Interest rates are rising.

Guess what – that’s a good thing for the city’s bank account. At the February 15 Board of Alderman meeting, a new investment tool was authorized for the city’s “idle” funds (cash in the bank that won’t be spent this year). The city maintains a healthy bank account which proved invaluable during the pandemic crisis and provides ongoing stability.

Ever wonder what the city does with this “idle” cash? Okay – you probably haven’t, but in case you are curious now – below is an edited excerpt from the staff memo to the Board of Aldermen, authored by City Administrator Kris Simpson that discusses the city’s investment strategy and this new investment option in their toolbox.

Here it is…

Missouri statutes establish rules governing how public funds may be invested. The Missouri State Treasurer prepares an investment guide for public entities based on these rules. The main premise of the investing rules is to reinforce that the funds being invested are public funds which belong to the citizens of our community.

There are three key principles guiding investment of public funds: safety, liquidity, and return.

  • Safety: the preservation of the principal of public funds is the primary concern.
  • Liquidity: investment obligations must meet the current and future needs of the community.
  • Return: the return on investment is the least critical objective.

Aside from state law, the City of Crestwood may establish an investment policy that is more stringent than these rules, but not less stringent. Crestwood’s investment policy is more stringent than state law allows.

Before the pandemic, the City of Crestwood invested idle funds in Certificates of Deposit (CDs) of various length, to earn interest on otherwise idle funds. CDs are a permissible investment vehicle under the City’s investment policy and state law, which provide a fixed rate of return during a set term. The downside to CDs is that they reduce liquidity – you should not access the funds invested in a CD before it matures, otherwise you will lose all or a portion of the interest.

Any funds we did not invest in CDs remained idle in the bank account and earned a lesser amount of interest. Staff sought to maintain an idle balance in our bank account that would allow us to meet operational needs while we waited 6-18 months for our CDs to mature. Over time, we established a CD investment ladder, timing CD maturity dates so that we regularly had maturing CDs delivering funds into our bank account.

With the onset of the pandemic, CD rates plummeted, as did the interest rate earned on the bank account. As a result, the City stopped investing in CDs. It did not make sense to tie up our funds for 6-18 months for the near-zero return being offered. Also, having more cash readily available was a financially defensive move to protect against economic uncertainty.

With the recent activity by the Federal Reserve to increase interest rates, it is now possible to achieve more attractive return on our idle funds. Therefore, staff began exploring options. Aside from CDs, the City Administrator asked the Finance Officer to investigate the Missouri Securities Investment Program (MOSIP).

MOSIP was formed in 1991 by intergovernmental cooperation agreement between multiple school districts. Over time, other public entities were able to join the cooperative, including cities and counties. MOSIP is a statewide local government investment program which is owned 100% by the participants. The investments used by MOSIP meet the applicable Missouri statutes governing public investments.

MOSIP today has over 250 members with assets over $3.5 billion as of February 2022. MOSIP is sponsored by the Missouri School Board Association, the Missouri Association of School Administrators, the Missouri Association of School Business Officials, the Missouri Association of Counties, and the Missouri Municipal League.

MOSIP contracts with PFM Asset Management LLC (PFMAM) to be the administrator. PFMAM is a registered investment adviser with the SEC and has a fiduciary responsibility to MOSIP. MOSIP maintains a banking relationship with US Bank, Gilmore & Bell are the legal counsel, and Ernst & Young are the independent accountants who audit MOSIP each year.

MOSIP offers several advantages. Let us return to the three key principles to investing public funds: safety, liquidity, and return.

In terms of safety, MOSIP’s investment program meets the established state laws governing the investment of public funds, which is to say, the program does not risk public principal.

In terms of liquidity, MOSIP offers many advantages over CDs. As stated above, CDs require the City to commit funds for a fixed period of time until maturity, usually 6-18 months with the longer term typically provided a higher return. By contrast, MOSIP offers a “Liquid Series” investment program, with a minimum investment period of one day, and minimum balance of one dollar. Managed electronically, the Finance Officer can transfer funds every day between the City’s bank accounts and the MOSIP Liquid Series account. We will still maintain a balance in the bank account as a cashflow safeguard, but our goal will be to keep as many funds as possible in the MOSIP Liquid Series account.

Finally, in terms of return, MOSIP currently offers very attractive returns. The Liquid Series account is based on the SEC 7 day yield – a standard measure of the yearly rate paid to investors of money market funds. The amount is based on the returns earned over a 7- day period. Basically, every day the account looks at the 7 day yield and adjusts accordingly. The most recent meeting between staff and MOSIP representatives was 1/30/2023. As of that date, the MOSIP Liquid Series rate was 4.39%. By comparison, pre-pandemic the City was earning CD interest rates between 1.75-2.50%, so the rate environment right now is strong.

Staff’s intention is to invest in MOSIP at present, but to evaluate the market and the City’s needs going forward. We may return to CDs at some point, or we may also blend investing strategies, combining a fixed term CD and the MOSIP Liquid Series. MOSIP also offers a “term” series that operates like a CD, which we may utilize in the future.

Okay – that might not have been a riveting subject but aren’t you glad to know that there are smart people watching out for our tax dollars. I sure am.