As a $50 million dollar a year business, the City has cash flow management objectives that are not that different from the goals of most households — we seek to maximize the return on City revenues and minimize our investment costs while keeping enough cash on hand to pay our bills.
Unfortunately City revenues don’t necessarily arrive on a nice, easy to plan for, weekly installment basis; rather they tend to come in fits and spurts that usually correspond to tax payment time.
That results in large chunks of revenues arriving a couple times a year which we then have to stretch out to make sure we can cover a full year’s worth of costs. What we do with that large chunk of cash during that stretch period is what cash management is all about.
Our bills as a City are a little more consistent and like most households we have a long list of items that have to get paid each week. With roughly 70% of our costs in our employees we have to make sure we have enough liquid cash to make weekly payroll.
When you have an uneven distribution of incoming revenues matched with steady outgoing weekly payments, you’ve got to be reasonably sophisticated in managing your cash flow. Our cash balances move up and down so we try to line up our investments to fill the gaps but we also want to stay in the market long enough to generate some much valued investment income.
Our Finance Department works hard to anticipate the projected balance between our revenues and payments, and they make decisions on how much cash we can afford to tie up in investments and how much cash we have to keep on hand to keep the wheels of the City government turning.
I’m oversimplifying what is actually a pretty sophisticated cash management portfolio that our Finance Department seeks to preserve and grow. When interest rates were higher this was a more stressful process because we wanted to put City taxpayer dollars to work and earn as much interest income as possible without cutting it too close and leaving ourselves short when it was time to write the checks.
When interest rates were higher we were able to put our revenues to work and bring in over a million dollars from investments a year. $1,000,000 goes a long ways and that’s money that we don’t have to ask the taxpayers to come up with — we let the investment market do the hard work for all of us.
For good reason the City is notoriously conservative in our investments — which means we stay in low risk and generally low return funds. But yesterday’s low returns look pretty high today so it’s all a matter of perspective.
For comparison sake, here’s a (discouraging) look at our investment earnings over the last 8 years as it mirrors the falling interest rates in the market.
2006 = $1,202,764
2007 = $1,436,221
2008 = $1,313,575
2009 = $712,742
2010 = $471,539
2011 = $223,993
2012 = $196,619
2013 = $160,052
Given the uncertainty of interest rates, the City is cautious not to overstate budget expectations for interest income when it comes to paying our bills but there is no doubt that losing $1 million in revenues at the same time that the State cut our local government funding by $1 million put a serious hurt on our cash flow.
It’s the reality of investment markets but it’s painful to watch and go through. On the flip side that’s why our financial advisors tells us to borrow, borrow, borrow — with interest rates at historic lows the City should be seriously looking at borrowing money because the cost of money (in terms of interest rates) has never been better.
Coming out of the Great Recession when everybody was scraping by and a lot of the blame was put on excessive lending and borrowing habits, it’s a bit of a hard sell to argue for taking out debt but financially that’s what smart businesses and cities are doing to take advantage of the market rates that have killed our interest income but are very attractive for borrowing.
If you have large projects that have been deferred, now would be the time to borrow the money to get them done. That was part of the logic behind building the new police station now — we can get it built and financed cheaper than ever and our City’s overall debt remains very low.
This post was prompted by the Finance Department’s recent investment portfolio performance report, the highlights of which I’ve shared below: