All Things Political: Municipal finance 101

All Things Political: Municipal finance 101
Adam Haber, a member of the Roslyn School Board

The past few years have seen billions in Federal COVID financial relief through the Coronavirus Aid, Relief, and Economic Security Act and the American Rescue Plan Act flowing into the coffers of every Long Island municipality. Because of this “free” money, local governments were able to balance their budgets without facing draconian budget cuts caused by a sclerotic COVID economy.

Now that CARES and ARPA funding are coming to a conclusion, elected officials must find ways to balance budgets in the face of inflation caused by all this largess. One solution is for Long Island governments to improve cash management.

Municipal cash management over the last several years has been limited to putting all cash and cash reserve accounts into checking and savings accounts, or certificates of deposit, which have paid little interest. That won’t work anymore, because interest rates have jumped dramatically over the last 12 months. For example, the one-year U.S. Treasury on Jan. 14, 2022, was 0.51%. One year later the same interest rate on a one-year Treasury is about 4.7%!

Because government change moves at a glacial pace, most Long Island municipalities keep their cash at the same banks they always have. Unfortunately, this usually means an annual interest rate at 2% or less. As a result, local governments are missing a huge, no- risk opportunity to earn additional interest on their cash.

There are two ways municipalities can earn 4% or more on their cash balances, which could equate to an additional $200,000 of annual interest on every $10 million in cash and/or cash reserves. The easiest and fastest is to sweep cash into municipal money market funds allowed under New York State law.

There are two widely used municipal money market funds in New York. NYCLASS, the larger of the two, works with about 100 Long Island municipalities, made up of school, water and fire districts, villages, towns and counties (both Nassau and Suffolk are NYCLASS users). The smaller of the two, The NY Liquid Asset Fund (NYLAF) is equally capable but serves fewer government entities.

The benefits of putting a government’s cash in either NYCLASS or NYLAF instead of at a bank include:
-Daily Compounding of Interest
-All participants earn the same daily rate, which quickly adjusts automatically following interest rate decisions by the Fed
-When interest rates are on the rise, locking into CD rates can result in missed earnings,
CDs have penalties for early withdrawal
-Invested dollars are fully liquid daily and never locked up
-No transaction fees or minimum balance requirements
-Efficiency! Saves time and effort, no need to plan for and manually reinvest/roll CDs or Treasuries

The second way a municipality can earn even a slightly higher rate than NYCLASS or NYLAF is by managing their own cash balances and purchasing a monthly Treasury ladder. For example, governments can purchase a one-, two- and three-month Treasury Bill (T Bill), and as each T-Bill comes due, purchase a new three-month one. This method yields a higher interest rate of roughly 25-50 basis points, but requires someone to actively manage the purchasing process. While T-Bills can be purchased and sold with complete liquidity, there is a small amount of interest rate risk, which goes away at maturity. To date, only a few municipalities in NYS purchase T-Bill ladders.

The bottom line: All municipalities should set up a NYCLASS or NYLAF account as soon as possible. This would enable them to better serve constituents and lower taxes. Every day they delay, risk-free revenue is left on the table.

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