reports formally reviewed by an independent auditor at least once a year, with findings reported directly to the governing body.⁶ This is a separate review from the annual financial audit, and smaller entities frequently miss the distinction.

State agencies, community colleges, and universities face an additional layer. The Texas State Auditor’s Office may review their compliance each biennium, subject to risk assessment and Legislative Audit Committee approval.⁷ State agencies must submit their most recent compliance audit report to the SAO by January 1 of each even-numbered year. Higher education institutions file an annual tracking report by December 31.

Collateralizing Deposits Above the Insured Limit

FDIC insurance covers government accounts up to $250,000 per official custodian at each insured institution.⁸ Most public entities hold far more than that. Everything above the insured amount has to be collateralized under the Public Funds Collateral Act, Chapter 2257, which works alongside the PFIA.

A depository institution receiving public funds must pledge acceptable collateral with a qualified custodian trustee to secure the uninsured portion, no later than the close of business on the day the deposit is received.⁹ A depository can use a single pooled collateral account across multiple public entity clients, but each institution’s pool stays separate; pools from different banks cannot be cross-collateralized.

Verify collateral levels regularly, not just at deposit. If pledged securities lose value between reporting periods, the deposit can slip into undercollateralization without anyone noticing. Volatile markets make that gap larger and faster.

Bond Proceeds: Federal Arbitrage Rules Also Apply

When the funds being invested are proceeds of tax-exempt bonds, federal arbitrage rules layer on top of the PFIA. Under 26 CFR § 1.148-2, bond proceeds generally cannot be invested at a yield higher than the bond yield; earning a profit on the spread can strip the bonds of their tax-exempt status.¹⁰ Temporary periods, reserve fund allowances, and rebate obligations apply, and any entity investing bond proceeds should treat the federal rules as a separate compliance track rather than assuming PFIA compliance is enough.

Consequences of Noncompliance

On the civil side, investment officers who act outside their policy or the PFIA’s authorized list can be held personally liable for resulting losses. The prudent-person standard works both ways: it defends an officer who followed the entity’s policy, and it offers little to an officer who did not.

Criminal exposure runs through Chapter 39 of the Texas Penal Code. A public servant who intentionally violates a law relating to their office with intent to benefit personally or harm someone else commits a Class A misdemeanor. Misuse of government property, which includes investment funds, is graded on a dollar-amount ladder that runs from a Class C misdemeanor under $100 to a first-degree felony at $300,000 or more.¹¹

The entity itself also pays. Audit findings on investment practices can trigger credit rating downgrades that raise borrowing costs on future bond issues, and repeated or severe findings can restrict access to capital markets. For smaller entities, the reputational damage from a public investment loss lasts years.

1
State of Texas. Texas Government Code 2256.005 – Investment Policies; Investment Strategies; Investment Officer
2
State of Texas. Texas Government Code 2256.008 – Investment Training; Local Governments
3
State of Texas. Texas Government Code Chapter 2256 – Public Funds Investment Act
4
Texas Public Law. Texas Government Code 2256.013 – Authorized Investments: Commercial Paper
5
State of Texas. Texas Government Code 2256.016 – Authorized Investments: Investment Pools
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State of Texas. Texas Government Code 2256.023 – Internal Management Reports
7
Texas State Auditor’s Office. Public Funds Investment Act and Higher Education Institution Investment Reporting Requirements
8
FDIC.gov. Deposit Insurance At A Glance
9
Legal Information Institute. 34 Texas Administrative Code 4.107 – General Collateral Requirements
10
eCFR. 26 CFR 1.148-2 – General Arbitrage Yield Restriction Rules
11
State of Texas. Texas Penal Code Chapter 39 – Abuse of Office