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It’s Time to Put Governments’ Lazy Money to Work

Hundreds of billions of state and local dollars are sitting stagnant in bank accounts earning almost nothing — balances that have tripled in recent years. It’s not clear why this is happening, but it’s far too much foregone income.

Money in a mattress
Despite the opportunity to capitalize on the sweetest short-term interest rates in two decades, recent Federal Reserve data reveal that state and local treasurers are leaving billions in potential investment income on the table. A recent analysis by Marty Margolis of the Public Funds Investment Institute (PFII) lays out the data. The lazy money that PFII identifies as “checkable deposits and currency” almost tripled, from $139 billion in 2019 to $375 billion in 2023. That cash is sitting in low- or no-interest-earning accounts for reasons that mystify the institute’s analysts.
State and local government bank balances chart
Chart courtesy of Public Funds Investment Institute
During that period, the dollars held in time and savings deposits actually shrunk by more than 10 percent, which suggests that many public cash managers were savvy enough to move money from low-yielding bank CDs to higher-paying money market instruments or even Treasury bills. But the threefold explosion of dormant cash remains inexplicable.

One theory might be that federal American Rescue Plan Act and infrastructure funding has landed in state and local coffers and is expected to sit there doing nothing until it’s spent. Possibly there could have been staff apprehension about the audit trail for these moneys, so they reverted to “cigar box accounting” by parking their federal funds in dormant separate accounts.

Yet there appears to be nothing in federal regulations that precludes routine professional cash management practices to generate investment earnings that benefit taxpayers. In fact, there appears to be explicit federal authority to make customary and conventional public cash management investments.

There’s also a timing problem with this theory: Most of this federal funding was not approved by Congress until 2021, and these idle cash balances had already doubled by then. (The CARES Act was passed in 2020, but did not provide funding directly to states and municipalities that year of the magnitude shown in the PFII chart.)

A second explanation — or excuse — might be that as the COVID-19 pandemic hit, banks suddenly started giving out higher earnings credits for public agencies’ “compensating balances.” In theory that’s possible, and not unknown in the banking business, but nobody can cite a rationale for why banks would do that nationwide without a political gun to their heads.

Nor has anybody identified a bank that awards a market-equivalent 5 percent earnings credit on compensating cash balances. Doing so would impair their net interest margins, which are a key measure of profitability watched closely by investment analysts. If this were the case, by now one would expect the professional literature or social media to be loaded with case histories and cost-benefit analyses.

A third and certainly plausible explanation is just “alternative uses of staff time.” When interest rates were below 1 percent a few years ago, the value of cash balances was easy to overlook. Maybe there were better tasks for treasury staffers working remotely during the pandemic than chasing down nickels in the bank accounts.

But in today’s market, the marginal income foregone at 5 percent on $375 billion likely exceeds $10 billion nationwide, even allowing for compensating balance credits and “transactional float” (when money is briefly counted twice due to transaction processing delays). Even by congressional standards for wasteful government, that’s a big number for public resources that could be better invested to benefit taxpayers rather than bank shareholders and executives who are the ultimate beneficiaries of lazy-money financial practices.

Then there is the possibility that it’s all a statistical fluke or just a passing wave in a flat ocean: We cannot rule out the chance that next year’s reported 2024 statistics will reveal a sudden plunge in these dormant bank balances, perhaps as the result of disbursements finally completed from all that federal money — or a belated staff awakening that there’s substantial income worth grabbing. As economists like to say about central bank monetary policies, there could be a “long and variable lag” at work here. However, that mantra would describe but still not explain what has been happening since 2019.

So something curious is at work here and it’s yet to be explained conclusively by the professionals who monitor the public treasury marketplace. Certainly it’s a topic worthy of some thoughtful analysis by the major national professional associations whose members are stewards of this cash. Maybe a few on-the-ball academic researchers looking for actionable subject matter can help solve this riddle and promote better cash management practices.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management. Nothing herein should be construed as investment advice.
Girard Miller is the finance columnist for Governing. He can be reached at
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