Investing for Small Governments

Interest rates have been rising significantly over the last year, making borrowing more expensive. Conversely, the rising rate environment has enabled governments of all sizes to earn significant investment interest income on their funds, not seen as much over the last several years. Investment income is critical to a government's financial health as it allows them to offset property tax increases and replace aging equipment, amongst other possibilities. There are a few easy, important considerations when investing funds.

1. Review your investment policy.

All governments should adhere to state statutes regarding investments and establish a comprehensive investment policy adopted by the governing body. It establishes parameters for investing funds, lists the allowable types of investments, defines risk tolerance, defines who will manage the investments, and how they’ll manage the investment program.  It should be reviewed and updated annually. Investment advisors and brokers must follow your investment policy when investing government funds, so it’s a critical document.

2. Conduct a cash flow forecast.

Cash flow forecasts are not only performed to ensure there is sufficient liquidity or cash available to pay bills during a given period, but it also provides a picture of how much money can be invested. The forecast can be as simple as summarizing your total receipts or cash inflows (property tax receipts, utility payments received, etc.) and your total disbursements or cash outflows (debt service, employee payroll, payments to vendors for goods and services). The difference between the two is your surplus cash available for investing, which should be broken down at least monthly and preferably more regularly. From there, you need to find your comfort level for how much money you need in the bank and how much can be invested out. Depending on your State statutes, local government investment pools (LGIPs) may be good options when you want a reasonable rate of return and want to maintain liquidity.

3. When investing, make sure your investment maturities are spread out or laddered.

Laddering is where you invest with different maturities, i.e., some maturing during the current year, next year, 2 years, 3 years, etc. Once you have investments laddered, for the most part, as an investment matures it is re-invested at a longer maturity or the “top of the ladder.” Doing so creates a steady cash flow by purposefully planning investments, creating liquidity at your pre-established maturity dates, and aligning with the risk tolerance identified within the government’s investment policy. It also reduces the risk you might face from interest rate changes and maximizes income for your investment portfolio.

4. Check with your financial institution to see the Earnings Credit Rate (ECR) on your operating accounts and ask if they can increase it.

On your banking analysis statements, your municipality earns interest off of money deposited. Banks then apply the ECR on the balances the municipality leaves in their account. The amount calculated after applying the ECR is then used to credit service fees. The higher the ECR, the more likely the municipality can cover its fees. Most importantly, a higher ECR allows the municipality to keep less money in its operating account enabling them to invest more at a higher interest rate. Regularly review your analysis statement and question your financial institution if anything seems off. Never be afraid to ask for an increase to your ECR! If you don’t ask, the answer is always no!