by Chad Freiberg and Brent Heller
For many people who manage public sector finances, investing is not a full-time job. City treasurers, county administrators and other civic leaders often spend most of their time focused on running their municipalities while meeting the day-to-day needs of their constituents.
That doesn’t mean that an investment strategy isn’t important, however. Investing in cash and securities can help a municipality boost short-term cash flow and support long-term growth, but only if the right investment decisions are made. This can make finding the right financial partner critical, particularly for municipal leaders who are especially short on time. Here’s a closer look at how to develop an investment strategy that fits your needs and what to look for in a partner relationship.
Focus on the right strategy
Investing can look a lot different for public entities than it does for the average person. First, a number of federal, state and local laws control which investments can be made. Second, many municipalities develop their own investment policy statements, in large part so that they can abide by these laws. As a result, municipal financial leaders often take a more conservative and deliberate approach to comply with regulations.
Liquidity management is also important for public sector financial leaders, meaning they want plenty of cash on hand as well as investments with maturities of three months or less. One key strategy is to ladder investments, which means selecting assets with short-term, intermediate and long-term maturities. Short-term returns can help boost a municipality’s cash flow while also providing funds to reinvest in the longer-term assets. Additionally, a percentage of funds can be set aside as reserves, which provides added stability over time.
Knowing which type of assets are the most appropriate is equally important. Treasury bonds are a good example, as they are backed by the full faith and credit of the U.S. government, which makes them very low risk. This type of asset is geared toward a predictable income stream, stability, liquidity and capital preservation. Other types of investments like certificates of deposit (CDs), government-backed agency bonds and municipal bonds can also provide steady and reliable returns.
Experienced partners matter
Given the complexities of a public entity investment strategy, finding a partner who is experienced in this space is critical. Look for someone with a firm grasp of applicable laws and a good understanding of your municipality’s investment policy, as well as a willingness to act as an extension of your team and manage your portfolio on a day-to-day basis. Partners should be able to manage risk through diversification, oversight, and a focus on quality through ongoing credit monitoring and review of holdings.
To juggle both short- and long-term investment goals, be sure to regularly review your banking relationship and the account structure you have in place. Depending on different market and rate environments, there could be opportunities to maximize interest income or decrease the amount of fees paid for treasury management solutions tied to your operating account.
Additionally, it’s important that your financial partner checks in regularly. Check-ins should include portfolio performance reviews, discussion around current and future cash flow needs, strategy adjustments and market outlooks.
Even with the best strategy in place, municipal investing is challenging. Ultimately, your best bet is to build a well-diversified portfolio with a mix of asset classes and maturities that are allowable under law. An experienced financial partner who puts your interests first and understands your goals can help you adapt to changing market conditions and adjust your investments accordingly.
