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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)
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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
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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.
@FedFRASER