Cash Management Practices in Louisiana Municipalities
Onwujuba, Christie C., Lynch, Thomas D., Journal of Public Budgeting, Accounting & Financial Management
ABSTRACT. In this paper, we examine the cash management practices in the State of Louisiana and contrasted those practices with the rate of return on investment income due to cash management practices. Essentially, we framed various model hypotheses from the literature, which tells us that if those practices exist then we should see an increased rate of return due to cash management. In general, our research supported the literature but there were some interesting exceptions that merit attention.
Laws and regulations constrain public mangers on their cash management and investment practices by various regulatory requirements in order to safeguard public assets as well as improve the credibility and integrity of government agencies. For instance, law requires that the investment policies of local governments reflect prudent practice (King, 1996) and identify a range of instruments in which public managers can or cannot invest. These limitations not withstanding, local governments can minimize fiscal problems by choosing management and investment strategies that not only safeguard public assets but also maximize returns on investments. The primary purpose of a cash management program is to maximize the income realized from an entity's cash flow (Miller, 1996: 124).
The purpose of government is to benefit the larger society and not to economically benefit itself as is true of a private concern in a market sector. Nonetheless, practitioners in government can apply many economic principles developed for the private sector and often government activities significantly improve when they are employed. Unlike the private entity that increases its assets value by maximizing profits, normally government generates its revenues through taxes. Government policy makers expect fiscal officers to develop effective collection and disbursement system and ensure fiscal operations that balance the objectives of safety, maintaining liquidity, increasing investable cash balances, and maximizing the yields on investment. Effective collection and disbursement strategies increase cash balances that policy makers can put immediately into productive investments. Speeding up collection and delaying disbursement in ways that are reasonably economical usually achieve that purpose. This study examines cash management practices in Louisiana municipal governments. It also examines the effects of those practices on return on investment by seeing if they are indeed related to return on investment.
There is a refocusing in the literature on the importance of managing public funds at all levels of government, particularly at the state and local levels. Several reasons account for this refocusing. First, intergovernmental fiscal relations changed with new contextual changing circumstances, which increased the fiscal burdens on state and local governments. This increased the necessity for these governments to discover alternative sources of revenue in order to finance their operations. Second, public opinion shifted markedly against policies that focused on the benefits on public goods while underplaying the opportunity costs of those services. Analysts agree that policies that concentrate more on benefits tend to encourage overproduction and waste because they underplay the opportunity costs of providing services. Third, the events of the recent past demonstrate governments incurred substantial losses in revenue due to poor cash management and unsound investment policies. This has renewed legislative and public interest on the activities of fiscal officers. These trends brought about new pressure on public managers to become more efficient, prudent and responsible in managing public assets (King, 1996).
Federal assistance to state and local governments dwindled over the past decades, and as a result, states assumed more responsibility toward their local governments (Miller, 1991). …