Effective matching of maturities to cash flow requirements: by matching investment maturities to its cash flow requirements, the City of Raleigh has been able to increase investment earnings while ensuring adequate liquidity for short-term needs.(Best Practices)

Investing governmental cash assets carries the special responsibility of balancing the desire to maximize investment yields with the need to minimize risk. Government finance officers are often reminded that prudent investing encompasses three primary objectives, in order of decreasing importance: safety, liquidity, and yield. These objectives have assumed even greater significance now that many governments face the temptation to compensate for dwindling revenues with increased investment income.

In 1997, GFOA promulgated a recommended practice entitled "Maturities of Investments in a Portfolio." Recognizing the inherent price volatility of longer maturities and the liquidity needs that all governments face in their day-to-day operations, GFOA recommended an overall investment strategy for state and local governments that matches investment maturities with anticipated cash flow requirements. Specifically, the practice recommends that governments not invest in securities maturing more than five years from the date of purchase, that they adopt weighted average maturity limitations, and that a portion of the portfolio be invested in readily available funds such as local government investment pools and money market funds.

AN INVESTMENT PARTNERSHIP

Like many governments, the City of Raleigh, North Carolina, has done a good job of responsibly investing its money in compliance with the three objectives noted above. Until recently, however, the city had not been able to fine tune its investment program to accurately match maturities with its future cash flows. Raleigh was finally able to address this challenge in 2001 when a public finance organization presented to finance staff a cash flow model it had developed as part of its investment consulting practice. By efficiently matching investments to daily net cash flow, the model enables governments to take advantage of the natural positive slope of the yield curve by extending the average life of the portfolio.

Raleigh retained this firm as its investment advisor and has since incorporated the cash flow model into the city's enhanced investment program. The central feature of this program is the use of the model to target the dates when cash flow from investments is needed to meet the city's expenditures. This model is part of an overall investment partnership between the city and its investment advisor. While the city is still the manager of the investment program, there is new emphasis on purchasing investments within the parameters of a detailed investment plan that is updated in a report presented to the city each quarter. The city follows the investment plan, makes the purchases called for in the plan, and submits to the investment advisor each week the results of investment activity and actual cash flows (both revenues and disbursements).

CASH FLOW MODELING

The process of managing the cash flow model involves both a look backward and a look forward. Looking backward, the comparison of the actual receipts for the previous quarter to the cash flow projections provides feedback on the validity of previous assumptions and assists in mapping future projections. Looking forward, the city correlates projected cash receipts, projected cash disbursements, and maturing investments to determine new investment maturity requirements. While there are normally a few shorter-term gaps to fill with a new maturity, the majority of new investments are placed at the longer end of the yield curve.