It’s already happening! Banks and advisors are setting expectations with clients for more upcoming rate cuts by the Federal Reserve. These will lead to lower deposit rates and yields on short-term cash for next year.
As mentioned in prior blogs, you shouldn’t fall into the trap that lower interest rates mean that the value of cash cannot be a valuable revenue-generating asset.
The right data will enable you to plan on making more interest income next year.
A number of public and higher-Ed institutions keep more cash than necessary on the sidelines, so liquid that the cash becomes dormant. Doing so leads to a lost opportunity in creating or preserving interest income.
There are three steps you should take to make more interest income on your cash, even in a declining interest-rate environment.
First, have a liquidity analysis performed by three+one®. Keep in mind that a liquidity analysis is far different from a cash flow analysis. Looking at all financial transactions from an entity’s perspective—and comparing each transaction that flows through its financial institutions—will lead to valuable data for all parties involved. The more information you have when you actually need cash, not just when you think you need it, will create a level of confidence as you seek to put all cash to work.
Second, the time horizon of short-term cash will allow you to understand the value of cash in the marketplace. All cash has value, whether for a day or for two or more years. Having the confidence to make the decision is a matter of having the necessary information at hand. Our proprietary cashvest® platform can provide you with all the data you need to manage your cash, while also providing a road map to your financial institutions, with sound advice in the management of deposits or investments.
Third, trust the data. While short-term interest rates may rise or fall, the ability to leverage the time value of your cash will allow you to capture or preserve interest income on all cash. In doing so, you should have confidence in what the data is telling you. The ability to have accurate information at your fingertips will allow you to make timely investment decisions with your financial institutions, while always having access to cash when it is needed.
This is the time to start preparing for next year. Let our cashvest® platform provide you with the accurate liquidity data necessary to put all of your cash to work. You’ll be taking advantage of the time value of all cash and preserving your interest income.
Having the right data will enable you to instruct your financial institutions on the steps you plan to take to make more interest income next year. That’s better than having them tell you to expect lower-interest earnings.
cashvest® by three+one® is here to help you demonstrate that kind of confidence.
Across the country, local public entities find themselves in the same predicament: trying to do more with fewer resources, smaller staffs, and greater demands.
In today’s environment, these issues are virtually universal, in cities, towns, villages, and school districts within a given county—and adjacent counties.
On top of these constraints is a steady stream of unfunded federal and state mandates that public entities must implement, with ever fewer dollars to cover day-to-day overhead expenses.
It should come as no surprise that more and more entities are looking to work together to eliminate duplication of services and reduce unnecessary overhead. As a result, shared-services initiatives are gaining popularity, ranging from public works, public safety, self-insured healthcare plans, and cooperative purchasing programs.
The ability to join forces can have an immediate and beneficial financial impact. The one impediment is jurisdiction of control. Entities involved in sharing services should have a long-term perspective of outcome and address this clearly upfront—and in writing.
The need to consider or expand shared services may not be desirable, but rather an absolute necessity to survive. This is especially true for smaller entities within larger jurisdictions. In the minds of taxpayers, a proper business attitude is to be applied, rather than an emotional wrestling match over control.
Under a shared-services agreement, the concern of lost identity should not be raised; the initiative is a joint effort in providing/receiving services for the participants’ mutual benefit. In general, the initiatives should focus on saving money and/or generating revenue.
Here are 5 financial shared-service initiatives to consider:
1. Conducting a universal banking services Request for Proposal. A banking RFP would create a large volume of buying power to use in negotiating competitive pricing on bank fees and deposit rates. A collaboration like this could include villages, towns, cities, school districts, and the county government, all at once. The end result could lead to hundreds of thousands—if not millions—of dollars in savings and or additional interest income. rfpPrep® by three+one® is the first-ever electronic banking RFP (Request for Proposal) service, entirely online and specifically designed to facilitate the bidding of banking services. Visit our rfpPrep site for more resources.
2. County governments can be a source of purchasing the short-term paper of related entities as they come to market. As local villages, towns, and school districts issue Bond Anticipation Notes (BAN) or Tax Anticipations Notes (TAN), a county could be a bidder of such notes, as allowed by legal statutes, for investment purposes. As such, the county can be an additional bidder, helping to lead to lower rates and greater competitive pricing on cash for investment.
