The gap, or “delta,” between passively managing those funds vs. using active liquidity management often averages 1.5% to 2.0%.

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The Delta Factor:

Active vs. Passive Investing

by William Cherry, Director of Public Partnerships

Local public entities come in all shapes and sizes.  From small community colleges and water authorities all the way up to towns, villages, county governments, and cities.  Budgets can range from several million dollars to more than one billion dollars annually.  One thing that they all have in common?  Surplus cash, over and above what is needed for current operating expenses, sitting in their bank accounts that can be put to work generating interest income.

three+one-liquidity-analysis-active-vs-passive-investingEvery municipality or public entity has an adopted investment policy that puts safety of principal at the top of the list of priorities, followed soon after by the requirement that they prudently maximize interest earnings on the funds in their care and custody.  The gap, or “delta,” between passively managing those funds vs. using active liquidity management often averages 1.5% to 2.0%. That additional amount may not sound like a lot, but when you are dealing with tens of millions, or sometimes hundreds of millions of dollars, that delta factor can mean the difference between a tax increase or a tax cut!

A finance office that uses passive investing basically keeps their funds in two types of accounts: their regular bank account plus a daily money-market account or a daily investment pool. They shift the funds back and forth as needed to meet expenses and earn a somewhat higher rate of interest on the day-to-day balances kept in the money-market account.  The downside of passive investing is that it does not take advantage of the significantly higher interest rates that can be found in fixed-term investments such as certificates of deposit and U.S. Treasury bills. Passive investing misses out on the power of tapping into the Future Value (FV) of cash.

On the other hand, active liquidity management uses future cash-flow forecasting to predict how long those surplus funds will remain on deposit before they will be needed to pay for goods and services. That information is powerful because it can be used to confidently add secure, guaranteed, fixed-term investments to a public entity’s portfolio.  The result is a much stronger, balanced portfolio of short- and longer-term fixed-rate CDs and T-bills, combined with those existing daily money-market and municipal-pool accounts.

The delta between active cash management vs. passive can be as high as 2.0%. In the case of a medium-sized county with a $300 million annual budget and an average of $150 million in cash on deposit, that could mean an additional $3 million in operating revenue annually over and above what they would have earned using passive investing.  The delta factor works the same way whether you are managing the finances of a $30 million public entity or a $300 million one –and it remains in place regardless of whether interest rates are climbing, flat, or falling.

three+one®  is the nation’s leader at helping public entities reap the benefits of the delta factor.  Check us out at www.threeplusone.us and harness the power of cashVest® to tap into higher revenues!

William Cherry served for 24 years as a county chief financial officer responsible for managing and investing public funds, and for 20 years as a county budget officer. He can be reached by phone at 585-484-0311, ext. 709 or by email at wec@threeplusone.us

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