Towns earning less on reserves

AREA — The depressed economy is hurting municipal funds in many ways, and town leaders are being forced to face yet another loss of revenues in the form of slashed interest rates.

Paris recently switched from TD Bank to Northeast Bank, lured in part by the bank's 1.35 percent interest rate on the town's idle cash.

With the account fluctuating from $250,000 to $2 million, the account was earning anywhere from $300 to $2,250 every month.

Last month, however, Town Manager Phil Tarr gave a disturbing report to the board.

"One of the reasons we changed was the 1.35 percent rate that they offered for our idle cash," said Tarr. "As of last week, the rate dropped to .5 percent."

With a $1.5 million balance, the difference in interest rates cost the town over $1,000 last month.

"It's the only part of the proposal and the subsequent contract that they would not guarantee," said Tarr.

The reduction in interest rates, says Tarr, has to do with the federal economy.

"The principle reason is because banks frequently rely on treasury bills to fund their operations," said Tarr. "... [If] those are presenting .015 percent income or revenue for the bank, they can't sustain a 1.35 based on that. ... That's economy-driven."

While the low interest rate is a disappointment to town leaders, Paris is unlikely to switch banks again any time soon.

That's because the bank has also offered other incentives to the town, including free checking, free checks, electronic banking for checks deposited from the town office, and free payroll services.

"From a practical point of view, we would accomplish little if anything by making a change," said Tarr. "... Interest rates will always be a variable ... With these services and the .5 percent rate we probably still have an advantage with NE Bank."

TD Bank, which the town abandoned in September, was paying only .25 percent on the town's idle cash.

Paris isn't the only town trying to deal with poor interest rates.

Mark Silber, a Sumner selectman, recently convinced the town to explore moving scholarship monies into a managed fund with the Maine Community Foundation, after learning that the town's scholarship balance was earning a paltry 1.25 percent.

"We would pay something," said Silber, "I don't know, 1.5 percent, but last year, as a fund, it was a hard year. They made 12.5 percent."

The Maine Community Foundation managed nearly $230 million in assets for 2009, and diversifies its investment over a broad range of assets, such as foreign equity, private equity venture capital, and marketable alternatives.

Had the town been in the managed fund, Silber says that it would have been able to accomplish more.

"We would have so much more money to give away to scholarship recipients," said Silber.

A managed fund is always subject to a level of risk that goes beyond a federally-guaranteed treasury bill, but Silber says that there is no commitment needed.

"If we change our minds, we can always pull our money back out of the fund," he said. "It just makes sense."

Investing all of a town's money into a managed fund isn't a realistic goal for most municipalities, because towns generally need easy access to the capital.

"Town funds have to be more liquid," Sumner Town Clerk Susan Runes told the board."I'm looking to get some of that out and stagger terms, but it still has to be liquid. We have to have access to the whole kit and kaboodle by October of '11."

Towns like Sumner and Norway are always looking for CD rates that allow them to maximize earnings in a difficult time.

Runes noted that the town sometimes takes advantage of particular opportunities that present themselves.

This month, she noted, "there's a six-month CD that Northeast [Bank] has for three quarters of a percent, which is still better than half a percent in a money market account."

Norway also typically shops around for CDs, although Town Manager David Holt says that tough times make it a less rewarding exercise than it once was.

"The truth of it is, we haven't monitored it as closely as we used to back when it made much of a difference," said Holt. "You're talking investments at best 2 percent, and usually in the mid-ones."

For day-to-day transactions, which Paris recently transferred to Northeast Bank, the town of Norway has maintained a long-term relationship with Norway Savings Bank.

Holt says that the town values that fact that Norway Savings has been an active participant in charitable efforts in the community.

"We do appreciate their name and the fact that they invest in the community," said Holt.

The appreciation wouldn't cause the town to lose money by ignoring a big discrepancy between the rates of Norway Savings and the market, says Holt.

"We would change if they were at sub-one and somebody else that was trustworthy was at 10," said Holt. "We're not that closely married to them."

But, particularly in today's market, Holt says that it makes sense to stay with a bank like Norway Savings, which has donated $338,000 to local causes over the past five years.

According to Karen Hakala, vice president at Norway Savings Bank, "more than 60 percent of those dollars went specifically to organizations within the town of Norway."

"We do value them as a bank," said Holt.