Expanding on The Large City Cash Position, and the Substantial Revenue it Could Generate.

While the City can't invest its cash into typical investments like stocks or corporate bonds, it remains possible to earn a substantial return on that cash while taking minimal to no risk.

In 2021, the city earned a modest $1,794,828 from investment activities. That is a 12% return on its $14,566,496 investment account. That is fine, but it’s down from 2020 earnings of 2,316,799 and 2019 earnings of $10,537,328. These large investment returns are a byproduct of the massive influx of cash onto the balance sheet stemming from the water lease payment acceleration. Those funds, originally planned to prepay outstanding bonds, were not yet eligible for that purpose. As a result, they were temporarily stuck on the balance sheet and in that process, were invested, and generated a tidy sum for the city. That 12% isn’t a bad return and sounds about right given the strong market performance of 2021. $1.8m is great in the context of a ~95 million budget, but we can definitely do more. If legally able - I’m not sure of the law - the city should allocate more unused cash to the investment fund.

Increasing the size of market investments is an aggressive plan and I can see why market risk is a concern holding the city back. However, there are ways to avoid the volatility and unpredictable nature of the stock market, or even avoid putting assets into the investment fund itself. With its substantial cash deposits of over $100 million, and with today’s historically high short-term interest rates, there are ways to generate meaningful returns. With that cash, the city can invest in ultra-safe assets, on a short time horizon (with the ability for immediate liquidity if the situation demands it), that allows cash to be readily available for committed expenses or unexpected demands.

What I call for in the following essay is not complicated, it simply requires some proactivity and a few hours of work over the course of the entire year. Given my proposal stands to gain the city potentially enough revenue to balance the budget, the return on work effort is stratospheric. It starts by simply forecasting out cash demands for the city on a monthly, quarterly, or half-year basis. With those various forecasts established, it just takes a little treasury management (actively investing cash in near-term yielding instruments).

Reviewing what ”has” and “could have been” is useful only because it gives us some context into the earning power of cash and reserved capital - something the city has, despite its relatively weak financial position (Yes, the city has an A rating from the bond rating agencies, but by my own analysis, that rating is a few points lower, and I anticipate the official rating will follow mine in short order).

Had the city allocated 50% of its cash to its investment fund, based on its 2021 performance, the city would have generated ~7mm, covering all debt and ~7% of total expenses. Not major, but it chips away. If you are aggressive in your assumptions about what can be invested, its worth noting that the city holds $117,559,285 in its deposit account (well over the FDIC insurance limit - however, the balance was collateralized - backed up with assets by securities held by the City of Erie and its agent in the City’s name. (I’m not sure what that means in practice; unclear how the city could hold assets of ~$117,000,000 in its custody to back up its cash balance with assets as I see no signs of $117 million on either side, assets or liabilities - which I believe they would be marked as given they have an obligation - of the ledger).

However, it’s important to note that the risk of PNC or counterparties with custody of City cash balances going insolvent is incredibly remote and extremely low as PNC is a bank approaching Too Big To Fail status for other reasons I will outline ahead. In a bank-run scenario, the Federal Government would likely deem its failure a systemic risk and guarantee deposits. However, given the recent regional bank turmoil, I thought it was worth noting. The bottom line is that the city’s bank account’s cash level is well above the $250,000 insurance protection and is also exposed to potential loss if the financial partner fails, but that event is near impossibility.

Concerning deploying more of its cash to investments, with aggressive, active management, and in a very safe manner “risk-free” (the investment I outline is considered in financial markets as a risk-free asset), in one scenario, the city could park 90% of its cash in 3-month Treasury bills and collect 5% on those assets, withdrawing 25% of the initial balance each quarter as cash is moved back to the bank account from the investment account to cover upcoming expenses for the current quarter. In this scenario, the city could generate $987,187.5 in the year’s first quarter by investing 75% into three-month bills and keeping 25% in cash to pay ongoing expenses for the first quarter.

