The first step in setting up an investment program

In our previous article, we discussed the steady increase in interest rates over the last two years and the greater benefit of investing your public funds dollars now when compared to the extremely low interest rates of prior years. This is of particular importance for those treasurers with public fund balances sitting in checking and savings accounts at banks that are content to keep their rates low. So, if you are not currently investing, or think you may not be investing as much as you could, where do you begin?

When assisting public entities with investing their operating fund balances, we suggest starting with an analysis of their core balance, which we define as their minimum long-term liquid balance. The core balance might be the lowest total monthly balance of an entity’s checking, savings and other liquid fund accounts, over the previous 24 months, plus any current investments. Then, depending on a variety of factors, including expected changes to revenues or upcoming projects or large expenses, we work with the client to determine a percentage of that core balance they would be comfortable investing.

If, for example, the core balance is $10 million, we might suggest an initial investment program using 50%, or $5 million, invested into a laddered portfolio. No one wants to be in a position where they have to delay making a payment while waiting for an investment to mature, so we would choose a percentage that is certain to leave plenty liquid. The laddered portfolio would then provide for regular maturities to make adjustments if the core balance changes.

Such an approach gives treasurers an opportunity to improve interest earnings while maintaining a level of liquidity with which they are comfortable. In this example, if the investments earned an average interest rate that was 1% above the bank account rate, the potential increase in interest earnings would be $50,000 in the first year. If you would like to review options for increasing interest earnings on your fund balances 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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