"Low Rates Shrink Government Income"
Friday's Bond Buyer writes "Low Rates Shrink Government Income". The article says, "Low short-term interest rates continue to erode the investment income of state and local governments. While interest on bank deposits and other short-term investments contribute a small percentage of municipal revenues, the squeeze on investment income is yet another pressure at a time when most sources of state and local government revenue are under significant stress. Municipalities that have filed financial statements for fiscal 2010 show a drastic decline in investment earnings. According to Merritt Research, the median city in 2010 reported investment income of $593,000, down 28% from fiscal 2009 and 72% from fiscal 2008. The median school district's investment earnings tumbled 72% from 2009 and 88% from 2008.... The decline is broadly attributable to two things: municipalities have lower cash balances because urgent spending needs have coincided with a sharp drop in tax receipts the past few years, and the income that governments can wring out of their cash has shriveled because of low interest rates. Like just about any entity with imperfectly matched cash inflows and outflows, municipalities often find themselves holding cash before they need to use it.... [G]overnments park this money in super-safe places like bank accounts, money market funds, guaranteed investment contracts with a bank or insurance company, short-term Treasuries, or other iron-clad instruments generally considered equivalent to cash. Until a few years ago, even short-term low-risk cash-equivalent interest rates provided a meaningful amount of revenue. According to the Census Bureau, state and local governments in 2008 collected $93.4 billion in interest -- 3.5% of their total revenue."