3. Counties can provide additional resources and expertise through their finance offices in helping smaller local entities identify and manage their cash. It would still be expected that associated entities would control their cash, but alleviate the stress associated in identifying and investing cash.
4. Combining technology efforts can be effective and beneficial both in financial and banking transactions, especially in the flow and protection of collections and payments.
5. Finally, consider consolidating tax collection. In the future, all tax collections will be automated. The need to have a counter or have the control of check collection will become obsolete. Having one point of contact for tax payment and options payment can lead to major personnel and banking cost savings.
Sharing services can be pathway to strengthening the financial well-being of all those involved. Let three+one help you in setting up and managing your shared-services initiatives. What may seem as a major undertaking can be simplified with through our proprietary liquidity analysis and modeling capabilities.
As always, our mission is to help public entities to do more in serving their communities.
When it comes to comparing the cost of banking services, the need to dig below the surface is necessary.
Most public entities will conduct banking Request For Proposals (RFP) to compare pricing on bank services and products. In these RFPs, the level proposed for an earnings credit rate (ECR) plays an important role in determining best pricing. But that may not always be the case.
Externally, banker(s) will view each client as a whole relationship. But internally to the bank, each service or type of deposit account is viewed separately. Here’s the most important thing to remember: the cost for individual banking services and the level of rates offered on bank deposits have their own separate profit centers. They must stand alone and be compared separately.
An ECR is used to determine the interest earnings a bank calculates internally for the level of deposits necessary to cover banking fees. This level can vary from .50% to over 1.25%. However, that’s only half of the real calculations in how the bank covers its cost.
It is important to note that bank fees for products have built-in profit margins to cover the cost of services and overhead. For large national banks, the pass-through costs for their organic overhead are greater than those of local community banks. Bear in mind that local community banks need to cover the costs for outside, third-party support and services; these might be higher due to a smaller number of clients vs. national banks.
As a former Market President of a major bank, here are some tips you should consider when determining the best bank pricing:
1.) Internally, banks price treasury services separately from deposit rates. So should you! Keep in mind that banks internally price their treasury services independently of treasury management of deposits. Since they are priced separately inside the bank, you should also view them separately when comparing pricing. Even though the industry makes you think they are intertwined, you’ll get the best pricing on your banking services and the highest yield on your cash if you consider them independently.
2.) Request a proposed ECR rate, and one that will readjust as the Federal Reserve increases the Fed fund rate. Ideally, the sharing arrangement between you and the bank should be a 50/50 split. As rates increase, so should the narrowing of the spread.
3.) Be sure to have the bank disclose any FDIC charges related to deposits being held by the bank. You may have a higher ECR but if FDIC charges creep in, the less competitive your ECR may be. There needs to be a balance on both sides of the relationship.
4.) A wholesome relationship and strong communications between you and your banker(s) are imperative. There is a direct link between better pricing and strong ties with your bank.
At three+one, we believe in strong relationships with your financial institutions. As interest rates change, so does the value of your deposits and how they relate to the overall value of your banking services and fees. As an independent liquidity analysis and data firm, we provide a pure, unbiased perspective around both sides of any banking relationship.
There is a real cost to doing business. To make a true comparison—and be fair to all involved, including those your entity serves—it is important to know what your real costs are.
We’re here to help you sort it all out.
The trends continue: short-term interest rates are still on the rise, the economy is growing, technology is advancing, and banks want your business. That is good for you and your banks.
Let me breakdown each of these trends:
First, short-term interest continues to rise and I expect this trend to continue throughout 2019. The Federal Reserve wants to bring short-term rates back up to what it views as normal levels: 3% to 4%.. This means you will make a greater interest earnings on your cash and banks will make more net-interest margin on deposits, making it appealing to both sides of the relationship.
Second, the U.S. economy is improving and above most expectations. A better economy means higher tax receipts for public entities, a strong job market for college graduates, and a more stable lending base for banks. All that is good for everyone as well.
Third, advancing technology brings new levels of productivity both personally and professionally in today’s marketplace. The ability to do banking transactions faster, virtually, and at your fingertips, allows greater access, control, and opportunity whenmanaging your cash. It also gives banks greater ease in monitoring and managingdeposits and transactions. These tech advances are both great for you and helpful to your banks.
