Going once, going twice, sold! How Web-based auctions can increase yields and improve efficiency.

• Author: Mecca, Gerald<
• Position: 90-Day CD - Cover Story

Editor's note: In its October meeting, the GFOA Executive Board approved an alliance with Grant Street Group to create GFOA YieldAdvantage, a real-time electronic marketplace for investing short-term government cash holdings. To learn more about this new product, contact Jeff McElravy at jmcelravy@gfoa.org.

While harnessing the advantages of the Internet remains a challenge for many local governments, there is little doubt that many core business processes could be readily enhanced by abandoning customary practices and embracing the use of the digital highway. One such area is cash management, namely, the process of investing idle cash. Local governments can now optimize their investment earnings by auctioning investments online--a process that increases competition for public funds by making those dollars available to a larger pool of financial institutions. This article describes how Monroe County, New York, has used a Web-based auction platform to achieve superior yields, greater internal control over assets, and increases in worker productivity.

MONROE COUNTY'S E-EVOLUTION

Monroe County's use of the Internet to purchase investment vehicles, while unique in terms of the prevailing practices among municipal governments, represents a logical step in the evolution of public cash management practices. Driving this initiative is a strategic effort to optimize non-tax revenue--in this case, investment returns on available cash. For county management, every dollar earned through sound investment is ultimately a dollar earned without cutting services or increasing taxes.

In 1992, the county found itself confronting a growing budgetary imbalance. A crisis-driven review of the county's financial performance found that the cash management function was fertile ground for significant gains. Despite an operating budget of roughly $650 million, the county had earned just $2.6 million on its investments the previous year. Compared to the 90-day Treasury rate index, Monroe County had under performed by five basis points.

Prior to 1992, the county followed a very traditional approach to investing. One full-time accountant in the finance department procured appropriate investments through an informal process of calling local banks and placing orders over the phone or via fax. Some banks offered limited personal computer-based transaction services, but these services did not allow for either a survey of all market participants or efficient placement of county funds with the winning bidder.

Compounding this inefficiency was the observation that funds in various accounts remained unduly idle at various points in time throughout the year, thereby generating dismal returns. The county lacked suitable performance benchmarks to ensure that the outcomes of the investment process were consistent with prevailing rates of return for the money market. In short, the county needed an overhaul of its cash management process to ensure the returns it desired.

The county soon engaged an investment advisory firm to perform an objective, thorough analysis of the procedures and practices of the cash management function. While this review could have been handled internally, the county recognized that the expertise needed to achieve wholesale improvements could not be easily obtained and deployed by a government facing severe budgetary pressures and the constraints...