The land of no returns

March 18, 2012
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Conservative investors and local governments regrettably have nothing in common — as in virtually no returns. Individual savers and treasurers at the county, city and township levels are in their fourth consecutive year of pathetically piddling yields on their deposits, while time, a very close sibling of money, marches on.

That situation is expected to continue for at least two more years because of the action the Board of Governors of the Federal Reserve System took after some the biggest players in the nation’s financial services industry almost completely ended fiscal life as the country knew it back in 2008. Fed Chairman Ben Bernanke recently said the board’s nearly four-year-old policy of lending to banks at a rate of 0.25 percent would likely continue through 2014. That policy has helped keep inflation in check, but it also has deflated returns on fixed investments.

Unfortunately, that premise has taken its toll on investors, who have watched their retirement funds and children’s education accounts creep along, while the end of their working days and the time their kids head off to college have gotten closer. And those situations came on top of the losses they suffered when badly bundled mortgages and credit default swaps were the rage of Wall Street.

Two weeks ago, according to BankRate.com, a website that tracks interest rates, one-year Certificates of Deposit were paying from 0.150 percent to 1.080 percent; three-year CDs were paying from 0.500 percent to 1.460 percent; and five-year CDs were offering from 1.050 percent to 1.740 percent. Money market accounts ranged from 0.70 percent to 0.91 percent. So savers see little hope down the line.

Public officials also seemingly are tiring of the near-nothing yields, as they’ve tried to grow taxpayer dollars and earned revenue into a bigger pot that could help maintain services and keep taxes low.

Take Kent County, for example: In 2003, the investment earnings for its general operating budget were $1.8 million. In 2004, that figure was $2 million. In 2005, it was $2.5 million. In 2006, it was $2.75 million. But for the current fiscal year, earnings from investments are projected to be $282,000.

The situation is the same for cities and townships and for agencies like the Grand Rapids Downtown Development Authority, the Grand Valley Metro Council, the Convention and Arena Authority and others. Millions of dollars less are going into public coffers due to the nation’s current fiscal policy.

Kent County Treasurer Kenneth Parrish made his annual trip to the Board of Commissioners recently to present his investment report. He began by reminding commissioners that the county’s policy for making investments is threefold: first is security, second is liquidity and third is yield.

An acronym for that guiding principle — one to which conservative investors may well adhere — is SLY. But this time, Parrish said it might as well be “SL0” with the “0” being shorthand for zero. “It’s really become the SLO method. Safety first, liquidity second and no yield third,” he said.

The county operates an investment pool that includes deposits from about 100 governments, public agencies like GVMC and public funds like the county’s waste-to-energy facility. The pool’s cash and investment total amounted to nearly $324.5 million as of Dec. 31. The investment income for the past year on that hefty amount was just short of $2.4 million, for a return rate of 0.73 percent. A year earlier, the pool’s investment totaled $325.8 million, the investment income was $3.8 million and the return rate was 1.18 percent. So, the return worsened as the economy improved.

“I wish we could earn a better bottom line,” said Parrish, especially with the need for revenue being so vital now. “But we’ve never lost a dime of investment principal.”

The county’s pool had $58.5 million in government securities, $12.2 million in pooled funds, and $253 million in CDs and money market accounts with 19 area banks at the end of last year. The biggest shares of those latter funds were at Huntington National Bank, $49.6 million, and PNC Bank, $44.2 million.

In contrast, the Bank of America held the smallest share of the pool’s funds with $549.06. When he was asked why so little was invested with BOA, Parrish said, “We’re in the process of liquidating our funds from there because their rates dropped so low. Some banks have more cash than they need right now. It wouldn’t surprise me if they were back on the list next year.”

The county’s policy doesn’t allow Parrish to invest more than 25 percent of the pool’s total with a single institution. Huntington has 15 percent, and PNC has 14 percent — numbers that are much higher than the investment returns savers and local governments are getting.

“Unfortunately,” said Parrish, “the 6 and 7 percent investment rates we saw when I took over 15 years ago are long forgone and may never be seen again.”

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