Developing and implementing an investment strategy in rural areas.

• Author: Pavitt, Gregg

The pressure to find alternative revenue sources is as intense in rural areas as it is in urban and suburban jurisdictions. Interest earnings from investment of municipal funds is an attractive revenue option that many small towns have not aggressively pursued. Several factors - custom, a desire to send business to local vendors, and a lack of an extensive investment community to offer new products and techniques - often cause rural town councils to leave investable funds in one or two local banks.

A successful expansion of a restrictive investment environment in the City of Scottsbluff, Nebraska, has provided additional investment opportunities. By presenting the council with a clear analysis of the business dynamics of broadening investment opportunities and establishing an investment policy that the council supports, Scottsbluff's finance director was able to develop a viable and safe investment strategy. Inexpensive information technology allows finance directors in rural areas to keep up with the latest changes in the markets, making them effective buyers of securities.

Scottsbluff's Old Strategy

The City of Scottsbluff (population 14,000) is located in rural western Nebraska, and the closest metropolitan area is Denver, Colorado, three-and-a-half hours away. Scottsbluff's economy is dominated by agriculture primarily - farming, ranching, and processing - and by implement manufacturers. The town is also the center for retailing and medicine for a 100-mile radius. Its large sales tax base has enabled the town to accumulate significant investable, unrestricted funds. In FY1996, approximately $31 million in total revenue was collected, while the general fund revenue for the year was $4.5 million.

Although significant interest income could be earned, the town's investment experience had kept within a fiscally conservative tradition, preventing the town from fully maximizing its resources. For example, keeping funds in the local economy was a priority. Scottsbluff thus invested its funds only in certificates of deposit (CDs) at the three local banks. Due to state investment collateralization requirements, however, the banks invested town funds in U.S. government securities, collecting a significant premium for the service. Although the town was "buying locally," the end result was that the town received low earnings while the funds went elsewhere.

As the town's funds were large relative to the asset base of the local banks, the banks often...