Cash Management Practices among Southeastern County Governments: Proper Utilization or Excessive Caution
Modlin, Steve, Stewart, La Shonda M., Public Finance and Management
Proper management of idle cash reserves is becoming a major feature within county government revenue policy. Each facet of the process, from collections and disbursements to investments, is critical if local governments expect to maximize cash flow. This study examines cash management practices of county governments in North Carolina, South Carolina, and Tennessee. External governmental factors, banking practices, and investment choices are all examined to assess contributions to return on investments. The findings indicate that decision-maker responsibility, the use of external banks, and the use of zero balance accounts or concentration accounts have a positive impact on investment return. In addition, as money be-comes more available, investment prerogatives generally focus on the local government investment pool.
Among the many efforts to increase the amount of revenue needed for ser-vice distribution, local governments employ a variety of methods to increase cash flow. The recalcitrance of elected officials to gain more revenue through tax increases has forced government officials to assess internal cash manage-ment procedures and decisions concerning cash investment activities. Strapped with the enormous responsibility of safeguarding public funds, finance man-agers and trustees have the added burden of answering to the public and elect-ed officials. In many states, this confinement burgeons as a result of state oversight policies and procedures that provide direction and determine in-vestment practices of local governments. All of these factors ultimately have a deciding effect on the ability of a county government to have sufficient fund-ing for elevated rates of return.
Despite the cyclical changes of the national economy, local government finance managers and elected officials in many areas across the country con-tinually struggle with disruptive cash flows. To further complicate this issue, external forces and the public scrutinize these activities. First, a heavy reliance on intergovernmental funding can have serious repercussions. Over the past several decades, states and local governments have watched their share of fed-eral revenues decrease while grants to individuals have steadily increased (U.S. Advisory Commission on Intergovernmental Relations, 1988; U.S. Of-fice of Management and Budget, 2010). To combat this problem, it has been recommended that local governments generate revenues from own-sources rather than relying on temporary assistance from other levels of government where a sudden shiftin the agenda can be decisively detrimental (Modlin, 2010). Second, the situation regarding idle cash balances has become quite capricious. In the 1960s, 1970s, and even in the 1980s, various research find-ings maintained that local governments were not working diligently enough to maximize revenues through sound investment practices (U.S. Advisory Com-mission on Intergovernmental Relations, 1965; Aronson, 1968: Cooper, 1972; Thompson and Gates, 1988). High fund balance levels in the 1990s and early 2000s provided an avenue of inquiry as to whether tax levels, especially prop-erty taxes, should decrease. Practices during this time period led to the third problem associated with cash management practices-investments. Question-able investment practices emerged in the 1990s as a result of excess available unrestricted revenues that were invested in higher risk securities. Arguments were made that traditional behaviors associated with risk aversion were negat-ed in many of the infamous investment practices in which large amounts of cash were lost (Bozeman and Kingsley, 1988; Kearns, 1995). However, McCue (2000) found that the majority of investment officials at that time were risk averse with a keen awareness of the need for the protection of public in-terest monies despite notions of potential maximum utilization of portfolios.
This article examines the cash management and investment practices of county governments in North Carolina, South Carolina, and Tennessee. …