Today’s higher interest rates on daily money-market accounts and LGIPs (Local Government Investment Pools) means that some school districts and local governments are opting to use a “one-stop-shopping” approach to investing by depositing ALL of their surplus cash into one of these types of accounts. While these subsidiary depositories may be a good choice for short-term liquidity, they cannot take the place of a well-balanced, diversified investment portfolio.
At their recent annual “Finance School,” the New York State Comptroller’s Office recognized diversified, fixed-term investments as a key component of good management. And the GFOA (Government Finance Officers Association), a highly-respected national organization that guides public entities on fiscal policies and best practices, says this:
“Be aware that an LGIP may be a part of a diversified portfolio, but that a portfolio comprised solely of an LGIP may not provide the government entity with appropriate diversification.”
Furthermore, in their recommendations of other best practices for public finance officials, the GFOA advocates using 12-month future cash forecasting on a constantly rolling monthly basis, as well as using a combination of laddered, fixed-term investments with differing intervals and staggered maturity dates as a core foundation of investing for local governments. According to the GFOA, incorporating a series of longer-maturity, laddered CDs and U.S. Treasuries into your investment portfolio “reduces the risk you might face from interest-rate changes and maximizes income for your investment portfolio.”
It should come as no surprise then that state comptrollers and auditors echo these very same guidelines when it comes to overseeing cash management by local governments. Exemplary cash management necessitates a regular analysis of your public entity’s overall liquidity to determine how much cash you have on deposit across multiple bank accounts. It also requires you to regularly perform future cash-flow projections based upon previous years’ spending patterns so you can confidently determine how long some of those dollars should remain on deposit.
Once you have this critically-important data at hand, best-practice standards require that you use this knowledge to establish a constantly-revolving, diversified, secure portfolio of laddered time-deposit investments such as CDs and Treasury bills, while also benchmarking the highest-available interest rates.
Diversification is certainly a key to unlocking higher earnings over the long haul, but it is also one of the most important cornerstones of a highly-rated, safe, and effective investment portfolio.
William Cherry served for 24 years as a county chief financial officer responsible for safely managing and investing public funds, and for 20 years as a county budget officer. He now serves as the Director of Public Partnerships for three+one, and can be reached by phone at 585-484-0311, ext. 709 or by email at firstname.lastname@example.org