News Column

Little to gain

June 7, 2014

By Chris Lavender, Times-News, Burlington, N.C.

June 07--When personal financial investments took a hit as the economy tumbled in 2008, the same thing happened to local governments.

And they haven't rebounded since the recession ended either, providing fewer dollars to be rolled over each year into operating budgets.

It's not an isolated situation. Burlington, Mebane, Graham, and Elon have experienced substantial decreases in investment earnings in part because of historically low interest rates. It's clear to local government officials that weaker earnings are a new norm.

According to Office of the State Treasurer Communications Manager Shorr Johnson, local governments are limited as to what they can invest in by the Local Government Budget and Fiscal Control Act. Most local governments across the state hold their funds at banks or in the N.C. Cash Management Trust.

"The allowable investments are conservative in nature and therefore typically return a lower rate relative to more risky investments," Johnson said. "When choosing investments, the priorities for local governments are safety, liquidity and yield, in that order of importance."

Burlington City Manager Harold Owen said the city's investment portfolio isn't producing the same returns it once did because of the economy and lower interest rates.

"We want to be conservative and not lose investments," Owen said. "Our options in local government are very limited."

Owen said there were no immediate plans to change the city's investment mix and hoped that the economy would improve, allowing earnings to rebound.

BURLINGTON'S INVESTMENT earnings in fiscal 2005-06 were $1,293,769, followed by $1,379,483 in 2006-07 and $1,457,069 in 2007-08. Then the recession struck.

Investment earnings for the city in 2008-09 were $790,615, followed by $145,354 in 2009-10. In 2010-11, investment earnings were $69,631, and $39,135 in 2011-12 -- about a hundredth of what they were in 2006-07. Burlington's investment earnings in 2012-13 were $110,305.

Owen said the numbers show a "wide range of difference." The city hasn't been able to roll over as much of its investment earnings into its budgets.

Financial instruments local governments invest in include commercial paper, treasury bills, treasury notes and certificates of deposit.

CITIES AND TOWNS aren't the only ones in an investment hole. Alamance County Finance Officer Tom Manning said returns on the county's investments in recent years have been "terrible." The county is required to abide by the same investment guidelines as the municipalities.

For 2014-15, the county budgeted $5,000 in investment earnings toward the overall budget. Manning said in previous fiscal years the county budgeted about $50,000 in investment earnings to the budget.

Manning said he believed interest rates would likely remain low for at least the next year, continuing the current trend of low earnings on investments.

In 2009-10, the county allocated $400,000 in investment earnings to the annual budget. The county allocated $200,000 in investment earnings to the budget in 2010-11, and $100,000 in investment earnings to the budget in 2011-12, followed by $75,000 in 2012-13. The county allocated $50,000 in investment earnings to the budget in 2013-14.

MEBANE CITY MANAGER David Cheek said interest rates for some of the city's investments are at 0.4 percent, generating minimal returns.

"We might as well bury money under a mattress," Cheek said.

Only a few years ago Mebane was able to allocate as much as $500,000 of its investment earnings toward its annual budget. Cheek said the amount contributed recently was $15,000 to $20,000 as earnings plummeted.

Cheek said the decline has more to do with the global economy than economic conditions in Alamance County. Cheek said the constraints placed on local governments in what they can invest in plays a role in the level of returns. Investments also are required to be collateralized by a bank.

"We can't go out and buy risky stock and hit a home run," Cheek said.

In 2006-07, Mebane's investment earnings were $449,670, followed by $592,209 in 2007-08. In 2008-09, the city's investment earnings were $518,711, and $188,700 in 2009-10. In 2010-11, investment earnings were $47,149, and $22,532 in 2011-12. In 2012-13, investment earnings were $14,422, and $11,943 in 2013-14.

GRAHAM CITY MANAGER Frankie Maness said he didn't believe investment earnings would improve in the short term. The city's investments include funds in deposit accounts, money markets and certificate of deposit accounts.

"They are all drawing very little interest," Maness said.

Maness said weak earnings potentially could affect the city's property tax rate in the future. When earnings were higher, it allowed the city a financial cushion since more investment earnings were allocated to the budget. When earnings drop off, funds from other sources have to be used to offset the losses.

In 2006-07, Graham's investment earnings were $609,993, followed by $476,954 in 2007-08. The city's investment earnings were $259,437 in 2008-09 and $107,288 in 2009-10. In 2010-11, earnings were $84,317, and $114,947 in 2011-12. In 2012-13, Graham's investment earnings were $47,656, and $30,300 in 2013-14.

ELON'S INVESTMENT earnings haven't fared any better. According to Elon Town Manager Richard White, Elon's investment earnings in 2006-07 were $139,599, and $112,228 in 2007-08. In 2008-09, the town's earnings were $40,394, and $20,796 in 2009-10. In 2010-11, earnings were $6,429, and $14,570 in 2011-12. White said the town's earnings were $7,960 in 2012-13, and $5,600 in 2013-14.

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(c)2014 Times-News (Burlington, N.C.)

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