Article

Is now the time for public treasurers to increase interest income from fund balance investments

Authored by Mark T. Rochford

Interest income can generate a significant amount of additional money for public entities like schools, libraries, authorities, villages and townships, and cities and counties. However, many public entity treasurers are not taking advantage of the opportunity to increase interest income for their organizations. In December 2015 interest rates began to move upward again after more than seven years of stagnation. Currently treasurers have an opportunity to reevaluate their public fund investment strategies and generate additional income for their organizations.

Benefits of Moving Money

Because of persistent increases in interest rates, now is an excellent time to consider moving money from savings accounts or certificates of deposit (CDs) into other investment options such as U.S. Treasuries, agencies, negotiable CDs and commercial paper. Since rates started to move in 2015, rates on the 6-month U.S. Treasury bill are up over 1.6% as of April 2018. $5,000,000 invested now would produce more than $40,000 in additional interest earnings over what would have been earned on the same amount invested in 2016.

Changes in banking regulations are another reason to consider moving money from traditional savings vehicles. Due to the implementation of Basel III, many banks have lowered the rates they are willing to pay on products like savings accounts and short-term CDs. Basel III deleveraged banks when it changed the types of assets banks can include to determine lending amounts. The changes are being implemented slowly over time, from 2013 to 2019, which means there is still another 1½ years before all banks absorb the full impact of short-term bank rates. Credit unions are also subject to similar rules. The downward pressure on bank rates and profitability may make other investment products such as Treasury bills, agencies, and commercial paper better options for increasing interest income earnings, particularly in the short-term.

The Value of Short-Term Investment Options

According to a 2017 Federal Reserve Congressional Budget Office projection, short-term rate increases are expected to begin leveling off in 2021, making a clear case for increasing the weighted average maturity of investments at that time. Although as interest rates are rising, it is possible to increase weighted average maturity to enhance portfolio performance, the first step for public sector organizations that have money in low-interest rate accounts is to look at short-term investment options that will allow them to generate increasing amounts of interest income.

For a treasurer who has never invested public funds, or who hasn’t done so since before the recession that started in 2008, short-term investing offers a level of comfort that there will always be funds available to meet unexpected payment obligations, as well as the ability to get comfortable with the process of investing. As a treasurer for a school, library, village, township, city, county or authority, when is the last time you looked at the amount of interest income your existing fund balance could be generating for your organization?

If you would like to review options for increasing interest earnings on your fund balance while maintaining safety, liquidity and return the investment team at Baker Tilly Investment Services is available to answer questions or provide an analysis of current investment strategy.

For more information on this topic, or to learn how Baker Tilly investment specialists can help, contact our team.

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