Borough's cash earning interest

Posted: Thursday, August 09, 2007

Cash flow is said to be the life's blood of any successful enterprise, and in that respect, the Kenai Peninsula Borough is little different from a private company.

Today, the municipal government has more than $133 million distributed in various accounts, there to cover the bills for everything from the daily functions of government to major long-term capital projects. But while awaiting transfer to creditors and contractors, the borough's cash is not sitting idly in the bank. It is invested and earning interests in a variety of short-term securities.

In a brief report to the assembly attached to the Aug. 7 meeting packet, Finance Director Craig Chapman outlined how borough funds are handled. He also spoke with the Clarion on Tuesday.

On June 30, 2007, the end of the last fiscal year, the borough had some 59 percent of its portfolio - about $78.4 million - invested in securities. The large majority of those were issued by federally backed agencies, while a small amount, about 7.2 percent, in commercial paper, which acts like a certificate of deposit (CD), and corporate bonds, Chapman said.

The other 41 percent of the portfolio, about $54.6 million, is held as cash or cash equivalents, and includes such things as the proceeds from bonds issued by the borough to finance various hospital, solid waste, school and other projects, as well as money invested in the Alaska Municipal League investment pool. Also in that category is a sizeable chunk of cash approximately $20 million that is invested every night in he Wells Fargo Bank's Money Market Sweep. Chapman said those few overnight hours generate about $2,800 in interest per night.

The agencies mentioned above come in two forms privately owned, publicly chartered entities called Government Sponsored Agencies or GSAs, and several federally related institutions that are arms of the U.S. government.

The eight GSAs created to cut the cost of borrowing in certain sectors of the economy such as homeowners, students and farmers include familiar lending programs such as the Federal National Mortgage Association, often called Fannie Mae, the Student Loan Marketing Association, sometimes called Sallie Mae.

The borough also has investments in government arms such as the Federal Home Loan Mortgage Corporation and U.S. treasury bills, all backed by the full faith and credit of the U.S. government.

An advantage of agency security investments is that they are exempt from state and local taxes.

Of the roughly $133.6 million in the borough's overall portfolio, about 48.2 percent, or $64.4 million, is invested in securities maturing in less than one year, where yield on investment averages 5.03 percent.

Some $68.5 million, 51.3 percent of the money, is invested in paper maturing in one to five years. Here the average return is 4.23 percent.

Another $650,187 is invested money associated with Utility Special Assessment Districts and Road Improvement Assessment Districts that return a rate of 7.95 percent.

The portfolio's yield fluctuates over time, and over the past year has risen from 4.286 percent to 4.638 percent, representing a growth in interest earnings of $500,000 that is allocated to the various government units, Chapman said.

"That's a good change in one year," he said, adding that it is a good deal better than just a few years ago when the yield rate hovered closer to 3 percent.

The borough does not invest its money in stocks, Chapman said. The key to the borough's investment policy is, first off, safety of the principal and maintaining a steady monthly cash flow.

"Last, but not least, is a reasonable rate of return," he said.

Chapman explained that of the $133 million in portfolio, $20 million represents borough's general fund. Other participants in the investment pool include the $14 million attached to borough hospitals, some $25 million in the school district, another $40 million dedicated to capital projects, $19 million associated with the borough's service area accounts, about $5 million in the Land Trust Account, some $4.8 million in the spruce bark beetle program, and a few smaller accounts.

Hal Spence can be reached at hspence@ptialaska.net.



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