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Focus on New Laws: Long-Term Capital Plan Investment Authority Expanded to More Cities
Cities with credit ratings of AA or higher are now permitted to invest a portion of funds held for long-term capital plans in the stock market.
Under a 2023 law change, cities with credit ratings of AA or higher are now permitted to invest a portion of funds held for long-term capital plans in the stock market (also known as the equities market).
Stocks, historically, have produced higher returns than bonds but are inherently more volatile than other investments authorized under Minnesota Statutes, Chapter 118A. The 2023 law change limits city investments to certain types of indexed stock mutual funds or investing through the Minnesota State Board of Investment. It also limits the amount of a city’s investments in this category. The authorization was included in the omnibus state government finance and policy bill, Session Laws 2023, Chapter 62, Article 3, Section 2, Section 3 and Section 4. The expanded authorization was effective May 25, 2023.
Expansion of investment authority
The additional investment authority that was extended this year to AA-rated cities was originally provided under a 2017 law to any city with population greater than 100,000 or any city that had its most recently issued general obligation bonds rated in the highest category by a national bond rating agency (AAA).
Under the 2017 law and the law as expanded this year, qualifying cities are permitted to directly invest funds (without a broker) in broad based U.S. stock mutual funds, generally called “large cap” equities index funds. They are also permitted to indirectly invest funds in the same category through the Minnesota State Board of Investment through an account established with the Public Employers Retirement Association (PERA).
Considerations
Qualifying cities may only invest funds that are held for long-term capital plans authorized by the city council and may invest up to 15% of the sum of the city’s unassigned cash, cash equivalents deposits, and investments.
Municipal investments in index mutual funds or through the State Board of Investment non-retirement equity fund option should be viewed as long-term investments. Equity investments carry a risk of loss, and all qualifying governmental entities are responsible for determining their risk tolerance for equities and should plan and invest accordingly.
The League recommends cities adopt a formal investment policy and review it each year with their council. Funds needed for current city operations or short-term obligations should be maintained in liquid investments or kept at your local financial institution.
The Minnesota State Board of Investment maintains a webpage with information on how qualifying cities can establish an account.