The financially troubled District of Columbia government earns proportionately less income from its investments than any other area jurisdiction, according to a survey of local governments.
District officials blame the disparity on chronic cash flow problems. But some members of the City Council contend that even with the current budget squeeze, Mayor Marion Barry and his administration have not examined the money-making potential of their investment income closely enough.
Like the District, other area jurisdictions plow virtually all their available cash into short-term investments -- primarily certificates of deposit at local savings and loan institutions and repurchase agreements with local banks for Treasury notes and other government securities. They then withdraw the money when it is needed to pay bills.
The larger a jurisdiction's budget, the more money it theoretically has on hand to invest and the more it should earn from its investments. But if large amounts of money are needed daily to pay the bils -- as officials say is the case in the District -- then investment income plummets because the money doesn't stay in the savings institutions long enough to take advantage of the interest rates.
With a $1.9 billion budget, the District will earn approximately $8.5 million this year from its investments, according to Budget Director Gladys W. Mack.
By contrast, Prince George's County anticipates earning nearly an identical amount on investments this year -- at least $8 million, according to officials -- but with a budget of only $458 million.
Faifax County, which has an extremely aggressive investment policy and, under Virginia law, is able to invest in high-yielding corporate securities such as the General Motors Credit Corp., projects total interest earnings this year of $30 million from a total budget of $757 million. i
Montgomery County, working with a $600 million budget, anticipates it will earn $18 million from investments in fiscal 1980. Alexandria, with a $94 million budget, will earn $192 million -- still proportionately higher than the District's projected earnings.Arlington, with a budget of $168 million, will earn $4.6 million -- againproportionately higher than D.C.
There are some differences between these jurisdictions and the District. For example, under the povisions of home rule, the District cannot enter the bond market. The other governmentscan sell bonds for construction or other projects, and invest the money that is raised until it is needed on the projects.
Because these bond revenues generally arrive in a large amount all at once, they can be invested at a higher rate than revenues that dribble in more slowly. In general, the District has a more even revenue flow -- and thus, less lucrative -- than many other jurisdictions.
According to Ivanhoe Donaldson, general assistant to Barry and head of a special cash management team, the District lags in investment income because of its habitual shortage of ready cash.
The District recently fell so far behind in paying its heating oil bills that its supply was nealy cut off. TheDistrict also has had to resort to short-term borrowing from the U.S. Treasury in emergencies.
"They [the suburban jurisdictions] have more money out there than we do," Donaldson said. "The real story would be if they weren't doing better than we are."
Council member John A. Wilson (D-Ward 2), chairman of the Finance and Revenue Committee, acknowledged that cash flow is a major reason why the District's investment income is comparatively low.
Wilson added, however, that it would "make sense" for the District to take advvantage of its ability to borow more money interest-free from the U.S. Treasury, and plow that money into investments.
"The problem now is that everything we borrow we need to pay our bills," Wilson said. The District currently owes the Treasury $40 million.
But City Council member Betty Ann Kane (d-At Large), a vocal critic of the way the Barry administration hashandled the city's current fiscal crisis, said, "I don't think it's entirely related to cash flow problems. It's related to the attitude that the investment market is not where you look for revenues."
In a memo last November, Kane said it was "truly shocking" that in an era of skyrocketing interest rates, the D.C. government projects that it will earn even less investment income this when the District's money was kept in the U.S. Treasury and earned no interest at all. The District was not allowed to take charge of its money until home rule took effect in 1975, and it did not actually withdraw the funds until 1978.
"It's a fairly good instance of not year than last. Last year, the city cleared more than $10 million from its investments.
Kane said the skittishness about investing is a "hangover" from the days making the adjustment from the way things were," Kane said. She said she had asked Barry administration officials about the city's investment policies last fall, and "found a real lack of sophistication about managing the taxpayer's cash.'
Donaldson acknowledged that the District's unfamiliarity with the investment market is a factor. "We're only in our second year of doing this," he said. "You need time to test the limits of your system."
But he reasserted that the biggest factors are the District's lack of cash and the need to withdraw invested money to meet daily expenses. If Congress gave the District a large enough appropriation to create a budgetary reserve for the city, Donaldson said, that would improve the investment picture.
"We operate on a break-even basis," he said. "Those other jurisdictions have reserves. What you have to remember is that investments are a day's luxury. Our first obligation is to keep the cash flow operational to meet our needs."
Jim Sandifer, director of Fairfax's investment program, said that county currently has around $248 million earning investment income.
Donaldson said the District has far less cash available for investment, and that the average amount available to a jurisdiction such as Fairfax "far exceeds" the maximum the District ever has to invest.
The District puts up its investment money for competitive bid by banks and investment houses, Donaldson said. For example, city officials might announce that $30 million was available for a 30-day period. The money would be deposited with whatever bank offered the highest interest rate.
But the District often has to call that money back early to pay bills before the money has drawn the maximum possible interest, Donaldson said.
When the District issues welfare checks, for example, it is immediately forced to recall enough money to cover virtually all of them since most are cashed quickly.
In other words, the District experiences a shorter "float" -- the time between when checks are issued and when they are cashed -- than do some other jurisdictions.
On payday in Fairfax, for instance, Sandifer deposits only enough money in the bank to cover about 5 percent of the government paychecks issued. The rest of the payroll money is allowed to draw interest for two or three more days before being deposited in the payroll account.