FINANCIAL MANAGEMENT/Revising treasury management strategies
Within the financial management profession, perhaps no area is undergoing as drastic a transformation as treasury management. Forces such as technology, privatization and the reduction in the supply of treasury securities are changing how some governments manage their short-term investment programs. By using several management strategies, financial officers can boost the efficiency and effectiveness of their municipal investment programs.
With duties like administering payroll, accounting, managing risk and assessing property, finance officers often have little time to manage an investment portfolio. In addition, most local governments have a small financial staff, which makes it difficult to assign a single area of cash management, such as investment, to one person. To improve short-term investment programs, many local governments are opting to privatize their portfolio management services.
In Ann Arbor, Mich., Chief Financial Officer Dean Moore was facing those time and staff constraints and opted to privatize selected investment functions, such as cash flow forecasting, investment security selection and reporting on investment results. Privatization helped the city develop a more reliable cash flow forecast that detailed two- and three-year histories of revenue inflows and outflows.
In addition, the city’s investment advisers now obtain competitive quotes for securities, provide periodic investment reports to the City Council, and restructure and monitor the portfolio. Because the improved cash flow forecasting and portfolio refinements have lengthened maturities, the city estimates that investment returns have increased markedly.
Using the services of two investment advisers also can improve portfolio performance. That tactic has been adopted by Hanover County, Va., which uses two competing investment management advisers to separately manage two fixed-income portfolios of similar average maturity.
Two dedicated portfolios with separate investment firms allow the county to control investment fees and better monitor portfolio performance. The county selects the investment management firms through an RFP every five years. Depending on various factors, new inflows of money are allocated to one of the portfolio managers during the five-year period.
The county has seen several benefits from the parallel competition. During the bid process, the promise of ongoing competition has resulted in lower investment management fees. Also, subsequent price increases are limited during the agreement, and customer service is improved. With the two advisers, the county has a point of reference for performance measurement.
If portfolio management services are done in house, local governments can improve the portfolio’s management (and performance) by purchasing software that can track, analyze and report on investments. Some software even allows the user to make trades online.
Most of the software is fully compliant with GAAP, GASB or other accounting/legal requirements and practices. In addition, the standard and ad-hoc reports produced by financial management software are easier to use than are common spreadsheet software programs, like Lotus or Excel.
Many innovations are occurring in the public sector that will improve treasury operations innovations that are critical to the overall financial well-being of local governments. The cities and counties that develop new management strategies and take advantage of new management services available from the private sector may help improve their short-term investment programs.
The author is manager of policy analysis for the Government Finance Officers Association Research and Consulting Center in Chicago.
