Councilman urges changes in investment policy
The council has about $40 million on hand—an amount that fluctuates—to pay its bills. That money is diversified among several investments, including the Local Government Investment Pool, treasury bills, certificates of deposit, federal agencies securities and money markets.
In June, about 70 percent of the funds were invested in the pool.
The pool interest rate is low—this month it's about .27 percent—but the money is liquid and can be accessed the same day. The rate has dropped from about .45 percent in June.
Perrotto recommended in June that the city put money into CDARS, a certificate of deposit program insured by the federal government.
City policy allows only 40 percent to be in CDs.
Perrotto brought the issue up to staff earlier this year, and staff has since transferred $6 million into CDARS for an average rate of about .98 percent. That's a pick-up of about $42,000 at today's rates, Perrotto said.
That would be $100,000 if a total of $20 million were shifted, again at today's rates.
At a recent study session, Perrotto, a financial and investment consultant, said more money should be shifted to CDARS.
"This could give us a tremendous opportunity to generate revenue that will help our taxpayers," he said.
Winzenz urged caution in locking too much money into CDs.
"At .27 percent, interest rates can't go too much lower. … "We want to be able to react to investment opportunities when they go back up," he said.
About 32 percent of the city's money is now in CDs with about 56 percent in the pool.
Another part of the city policy mandates that only 20 percent of the money can be put in investments that take longer than 24 months to mature. That's another way to protect the city from tying up money for long periods of time, Winzenz said.
Perrotto said a laddering process used by the city should help it retain its liquidity because the CDs will come due when needed.
Council member Tom McDonald said nobody has a crystal ball, and he suggested leaving the policy alone for now because the financial future is so uncertain.
"If the feds start raising interest rates aggressively as the nation comes out of the recession, we could lose out big time," he said.
"I like the idea of hedging our bets."
Perrotto said he doesn't see a significant increase in rates in the near future.
McDonald and Bill Truman did not even want staff to bring the policy back to the council, saying it is a waste of time.
But the majority did.
City Manager Eric Levitt supported the idea of looking at the old policy.
"I'm not really sure why those restrictions are in place," Levitt said.
Some might wonder: Why does the city have $40 million lying around?
About $10 million is money previously borrowed for capital improvements that has not been spent yet, Jay Winzenz, assistant city manager, said. That includes money for street repair and such projects as an aquatics facility.
Another $5 million is set aside for infrastructure replacement at the wastewater treatment plan.
The remainder money is tax revenue.
The money doesn't come in equally throughout the year. A large chunk comes in December and January when people pay their property taxes. Another chuck comes in June or July, when the city typically borrows money. More comes in fall when the city receives its shared revenue payments from the state.
Throughout the year, the city draws down on that money to pay its bills.
That avoids short-term borrowing to pay regular operating expenses, such as payroll, and also allows the city to generate some investment income, Winzenz said.
That income has taken a hit along with the economy.
In 2006, income from general investments was $1.2 million, Winzenz said. In 2008, that was $978,000. In 2010, the city is anticipating $525,000.
"We've realized significant interest earnings from the money we've invested," Winzenz said.
"But with interest rates as low as they are, the amount of earnings is significantly less."