In the second quarter, the investment capital would shrink to 50% of the total initial cash balance noted above invested in the Treasury bills as 25% was used in the 1st quarter and 25% would be needed to cover 2nd quarter spending, which ultimately results in $731,250 in second-quarter earnings. Again, in the third quarter, using that same logic of reducing the investment account for another quarter as the cash is transferred to the checking account to cover ongoing expenses, the total investment income would be $365,625. Finally, there would be no income in the 4th quarter as the remaining 25% of cash in the investment account from quarter three would be transferred to the checking account to cover ordinary expenses in the 4th quarter.

So in total, the city, by employing active treasury management, would have been able to earn an extra $2,084,062.5 while leaving more than enough cash for current quarter operations in the bank - in fact, enough cash to cover three months of spending. Going further, in a simple example where we don’t worry about keeping cash available, I think you could be strategic in finding highly rated corporate debt (bonds) and private credit (direct loans to highly stable, large corporations) yielding closer to 7-10% in today’s environment while also being more aggressive with the amount of cash committed to the investment fund. This would net the city 9-13 million (based on the current $14 million in the investment fund plus the $117 million in new cash).

That said, I’m nearly 100% certain Pennsylvania law would not allow municipal funds to be invested in corporate securities or other private market securities. These funds need to be held in accounts that are as conservative as can be. But that leaves the door open for specific Treasury securities (debt issued by the Federal Government) that have maturities of 12 months or less, Treasury Bills, often referred to as T-bills. These Treasury bills, often considered near cash or cash equivalents, are risk-free, liquid assets guaranteed by the US Federal Government.

In fact, assets held in Treasury Bills at the Treasury’s website (Treasury Direct), your money would be safer than if they were sitting in an FDIC-insured account at a traditional bank. Banks fail, and sometimes, if the deposit is large enough, depositors lose money, depending on the discount or premium to the $250,000 FDIC limit. If it were in a treasury account, your T bills would have the safest custody in the world, and in the event of financial turmoil, they would be backed and honored by the full faith and credit (read: taxpayers) of the United States Government.

It might take a little longer to figure out which corporate bonds to buy and what maturities to match up with spending requirements; however, I wanted to present the safest, most conservative scenario to show what revenue the city could collect on a base case. Saying we can’t commit cash to an investment account is not reasonable as you can strategically invest over different time maturities, as we did in the first example.

Treasury bills are one of the most liquid securities in the world. They can be sold within seconds of submitting a sell order, and the new cash could be wired from a treasury investment account to the city’s spending account in less than two hours. You could be more aggressive than committing 75% in the first quarter and drawing down 25% each quarter. You could get away with a more significant portion or switch from 3-month treasuries to 1-month treasuries that yield 4.11%. That would allow you to start with 91% of the total balance invested into T-bills (treasury bills), and draw the investment account down by 8.3% each subsequent month, giving the city immediate access and spending power for one month of total spending (this analysis is purely based on assets, the reality is that the city collects substantial income and real estate tax income, which would free up far more cash to remain invested).

Whether you budget out monthly or quarterly spending and move assets accordingly, the total investment income isn’t the most significant, but that would essentially cover debt service payments. For a city consistently crunched at budget time at the end of the year and running a deficit of a few million, this could make the difference between a balanced budget and a net deficit, eating away at the city’s assets and pushing future financial conditions into more jeopardy.

The city has a very large total of liabilities between the pension liabilities, long-term debt, and other agreements, coming to just under half a billion dollars comprised of unearned revenue, accrued liabilities, compensated absences, OPEB liability, and, importantly, net pension liability. This sounds like a complicated or time-consuming task, but once you design the timing structure of the investments and cash movement, the reality is that executing it would take 4-5 hours a year. That’s a return of $416,000 an hour! I think that’s well worth some time and planning by the city’s financial officers.

All you do is periodically initiate wires and enter purchase orders on the web-based investment platform for T-bills, just like many Americans do when they buy a stock. Given our limited tax base and resources, we must fight for every extra dollar the city can get. By collecting ~99% of levied income and real estate taxes and practicing treasury management, the city could have covered 12% of the public safety (police/fire) budget. The process is straightforward, consumes very little time, and pays a huge return on the effort invested. If the city needs someone to design a bond ladder, make quarterly wire transfers, and buy T-bills 3 - 12 times a month, they should send this outlet a direct message. I have just the person.