The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
ID®[p)©UI"frmTIl®llll \t f ®cdkeu@ll lE@II TlfrK @J! CS'\ -........ TE;'l 'i'P c:3;\ ;::;, JJ ('fV 0 October 21, 1977 Managing the Public'sCash Financial analysts are well aware of the many innovations made by corporations and individuals in cashmanagement techniques in recent years, but few have noted the equally impressive strides made by state and local governments in managing their $250 billion in annual revenues. Yet given the magnitudes involved, government treasurers can add considerably to pu bblic revenues by wisely investing the cash balances that they have available in excessof operating needs. Moreover, their actions can havea far-reaching impact, influencing both the level of commercialbank liabilities and the behavior of the monetary aggregates. In this new environment, the pooled investment of excess public funds has become one of the favored techniques of government treasurers-a prime example being the State of California's Pooled Money Investment Account. That sophisticated operation has expanded rapidly over time, and this year began handling local as well as state government funds. An examination of the California Account should throw some light on the future trend of public cash management and its potential effect on banks and the public. that serve as state depositories. In 1967, its investment facilities were extended to special state funds, and in January of this year, local jurisdictions also were allowed to placE their excessfunds with the Account. Over the years, the scope of the Account also was broadened to include investment in a broad range of eligible securities. Today, counties and other governmental units can receive a return on their otherwise idle funds which is computed on the average yield of the entire Account, and as an added attraction, can withdraw their funds on one day's notice. The Account also offers local treasurers a much wider investment range than they could obtain for themselves-similar to the range of options available to a major bank's money desk. The Account can purchase U.S. Treasury and Agency securities, negotiable CD's, collateralized time deposits, commercial paper, and bankers' acceptancesand can also make repurchase agreements on any eligible security. Reflecting these advantages,260 local jurisdictions utilized the Account in the first six months of the new program, contributing $1.2 billion to the Account's total resources of $6.5 billion as of June 30, 1977. Operating a pooled fund When established in 1956, the California Pooled Money Investment Account was limited to investing monies received by the State Treas. urer in demand accounts at banks Impact on deposits California's pooled investment program has significantly affected the amount and volatility of deposits at commercial banks within the state. (continued on page 2) D®JP)@l'f1 Cmrn®ITll IF®cdJ®rr@ll §@Jffi IF Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco nor of the Board of Governors of the Federal ReserveSystem. j Over the last decade (fiscal 196676), State revenues increased from $3.6 billion to $10.2 billion, and available funds in the California Account jumped from $729 million to $3.6 billion-but the funds held in bank demand deposits by the Account were no higher ($47 million) at the end than at the beginning of the period. Over the decade, then, the demand-deposit share of the Account's total available funds dropped from 6.5 percent to 1.3 percent. Further economizing of demand balances is now being achieved with the recent extension of pooled-investment facilities to local-government units. These and other factors have also affected the amount and volatility of funds held in bank time deposits. Over the last decade, the share held in that form has dropped from 27 percent to 17 percent of the total, reflecting the broader variety of investment vehicles available to the Account's managers. Indeed, the trend may accelerate in the future, because under recent authorization, the Account is now beginning to place funds in time deposits of savings-and-Ioan associations, and also in negotiable CD's issued by banks outside California. Cyclical interest-rate factors also affect the flow of funds in and out of bank time deposits, although not to the extent that might be expected, because the Account normally invests in large-denomination time certificates ($100,000and over), which are not subject to Regulation Q rate ceilings and are thus competitive with money-market instru2 ments. Still, an increased volatility in time deposits has become evident over time with the increase in the number of alternative investment vehicles, reflecting shifts in the rate differential between time deposits and other instruments. The normal seasonal pattern of time-deposit flows has continued this year, although at a lower level following the incorporation of local-government funds in the California Account. Typically, public time deposits run off in the first three months of the year, and then rise in April following the semiannual property-tax date. That tern was again evident in 1977, although the seasonal run-off was steeper, and the spring rise substantially smaller, than in other recent years. Impact on bank poUcy The California experience suggests that pooled investment programs can have a major impact