The dollars and sense of investing idle funds [Mar. 1987]

!J
THE DOLLARS AND SENSE OF
INVESTING IDLE FUNDS
Il I~ I
GEORGIA DEPARTMENT OF
COMMUNITY AFFAIRS

THE DOLLARS AND SENSE of
INVESTING IDLE FUNDS
Prepared by: Government Information Division Georgia Department of Community Affairs
40 Marietta Street, N.W. Atlanta, Georgia 30303
Jim Higdon, Commissioner March, 1987
An Equal Opportunity Employer

TABLE OF CONTENTS

Introduction

1

Why Invest Idle Funds?

Alternatives for Local Government Investing

3

Summary

6

Sources of Further Information

6

References

6

THE OOLLARS AND SENSE OF INVESTING IDLE FUNDS Introduction
Local governments frequently accumulate funds in specially designated fund accounts. These earmarked funds are managed separately from the ongoing capital and operational financial accounting of government. It is possible to utilize the idle assets in specially designated funds to earn additional revenues for the community.
A previous report published by DCA in 1986, entitled "Investing Idle Funds" provided a description of preferred cash management practices and a step-by-step procedure for investing idle funds. This Dollar and Sense report illustrates how much return can be realized from various types of investments, and summarizes how various sized cities and counties are currently investing their idle funds.
The report compares the rates of return on various types of investments, and describes alternatives that might be appropriate for communities of various sizes. The report demonstrates that investment yields are themselves a significant revenue source.
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WHY INVEST IDLE FUNDS?
Interest from invested funds is itself a revenue source. It reduces dependency on taxes, service charges, and other local government revenue sources. A wise investment strategy can be as simple as putting idle funds in an interest bearing checking account.
The process of investing idle funds is based on fund accounting and cash management practices that are authorized under Georgia law and endorsed by the Georgia Finance Officer's Association (GFOA). According to the GFOA, maximizing investment yields requires "ensuring that there is enough cash to meet the jurisdiction'sdaily needs whili also keeping the maximum possible amount of cash in short-term investments."
The principal reason for investing idle funds is to increase the amount of local revenues. The amount of revenues that can be earned is dependent upon the amount of available cash, the length of time it can be invested, and the rate of return on the investment. The rate of return may be further dependent on the level of risk that is acceptable, and the liquidity that is desired by the investor.
Investing funds in the community may have a leveraging or multiplier effect on other investments. Surplus cash might be used as the matching portion of federal or state grants. Community improvement grants, such as the Community Development Block Grant (CDBG) programs require the grant amount applied for to be matched by local funds. In this manner, the local expenditure has "leveraged" an equal amount into the community.
Investing otherwise idle funds in public utility and facility improvements may produce a multiplier effect by promoting revenue-generating private development. The original investments encourage new or expanded businesses that pay additional taxes, as well as employ additional taxpayers who trade in the community.
Idle cash surpluses can be used to purchase land that will be needed later for public facilities. The rate of return on investments of this type is dependent on the appreciation rate of the real estate parcel, less the taxes lost as a result of its being removed from the tax digest.
1Bland, Robert L. "The Effect of Cash Management Innovations on the Investment Income of Local Governments", State and Local Government Review, Carl Vinson Institute of Government, University of Georgia, Winter 1986.
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ALTERNATIVES FOR LOCAL GOVERNMENT INVESTING
Careful investment of idle funds begins with a reliable forecast of the amount and the length of time cash is available in each fund. From this information, the clerk, treasurer or finance director prepares a daily cash budget to identify the aggregate daily, weekly, monthly, and yearly cash position of the government. With a daily cash budget to work from, short and medium term investments can be selected with maturity dates and liquidity that match the expected cash needs of the jurisdiction.
The most commonly used types of investments are time deposits in banks and savings and loans associations. The following is a brief description of some alternative investments authorized under Georgia laws.
1. Time deposits - interest bearing savings accounts are popular because of their low risk, lack of service charges, and maximum liquidity. Daily deposits and withdrawals can be made without interest penalty.
2. Money market deposit accounts (MMDAs) - are similar to time deposits except limitations may exist on the amount of individual deposits and withdrawals, and on the minimum amount on deposit. Interest rates may be tied to those available in the commercial money market.
3. Interest-bearing checking accounts (NOWs) - these are the most liquid form of investment; they combine the interest yield of the time deposit with the convenience and liquidity of a checking account. The interest rate is probably the lowest and charges may be made for providing this level of service and convenience. Special "Super NOW" accounts with higher interest rates are available if limitations on the number of checks that can be issued is acceptable.
4. Certificates of Depost(CDs) - a time deposit that is usually restricted to 3-month or longer minimum intervals at which the money is unavailable for withdrawal without penalty. CDs are also limited to fixed deposit amounts of denominations of $1000 or greater. Among time deposits, CDs have higher yields because of the lower reserve deposits required for them by the Federal Reserve System.
5. Treasury bills (T-bills) - for larger amounts of cash to invest, T-bills are available at a relatively high rate of return and a relatively low risk. The interest rate is determined by the commercial money market.
6. Treasury notes (T-notes) - similar to T-bills, but with an even higher interest rate because of their longer maturity periods.
7. Repurchase agreements (repos) - consist of purchased securities coupled with a guaranteed repurchase agreement at the same rate, plus interest. Repo agreements can be executed in extremely short periods of time (literally overnite), and are popular instruments for obtaining a high rate of return on large amounts of cash for an extremely short-term investment.
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8. Local government investment pool (LGIP) - this is a state-managed pool of smaller investment amounts to obtain the higher rates of return available to larger-scaled investments. The Georgia Department of Administrative Services manages the LGIP and permits one-day deposits without withdrawal penalties.
9. Leveraged grants and loans - in situations where investment monies can be replaced at a later date from conventional revenue sources, available cash can be temporarily used to match loans and grants from federal and state sources (such as CDBG grants). On 50-50 matching grants, the rate of return on such investments is 100%.

