The most effective (and highest revenue-generating) municipal investment portfolios include a calculation that compares the cash-on-deposit in various bank accounts to the projected time frame, or number of days, those funds will remain in on deposit.
Cash on deposit in municipal accounts can be divided into four distinct time-horizon categories.
Day-to-day working capital. This category generally includes checking accounts where the funds are transitory and will only be on hand for a very short time. These types of accounts usually generate fairly low interest earnings due to the temporary nature of the liquidity.
Transitional capital. This category includes “funds-in-transition” investment options such as money-market accounts and local government investment pools (LGIPs). These banking choices are perfect for cash that is expected to remain on deposit for 15 to 45 days, but may be needed sooner than that. These accounts often generate higher interest earnings than a checking account, but usually not as much as longer-term investments might earn.
Short-term investments. This is one of the core segments of a properly balanced portfolio where a public entity can generate a very significant amount of interest income. Investments often include a laddered portfolio of fixed-rate CDs and U.S. Treasuries that can range from 30 days all the way up to six months. As each investment matures, it is replaced by an ever-revolving and rotating series of new investments at the most current interest rates as long as the funds are not needed for day-to-day working capital.
Long-term investments. This category can be a “cash cow” in generating revenues and often includes six-month, nine-month, and one-year fixed-rate CDs and Treasuries. For some exceptionally well-financed public entities, the timeline can even extend to 18 months or 24 months. Accurate future cash-flow forecasting allows a public entity to tap into this deep current of interest earnings which can generate huge amounts of non-tax revenue.
Is your public entity’s cash/time investment balance correct? Are you putting your funds where they are working the hardest for you and your taxpayers?
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 wec@threeplusone.us