on bank policies-especially the aggressive utilization of funds known as liability management. An efficientlyoperated investment fund minimizes resources allocated to non-earning demand balances. As a result, statelocal demand ba-lancesmay show little or no growth over time-no matter how substantial the increasesin total public revenues or in the volume of money handled by pooled funds. Pooled investment programs, with their increasingly wide array of investment alternatives, also imply greater volatility in public time deposits held at banks. The volatility is most evident when government $ Billions STATE-LOCAL TIME AN D SAVINGS DEPOSITS 6.0 5.5 5.0 4.5 4.0 3.5 Large California Banks J F M A M J funds are held in time-deposit forms subject to Regulation Q ceilings, becausethose funds are likely to be withdrawn whenever rateson money-market instruments rise above the deposit ratesbankscan pay. Deposit flows of course would reversewhenever ratesmoved in the opposite direction, but at such times banksmight find themselves incurring extra costsbecauseof the relatively high above-market rates paid on deposits.Again, in view of the growing tendency for governmentsto put their funds in large negotiable CD's (not subject to Reg Q ceilings), banksmay find themselvesincurring heavy interest costs in order to compete for such funds. Pooled investmentdoes not represent a problem today, when banks haveadequatesourcesof funds availablein relation to loan demand. However, the increasingvolatility of such funds could make it difficult for banksto carry out liability-managementstrategyin a period of strong loan demand. Bankscan no longer be certain of offsetting private deposit outflows with inflows of public depositsduring periods when income-tax and property-tax paymentsnormally flow into government coffers. Shifts among aggregates More efficient cashmanagementwhether by state and local governments or by corporations and individuals-leads to economy in demand balancesand to other shifts of funds which affect the major monetary aggregates.Investment decisionsby managersof pooled-investmentfunds thus influence trends in M1 (currency plus 3 J A SO N 0 demand deposits),M 2 (M 1 plus bank time depositsexcept large CD's), and M 3 (M 2 plus thriftinstitution deposits). If fund managersshift demanddeposit balancesinto bank time and savingsdeposits,they reduce . M 1 but leave M 2 unchanged.If they shift time-deposit funds out of banksinto savings-and-Ioanassociations, they reduce M 2 but leave M 3 unchanged. If they then shift those funds out of deposit institu- , tions into money-market instruments, they reduce M3; and so on. In the pastfew years,improvements in public (aswell as private) cash managementhave in fact contributed to the faster growth of M 3 relative to M 2, aswell asthe faster growth of M 2 relative to M 1· Increasinglyefficient cashmanagement is evident in the record of the California Pooled Investment Account. Interest income earned by the account climbed from $30million in fiscal 1966to $204million in fiscal 1976,when interest-bearing investmentsmade up all but one percent of the Account's total resources.In the next few years,as more local governments utilize the pooledinvestment fund, the Account's earningsshould rise significantly. Indeed, the public should benefit from this improved cashmanagement by state and local governments. With the maximization of resourcesallocated to interestbearing investments,tax rates needed to meet any given level of expenditure will be reduced. Ruth Wilson UOl8u!4SEM. 4eln • uo8<3JO• epeA<3N.o4epl !!eMeH • e!u.lO}!le:) " euoz!.lV' • qselV' 'me;) lo;)spue.ll:l ues (;s""'ON m Vd 's'n lBVW 55V1 J lSlllB:! BANKING DATA-TWELFTH FEDERALRESERVE DISTRICT (Dollar amounts in millions) Selected Assets and liabilities large Commercial Banks Amount Outstanding 10/5/77 Change from 9128/77 Loans (gross, adjusted)-and investments* Loans (gross, adjusted)-total Security loans Commercial· and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)-total* Demand deposits (adjusted) U.S. Government deposits Time deposits-total* States and political subdivisions Savings deposits Other time deposits:j: Large negotiable CD's 101,397 79,003 2,433 23,960 25,824 13,669 8,126 14,268 100,265 28,939 455 68,773 5,278 31,914 29,231 11,576 Weekly Averages of Daily figures Week ended 10/5/77 Member Bank Reserve Position ExcessReserves(+)/Deficiency (-) Borrowings Net free(+)/Net borrowed (-) Federal funds-Seven large Banks Interbank Federal fund transactions Net purchases (+)/Net sales H Transactions with U.S. security dealers Net loans (+)/Net borrOWings H + + 97 38 59 + + + - - + - + + - + - 534 705 763 102 95 86 170 1 851 1,213 504 373 2 29 367 354 ' + + 171 + 8.62 + 10.11 46.71 + 6.56 + 24.24 + 16.06 - 8.26 + 11.95 + 9.90 + 10.14 - 2.99 + 10.06 + 1.87 + 14.31 + 8.32 + 4.21 + 8,045 + 7,254 2,133 + 1,476 + 5,039 + 1,891 732 + 1,523 + 9,028 + 2,665 14 + 6,288 + 97 + 3,995 + 2,245 + 468 - - Week ended 9/28/77 590 + Change from year ago Dollar Percent Comparable year-ago period 49 28 21 + + 290 883 + 274 65 0 65 + 752 *Includes items not shown separately. :j:lndividuals, partnerships and corporations. Editorial commentsmay be addressedto the editor (William BurKe)or to the author, •.• Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San francisco 94120. Phone (415) 544-2184.