Finally, as rates rise so does the spread that banks make on deposits. As a result, banks are more willing to raise deposit rates—if asked. The need to communicate with your banks as rates go up is imperative if you are to make the most of this rising-rate environment. This is good news and for both you and the banks, as you will both experience more interest earnings.
Rising rates, a stronger economy, advancing technology, and a desire for banks to gain and keep your business. They all have all the makings of a great 2019.
The link to ensuring success is the support and services of threeplusone. This is a fact. Our proprietary liquidity analysis and data will enable your entity to be proactive in managing all its cash in a rising-rate environment, while adopting new technologies and enhancing itsbanking relationship. And that is good news for both your entity and your bank.
A personal relationship with your banker is everything. Being a good customer1 has its rewards but also comes with responsibilities.
Last week, I had a meeting with a local banker. She told me how much she enjoys personal interactions with her clients. She shared a story about a customer who had stopped by her office to just say hello and drop off a cup of coffee. A few weeks later that client called for help on an unexpected matter, and she responded immediately. His request required critical information and needed higher management approval. However, based on her knowledge of and relationship with the client, she was able to address all his questions while he was still on the line.
So many times we expect bankers to react to our requests at a moment’s notice. However, given higher demands and the need to service many clients, the ability to respond swiftly is often directly linked to the strength of the bond between client and banker.
So what does this mean?
1.) Given Dodd-Frank regulations—yes, they’re still in place—and the need to “Know Your Client,” strong communications between banks and entities are a must. No matter who initiates the call, please respond as soon as possible. Both sides need to get in the habit of responding quickly; that’s especially important when an unexpected need or emergency occurs.
2.) It’s healthy to meet with—or call—your banker at least once a quarter. This can be a challenge if you have multiple bank relationships. Make your primary bank and/or lending institution your top priority; secondary banks require only an annual meeting and review.
3.) Call, email, or stop by every once in awhile to just say hello. Let me assure you, as a former banker, such a greeting, with no requests attached, goes a long way. Those friendly touches will be remembered if and when you have to make special request later on.
4.) When there are significant changes at your office, notify your bankers. Provide any essential information as well as any forms the bank may need to keep on file. Don’t surprise your bankers well after the fact. This can cause mistrust and lead to delays when time is tight or the need is great.
5.) The right fit and comfort level are important elements to a healthy bank relationship. If you make an effort and you get little response back from your banker, then it might be time to consider a new banker.
Given our business, public service, higher Ed, and government banking experience, we believe in the strength of an engaging banking rapport. The value of a strong customer relationship with your banker(s) is everything, which will lead to better pricing, proactive deposit rate increases, and a quicker ability to respond to simple or complicated requests. And that will enable you do more for those you serve—your customers2.
Definition of customer (noun)-
1. Informal: A person one has to deal with or through.
2. A person who purchases goods or services from another; buyer; patron.
Origin 1400-50 late Middle English
Target’s CEO, Brian Cornell, stated late last month that the consumer environment in the United States has never been better, indicating that retail sales are strong and will only get stronger.
These comments are in line with those of economist James Glassman at J.P. Morgan. During a recent New York State County Treasurers Conference, Glassman was very positive on the state of the U.S. economy and the upward trend in sales tax revenue from gas and retail sales. He expects the economic growth in the U.S. will continue to be positive into 2019 and 2020.
As a result of this sustained growth in the nation’s economy, a parallel growth in public operating funds is very likely. We expect the vast majority of public entities across the country will have more cash on hand this year than they did in 2017. This is the same trend that entities experienced in 2016 and 2017 compared to previous years—but at a higher percentage level.
With more cash on hand, the greater is the need to manage that cash proactively—especially as higher short-term rates lead to even higher operating reserves going forward.
This is very exciting news.
Taking full advantage of this growth trend is paramount, especially when preparing for ongoing sustainability.
At threeplusone, we view all cash as a revenue-generating asset. We use proprietary algorithms to produce liquidity analyses that capture the time value of all cash and sync it to its marketplace value. With such data in hand, public entities have the knowledge base they need to better deal with financial providers and advisors.
The likelihood of having more cash on hand this year and next is in store for public entities across the country. It will be up to you to put that extra cash to work on behalf of those you serve.