School Business Affairs October 2020

24 OCTOBER 2020 | SCHOOL BUSINESS AFFAIRS asbointl.org FINANCIAL MANAGEMENT An Attractive Alternative for Cash Management Considering local government investment pools and money market funds. By Craig Robinson P ublic and nonprofit officials are expected to seek the best available returns when investing stakeholder dol- lars. However, that task has become increasingly difficult in a low inter- est rate environment because cash that sits in a typical bank account does not earn a historically com- petitive rate. Put simply, due to the Federal Reserve aggressively lowering inter- est rates, it is time to revisit the earn- ings credit rate (ECR) that financial institutions offer on bank balances. The current 0–0.25% interest rate environment may result in banks offering less competitive ECRs or ECRs that barely offset balance- based charges. It is important to compare the ECR offered relative to the yield on a local government investment pool (LGIP) or money market fund that might be available. LGIPs and money market funds may be more appeal- ing alternatives for cash management under current market conditions. What to Compare Banks have historically set their ECR to approximate the three-month Treasury bill. In order to accurately compare the ECR relative to other alternatives, it is important to look not only at the stated rate, but associated fees on deposit balances. Deposit balance fees include: • Deposit Administration Fee • Insurance Recovery Charge • Recoupment Monthly Fee Banks may also impose a reserve requirement, which can effectively reduce the balance available to gen- erate earnings credits by as much as 10%. Deposit-based fees and reserve requirements should be considered because they can decrease annual earnings considerably. LGIPs and government money market funds do not charge these same fees; therefore these alternatives lead to increased annual earnings for public entities, even if the stated rates are the same. Consequently, it is important to compute the “net” ECR and com- pare the “net” rate to alternative investment options. ANDRANIK123/STOCK.ADOBE.COM

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