A comparison of the interest rates available as of March 20, 1987 is presented in the following table:

Table 1: APPROXIMATE INTEREST RATES FOR SELECTED INSTRUMENTS, MARCH 1987

Type of Instrument

limitations

Interest Rate

Time deposit MMDA NOW CD Treasury bt1l Treasury note Repo LGIP Leveraged grant

None Minimum deposit Minimum deposit Minimum deposit Minimum deposit Minimum deposit Minimum purchase Minimum deposit Grant opportunity

5.00% 5.25% 5.00-5.25% 5.25-6.90% 5.50% 6.00% 5.60% 6.40% 50-100%

Additional investment opportunities may exist for local governments. The rates above are for comparisons between instruments only, and are offered only as a "snapshot" of the rates available at present.
All other factors, such as rate, liquidity, and minimum deposit being equal, some local goverp~ents will keep some funds in separate financial institutions in the community, or rotate their place of deposit between banks on a periodic basis.

Which instruments are most appropriate for a particular community can

best be determined by preparing a cash availability forecast, and a daily

cash budget. A diversified investment portfolio would likely serve the needs

of many counties and municipalities. Most local governments should be able

to as

invest 98% of

90% of their idle funds. their bank book balances.

2Many

small

communities

invest

as

high

The following tables illustrate the diversity of investment amounts, earnings, and earnings per capita of cities and counties by population group.

2Charles K. Coe, Handbook of Specific Ways to Increase Revenues and Decrease Expenditures, University of Georgia, May, 1979.

Investment earnings and percent yield reflect a higher rate of return than that presently available because of a general decline in interest rates in the last twelve months. The tables suggest, however, a considerable revenue potential:

Table 2: IDLE FUND INVESTMENTS BY GEORGIA CITIES, 1986-87

Average Number Average Funds Average Avg Earningsl Earnings

Population Surveyed

Invested

earnings Avg Invested $ Per Capita

AlI

5.005 497

$1.694.275

$86.587

5.11 ~

$17

A

190.340

5

$78.600.059 $4.740.993

6.03~

$25

B

34.913 10

$3.974.675 $495.708

12.47~

$14

C

15.059 25

$5.978.515 $213.982

3.58~

$14

D

6.899 41

$2.129.029 $111, 174

5.22~

$16

E

3.613 70

$509.381 $33.441

6.57~

$9

F

1.577 105

$192.605 $10.831

5.62~

$7

6

709 93

$77.067

$3.501

4.54~

$5

H

290 148

$63.796

$4,462

6.99~

, 15

Table J: IDLE FUND INVESTMENTS BY GEORGIA COUNTIES, 1986-87

Average Number Average Funds Average Avg Earnlngsl Earnings

Population Surveyed Invested

earnings Avg Invested $ Per Capita

AlI

34.600 158

$2,779,466 $312,748

11.25~

$9

A 267.861 9

$29.572,346 $3.917.668

13.25~

, 15

B

64.316 13

$4,128,828 $379.211

9. 18~

$6

C

34.339 27

$1.772,169 $174,410

9.84~

$5

D

18.985 33

$894,885

$62.499

6.98~

$3

E

12.159 28

$615,891

$42.742

6.94~

$4

F

6.788 48

$309.558

$17.791

5.75~

$3

As seen from the above local government investments, substantial earnings are possible. In even the smallest municipalities (average population of 290) $4,462 was earned over a 12 month period. This represents the cost of a computer work station that could be purchased with the interest of investing idle funds. A smaller return could be used to purchase playground equipment; a larger sum could be used to buy and equip an additional patrol car.
The average earnings on idle funds investment by Georgia counties was $312,750. At an average salary of $20,000 per year, 15.5 employees per county could be paid with the interest from these idle funds investments. A lesser sum could purchase and operate an EMS rescue unit; a greater amount could finance additional road paving.

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SUMMARY
The most significant conclusion to be drawn from this study is that investing idle funds can generate substantial revenues for local governments. This source of revenue is not limited to the larger communities or to those with highly specialized financial managers. Even the smallest communities can invest in local time deposit accounts or join in an investment pool to generate income to replace lost federal revenue sources.
It is important, however, that an idle fund investment program be carefully undertaken. An available cash forecast on a daily, weekly, or monthly schedule should be prepared. The cash forecast can then be translated into a investment budget that can be matched to the best combination of investments.
Each jurisdiction is different, and will require a unique combination of investments. With careful consideration, more than 90% of Georgia's cities and counties can invest otherwise idle funds to produce significant revenues.
SOURCES OF FURTHER INFORMATION
For further information concerning how to invest idle funds, contact the Georgia Department of Community Affairs, Government Information Division at (404) 656-5526. Specific information concerning investing in time deposits can be obtained from banks and savings and loan institutions. Information concerning investing in the Local Government Investment Pool may be obtained from the Director, Fiscal Division, Department of Administrative Services at (404) 656-2168.
REFERENCES
Bland, Robert L., "The Effect of Cash Management Innovations on the Investment Income of Local Governments", State and Local Government Review, Carl Vinson Institute of Government, University of Georgia, Winter 1986.
Cothran, Dan A., "strategies for Enhancing Financial Management in small Governments", State and Local Government Review, Carl Vinson Institute of Government, University of Georgia, Winter 1986.
Department of Administrative Services, "Local Government Investment Pool" and "Procedures for Investment", State of Georgia, 1981.
Department of Community Affairs, "Investing Idle Funds", State of Georgia, November, 1986.
Middle Georgia Area Planning and Development Commission, "Investment Manual for Small Units of Local Governments", June, 1976.
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