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By JOHN E. LAWLOR Finance Director

Because of the fluctuating interest rates during recent years much has been written in current literature about the investment of public money. Many of these articles lean toward the exotic: computer modeling of cash flows, advanced quantitative analysis, which is not practical for the small community. At Naperville we have been able to operate an effective investment program with minimum time and without extensive planning. By effective we mean a program which provides for the safety of funds, sufficient liquidity to meet our needs and a yield consistently above the State Treasurer's Investment Pool, which we use as a benchmark. Our first goal was to eliminate idle cash, the second was to optimize yield.

Our first step was to pool all of our money for daily banking and investments (excluding the pension funds). The most difficult part to this step was overcoming the skepticism of lawyers and others who questioned the legality and practicality of pooling. Three bank accounts were established: undistributed, for collection of receipts, payroll and accounts payable with all disbursements through the latter two. The same results probably could be accomplished by having the bank treat several individual accounts as a single entity.

The next step was arranging with the bank to have our undistributed account balance placed in an overnight re-purchase agreement each night. Our payroll and accounts payable accounts are treated as NOW accounts. This met our first goal of being 100 percent invested.

Conventional wisdom requires that you accurately predict both cash inflow and outflow. Receipts were not too difficult to project but disbursements proved to be impossible. To overcome this problem we went for timing. The City Council delegated to the City Manager the authority to approve disbursements. We were then free to administratively determine our payment dates which were established as the 10th, 20th, and 30th of each month. Once the payment dates were established the disbursement amounts settled into a predictable routine.

At this point most readers will see that a great deal of internal cash movement and the resulting paper work was eliminated. Cash receipts are debited directly to the appropriate fund when received and disbursements are credited as made. While our system is totally automated, right down to electronic scanning of some receipts, the procedure would be the same for a manual system. Other than the elimination of the investment accounts in each fund and the elimination of the Payroll and Payable Funds no changes were made in our fund accounting system.

An investment ledger, including the accrual of interest, premium and discount on investment was added, but this is outside the fund accounting system. For our purposes we distribute the interest earned to each fund on a monthly basis. A daily basis would be better but we have found using the month end balances is sufficiently accurate and much easier.

The investment of the money is in reality the easiest part. Our deposits are bid using all legal investment options. In practice we have found the diversity of the investments takes care of itself, thus assuring a good liquidity mix. We use local and regional banks as well as brokerage houses. All bids are on a yield basis with a 360 day year, 30 day month.

The money in the undistributed receipts account is first used to pay current bills, a LIFO inventory of cash. Depending upon market factors, excess cash is either left in the undistributed receipts (invested overnight) or transferred to the State Treasurer's Investment Pool until a minimum of one million dollars is available. We try to bid in multiples of one million dollars. A spread sheet is kept showing the maturities for eighteen months as a reference. By referring to the spread sheet of investments we can readily see which months have ample maturities and which ones are lacking.

Pending maturities are reviewed to determine if the money will be needed during that month. If not, the money is re-invested. If it is expected to be used during the next few weeks, the money is invested short-term or deposited to the State Pool. The investment decisions are two tier. Whereas conventional wisdom would have us in June decide we need $350,000 for the January 13 payroll and invest it accordingly, we simply decide we will need money in January. In January we then make a more accurate projection of our needs during the month. By so doing we have fewer transactions of larger amounts. This encourages better competitive bidding, simplifies paper work and increases yield, while allowing sufficient leeway in projecting our needs.

Our system has worked well for us over the past five years. Our $43.2 million in pooled investments have consistently out performed the State Investment Pool by at least 10%. The best feature is that it requires only a few hours per month to monitor.

May 1983 / Illinois Municipal Review / Page 9

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