Authored by Jeff Messer and Mike Geraty
The American Rescue Plan Act of 2021 (ARP) will soon inject $1.9 trillion into the economy. ARP provides $350 billion to bolster the public sector, including $195.3 billion to states and Washington, D.C., $130.2 billion to local governments and $20 billion to tribal governments.
The bill specifies that the U.S. Treasury (Treasury) will release the funds within 60 days of enactment of the law. States have another 30 days to distribute funds to non-entitlement communities (villages and townships with fewer than 50,000 in population).
Treasury may withhold up to 50% of the monies at first and release the balance within 12 months. Funds must be deployed by Dec. 31, 2024.
With direct relief funding on the way, organizations should prepare by:
Consider setting up a separate account for ARP funds at a custodian bank. When funds are deployed, the account owner may direct the custodian to make disbursements, or the organization makes the disbursements and submits required paperwork to be reimbursed by the custodian.
In the event of an external ARP audit, a separate account may help streamline the process.
Public sector entities have more than 3.5 years to spend the relief funding. There is time to make qualified investments that earn interest while thoughtfully and deliberately developing a strategic spending plan. Below, we analyze current investment options. Before investments are made, it is critical to review federal guidance, state statute and the organization’s investment policy for public funds eligibility.
The Treasury issues bills (T-Bills) from four weeks to one year. Bills are issued at a discount and mature at par. The difference between the two is investment earnings.
The supply of money in the system has driven the demand for money (short-term interest rates) almost to zero. The yield on the four-week T-Bill is 1 basis point (BP), or 0.01%. A BP is 1/100th of 1.00%, or decimal 0.0001.
At one year, the relationship between price and yield is straightforward. The dollar value of 1 BP (DV01) is $100 per million. For example, the yield on the one-year T-Bill is currently 0.05%. That is equal to $500 per million.
An investor may purchase $1 million of the one-year T-Bill at a discount of $999,500.00 and receive $1,000,000.00 at maturity for earnings of $500.00.
Negative interest rates have been around for 10 years. Currently, the amount of global negative yielding debt is $13.8 trillion. In a negative rate environment, investors pay interest; they do not earn interest.
If the yield on the one-year T-Bill were -0.05%, an investor would pay $1,000,500.00 and receive $1,000,000.00 at maturity for a loss of $500.00. Investors lose money in a negative interest rate environment.
Money market funds seek to earn income, pay dividends and maintain the net asset value (NAV) of the fund at $1.00 per share but cannot guarantee they will do so. If a fund’s NAV drops below $1.00, it “broke the buck.”
Baker Tilly Investment Services (BTIS) tracks 44 money market funds offered by an online discount broker. The average yield is 0.01%, while the highest is 0.04%. All the funds are no-load funds, with no transaction fees and no short-term redemption fees. However, they are not Federal Deposit Insurance Corporation (FDIC)-insured nor guaranteed by the U.S. government. The fine print clearly states that an investor could lose money by investing in a money market fund.
The expenses incurred in operating a money market fund are on the order of 0.15%. Most are being offered as a convenience or loss leader. We expect some will cease operations.
A recent Goldman Sachs research article considers negative rates for money market funds. It describes the Reverse Distribution Mechanism (RDM), whereby following the distribution of the funds’ negative rate (dividend), investors own fewer shares. A negative dividend reduces shares held by an equal amount. The NAV remains stable at $1.00.
Commercial paper (CP) is an I.O.U., an unsecured promissory note, due from overnight to 270 days. Like T-Bills, CP is issued at a discount and matures at par. The yield on 90-day CP is about 0.08-0.13%.
Currently, there is little supply in the CP market. Few issuers have short-term funding needs. They have taken advantage of low long-term yields and locked in their funding needs. They have issued term debt at what used to be CP rates.
Municipal bonds are issued by state and local governments to fund public work projects and may be an appropriate investment of ARP funds. The yield on a two-year municipal bond is about 0.15%.
It is important to note that, absent any state-specific remedies, the FDIC limit on bank deposits and certificates of deposit is $250,000.00 per bank and per tax ID. Some states require deposits greater than $250,000.00 be collateralized. An investor could lose money maintaining a bank balance above $250,000.00.
The StoneCastle Federally Insured Cash Account (FICA) provides up to $50 million of FDIC insurance coverage and currently pays 0.08% on balances up to $25 million. StoneCastle provides access to more than 800 U.S. banks and allocates deposits in increments of up to $250,000.00. U.S. Bank, N.A., acts as the StoneCastle custodian.
FICA is an eligible investment for tribal governments. It is also an eligible investment for public funds in the states of Minnesota and Wisconsin.
The BTIS team can help.
We have highlighted the risks and merits of most short-term fixed-income investments used in our practice. While we are not currently aware of any federal guidance pertaining to the investment of ARP funds, all investments must satisfy public funds state statute and the organization’s investment policy. We will provide an update if federal investment guidance is released.
For more information, contact our team.
*BTIS may earn a referral fee from StoneCastle for introducing new clients. BTIS is precluded from charging fees to or earning fees from Baker Tilly audit and assurance clients. In every case, SEC-required disclosures must accompany any written client communication.
BTIS is a Division of Baker Tilly Wealth Management, LLC, a registered investment adviser and wholly owned subsidiary of Baker Tilly US, LLP.
Bloomberg’s Negative Yielding Debt Index
Goldman: Negative Rates in U.S. Money Market Funds